How much inequality should we accept?

Inequality is at the heart of the Joy in Enough campaign, and the opening session of our Plenty! programme is all about it. We argue that entrenched inequality is something that stands in the way of people’s flourishing, and that Christians should work together for a fairer economy.

At the same time, a certain amount of inequality is inevitable. People are different, with varying levels of ability, motivation and ambition. We can’t treat everyone the same, and attempting to do so would be a failure of a different kind. So how much inequality is acceptable?

Branko Milanovic, an economist who specialises in inequality, recognises that it does have some positive effects: “Without inequality you lack incentives to do practically anything – to work, to invent new things or to invest. Nobody is going to do things for nothing and we know that monetary rewards are really crucial, so this is the good part of inequality. We should not forget that inequality is indispensible for the development of a society.”

Some inequality is useful then – but too much is corrosive to society. Where is the happy medium?

The recent Earth for All report asks this question, and the Transformational Economics Commission that informs the report has attempted an answer. They draw on the work of the Chilean economist Jose Gabriel Palma. Rather than look at distribution of wealth across the whole of the economy, he focuses on the two ends of the income spread. This is based in the observation that in most countries half the wealth goes to the 50% of people in the middle.

If half the wealth generally goes to the middle classes, then the big difference in inequality is between the top 10% and the poorest 40%. Divide the wealth of the top 10% by the share of the bottom 40%, and you get a simple measure of inequality called the Palma Ratio.

The UK has a Palma Ratio of 1.47, according to the OECD. The US is 1.63. Several European and Scandinavian countries score around 1. At the other end, South Africa is nearer to 7.

The Earth for All report tracks the effects of inequality along with sustainability measures in its computer model. They reckon that a Palma Ratio of around 1 is sustainable – so the richest 10% would have the same wealth as the poorest 40%. Anything higher than that and you risk social tension that may eventually become ungovernable: “extreme levels of inequality are deeply destructive, even to the wealthy. They create division and resentment. They breed conditions that are dangerous to everyone. They undermine democracies.”

When inequality becomes too extreme, the experience of the richest and the poorest is so different that you no longer have one society. Government can be captured by the wealthy, often depending on the allegiance of the middle classes against the poorest. Rising inequality leads to more extreme politics, but inequality of around 1 on the Palma ratio appears to be stable.

That’s what the computer model says, but of course this is a moral question and needs more than a computer’s answer. It’s a matter of wisdom and of context – what you consider to be an acceptable level of inequality is likely going to be influenced by where you are on the scale. There is a balance to strike, and no definitive answer. We don’t need absolute equality, but as Paul wrote to Timothy, we should expect the rich to be generous and ready to share.

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