(Image via HarshLight / Flickr)

Tom Orren continues his three-part series on how the laws of economics could help us create a fair society, nation and world.

Read Part One here.

FAIR SOCIETIES PROVIDE all of their citizens with what they need and that hinges on three factors.

The first is how fairly the society’s products are distributed — that is, fairness.

The second factor is the society’s total productive capacity – otherwise known as its output – and in economics that is shown using a Production Possibility Curve (PPC) which expands outwards as a society’s output grows.

Output is a combination of two things: effort and efficiency, or, working harder and working smarter. Working harder is fine, but there are limits to how long or how hard people can work and how many extra people can be put to work. So, generally, the most successful societies are the ones that work smarter.

The third factor is the kinds of products that a society produces. This is also shown on a PPC. It shows how a society has a choice about whether to produce consumer goods (food, clothes, cars and so on) or capital goods (infrastructure, machines, technology and so on).

Consumer goods are simple. Once they are made, people consume them and that’s that. But making capital goods requires people to forego some immediate consumption, the pay-off being that their society will become more efficient and will be able to produce more of everything in the future.

All progress requires some form of sacrifice or delayed gratification and creating fairer societies is no exception. It’s always worthwhile giving up something today if it means becoming more efficient – or fairer – in the future. Take technology: with a little sacrifice, any society can allocate more resources to the production of new technology and thereby expand its PPC. The increased efficiency that results should benefit everyone. Yet this is not always the case, because sometimes the benefits of that new technology do not get shared.

Back in the 1970s, the future looked obvious. It looked as if technology would deliver five-hour days, four-day weeks and retirement by the age of 50 — and why not? Advances in technology over the previous century indicated this would be possible. Yet lately – despite technological progress exceeding all expectations – those indicators have been going backwards. How could that be? The answer is simple. Society forgot about fairness. It forgot to share.

Here’s how it works: every technological advance since the Stone Age has also created inequality. Increased efficiency in one group allows it to progress while the rest remain stagnant. This creates winners… and often losers. That kind of temporary inequality is inevitable and it’s not particularly unfair.

In fact, it may even be desirable because the chance to get ahead is what motivates people to innovate. That’s been recognised by most societies in the form of patent laws — people acknowledge that if someone has a good idea, then it’s only fair that they are rewarded for it.

But it’s a different matter if such temporary inequality becomes entrenched. Entrenched inequality creates discord and that can turn nasty. However, it can be just as easily avoided if those who benefit the most from a new technology share some of their gains with those who did not, or who lost because of it.

Imagine a society or a tribe that invents some new technology like a bow and arrow. The tribe’s PPC will expand outwards because the hunters will be able to catch more meat with the same effort and that increased efficiency should make the whole tribe better off. True? Naturally. Unless, of course, some greedy hunter keeps all of that extra meat for themselves.

Enter the law of diminishing returns. It says that keeping all that extra meat wouldn’t do a greedy hunter any good because they could only eat so much before they were fully satiated. After that, any extra meat would only result in vomiting, which would reduce their total satisfaction.

So there’d be no point in a hunter being too greedy. It would harm them twice-over: first, due to overindulgence and a second time by harming those who depend on them and, in turn, on whom they depend. What’s more, if that meat went to a more needy person, it would create far more benefit for the tribe. The more fairly it was shared, the greater the tribe’s wellbeing would be.

We can see how greed doesn't serve these types of societies or tribes: fairness becomes a matter of life and death. It’s obvious that everyone can be better off if any extra output due to increased efficiency is shared.

The law of fairness says that that same principle should apply universally. However, in modern societies, the consequences of greed are less severe. It’s less a matter of life and death and more a matter of lifestyle. In many cases, greed is even admired.

Re-enter empathy. Most of us feel uneasy when watching others struggle or suffer, especially if we can help prevent it. This brings us to another factor that technological advances have in common. Eventually, all good ideas get shared so that others can use them to expand their PPCs, thus turning temporary inequality into a long-term, collective advantage.

That way, everybody can benefit. That’s the law of fairness in action. However, if those advances aren’t shared, discord sets in and eats away at society.

Nowhere is this more obvious than in the USA, which, in 2017, was home to 563 billionaires — more than anywhere else in the world. But it was also home to serious inequality. What’s more, the wealth of those billionaires is growing faster than the wages of most workers.

For example, in 2015, Bill Gates was worth nearly US$80 billion (AU$102 billion) and yet in 2017, despite vast amounts of consumption and philanthropy since then, he was worth US$89 billion (AU$114 billion). He simply cannot help getting richer because once a certain threshold of wealth is crossed, wealth generates more income than a person could ever spend.


That’s why in 2018, he's now worth more than US$92 billion (AU$118 billion). He can never give away enough money to stop becoming more wealthy. But honestly, would he be any less happy with $40 billion, or even $4 billion?

At the other end of the spectrum, minimum wages in the U.S. range from $7.25 to $11.50 (AU$9.28 to AU$14.73) per hour. So an employee working 40 hours could earn a maximum of US$460 (AU$590) a week, which is barely enough to pay rent and utilities, let alone provide a balanced diet or an enriching environment for children.

It seems grossly unfair that the second richest person on Earth can’t stop getting wealthier while his fellow citizens have to live below the poverty line. Yet some business people argue that Gates deserves every cent of his wealth. That’s business for you, it’s all about personal wealth.

But a good economist would disagree. They’d say that, compared to Gate’s wealth, the inadequate wages paid to low-skilled workers in America amount to modern-day slavery and that inequality is actually harming the U.S. economy, not helping it. Worse still, it is creating social unrest — a revolution may even be brewing.

That’s the law of unfairness in action.

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