Friday, May 13, 2011

Inequality 6: On Social and Class Dominance

There was another comment in my article, Why inequality is good, posted at the New Asia Republic. For brevity purposes, I condensed such long comment into these four points:

1. “The notion of perfect competition is a fantasy. Therefore the equilibrium outcome of markets may not necessarily be the most efficient outcome for society.”

2. “Addressing inequality may increase social & institutional capital – the benefits accrued from the improvement may then outweigh the cost of redistribution.”

3. “Capitalistic societies tend towards inequality- and this inequality leads to class dominance... I disagree that left to markets, civil society can reach its fullest sense of compassion and dignity.”

4. “Free markets allow goods and services for those who are able and willing to pay, but leaves out those who are not able to afford it.”

Here are my counter-arguments.

On #1. In most cases, perfect competition does not exist, but in a few cases, it does. For perfect competition to occur, ALL these five factors should be present at the same time: (a) homogeneous product, (b) many sellers of a particular product, (c) many buyers of that product, (d) perfect information, and (e) free entry and exit of firms.

Take tomatoes. The small, rounded, red cherry tomatoes are different from small, not rounded (maybe flattened, oblong, etc.) tomatoes, are different from medium-size rounded tomatoes, are different from medium-size, not rounded green tomatoes, are different from large-size rounded tomatoes, are different from large, seedless tomatoes, are different from large, few seeds tomatoes, and so on.

Here, there are heterogeneous products among tomatoes alone. If we talk of perfect competition, then comparison should only be on homogenous, similar or same product in terms of quality and characteristics. Once you introduce a different product, say a different type of tomato, then one factor of perfect competition – the homogenous product criteria – is immediately violated.

Thus, the real world is characterized more by monopolistic competition, not perfect competition, because it is very easy to create a mini-monopoly in each sector and sub-sector. The different qualities and characteristics of tomatoes mentioned above would constitute a mini-monopoly in the production and trading of tomatoes.

A few products would qualify under perfect competition, somehow, like petroleum products. Whether the gasoline is sold by a Shell gas station or Chevron or Total or Petron or PTT or any other gas stations, we assume that it is of same quality. A really homogenous product. There are many gas station sellers, there are many motorists, and the prices by different gas stations are generally the same, there is perfect information. Free entry and exit, however, can be affected by government regulations and politics. Not all gas stations that want to enter a certain city may be granted business permit if the Mayor or an influential Councilor there owns one or more gas stations already, as this will adversely affect their business.

On #2, forcing equality may increase social capital, or it may increase social deadweight loss. When you redistribute income and assets by force and coercion, you are confiscating money and resources from the efficient and hard working people, give to (a) government bureaucracy that legislates and administers the income confiscation and redistribution, and (b) the poor who become poor because of natural causes (their house, car, farm or shop or factory were wiped out by flash flood or tsunami or volcanic eruption or huge fire, etc.) or because of personal irresponsibility (over-drinking, over-smoking, over-eating, got various diseases that dissipated personal and household savings).

Since most forced equality welfare programs do not care the cause of poverty, some personal irresponsibility can be augmented and worsened by social and government irresponsibility. And overall social deadweight loss is expanded.

On #3, “Class” categorization in modern capitalism has become murky and vague. The traditional capitalist class (“bourgeoisie”) vs. working class (“proletariat”) no longer applies strictly. The richest men in the planet do not own the biggest manufacturing plants or power plants or own tens of millions of hectares of land. Rather, they are software producers and sellers, real estate developers, mall developers. The income plus perks of top ranking UN, WB and IMF bureaucrats are much higher than the income of many medium-size, even big-size companies that are grappling with fierce competition from other companies. These international bureaucrats are neither capitalist nor workers in the traditional definition and class delineation.

If we distrust civil society – civic clubs, business clubs and professional associations, industry associations, sports clubs, church organizations, private and corporate foundations, villages association, etc. – to give “compassion and dignity” to the poor, why do we trust government bureaucrats, politicians and UN bureaucrats to do that job? Are the latter group composed of different molecules, different heart rates and IQ, than the rest of humanity?

On #4, as I argued earlier, free markets means free individuals as ALL markets are composed of individuals. Market segmentation ensures that there is a market for everyone, from the richest to the poorest. The very rich may aspire for a $1,000 meal while the very poor may aspire for a $1 or $0.50 meal. It does not mean that the latter food is poisonous and have zero nutrition while the former is super-nutritious that it is capable of prolonging the life of the person up to 150 years or more.

When people know their place under the Sun, they will realize that they need to work more, than envy more and lobby more for government welfare. A person having an average take-home pay of $200 a month should not aspire a lifestyle of $300 a month or more, then demand that government should subsidize him so that he can live a bubble lifestyle that he wants.

Do not discount the capability of individuals, rich and middle class alike, for voluntary charity, to help the less privilege people. Especially if such people are showing deep desire to improve their lives on their own.

See also:
Inequality 4: Why Inequality is Good, May 10, 2011
Inequality 5: Comments to Why Inequality is Good, May 11, 2011
Hayek 3: Inequality and Progress, May 19, 2009
Competition vs. Regulation
Ronald Coase and The Firm

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