Income inequality as a political issue

Income inequality is a highly publicized and much debated topic. How do we reconcile the arguments over this issue with reality, given the battle lines between one side and the other?

The origin of the inequality as political issue begins with Marxist theory.

Karl Marx originally proposed an economic theory that suggested how and why capitalism should be replaced. In Marx' view, capitalism, as expressed in the industrial revolution, cruelly exploited workers and turned them into valueless machines. Moreover, there was great inequality between the managers of the corporations and the workers who worked for them. Marx predicted that, at some point, workers would revolt against this exploitation, and create a transitional government that would eventually become a communist society. The new society would be egalitarian (all people would be equal) and not have an economic hierarchy.

Marx' theory developed into mature Socialist movement in Europe during the latter part of the 19th Century. Socialist leaders attempted to organize workers to prepare for the inevitable revolts, but they never happened. Meanwhile, Russia became a Communist state, during World War I, when it was taken over by a revolutionary gang. The same process took place in China under Mao. Neither followed the roadmap Marx had constructed.

In the period between the two world wars, socialist intellectuals began to think about why workers had not revolted. Was there something wrong with Marx' theory? The Frankfurt School was founded in Germany, in 1923, with the express purpose of correcting flaws in Marx' approach, using a tool called "Critical Theory." Critical theory attempted to look at Marxism from the outside in order to analyze it objectively. One conclusion they drew was Marx had not included psychology in his analysis of worker class behavior.

Using Freud's theories, the Frankfurt School concluded that workers did not revolt because they had been psychologically seduced by capitalism and were under its control. Working in a capitalist society forced the worker to earn the money that would allow him to achieve the lifestyle enjoyed by his neighbors. He was stuck on a treadmill and couldn't get off. They concluded it was a mistake to concentrate on the worker class as a constituency because it was too narrow and could not generate a revolution by itself. Instead, they would focus on all of society.

To that end, the German Social Democratic Party (SDP) published a document in 1959 called the Godesberg program. This program changed socialism's focus from exploitation of the worker to economic inequality across the whole culture. The party believed that if they could not defeat capitalism as an economic theory, they would have better luck attacking it for creating inequality. From the early 1960s to today, socialists have been attacking capitalism as the cause of inequality in the West. Their solution is to utilize government to alleviate inequality as a step toward transition to a socialist state. This tactic remains a core component of the Left’s playbook today.

To test the socialist’s idea, we examine historical income levels by economic class in the United States.

Here we see the income distribution in the United States at three different time periods: 1774, 1860, and 2011. What's notable here is that there is very little difference between income levels for each class over the two-hundred-and-forty-year span. The top tier has produced about 50% of the income, the middle tier about 35%, and the bottom tier about 10%.

These results are surprising given the state of American society when they were measured. In 1774, the United States did not exist and income was based on the colonial economy. In 1860, the industrial revolution was underway and the Civil War would soon begin. In 2011, eight years ago, the United States was operating in a mature post-industrial globalist society. Could these periods have been any different?

The most likely conclusion, to be drawn from the chart, is that a capitalist society operates by a set of poorly understood mechanisms that determine income distribution. Income is related to human capabilities and motivation. The results are similar for any time period and there is no manmade way to change the result. This means that throwing money and government programs at inequality will accomplish nothing.

How do Americans really feel about income inequality? The answer is surprising. For all the press about CEOs making 2000 times the salary of the average worker, Americans don't care about that metric. Study after study has shown that people care about their income as it relates to their peers, not some CEO. In other words, if I'm an attorney, I want to know that my income is similar to what other attorneys make. If I am below that standard, I will be unhappy.

If there is no way to make inequality go away, why waste time and money trying to do so? Focus on education and job training to help people get better jobs. And focus on keeping the economy strong so jobs are available.

Socialists understand that inequality cannot be eliminated from a capitalist system, so they advocate replacing capitalism with socialism. The only problem with that idea is that socialism has failed every time it has been tried. Socialists continue to use inequality as a hammer against capitalism to tear it down, even though they have no practical alternative.