It’s the inequality, stupid

Blair going, and Brown coming, hopefully means some new policies for our Labour government, and fingers crossed that this will include doing something about inequality. Polly Toynbee thinks this might happen. I’m not so sure.

Anyway, I’m just going to show why inequality matters… Blair’s insistence that it wasn’t necessary to do anything about inequality, but just give the poor a hand up, can only be based on a (wilful?) misunderstanding or misreading of how markets work.

First, though, there’s the happiness argument. Richard Layard shows how happiness doesn’t increase as we get richer (beyond a certain point – perhaps where we have all the essentials and bit more) but that the poorest are unhappiest if there is more inequality. The more equality there is, the more happy society is. Now this could be purely because of envy – the poorest have enough (food, shelter etc.) but see others in luxury (big tellies, fast cars) and want that too.

However, the nature of the free market causes more fundamental problems when there is too much inequality. Essentially this is because there is no such thing as a perfect market: a perfect market, one where supply and demand set the price, needs players to have access to the same information and access and to have roughly the same amount of money (and goods that can be easily and quickly reproduced to satisfy demand). The inequality we have undermines this completely. Here’s why:

  1. In some cases, a company can make more money by limiting the number of products as opposed to going mass market. Say an object costs next to nothing to make. If they are desirable and you could sell them at say £1000, but only 4000 people could afford one, you make £4,000,000. To get 4 million people to buy you have to lower the price to 50p, making £2 million. Soap companies do this all the time, repackaging the same product at different prices.
  2. Even with competition this doesn’t lead to the lowest profitable price. Each company sells for whatever they think will bring them the most profit, and usually keep the price as high as the market can stand (the most people are prepared to pay). People don’t ‘look around’ enough to drive down prices so not all the money goes to the cheapest. As before, the extra profit to be made by keeping a higher price may easily outweigh a growth in market share that could be attained by lowering a price.
  3. Often convenience and laziness means people go for the easiest option. If you’re in London and you want a coffee, you don’t have time to read reviews of lots of coffee shops, so you rely on Starbucks as you know what you are getting. Yes, it’s more expensive than other places, but there’s less risk as the consumer doesn’t have perfect information. Then the smaller places lose business, reduce costs or increase prices, and then close.
  4. And you don’t always have a choice. Who’s going to walk to a cheaper shop to save 10p on a pint of milk.

Indeed, my favourite examples to illustrate this come from when I used to live in Notting Hill (in subsidised housing – couldn’t afford it otherwise). In Crispins (a 24 hour store) here a caramel slice cost 75p, yet the Crispins a quarter mile down the road sold the same thing for 99p. I was working in a second-hand record store where we often sold CDs for £13 that were cheaper new in Virgin. In both cases there’s a mix of the rich and tourists who are prepared to pay more.

Now the problem here was that poor people lived there too. And because the very rich don’t notice that their milk and bread was more expensive, the shops get away with it and the poor had to pay the high prices too.

The same is true of housing. The value of housing isn’t down to the amount of enjoyment/use you get out of it, but is based on people’s willingness to pay. So if there are enough people with high disposable income that are prepared to pay higher prices, it drives up the prices for the rest of us. As long as it’s still affordable (i.e. no-one is actually starving), people then use higher and higher fractions of their income for housing, leaving them with less for everything else.

Lastly, large inequalities can cause hoarding, which is the above issues taking a life of their own, and sometimes because people hope to make money from future price movements. Amartya Sen showed how the Bengal famine of 1943 didn’t come about because the area didn’t having enough food, but that it was distributed wrongly. Often prompted by shortages, or rumours of shortages, the richest buy up all stocks, whether they need them or not, leaving the poor with nothing. In the case of famines, the rich often hope to make money by selling their accumulated stocks. The housing bubble here is partially caused this way, as speculators buy up all the new housing in the hope that they can sell it for more later. And there is also the hoarding effect of people who just want to own more than one home. Inequality in the UK is such that the amount that some rich people are prepared to pay for a second home is more than some poor people are prepared to pay for a first home. Inequality can cause homelessness just as easily as a lack of supply. That’s why inequality matters.

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Filed under Politicians, Statistics and simplicity

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