An ardent advocate for free-market capitalism, Friedman argues that some degree of inequality is desirable in a well-functioning economy; some degree of inequality is inevitable in a free-market economy; and income inequality in market economies was overstated (Friedman, 1962). The Prime Minister of Singapore, Mr Lee Hsien Loong, similarly agrees that income inequality occurs naturally in an economy and suggests its benefits as a form of motivation for life outcome improvement (Lee, 2018).
Some academicians suggested that people’s relative positions in income distribution do not matter; whereas absolute income matters to both the haves and have-nots. Friedman too argued that a lowly paid individual would still be better off in a market economy, despite positioned at the bottom of income and wealth distribution. Market economy increases absolute standards of living and hence, reduces incidence and extent of absolute poverty.
Opposing views suggest that individuals’ relative standing in the society and their perceived fairness of such standing are important psychologically. Knowledge of their position at the bottom exac- erbates feelings of deprivation among the poor, even if absolute income is increasing. The awareness of wealthier others creates political misery which could escalate into social and political tensions (Milanovic, 2016). Pragmatically, inequality is relevant to policymakers.
Inequality of Outcomes
In a market economy, individuals are rewarded income proportionate to their contribution to the total economic output. Individual abilities to produce output vary according to factors of production, including labour, capital and land in their control, as well as their appetite for risk-taking. These individual differences result in unequal outcomes.
Friedman argues that inequality of outcomes incentivise individuals to take on labour and risks that otherwise would not be taken.
The desirable inequality referred to by Friedman is inequality of outcomes, not inequality of opportunities. At the micro level, inequal- ity of outcomes motivates individuals to improve their livelihood. Being perceptive of inequality is being self-aware of one’s current state and the state that other members of society are in, and forming an ideal state to aspire towards. Understanding the gap between the current state and the target ideal state helps individuals to formulate steps towards achieving it (Philips & Silvia, 2005). Friedman argues that this form of self-interest and greed collectively drives advancement and economic growth (Ro, 2012).
Inequality of outcome is also a product of meritocracy. Meritocracy operates by weeding out incompetent individuals and selecting the brightest who are then rewarded differentially. Meritocracy legitimizes unequal outcomes with the underlying principle of fair competition (Tan, 2008). Again, the difference between equal outcomes and equal opportunities must be noted. Meritocracy and its unequal outcomes are seen as fair if every individual has the same opportunities for success.
If human behaviour and market forces inevitably result in inequality of outcome, is there a level of inequality that is optimal for or accept- able by society? While inequality sounds semantically negative as an abstract concept, when contextualised in numerical terms, people agree that inequality of outcome such as pay gap should exist. While most respondents demand for less inequality, they also simultaneously endorse some extent of inequality. The findings is consistent across 40 countries examined in the study, and across different segments of society, including the rich and poor, liberals and conservatives, and across educational levels. In aggregate, respondents converged on an ideal pay ratio between the chief executive and an unskilled worker at 4.6 to 1 (Kiatpongsan & Norton, 2014).
This ideal pay gap ratio is not a realistic one. Dairy company Ben & Jerry’s once adopted a compensation policy to cap its top-to-bottom pay ratio at 5 to 1. After 16 years, the company abandoned the pay ratio policy after it failed to recruit successors for its top executive positions (Weiss and Credit.com, 2013). The latest survey data show that on average, CEOs’ pay ratio in relation to the median salaried employee among American companies is at a stark 241 to 1 (Equilar, 2018).
While it seems that outcome inequality is to some extent tolerated, research shows that increasing inequality and the knowledge of it decreases motivation and labour productivity. When wages or pay distribution is made transparent, lower paid workers reported less job satisfaction and made less effort, whereas higher paid worker reported no additional job satisfaction and do not work any harder. Increasing inequality also has other negative effects. It impairs decision-making, reduces empathy and increases unethical behaviours. People at both ends of the distribution are more likely to take unwise risks and exhibit gambling behaviours. Perception of being richer leads people to be less empathetic towards others and exhibit less generosity. People who are paid both unequally high and unequally low are more likely to exhibit unethical behaviour and cheat (Norton, 2014).
Inequality of Opportunity
Opportunities are beyond an individual’s control, but actions taken to translate available opportunities into outcomes are within one’s locus of control (Arneson, 1989). Egalitarians suggest that people should not be held accountable against poor life outcomes that resulted from circumstances beyond their control. Modern egalitarians seek to equalise opportunities and suggest that society should identify and indemnify these group of people (Roemer, 1993).
Individuals should be rewarded for their own merit, and not inherited economic or cultural capital. In reality however, qualities that are valued in a meritocratic society often do not exist universally (Teo, 2018). These qualities often can be cultivated relatively more easily by the wealthier through enrichment classes, interpersonal connections, internship, etc. Meritocracy perpetuates inequali- ty and discriminates individuals when inherent advantages and disadvantages of individuals coming from unequal backgrounds are not acknowledged and corrected. Opportunities must then be equalised before the meritocratic race starts.
Differences between opportunities and outcomes are murky, as inequality of outcome can transform into inequality of opportunity in the form of endowment and inheritance. A large part of inequality can be attributed to initial differences in endowment. The Epstein and Axtell’s Sugarscape simulation illustrate how randomised small initial differences in endowments, circumstances at birth and luck combined give the emergent result of very skewed wealth distribu- tion with a few super rich, a shrinking middle class, and a growing underclass of the poor (Beinhocker, 2006). While governments cannot (and should not) interfere in the freedom of transferring capital and wealth, they can intervene to narrow inequality of opportunities to ensure fair competition.
Wealth and income redistribution policies are targeted at inequality of outcomes, not inequality of opportunities. Friedman contends that the economy is inherently unequal and proposed negative income tax as a means to redistribute wealth and alleviate poverty (Preiss, 2015). This involves taxing individuals earning above a certain income threshold and redistribute the amount as cash subsidy to individuals below the income threshold. The tax system suggested is progres- sive and does not disincentivise subsidised individuals from gainful employment. Milanovic proposed global redistribution to address global inequality by creating a global non-governmental agency to raise tax among the rich from rich countries and distribute them to the poor from poor countries in the form of cash grants.
The egalitarian planners on the other hand suggest the central idea of equalising opportunities while taking into consideration comparable degrees of responsibility exercised by individuals. Roemer suggests identifying sets of circumstances that are beyond individuals’ control and the associated indicators that reflect the degree of responsibility they exercised. Individuals within the sets of circumstances identified and who have exercised comparable degree of responsibility should be indemnified by society.
In the context of Singapore, the government attempts to equalise resources by providing quality education, affordable housing and healthcare, many of those targeted for the poor. Singapore’s Housing and Development Board for example, provides rental housing for the poor. Rental agreements are renewed every six months, with rent rises as income increases. On the flip side, this creates a sense of insecurity and reduces incentives for the poor to work harder and take on better paying jobs. Statements uttered commonly such as “Singapore is not a welfare state”, “no free lunch in Singapore”, as well as narrowly targeted, conditional state assistance schemes, carry strong negative connotations and signal to recipients that they belong to the very bottom of the society who cannot catch up — instead of regarding such welfare as their universal rights.
So, is inequality inevitable? Some degree of inequality of outcomes will ultimately exist in society. The government’s role then is to equalise opportunities as much as possible to ensure every citizen has a fair chance of achieving their desired outcomes. Interventions to equalise both outcome and opportunity should work hand in hand to sustain individuals in the short run and lift people out of the bottom rung of the society in the long run. Interventions to equalise opportunities and build human capital are more difficult to design and do not generates immediate results, but they should not be overlooked.
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- Equilar. (2018). CEO pay ratio survey. Equilar.com. Retrieved from: http://marketing.equilar. com/31- 2018-ceo-pay-ratio-survey
- Friedman, M. (1962). Capitalism and freedom. Chicago: University of Chicago Press.
- Ro, S. (2012, July 31). Milton Friedman’s brilliant response to Phil Donohue’s question about greed. Business Insider. Retrieved from https://www.businessinsider.com/milton-friedman-on-greed-2012-7/?IR=T
- Kiatpongsan, S. & Norton, M. I. (2014). How much (more) should CEOs make? A universal desire for more equal pay. Perspectives on Psychological Science, 9(6), 587–593.
- Lee, H. L. (2018, February 6). Why Singapore gives top priority to fighting income inequality. The Straits Times. Retrievedfrom:http://www.straitstimes.com/opinion/why-spore-gives-top-priority-to-fighting-income-inequality
- Milanovic, B. (2016). Global Inequality: A New Approach for the Age of Globalization. Cambridge MA: Harvard University Press.
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- Phillips, A. G. & Silvia, P. J. (2005). Self-awareness and the emotional consequences of self-discrepancies.
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- Tan, K. P. (2008). Meritocracy and elitism in a global city: Ideological shifts in Singapore. International Political Science Review, 29(1), 7–27.
- Teo, Y. Y. (2018). This is what inequality looks like. Singapore: Ethos Books.
- Weiss, M. & Credit.com (2013). A sweet solution to the sticky wage disparity problem. ABC News. Retrieved from: http://abcnews.go.com/Business/companies-follow-ben-jerrys-lead-wages/stor
THAM YIN YEE
Tham Yin Yee is a Li Ka Shing Scholar and recent Master in Public Administration graduate at the Lee Kuan Yew School of Public Policy. She is also a Teach for Malaysia alumna and member of the Teach for All Community of Practice for Education Policy.