How to solve inequality problem that is plaguing capitalism? (By Prof. Richard B. Freeman)

A couple of weeks ago, on the 28th of July, I was fortunate enough to attend a seminar conducted by Prof. Richard B. Freeman, one of the leading labour economists from Harvard University, on the topic of “How to solve inequality problem that is plaguing capitalsm?”.

Prof. Richard B. Freeman on the left. Sorry, old phone’s camera is not the greatest.

Prof. Richard B. Freeman

Prof. Richard B. Freeman (In case you want to know what he looks like). That hat though…

I find it to be quite an intriguing topic, given inequality itself is regarded an inherent nature of capitalism. In other words, inequality is, I dare say, an inevitable consequence of (pure) capitalism. Why?

1. Capitalism, its components, and inequality as a universal concern

Because capitalism, by definition, comprises:

– Private ownership of capital and produced goods and services,

– Private trade/exchange,

– Profit-seeking behaviors,

– and Consumption

These are the pillars of capitalism. All of these 4 components will bring about inequality in one way or the other, and for one to say that he wants to combat inequality is tantamount to combating against (i.e. limiting/reducing) the degree of freedom of at least one of the 4 components as previously mentioned. At least, that was what we could logically imply from the definition of capitalsm. This is to say that people are inclined towards such thinking, getting rid of something or parts of something deemed undesirable.

However, never forget that Economics is not a hard science. It is more complex, and thus, has more leeways than what one could expect. In other words, in Economics, trying to solve a problem is not necessarily equivalent to getting rid of the problem because the problem itself can be related to having too much or too little of something (which at appropriate amount or level might turn out to be more beneficial than harmful). For instance, too high of an inflation, too much unemployment, too little demand, too little population growth, etc. For most of the variables, we would like them to stay at a reasonable level. This is economics flesh and bone because one of the duties of economics, as a field of study, is working to create balance, to reach equilibrium.

The solution brought fourth is one that has been thoroughly thought and empirically proved to be effective (by Prof. Freeman and his co-researchers), at least in the United States, and it also conforms to the economic way of thinking which puts much focus on seeking equilibrium point.

This pisses lots of people off.

At the start of his talk, Prof. Freeman briefly mentioned about how inequality is ubiquitous, about its persistent exisitence in the developed side of the globe. Country A might be getting richer, but this is only in aggregate sense. Taking a closer look, not everyone in the country gains from the growth. Some people are doing much better than the others, some improve slowly, some don’t, and some just go down hill. One interesting fact, though, is that in capitalism, ownership brings positive economic margins (i.e. profit) for those who own capital (business shares, lands, houses, etc). What he meant to say, I believe, is that the more you own, the more affluent you get. Once you have accumulated wealth to a certain point and is capable of re-investing the wealth in a sound manner, you are bound to grow richer. You still, of course, face risks, but unlike most people who have to put their income all into a single basket to generate some solid return, the richer 1% has enough wealth to be allocated to various lines of businesses to diversify risks, and it works. This helps explain the difference between the 1% (the rich and the darn rich) and the 99% (middle-class, the poor, and everyone in-between).

Prof. Freeman went on to show some more astounding facts. Did you know that 0.1% of the rich actually possess half of the total wealth of the entire 1% class? And, according to the International Business Times, The 0.1% in the US alone owned 22% of the total wealth in the country in 2012. However, they are often grouped as part of the 1%, and economics instruments like Gini index (that measures inequality) often fail capture this due to its large scope. Thus, it may require us to reconsider how we have thought of inequality up till now. As a matter of fact, it only serves to further strengthen the above statement by Prof. Freeman which basically says “the richer you get, the richer you get.” For this reason, the vast majority of the OECD (Organization for Economic Co-operation adn Development) countries are facing increasing inequality (rising gini index), except for Turkey and Greece.

On a side note, Gini index is a statistical means to measure distribution/share of income among households in an economy. It goes from 0 (absolute equality) to 1 (absolute inequality).

It is important to keep in mind that Prof. Freeman only talked about the developed world. Regardless, I believe, those who are living in the developing world have definitely witnessed with their own eyes the emergence of income inequality because inequality problem is not something unique to the developed countries. On both sides of the globe, Income inequality has led to various social issues, but one of the worst is an illusion of poverty (relative poverty). People who are in good economic situation might still perceive themselves as being poor if they work too hard on comparing themselves to those more well-off. It can cause people to arrive at inflated artificial standard of what is considered “decent life-style” and start to resent the world, the government, etc. This is actually no joke. It is happening as we speak.

2. Robot Economics: Future awaits

Robot will replace your best friend…

As if this is not enough to convince the audience that inequality is imminent, prof. Freeman then continued his speech by dragging in another topic, what he calls “Robot Economics”. It sounds fancy, yes. But, what is Robot Economics about?

Robot Economics is not literally about Robots as we all want it to be, but it comes close to its literal meaning. According to Prof. Freeman, Robot Economcis is about how rapidly advancing technology is impacting our economy, in the present and the future. Robot Economics seeks to explain this impact via 3 observations:

– Technological improvement has resulted in more machines replacing human labour

– New discoveries and innovations have led to declining cost of high-quality machines

– These machines continue to provide tremendous benefit to those who own them at the cost of human employment

These 3 factors, as you can see, are strongly related, and they help explain the rising inequality of the coming era, especially for countries where proper rules and regulations to counter inequality are not readily prepared (which are mostly developing nations with too many priorities and concerns and too little resource).

I, personally, find this concept of Robot Economics appealing, but I must be truthful to myself and to you, dear reader, that I do not 100% agree with Prof. Freeman.

Of course, technology will lead to more machines replacing “traditional” jobs that are physically demanded and routine-based, that can be equally achieved via programmable software or hardware. Many jobs that exist in the past have already ceased to exist in the current days. Farmers who used to plough the land using animals and harvest crops by hands are disappearing, particularly in the developed world, and are being replaced by farming tractors that can achieve so much more at much less time. This is a part of what led and made possible population explosion during industrial revolution. So, it is not a bad thing. Other more urban jobs like Bank Tellers, Cashiers, Travel Agent, etc. are also respectively being replaced by ATM, Self-service checkout, Travel-related websites, and such. This is undeniably happening. But…

But, we must never forget that many places and their related jobs that were predicted to go extinct due to the force of technology growth such as theatre (live actors), concert, university (teachers), etc. are still around and are doing well in terms of co-existing with the current technology. Instead, it is even doing much better thanks to technology. So, what is going on here? Will inequality be the ultimate outcome of technological advancement? Will more jobs be replaced and more people end up being unemployed?

Not really. First, technology promotes equal ground or equal opportunity. It gets rid of the past boundaries between the rich, the middle, and the poor, and allow these people to have more equal voice. People are also able to get so many things done with a few clicks on their computers, significantly reducing the reliance on networking (which is an advantage of being the richer few). It opens up more opportunity for people to start business, to advertise, to get more done with less capital. This implies that more people are able to reap benefits of capitalism as the barriers to get themselves started get thinner and thinner.

Second, never forget the “Caveman” principle. Caveman principle is a concept made known to me by Prof. Michio Kaku, a theoretical physicist at the City College of New York. Caveman principle is the idea that no matter how modern humans have far evolved and diverged from their primitive forms, they still share apart of the instinct, the tendency to follow their primitive behaviors as excercised by our ancestors. That helps explain why humans still prefer to go to offices to work (to be able to interact with one another in person), to go to concert (to experience the thrill of seeing your favorite stars with your own eyes), to be more inclined towards using paper forms for record and contract as opposed to electronic forms, and so forth. So, this means that some jobs will not be replaced, and thus, Robot Economics is not as bad as it sounds.

Third, yes, jobs do get replaced, and there will be structural unemployment at first (due to mismatch between skills wanted by employers and skills offered by employees), but given time, human labour will be re-allocated towards a new type of employment that might come into existence following the birth of some new technologies. For instance, robots will replace humans in some lines of work, but at the same time, people will realize that more and more robots need repare and maintainance, and this is when more jobs related to the field of robots will be created. Heck, if there was no computer in the first place, there would be no software developers or engineers, right?

3. Inclusive Capitalism: Solving inequality the Freeman’s way

So, what is the verdict? At what conclusions did prof. Freeman arrive? How does he solve inequality problem in this capitalist world?

Inclusive Capitalism: A better deal

Based on his research and analysis, there seems to be one way that works really well, and that is “Inclusive Capitalism”. It is not about banning people from seeking profit, from trade, or from ownership of resources and products because this would destroy the very incentive that drive our economy onwards.

Instead, Inclusive Capitalism seeks to involve everyone in the system, to allow employees to gain benefits from the growth of their company and industry as a whole. This means transforming employees into investors who have shares of the capital that exists within our economy. So, employers or owners of the business are no longer the only ones to gain from the business. This method seeks to share returns of capital more equitably, but at the same time, it does not hinder business from growing or destroy the owners’ incentives to innovate and refine their businesses. What Inclusive Capitalism does is instead extending the incentive, at larger scale, to more people (esp, employees) so the fruit of economic growth is better distributed.

Prof. Freeman mentioned a few examples of Inclusive Capitalism such as the practice of profit-sharing and stock options. He said (and I quoted): “Econometric evidence has proved that this will lead to higher productivity and earning because workers now have ownership stakes (incentives)“.

Then, Prof. Freeman went on to talk about how government should encourage companies to practice inclusive capitalism by giving them tax break and the like.


This is about where his talk ended, at least the interesting part, and I would like to bring this article to a close here. I think that this type of economic thinking and research are of great significant to the advancement of our economy and society. It matters not where you are or what your political tendency or religious belief is, whether you are in developed or developing countries, capitalism and free market are necessities for the growth of yours and your country’s well-being. Sometimes, it might seem simple and mundane, but a good understanding of the economic system you are in can be very beneficial and impactful because a slight change in how the economy operates can take you a long way to the future.

Last, but not least, I would like to express my gratitude to Prof. Freeman who gave a wonderful speech on the topic. His idea and progressive thinking will be greatly valued in the economic realm.