But the bankers aren’t the only ones. In 2010, according to U.S. Census Data, the top fifth of Americans, who earn more than $100,000 a year, received 49 percent of all income in the U.S., while the bottom 20 percent received just 3 percent. The U.S. also has the greatest disparity between rich and poor among Western industrialized nations, though a 2011 OECD report notes that, over the two decades prior to the onset of the global financial crisis, the gap between rich and poor widened in most nations.

Is inequality a problem? No, not if it is the result of hard work, of training and education, acceptance of responsibility and simple success at what you do. But inequality of remuneration and consequent living standards IS a problem when it is widely perceived that there is no just and fair relationship between work and reward.

“A fair day’s pay for a fair day’s work” – a fine-sounding slogan but hardly a reality today. The vast majority of working people slog away in factories and offices for the best part of their lives with nothing but a meager pension at the end of it – and even that may be in doubt. At the other end of the scale, the “fat cats” walk away with millions for having done little but presiding over a company’s – or even the entire banking system’s – demise. While this is causing growing, and justifiable resentment, the problem is very much deeper and more fundamental.

The absence of any defined relationship between work and reward may be widely perceived as a failure of social justice, but it has effects far beyond the immediately apparent. One such effect is that we will never, ever achieve full employment – real full employment in the sense that anyone and everyone who wants one can get a productive, rewarding and challenging job.

Money and Unemployment

Despite the negative human and economic effects of unemployment, and the desirability of full productive use of all economic resources, the ability to expand an economy to full capacity cannot presently be realized, for as the economy expands to near-full employment, the danger of inflation causes the Central Bank to put the brakes on.

The fundamental problem is that our money has no defined value. Sound impossible? Well, what IS a Pound Sterling worth? Or a Euro, a Dollar? How do you define its value?

The answer is that money has real meaning in terms of what you earn (wages), and what you can buy with what you earn (prices). But both wages and prices are open to continuing dispute, and lack any form of definition or stability. None of the world’s currencies has any stable, clearly defined value, and all are subject to a continuing upward movement known as inflation.

Inflation is not the complex esoteric phenomenon economists would have us believe. It is simply a matter of human greed – our natural desire to get more reward for the same work.

Inflation is an increase in price without a corresponding increase in value. If the price goes up for a better product that costs more to make, that is not inflation. But if a producer asks more tomorrow for the same product he sold for less yesterday, that is inflation.

Similarly with wages. More money for more or harder work is not inflation. Inflation is more money for doing exactly the same work.

In today’s economies, the level of economic activity directly affects inflation.

When the economy is sluggish, producers and retailers find difficulty in moving their goods; they respond by introducing price reductions, incentives and special offers. But as the economy expands and consumer demand expands, prices can be increased without losing sales.

Similarly with wages. Employees are naturally reluctant to demand more money, or threaten strike action, in a time of high unemployment with a lineup of job applicants outside the door. But when the economy approaches near-full employment and staff are hard to find, now’s the time to demand that raise you’ve been wanting!

Wages, prices and inflation increase as the economy expands and unemployment is reduced. This is the dominant feature of a free market economy, and balancing the two highly desirable but conflicting goals of full employment and zero inflation or stable money is the key to national economic management today.

The economy is slack and inflation is low. So the Government and/or the Central Bank expands the economy by lowering interest rates. But when near-capacity is reached in the more prosperous regions, inflation begins to rise, and the Central Bank attempts to control inflation by slowing down the economy with increased interest rates, thereby maintaining a level of permanent unemployment.

Recession or inflation? Our economic managers have two choices. Expand the economy to full employment and we get inflation. Or reduce inflation, by slowing down economic activity, creating unemployment and recession. The art of economic management as currently practiced lies in attempting to compromise between the two.

Apart from fiscal dishonesty and irresponsibility (printing money to gold-plate the presidential palace, or “quantitive easing” in the current economically correct jargon), inflation is not a monetary, but a social factor. It’s simple human nature. In hard times people behave themselves. But when things get easier, producers put prices up for the same product or service, and employees demand more money for the same amount of work.

The underlying economic factor which makes this situation possible is that pay and prices are settled by a form of disputation. The price is as much as the producer can get, or as little as the consumer is willing to pay. Similarly, the wage is as much as the employee can get, or as little as the employer can get away with.

This process is commonly known as free collective bargaining. But it is inherently unstable and subject to continuous upward pressure fuelled by the simple human desire for more. While the desire for more wealth and prosperity both personally and nationally is a very reasonable one, an economy and its participants should seek to increase their personal and collective prosperity by becoming more productive, by producing more and better goods with less labour, not by demanding more money for the same work or the same product.

The process of establishing pay, profits and prices by disputation results in friction, industrial disputes, loss of productivity, inflation, and permanent under-employment. It represents a facet of anarchy, in that it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines and regulation. Its damaging effects on the economy and prosperity are substantial and far-reaching.

In addition to the “hard” economic effects, there is a growing social dissatisfaction with the increasingly visible discrepancy between work and reward.

Full Employment. Zero Inflation.
And a Fair Day’s Pay.

Free Collective Bargaining on the wage, or pay side combined with totally unregulated market pricing is the key factor which prevents expansion to full employment. What, if any, are the alternative options?

A potential solution to this problem already exists, and needs only to be applied on a standardized national scale in order to bring stability – and social justice, that essential pre-condition of stability – to the economy.

For many years, a number of government agencies and corporations large and small, have been using a system of job evaluation to evaluate the work contributed by each employee. Each job is analyzed, and its essential characteristics and demands, such as training, responsibility, working conditions and physical/mental effort involved, are measured on a series of common scales. The job “value” is then directly related to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.

Currently there are several such systems in use, well tried and working successfully. All we need do is analyze and compare their different features to establish a single standard. This would become in effect a national standard of value for measuring the work element contained in a product or service, so that pay becomes a true reflection of the work required of a job. Society already measures apples and milk; it could hardly get along otherwise. Yet of all the commodities traded every day, work is the most important, and work is the one commodity we don’t measure.

A national standard would provide a point of reference, of justice indeed. Everyone would know how much they should get for the work they do, without hassle or argument or strike.

Labour evaluation can ensure remuneration stabilization. This process can be carried through to price stabilization.

A factory’s, or a business’s total costs consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labour added in the factory; and third, the costs of capital write-off, overheads and finance.

These are the costs of making a product, of supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price, there would be a direct and fair relationship between cost and price, and therefore between pay and purchasing power.

But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit. How is the net profit currently disposed of?

The prior destination for profits has traditionally been the investors, or shareholders. But today this is changing, reflecting in turn a new perception of the need to create a greater sense of teamwork.

Investment is vital, as also is the equipment it provides; but the machine is no longer the exclusive source of productivity and indeed its operation can be rendered useless without the intelligent participation of the workforce. The reality today, becoming ever more widely recognized, is that the people who work in an enterprise are equally vital: their inventiveness, their enterprise and initiative, their attention to the job in hand, their commitment to quality, their extra thought and effort... these are the factors which if encouraged and harnessed can turn investment into productivity and prosperity, and which can turn a company’s fortunes. Thus an annual workforce bonus reflecting performance of the company may also be included.

Apart from investor dividends and employee bonuses, the other major destination for the disposal of company profit is re-investment, either in research and equipment or increased working capital. The advantage is that in-house or self-generated investment comes without future servicing cost or commitment to repay.

There is one more claimant to a share in the profits, and that is the customer. Profits have to come from somewhere – or someone. In fact it is the customer who pays the price and generates the profit; with this view a further claim on profits would come from the consumer, demanding lower prices.

The stabilization of prices would require the establishment of public policy for profit distribution. This could take the practical form, first, of an overall profit ceiling.

Of the profit made, broad percentage bands could be established and gradually stabilized, distributing profit according to a pre-set formula as between co-workers at all levels, investors, and the internal needs of capital for reserves and re-investment.

As they do today, government revenue departments would continue to require that companies prepare in timely fashion properly audited annual accounts. Company profits would be examined in order to ensure that they are apportioned according to a consensus formula which respects the claims and contributions of consumers, investors, co-workers, and the future security of the business itself.

It should be noted that price stabilization effected in this way, through annual account regulation, would permit the same degree of latitude in pricing “deals” and special offers. But the profit ceiling would ensure an ultimate price stability.

Pay and price evaluation and stabilization would provide guidelines ensuring fair exchange between employer and employee, as well as between producer and consumer, without the need to argue or strike. More importantly, stable pay and prices would permit economic expansion to full employment without inflation.

Guidelines for pay evaluation coupled with profit limitations would replace dispute with rules, and would move to stabilize pay and prices even in times of economic expansion. In such circumstances it would be possible to expand the economy steadily to full employment and hold it there indefinitely without fear of inflation. The results would be seen in full employment, monetary stability, and a high level of productive efficiency and thus prosperity.

Back to gold?

Many economists and observers have long been aware that money has no defined value. A response has been the suggestion of returning to commodity-based money, like gold or silver. But the limitations of such rigid restrictions have already been experienced. Credit needs to be available, and to expand, in direct relation to the economic activity it has to support, lubricate and finance. It requires a flexibility which commodities cannot supply.

In any case, precious metals themselves fluctuate in value, if for example a major new source of gold is discovered, its “value” relative to other commodities will necessarily fall. And in times of uncertainty and financial instability, gold simply becomes an investment vehicle, a hoped-for hedge against inflation and currency weaknesses.

But in the search for monetary stability and “something solid” on which to base it, we have constantly overlooked the most basic commodity of all: human labour. Everything comes back to labour. It’s the only thing we’re trading. Indeed, the price of gold itself is ultimately defined in terms of labour: the amount of labour involved in exploration, location, mining and processing.

Labour is the one single commodity on which all else is based, in terms of which all else is measured and defined. It is the ultimate commodity on which to base our monetary unit.

Deflation

Inflation as a permanent feature of every world currency is a denial of one of the basic purposes of money known to every first-year economics student from the first day: money should act as a store of value. Yet a currency which loses – at the very best – 3% of its value every year is about as effective a store of value, as a water tank with a hole in it.

The longterm effect of productivity maximization combined with a labour-based monetary system is negative inflation. This becomes a completely normal, natural process. As productivity increases, the labour-content decreases, and it becomes possible for goods and services to be produced and offered at lower prices, thus progressively lowering the cost of living.

This has already happened in the field of computers and other electronics. Buy a computer today, and it is almost guaranteed that in three months’ time the price will be lower for a faster machine with more storage space on its hard drive.

This in turn means that as we get older we can look forward to increased purchasing power for our savings. A wild dream? No. This is as it should be, the normal course of events. We should be increasing productivity, producing more and better at less cost. And with a stable monetary unit, increased productivity involving less labour is reflected in lower prices. Currently we are forced to rely on pension schemes defined in terms of inflating currency, and government schemes which are already heading for deep deficit. So we console ourselves with inflated home prices, ignoring the warnings that bust can follow boom.

Money which increases in value over the years… an ideal which most “ordinary folks” with ordinary common sense would heartily applaud.

And yet our economists regard deflation with absolute horror. Do they know something the rest of us don’t?

There are two issues involved.

The first is that economists are contradicting themselves. Check the first chapter, indeed in the first few lines of any first year economics textbook, and there it is: “money is useful as a medium of exchange, and as a store of value.” And yet no one, economist, financial advisor, banker... indeed no one at all would ever suggest putting currency coins and notes under the mattress and hoping that by the time you retire they’ll be worth anything. We can all remember “how things used to be”, and the older you get, the more you see the rapidity with which money – the economists’ store of value remember – is losing its value.

Indeed the word “inflation” is hardly an appropriate term. “Depreciation” would be a lot more accurate. Instead of talking of “3% inflation this year”, it would be more realistic to speak of “a 3% depreciation in the purchasing power of our currency”. Inflation is a word with a good connotation; it means “bigger”, and that in turn has to be good. But “Depreciation” reflects reality: our currency is slowly deteriorating in real value – and by the time you need to spend your pension savings, your money will only be worth half what it is now.

Likewise, instead of “deflation” we should talk of currency “appreciation”.

So once again, why do economists dread deflation?

The answer is simple: inflation reduces the value of debts. If you owe £1,000 and pay it back in three years, its value will have fallen. It will be easier for you as the debtor to pay it back because your wages/salary will (hopefully) have increased.

This is particularly significant – and useful – for debt-ridden governments, which issue five-year bonds, happy in the knowledge that with a currency deteriorating in value by 3%-5% the real debt will be that much lower in five years when repayment time comes up.

Inflation – a depreciating currency which steadily loses value – is an incentive to spend now, pay back later.

Conversely, an appreciating currency which steadily gains in value and purchasing power, encourages saving, which in turn has a number of spin-off consequences. A nation which saves has more money available for investment. And when people can be confident that their money is naturally increasing in value, they will be less inclined to seek refuge in dubious investment schemes.

The Social Costs of Inequality

The absence of any defined relationship between work and reward results in a clear perception of social injustice. The current “remedy” consisting of a plethora of social services, only creates further distortions – and is extremely costly, as what might be termed the “guilty conscience effect” takes from the rich and gives to the poor.

So we see in developed countries the explosive growth of welfare support and subsidies of all kinds from education and healthcare to state pensions. This has led to another unforeseen consequence: governance has become less concerned with law-making, and increasingly occupied with income-redistribution.

The process of taking from the rich and giving to the poor is highly complex and costly both in terms of administration and of fraud. Thus the total apportionment for welfare does not equate with the total paid out in welfare: the administration costs of income redistribution have been variously estimated at anything up to 30% resulting in an over-staffed bureaucracy and an ever-increasing burden of taxation.

Another substantial result has been the introduction and growth of a new phenomenon: “social exclusion” in which a substantial proportion of the population is permanently reduced to the role of welfare recipients, lacking the education and skills necessary to contribute usefully to the nation’s, and their own personal economy. Different components of social exclusion influence each other, thus creating a spiral of insecurity, which ends in multiple deprivation. Deprivation usually begins with unemployment, due either to economic conditions or lack of educational qualifications and skills. This in turn leads to a significant degradation in living standards and increased risk of poverty. Living in poverty creates additional difficulties in the search for employment and contributes to a long-term unemployment trap for many individuals. At the same time, unemployment and poverty inhibit participation in social activities.

The resultant income disparity and the growing wealth gap also has a serious and substantial effect on the overall health of society, from violence and illiteracy to mental illness and life expectancy. In areas of extreme deprivation, low or zero employment opportunities, substandard housing, and an uneducated youth population without prospects, violence can easily erupt.

The main impact of social exclusion however is the parallel exclusion of a potentially productive workforce from the nation’s economy, thereby causing a significant reduction in potential national productivity and prosperity.

In Victorian times the wealthy assuaged their guilt by providing libraries and public baths for the poor. We are still living in the Victorian era today: the rich are taxed to provide welfare for the poor.

Social Security in its widest possible sense is the goal of every well-governed society, and the only true “Social Security” is full employment, that utopian condition in which there is a rewarding job for everyone who wants one, with the guarantee of a fair day’s pay for a fair day’s work.

Summary

Quoted in an October 2011 TV interview (PBS) Howard University professor Roderick Harrison believes that a major underlying cause of growing income inequality is that the gains in productivity have been divided more towards corporate earnings and profits than towards the workers and employees. “You have a gain in productivity. You’re producing more per worker. If that goes primarily to profits, which it has in recent decades, wages are not increasing due to that gain in productivity. The workers, the employees are not benefiting from it. 

“This has a knock-on effect in that the suppressed incomes of lower- and middle-income people means that people are maintaining their living standards by credit and borrowing. When debts become too risky in a climate of recession, people naturally try to wind-down their debts, so reducing consumer spending. And that’s part of the difficulty with climbing out of the recession.”

Professor Harrison continues: “I think the distribution of increases in productivity is the key. We have had great, substantial gains in productivity. If we maintain those, but if we distribute the benefits of that more widely across the work force, you would start to see a leveling out of incomes, a return to the prior levels of less inequality. That would broaden the consumer base and give some strength.”

This view is supported by a 2011 Report by the International Monetary Fund, which studied a sample of countries around the world between 1950 and 2006. It found that in countries with greater income inequality, such as Jordan and Cameroon, the economy more frequently plunged into deeper recessions, while economic growth lasted much longer in more equal societies. Indeed, greater levels of income equality corresponded more strongly to sustained economic growth than other economic factors, including lower debt levels, according to the report. “Sustainable economic reform,” the authors write, “is possible only when its benefits are widely shared.”