Inequality is one of the predominant topics in public discourse. It is an unavoidable part of every economic debate not only because of its inherent social significance, but also because it sets the framework for a more general comprehension of economic development. The lines of separation between present-day economists on questions like: “Why some nations succeed and others fail?”, “What caused the most recent global crisis?”, “What should be the role of the state in the process of economic recovery?”, ”Are markets self-governed or are they inevitably distorted?”, among others, can almost always be attributed to a certain understanding of inequality in society.

The success of the recently published books by the Nobel Prize-winning economist Joseph Stiglitz “The Price of Inequality” and Thomas Piketty’s “Capital in the Twenty-First Century” proved once again the importance of the issue in the contemporary society. Those books present in a very absorbing way the popular understanding of the somehow unfair and huge differences between the elite (the one percent) and all the others (the 99 percent). This article explores the topic of inequality, focusing not on inequality by itself, but on its foundations and the perception of unfairness. It may also be perceived as a discussion on the morality of capitalism and a critique of some of the conclusions put forward by the abovementioned authors.

Inequality Before the Law or Wealth Inequality

When we discuss inequality we should always distinguish between inequality before the law and inequality in wealth or distribution of income. The subject of inequality suggests a certain attitude towards (in)justice and that is why such a differentiation is particularly important. Inequality before the law in practice is always undue. If we proceed from the presumption that all people have unalienable or unconditional rights (meaning life, liberty and property), a different legal treatment would make people unjustifiably unequal by definition. Throughout most of the human history people haven’t been equal before the law (the right to vote is a sufficiently good example) and they have lived in societies of the privileged. However, the attitude towards this kind of inequality shouldn’t be transferred automatically to the inequality of wealth in contemporary societies.

Inequality in wealth or income is an issue which doesn’t suggest any inherent injustice. This is the big difference. Simply put, if two people are a part of a society and one of them has the right to work and earn his living, while the other one is prohibited to do so (i.e. they are unequal before the law), we can safely say that this is an unjust society. On the other hand, if they are a part of a society that provides them with the same opportunities, and one of them earns twice as much as the other, we would hardly be in a position to make a judgment about justice and injustice. This doesn’t mean that we should neglect the data or not look for the causes of inequality in income, but rather that we cannot work with the presumption of injustice just because wealth and income are different. If there is injustice indeed, it lies somewhere deeper than the straightforward interpretation of raw data.

Although the distinction between inequality before the law and wealth inequality is widely accepted and understood, those two continue to be mixed-up in the popular perceptions of modern society. Stiglitz to some extent does it, too. From its very beginning, his book subjects the reader to the author’s perception of the inherent injustice of inequality, pointing out the “Arab Spring” as a society’s answer to inequality and quickly applying this argument to the American society, the wealth of the so-called “one percent” and market failures. However, the events in some Arab countries weren’t brought about by any market deficiencies, but by the disregard for the rule of law and the limitation of free initiative.

Mohamed Bouazizi set himself on fire at the end of 2010 in Tunisia and unleashed a wave of protests in the region after being prohibited to sell his goods on the street and his means of subsistence being taken away from him forcefully. The “Arab Spring” then spread to societies where injustice was present, but injustice that was enforced by the state and not by the market. The inequality before the law caused the uprising in the Arab world. While the Arab case is highly important for the inequality debate in the so-called developed world, the argument should not be automatically transferred as a pure critique of wealth and capitalism.

The Artificial Debate: “Capitalism vs. Equality”

By focusing on the allocation of wealth and income, the debate on inequality tends to be presented as an opposition between capitalism (and free markets) and some imaginary alternative which ensures equality. This approach is extremely manipulative as it disregards reality. There are no examples of human societies which have been at least to a certain extent developed and have had pure equality i.e. did not have members with more wealth/privileges and material advantages. If we could travel back in time we would come across societies with gods and shamans, pharaohs, emperors, noblemen, aristocrats, totalitarian leaders, bankers and merchants and so on. In each case we have inequality – there has always been a difference between the majority of people (“the 99 percent” in Stiglitz’s terms) and the “elite”.

The argument “capitalism or equality” in the general sense supposes that the alternative is a form of socialism or state intervention (welfare state) which would lead to equality in terms of wealth and income. That is a fiction. Socialist societies also have privileged people and that is evident not only in history, but also in many examples around the world today. In a socialist society the division is between the elite or the so called “nomenclature” (those involved in government) and all the others that are subject to their power.

Yes, historically in socialist societies most people worked in similar factories, inhabited similar dwellings, drove 3-4 brands of cars (all being the same class) and seemed quite “equal” overall, but the difference between them and the elite was significant at all times. Leaving aside the debate whether it is possible for such a society to prosper, we can safely state that in every society, including totalitarian and socialist ones, there is material inequality – it is inherent to every social order.

What is significant is not inequality itself, but the reasons for its existence and every person’s chances to “bypass” it naturally – therein resides the feeling of injustice. Note that in most societies, inequality has historically been imposed by force – not by some market-based process, but by the use of power. Here we should investigate if the free market can cause such an unjust inequality that in effect destroys the society as in the case with the arbitrary rule of the absolute power. The debate in its essence is not about the opposition “capitalism vs. equality”, but rather on the morality of capitalism and the form of capitalism that is present in modern societies.

Free Society and the Perception of Justice

The belief in a free society should in no way be used for any kind of a simplified view of inequality. The idea that we can build a perfectly free society in which everyone has equal rights and just disregard the question of inequality often neglects the very organic beginning of this society. What makes a society free or fair is not the way its fundamentals and institutions are put on paper, but the people’s belief in it and their desire to live in it. Such a society, even being a democratic one, cannot exist if the majority believes that something is not right and the result is inherently unfair – in most cases this gives strength to populists and is the first step on the “road to serfdom”, if we use Hayek’s phrase.

The contemporary Western society presents us with exactly such a conflict between the general idea of a “free society” and the wide-spread perception of injustice. The most recent global financial and economic crisis – called the Great Recession, contributed to this conflict a great deal. The present times are unique with the fact that it is precisely the wealthy part of the world or the so-called developed countries that are in a crisis – with unprecedented levels of debt and unfunded social liabilities. The modern Western society is the wealthiest one that men have ever known, trying to create the perfect welfare state for its citizens, and nevertheless, it is also one that is in both an economic and a moral crisis.

Does this moral crisis mean that modern-day capitalism brings injustice? It somehow seems that the classic discussion about the economic inequalities neglects that question – it observes what we call here “justified differences” and is not going any further. We will present here the classical discussion, but also build upon it and investigate the unfair inequality that is a product of either a market failure or a state failure in the form of clientelism or the so-called “crony capitalism”.

The Justified Inequality and Development

On the one hand, the classic discussion about inequality and capitalism covers income redistribution and the concentration of wealth in the elite, and on the other, it focuses on poverty. The popular thesis is that differences are too big and ergo we have unfairness, while the obviously opposite thesis is that this is normal and actually represents the driving force of development.

Some may say “the rich are getting richer and the poor – poorer”, and others may say “all people are better off, including the poor”. In other words, it’s not the differences that matter, but the overall improvement of everyone’s welfare. Here we come across the well-known thesis about the pie – even if you receive a smaller piece (share), if the whole pie got bigger, your chunk would get bigger, too. These are the arguments which we can see in the famous debate¹, involving Margaret Thatcher in her last stand in the House of Commons (1990). It is exactly this discussion where from Thatcher’s famous quote that some people would prefer the poor to be poorer as long as the rich would be poorer as well.

In the classic version of this debate, other factors put aside, Thatcher’s thesis meets significant rational support. Most people undoubtedly realize that a free society cannot be equal (in wealth) and there is nothing wrong with that. People are different, they work in various spheres, exert different effort, have different values – some want more money, while others want more leisure. The development of an easily accessible global market leads naturally to more and bigger opportunities for success. Nevertheless, if an individual wants to be free, he or she will surely accept that freedom makes life diverse and less certain, including in terms of income and wealth.

The same goes for the rational attitude towards poverty and inequality. If we are to choose between a world without poverty and a world without inequality we would most probably choose the first option. The argument that capitalism is “bad” due to the significant inequality in income and wealth which it entails doesn’t withstand the thesis that capitalism makes societies richer and limits poverty. It is true that this generation is facing unprecedented technological advancement and lives in a world with more opportunities than ever before. If you could choose an era to live in and wanted to have a better life without knowing in which part of the world you will end up or in what occupation, your best choice would be today’s generation. The work of Hans Rosling² presents the big picture of the world in different dimensions and clearly shows that it is getting healthier and richer, and that the developing world is actually catching up in recent decades.

The discussion which contrasts the arguments of inequality to those of poverty and development, which we labeled as “classic”, has taken over public attention and has set compelling barriers between leftist and rightist intellectuals and economists. However, the dividing line doesn’t come from the logic of the market, but rather from the focus on simplified theoretical settings and a wrong interpretation of the feeling of injustice, trying to explain it through the prism of a given ideology or popular deceptions, and not searching for a rational basis. In this simplified debate there is not enough space for a critique of the modern-day capitalism and the feeling of injustice.

Unfair Inequality – Market Failure vs. Clientelism

Wealth inequality is inherent to capitalism – there is no doubt about that. There is also no doubt that a widespread feeling of injustice is present in the contemporary world, which has been additionally intensified by the “Big Recession”. But what does provoke this feeling – the success that is deserved, or the success of the privileged? We do not question the feeling of injustice, but ask if we do not rush to conclusions by accusing free markets for this perception?

Let’s do a mental experiment. The popular view is that capitalism is unfair, as it leads to incredibly large distortions in wealth. Each symbol of this distortion should provoke negative emotions in us, i.e. activate a sense of injustice. Let us imagine Mr. Steve Jobs and Mr. Mark Zuckerberg. Both can safely say that capitalism has allowed them to earn “outrageous” amounts of money and even to possess more money than entire nations. Why aren’t you angry already? How come the most emblematic examples of wealth accumulation in a capitalist society do not evoke immediate widespread negative emotions? Apparently, the feeling of injustice is not provoked by significant wealth, but by something else: how has this wealth been acquired?

Let us now imagine two anonymous bankers who handed out loans without proper risk assessment of the borrowers, harvested huge bonuses and in the end the state bailed them out. There it is, the sense of injustice. A whole movement even arose from it – referred to as “Occupy Wall Street”. The privileged position of the banker in this case is not caused by a market failure, but by a gift from the state. Money supply in contemporary Western “capitalist” societies is entirely controlled by the state and has nothing to do with the market. Note that the only thing that ​​the market did during the wake of the “Great Recession” was to try to destroy these very bankers – to kick them out on the street. The state saved them through the instruments of monetary and fiscal policy, which could easily be described as the money of the ”99 percent”. Both the “left” and the “right” realize that bankers have been privileged. But are they aware that the market was about to destroy them, while the state was on their side?

We can give similar examples from post-communist Bulgaria too. Imagine a successful entrepreneur who has started from scratch, sells his goods worldwide, creates jobs and as a result of that has grown very rich. This hardly causes negative emotions in someone. Now imagine someone who has never created anything, but being close to power, has benefited during the transition period and the privatization of state owned enterprises. Here it is again – an overwhelming sense of injustice. Realizing the difference between these two examples, we can answer many questions about inequality being fair and unfair.

These examples – both domestic and foreign, show that the feeling of injustice is not a result of the accumulation of wealth by itself, but of something else – the privileged position of some members of society. Unjust inequalities in modern “capitalist” societies are a fact, but they are not caused by the markets, but by the so-called crony capitalism or clientelism. The latter phenomenon is often realized in its micro form – getting an enterprise as a gift from the state, “winning” public procurement tenders, or receiving favorable regulation that basically “kills” your competitors or directly provides legal monopoly in a particular area. This form of micro clientelism is widely known, but the macro form of crony capitalism is almost always overlooked, namely monopolistic monetary policy and deficit spending by the government. These two are actually the main factors enriching the “crony” one percent, disguised as “social” policies and welfare.

Fair Society

Let’s use John Rawls’s idea about the “veil of ignorance” – while behind the veil of ignorance, we can imagine a just society in which we want to live, without knowing in what role we’ll find ourselves there. The logical experiment would inevitably lead us to a free society where everyone is equal before the law, but not necessarily equal in income or wealth. A society without privileged people and artificial inequality. This society sounds very close to the notion of capitalist society but seems to be far from what we have in the modern Western world.

Interestingly enough, Stiglitz, while attacking capitalism in his book³, acknowledges the guilt of crony capitalism, but the decisions that he proposes lead to more government that would inevitably create more clientelism. Moreover, his proposals to combat inequality by using monetary and fiscal policies to achieve that goal (e.g. monetary policy that would rather focus on jobs than on price stability) would virtually transfer even more power to what we call here crony capitalism. These are just the kind of policies that attempt to engineer the “desired” society, but that brought about the “Great Recession” and fueled the sense of injustice in the first place.

If the main argument against wealth is that it is earned on the back of ordinary people, meaning at their expense, it can only be done in several ways – by force, that is by plundering and violation of the law; by rules that favor some at the expense of others; through monetary policy which channels cash flows in one direction and takes away a bit (or sometimes a lot) of everybody’s money (by depreciating their value along the way); and through fiscal policy that redistributes taxpayers’ money in someone’s favor. The rich earn at the expense of the poor when there is no rule of law, or when there is a form of crony capitalism. Free markets do not allow this to happen.

Conclusions

The modern debate on inequality is, in practice, a discussion about the morality of capitalism. To simplify this debate by presenting two opposing worlds – a capitalist society where skills and effort lead to inequality, and a socialist society where the state can secure equality, may be a good learning experience, but leaves aside the challenges that we face in the modern world. Such a framework is inadequate to tackle the unfair inequality that we face in present-day capitalist society where the state plays a huge role – usually called the welfare state.

In this article we try to show that if we investigate in depth the modern-world inequalities and the widespread notion of unfairness, we can dig down to the foundations of unfairness that seems to be at the heart of the issue. The anger roaming throughout the modern world is not rooted in the material differences (if that was so, the sole idea of capitalism would have never been put into practice), but in the very process of their formation. If that is true, the perception of unfairness cannot be countered with redistribution, as it has nothing to do with the process of creating. The welfare state is no answer to the widespread perception of injustice. An in-depth discussion of unfairness is in reality a critique of modern-day crony capitalism.

The article is based upon several public discussions, among them one held at the University of National and World Economy in Sofia on March 19, 2014 and organized by the Institute for Market Economics and the Friedrich Naumann Foundation. The text, however, reflects the views of the author and should not be considered a summary of these discussions.

The article was originally published in the second issue of “4liberty.eu Review” entitled “Energy: The Challenges Europe Must Face”. The magazine was published by Fundacja Industrial in cooperation with Friedrich Naumann Stiftung and with the support by Visegrad Fund.

Read the full issue online.