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How Much Inequality can Merit Justify?

Rinto, a fourth year economics student, questions the meritocratic foundation of economic inequality.


On the 1st November, Boris Johnson declared a four-week long lockdown of England. This is the second lockdown since the start of the COVID-19 outbreak, and few people were surprised by the announcement. The initial fear and panic had been replaced by the gradual weariness and apprehension, as many had anticipated the measure’s devastating impact on the economy. A report published recently by the COVID Recovery Commission indicates that disadvantaged communities have been overwhelmingly affected by the pandemic, and sadly, this statement was just as predictable as the lockdown announcement. Similar to every crisis of the past decade, we are left pondering on the sources of a growing inequality.


The meritocratic dream

Nowadays, people generally assume that merit justifies inequality. Meritocracy is in fact so ingrained in our society that there exists a quasi-consensus across the political spectrum on the virtues of merit. The American Dream, for instance, is widely accepted in the United States as a national ethos, the model for an ideal society where the hard-working are rewarded regardless of their social condition. In Britain too, classist traditions have gradually eroded since the post-war period and instead, Labour and Tories alike scramble to claim the mantle of social mobility. Meritocracy appeals to the poor because it offers them a path to success and to the rich because it legitimises their wealth; to society because it incentivises hard work and to the individual because it fulfils their dreams. Anyone would apparently benefit from the apparent appeal of meritocracy. Yet, there has been a clear sense of unease around meritocracy ever since the resurgence of inequality in the last four decades. The sociologist Michael Young, who satirically coined the word “meritocracy” in his famous work of political fiction, foreshadowed the excesses of a system in which the value of an individual would be weighed against their talent and intellect. A society in its quest for equity could then ask: how much inequality can meritocracy rationalize? 


When money earns more money

During the last four decades, widening inequality in the developed world has been driven by an increasingly skewed income and wealth distribution. Put simply, the rich have got richer, with a distinct pattern in income sources between the top 1%, 0.1% and 0.01% of the wealthiest individuals. In Capital in the 21st Century, Thomas Piketty shows that the share of income attributed to capital becomes larger relative to the share attributed to labour as we move up in the income distribution. Qualitatively, the top 1% and 0.1% tend to be composed of managers, doctors and lawyers deriving their revenue from their profession, while the top 0.01% is mostly made up of financiers and CEOs of large companies benefitting from returns on stocks and real estate. The difference is also quantitative, with the UK’s top 1% and 0.1% earning more than £129,000 and £521,205 of annual taxable income respectively, compared to the top 0.01% earning at least £2,230,000. We observe an equally dramatic pattern for wealth: someone in the top 10% owns at least £350,000, compared to the top 1% owning at least £2,000,000 (individuals in the top 0.1% and 0.01% own probably much more than this). Piketty attributes this disparity to capital creating more capital: high net worth individuals earn high returns on their assets, which can be reinvested to generate more income. As a result, inequality becomes more pronounced at the top of the income distribution, with the very rich earning and owning significantly more than the rich.

When capital earns more money than labour, it is unsurprising to hear politicians railing against billionaires and their wealth. Surgeons and CEOs of large companies both belong to the top 1%, although many would agree that surgeons’ incomes are more proportional to their societal contribution than CEOs’ (with the latter also likely to belong to the top 0.01%). That is not to say that billionaire CEOs do not contribute to society. However, we may wonder how much income deriving from the appreciation of stock options or the returns on a hedge fund investment are truly deserved. And while some millionaires and billionaires give back to society through philanthropy, their donations elude any democratic oversights. For instance, should the Bill and Melinda Gates Foundation have so much power to shape public health policy? Or should their money be taxed and spent in other areas? Critics might argue that philanthropy at its worst maintains an unequal society that funds private schools and universities where the elites are overrepresented. Such misallocation of public goods illustrates how oftentimes inequality is the product of a complex, self-reinforcing mechanism with a potentially negative externality.


Relative poverty

In Britain, few people starve to death. Most people have access to public education, basic healthcare, housing, and a job. Presumably, we’ve never had it so good. So what is the fuss all about? The term “relative poverty” is tautological, if not euphemistic because in any society, the concept of poverty will be inherently relative to some arbitrary standards. Yet, the psychological hardship created by relative poverty can be as damaging as the material hardship caused by abject poverty. Low income earners in the UK are defined as any households earning less than 60% of the national median income, or less than £18,480 as of 2020. An estimated 14 million people live under this threshold, including 4.1 million children and 2 million pensioners. Of those 14 million people, 4 million live on less than £9,000. The net financial position of those households is almost negligible, with most assets held in pension funds and physical wealth. Among the lowest earners, wealth may even be negative because of outstanding debts. 

Due to a lack of data, it is difficult to assess the life of low income earners without succumbing to some stereotypes. In reality, some live comfortably on the national living wage, while others struggle to make ends meet, living in London is costlier than living in a rural area, dependents may constitute an extra burden–the situations are as varied as the individuals who belong to this group. However, after examining the anecdotal evidence of financial hardship in the media, a sense of anxiety emerges in all cases. For many people, it only takes a personal accident or a divorce to lose their income, slipping through a public safety net which has been left underfunded. The average workers have seen their real wages grow annually by 0.1% for the past 10 years, which underscores the stagnant living standards. And while an increasing number of students from low-income backgrounds are enrolled in higher education, 52% of disadvantaged youth are still likely to leave school early and remain in low paid jobs. 

Clearly, the meritocratic machine in the UK has stalled on many counts, and attributing the lack of social mobility to a shortage of talents among the most disadvantaged is not supported by the evidence. Our current form of meritocracy naively ignores how race, gender, disability and class predetermine people’s chances of success, and instead, it values the individual based on talent and knowledge alone. The result is an allocation of resources biased towards those who are already talented and whose economic returns are certain. The others will have to wait until a well-meaning altruist invests in their future.  


How much is too much?

Inequality is a dual problem: the rich keep becoming richer while the poor are kept poor. At the core of the issue, there is a self-reinforcing mechanism that misallocates resources to the wealthiest such that few opportunities exist for the less well-off. The dissonance between the ideals of a society founded on merit and the flaws in our system is deafening, if not disconcerting. It is disconcerting because the stability of a society depends on the set of beliefs that legitimize its imperfections: inequality is as old as ownership, but it becomes particularly pernicious once the most deprived feel left behind. The rise of populism and the political unrests that have shaken Britain since the Great Recession cannot be summarised in terms of economics. However, the ubiquitous rejection of an unfair economic system is observable in every crisis, be it political, economic or a pandemic, prompting us to question the soundness of a structure that is purely based on merit. In our times of unprecedented wealth, maybe everyone deserves to live at a material standard delivered unconditionally, free to discover their talents and pursue their dreams.

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