On Inequality (Revised)

Boundaries and Inequalities in Nature and Society

Boundaries and inequalities are two parts of the same story, and both parts are necessary for life and for human societies.

A dam is a boundary. The water level inside a dam is higher than that outside the dam. The difference of water levels drives the movement of electricity generators to produce electricity. The air pressure inside an engine is higher than that outside the engine. The difference of air pressure propels the movement of the engine. The biggest source of energy on the earth is from the sun. The temperature on the sun is much higher than the temperature on the earth. The difference in temperature drives much of the atmosphere movement, ocean currents, rainfalls, and photosynthesis on the earth. Without inequality, the world is a dead place.

From thermodynamic theory, the efficiency of an engine is determined by the difference of temperature inside and outside the engine. The higher the temperature differential, the more efficient an engine becomes. This is a general principle. The efficiency of a dam to generate electricity is determined by the height of the dam. The higher the dam, the more electricity can be generated. The efficiency of transmitting electricity over long distance is determined by the voltage differential. The higher the voltage differential, the less energy loss during transmission.

Because of the need to maintain differentials, systems generally have barriers to separate inside from outside. Engines have combustion chambers. Dams are constructed to separate water above from water below. Cells have membranes, where concentration of many materials and the electric potentials are different inside and outside. A system maintaining a higher differential needs to withstand greater pressure.

At the same time, systems with higher differentials are more costly to build. An engine that can withstand higher temperature and pressure is more expensive. So are higher dams and high voltage transmission systems. Systems with higher differentials, when they fail, can cause greater damage. A higher-pressure engine causes greater damage when they explode. A higher dam causes greater flood when it collapses. A nuclear power plant, which uses high density nuclear energy as fuel, can cause great environmental damage when accidents occur. Inequalities are necessary but they are dangerous.

There is a strong parallel in human societies. Human societies everywhere are unequal. In businesses, there are supervisors and subordinates. In academics, in the military and in government, there are different ranks. Among different countries, there are rich countries and poor countries.  Enormous efforts go into building and maintaining these inequalities.  At the same time, excessive inequality is dangerous – it can cause a human society to explode.

In human societies, boundaries exist to create and preserve social inequalities. This is obvious, since as organizations or societies come to control more resources, they increase their exclusivity and the difficulty of getting in.  Education (from the beginning of time) has two elements.  One is the imparting of a specific skill, for instance, in a medieval village, weaving or carpentry or blacksmithing.  The other is the acquisition of the right to practice that skill – admission to membership in the guild.  This dual practice continues to the present day, in ever more complex forms.  Law and medical schools train lawyers and doctors.  Bar associations and hospitals admit (or exclude) graduates of those schools to practice.  A major purpose of professional education is social advancement – and this is a relative process, requiring and enforcing inequalities.

Greater inequality often means greater profits. Companies can raise prices when they have a great competitive edge. Universities that are more exclusive can charge higher tuition. In a wealthy and democratic society, it is often difficult to maintain a high level of inequality. The elites will therefore move production to authoritarian countries where inequality is high and profit margin is high. They can take advantage of lax environmental standards, low taxes, lucrative profit-sharing agreements and cheap labor.  That is why elites in Western countries often support governments in authoritarian countries and suppress democratic movements in these countries, even while they are willing to accept a certain amount of taxation, and environmental and labor standards at home.  Moving inequality across recognized (and tough) boundaries makes it less of a political risk.

In short, inequality is everywhere. If so, why do many people, especially the richest and the most powerful, claim to fight for equality? This is partly because they worry about their own safety in an excessively unequal system.  But it is also because most people are at the lower end of the society. Today the richest person has more than a hundred billion dollars in assets. But most people have less than a few thousands in net assets. Thus, almost all public statements, whose main listeners have very few assets, promote and celebrate equality and solidarity and similar values. People promoting equality gain higher moral ground than others. And people with higher moral ground gain higher social status. Equality breeds inequality.

Indeed, almost everything we do personally or in small groups is to increase or maintain inequality. However, we avoid the term inequality. We try to stand out, or to be outstanding. We want to excel, to be distinguished. Many people who become prominent fighting against inequality send their kids to exclusive universities. We produce patents to create monopoly. We hope our books, protected by copyright, will sell. Our gods, our political systems and our moral standards are superior. We profess equality as a political and moral goal but subvert it every day in our daily life. If equality is equilibrium, we work against it. This is the way of the world. 

Regulation and Inequality

We have discussed inequality as an artifact of boundaries and a necessary feature of all life systems.  However, though inequality is necessary, it must also be kept under control. Safety and resilience require that the inequality that is permitted not become too extreme.

For the designers of a mechanical or (say) electrical system, the choice of the level of inequality depends on the tradeoff between efficiency and maintenance costs. In North America, electric voltage in residential areas is 110 V while in most other parts of the world, the electric voltage is 220 V. To carry the same amount of electric energy in a 110 V system requires much thicker wire than in a 220 V system. However, when accidents occur, 110 V causes less shock than 220 V. In a system with abundant natural resources, such as North America, we often choose options that are safer but less resource efficient. In systems with scarce natural resources, we often choose more resource-efficient but riskier options.

There is a parallel in social systems. In a social system that controls more resources, the internal inequality is often low. Low inequality may be less efficient, but it is much safer.  For this reason, dominant parties of a society do not necessarily hope to increase inequality all the time. Rich societies can afford to be relatively egalitarian, and in fact wealthy countries are systematically more equal than poor countries. Rich countries can utilize abundant resources as “energy slaves” – so that humans can live in relative equality, and with the security and quality of life that equality makes possible. Indeed rich countries have elaborate wage structures that are determined by social and political decisions, and not in markets.  This is the basis of the social element in a theory of value, which we will discuss later.  Rich societies purchase internal resilience and safety through institutions that limit and mitigate inequalities.

In a social system that controls fewer resources, the internal inequality is often high. In such a system, efficiency is very high for the elites, the designers of the system. They can afford many servants, retainers, and cheap factory hands. Their living standards are higher – often much higher – than those of wealthy people in richer countries. The living standards of the poor are lower – much lower – than those of poor people in richer countries. The protections of social valuation do not apply. However, such systems also have a higher probability of experiencing revolts, rebellions, and revolution. Elites in poor societies usually live behind high walls and employ security guards – even sometimes private armies.

Measures to limit inequalities within a national community are necessary to preserve the concept of a national community – of a common social system to which all members (qualified persons, or citizens) have a plausible degree of access.  Oligarchs – if they are wise – generally prefer to operate in the shadows, so that the extent to which they enjoy exclusive wealth, privileges and power is not widely visible to lesser members of the same community.

Fixed investments like railroads and highways and parks and libraries are shared by the whole society; they reduce inequality, but they are costly to maintain. When the British Empire was expanding rapidly in the 19th century, it built many public works and abolished slavery, an extreme form of inequality. By adopting a less unequal social system, Britain was able to maintain and expand a huge empire with relatively little cost and huge profit. Victorian Britain issued bonds, called Consols, that were to be paid in perpetuity and never redeemed.  The British Empire expected to last forever. Similarly, great egalitarian movements in the United States, such as the New Deal, combined massive public investments in energy, transportation, public buildings, and education with comprehensive social insurance. It was a program designed to create a society that would last, and dominate the world economy, for a long time.

The inequality of a system thus depends in part on how long the dominant parties expect the system to last. For an unequal system to last, the level of inequality cannot be too extreme. This applies both in nature and in human societies. When we go fishing, we hope to have some inequality over fish. But not too much. For this reason, we use a line to hook fish – this gives the fish a sporting chance. A fishing net would be more efficient. However, if everyone were allowed to use fishing nets to an unlimited degree in rivers, lakes and oceans, the fish population would decline rapidly.  When the dominant parties expect the system to end soon, the inequality of the social system tends to increase so that dominant parties can extract more profits while the system lasts.  It may be that when a society is governed largely by older people, the tolerance for inequality goes up as time horizons shorten.  When Ronald Reagan became President of the United States in 1981, he was both the most inegalitarian modern president and the oldest president in the United States to that date.