The Existence of Bad Actors Doesn't Explain Inequity
Unchecked, inequity naturally increases over time. Bad actors only make it worse.
What life is actually 'made of' is cycles of cause and effect, loops of causal flow.
~Steve Grand, “Creation: Life and How to Make It”
Twice in Known History
European and North American income inequality has been trending worse for hundreds of years with two noteworthy exceptions. The Black Death in Europe around 1350 upended the labor market by killing about half the population. Labor supply decreased more than labor demand, so wages went up for a period long enough to soften income inequality.
In the early 1900s, the one-two-three punch of World War I, the Great Depression, and World War II destroyed a huge amount of physical and financial capital. Capital tends to be owned by the wealthy, so this massive capital destruction reduced the wealth and income of the rich for a period long enough to again soften income inequality.
Outside those two sweeping historical events and a few localized blips, income and wealth inequality have increased throughout history.
“The rich get richer” isn’t exactly news. The main point of this post is that growing wealth inequality is a natural outcome of capitalism, which in turn, as I argued here, is a natural outcome of human nature. No bad actors required. No conspiracies necessary. Bad actors and conspiracies do exist and make things worse. But raging against them will not fix the systemic problem.
Notice I wrote, “…growing wealth inequality is a natural outcome of capitalism,” not an inevitable outcome. If we really want to fix inequity, we must take purposeful action to counteract the intergenerational links between wealth inequality and inequity. Here’s why…
Income and Wealth
Income and Wealth
To begin, consider the simple causal loop diagram in Figure 1. Arrows indicate causality. For example, savings “cause” wealth — it’s “family wealth” to indicate that wealth gets inherited. I have taken liberties with the ‘plus’ symbol, but it should be clear that income earned from working is used to purchase needs and hopefully wants, with the remainder going to savings (if there is a remainder, which turns out to be a pretty big “if” for most families in the U.S.).
Invested wealth appreciates in value. Consider real estate, for example. In the long term, real estate values tend to increase. So wealth “causes” more wealth via returns on investment. One can also receive passive income from wealth as it grows, assuming the passive income is kept lower on average than the return on investments. A house can be rented out, generating (“causing”) passive income for the owner.
Passive income is the heart of capitalism. Wealth in the form of capital (financial savings, real estate, company stocks, etc.) generates passive income for the owner. Total income is labor income plus passive income. As the capitalist accumulates more wealth, she earns more passive income, thus increasing total income. With more income, she can save more after paying for her needs (food, mortgage payments, education, healthcare premiums, taxes, etc.) and wants. The additional savings increase wealth even faster. Thus, not only do the the rich get richer, they get richer at an increasing rate — wealth grows exponentially if you do it right.
Education, Health, and Wealth
Wealth leads to better education and better health, as I explained here. The causal effect of wealth on education and health is most pronounced across generations: It is the parents’ wealth that leads to better educated children. And it is the parents’ wealth that, in part, leads to better pre- and perinatal health care and better health care for children.
Better childhood health impacts learning. Poor children are more likely to experience ADHD, asthma, lead poisoning, and anemia, all of which are known to be associated with either a decrease in cognitive functioning or behavioral problems. An economic study published this year highlights the intergenerational nature of the health-education-income interaction. The authors showed that mothers who took advantage of Medicaid services while pregnant enjoyed better health outcomes for their babies. No surprise there, but their grandchildren were healthier babies, too.
At the same time, early education impacts health behaviors later in life — better education leads to healthier behaviors — better self-care. In other words, quality education and quality health care are mutually reinforcing.
Education and Work
Human capital is an accumulation over time of education, training, and experience. When the labor market holds a person’s human capital — their expertise — in higher regard, it will respond with a higher income. Figure 4 shows that better education and health care for children leads to higher income for the adults they become. (Many factors impact an individual’s labor income; my point here is that human capital is one of them.)
No Bias Required
It does not take systemic racism, or any other bias, to make this inequity engine turn. Racism and bias are big problems for lots of reasons, including the fact that they make the inequity engine turn faster. But the intergenerational inequity spiral shown in Figure 4 is so fundamental that racism and bias are not required to make it turn. We don’t have to be bad to make inequity worse; we only have to hope someone else will handle it.
Royalty Happens
Income inequality tends to grow for two broad reasons. One reason is the self-reinforcing income-wealth loop (Figure 2). Another, more problematic reason is the combination of intergenerational wealth with the wealth-education-health care interaction (the big circular loop in Figure 4). When a person’s economic lot in life hinges more on their parents’ (or grandparents’ or ancestors’) lot than on their own, something is wrong. When the children of the wealthy, who can already expect to inherit wealth, enjoy conditions better suited for building further wealth, it is no less than a system of royalty. Is that what we want?
If not, we must take active steps to counteract the natural development of inherited elitism, a.k.a. royalty. We would need to do two things: 1) Cap the wealth that offspring can inherit (we currently do a half-assed job of this). More on this in a later post. 2) Break the links between wealth and the education-health care interaction (half-assed would be an improvement here).
Next up: The math says income inequality is explained more by inequity than by differences in ability or hard work.