Income Inequality Around the World Is a Failure of Capitalism

The United States' yawning income gap between the middle class and the top percentile isn't unique. It's part of a global phenomenon.

A new OECD report concludes that income inequality is rising in most developed countries. Here's the OECD's graph of Gini coefficients by country. Gini coefficients can theoretically range from 0.0 to 1.0, with higher values indicating greater inequality.

Gini coefficients OECD.bmp

The relative rankings of inequality haven't changed much over two decades, with the United States leading the trend. But inequality is rising in most developed countries, literally upending the Kuznets curve - one of market fundamentalists' most cherished ideas.

The Kuznets Curve, named after Nobel Laureate Simon Kuznets, predicts that as nations become wealthier, inequality initially rises and then declines, like a single squeeze of an accordion. Economists hypothesized inequality would rise as workers transitioned from low-paying agricultural work to higher-pay industrial work, but that the lower classes would catch up once the industrial revolution completed. Kuznets himself thought that as a country grew wealthier, it would also implement more redistributive policy. Kuznets, who died in 1985, was more or less right, but only for his lifetime.

In the last 25 years, however, the accordion bellows have expanded again. Income inequality is on the rise in developed countries, and there is no obvious answer why. The OECD considers several reasons why this might be, including: increases in more people working part-time; increases in investment-based income among richer households; and even rich folks marrying each other and doubling up on wealth accumulated at the top.

But the dominant reason is that we're experiencing another labor revolution, a transition from low-skill industrial work to high-skill knowledge work. High-skilled workers with jobs that cannot be off-shored or automated are being paid more compared with low-skilled workers. Worse, the transition is stuck -- as educational costs rise, less educated families are unable to gain the education required to complete the transition.

Though the report never puts it this way, one interpretation of the data is that inequality naturally grows from unfettered capitalism. Marxists won't be surprised, but the report should be disturbing for centrists who believe both in free markets and social equality. If free-market capitalism works so well for every income level, why have so many people seen income pass them by with capitalism working more efficiently than ever before?

One possible problem is the moral foundation that underlies capitalism: meritocracy. Our faith in meritocracy is deeply held and hardly questioned. After all, rewarding people according to merit is superior to corruption or nepotism.

But a system superior to corruption and nepotism is not necessarily the best possible system. What we consider "merit" is the result of education, and greater education requires greater income. Meritocracy, therefore, is a kind a social divider. As I wrote earlier, the idea of the "self-made person" is at odds with its moral connotations.

Until we come up with a better system, the best solution is in the OECD's conclusion: "Policies that promote the up-skilling of the workforce are therefore key factors to reverse the trend to further growing inequality." The only way to achieve fairness in a meritocracy is to provide more equal opportunities for everyone to attain merit.