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Capitalism and the Challenge of Inequality

Andrzej Rapaczynski
Columbia Law School, [email protected]

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Andrzej Rapaczynski, Capitalism and the Challenge of Inequality, 18(1) CAPITALISM & SOC'Y Article 6
(2024).
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 Capitalism and Society
Volume 18, Issue 1 2024 Article 6

Capitalism and the Challenge of Inequality

Andrzej Rapaczynski
Columbia University
 Capitalism and the Challenge of
Inequality
Andrzej Rapaczynski

Rapidly rising income and wealth inequality in the United States and other Western countries
has been commonly identified as an inherent and nefarious feature of the capitalist system. In
fact, however, rising inequality within the economically advanced countries has been
accompanied by both a significant relative improvement of the economic and social position
of the previously disadvantaged groups, such as women and ethnic minorities, and an
unprecedented reduction of the inequalities between the people living in the advanced
countries and the rest of the world. This change is largely due to the phenomenon of
globalization that brought the advantages of the capitalist economic system to the developing
world. Rising inequality is also an effect of the deep technological transformation of Western
economies in which an increasing share of national wealth is produced by a much smaller
number of highly skilled and educated people than had ever been the case in the past. To be
sure, the growing inequality does raise the specter of political instability and may call for some
counteracting redistributive measures. But the most important condition of all such measures
is not to base them on a theory that might undermine the legitimacy and the effectiveness of
the capitalist market economy. A program of restituting to the descendants of American slaves
the value of the labor unjustly taken from their ancestors might both alleviate some of the
existing inequalities and reduce racial animosities, while at the same affirm the liberal
commitment to the institutions of private property and inheritance. A provision of a certain
amount of capital to each high-school-graduating student might widen and equalize their
opportunities, while giving them a stake in the free market economy and redefining the
concept of American citizenship.

Keywords: inequality, capitalism, liberalism, globalization, technology, restitution, stakeholder

society.
 Capitalism and Society, volume 18 (2024), issue 1, article 6

To paraphrase a minor nineteenth-century economist, a specter is haunting the United

States—the specter of inequality. The real story is quite complicated, but the lines most often
heard are these:
During the last few decades, we are told, inequality has grown in a way that is
unprecedented. Not only have the fortunes of a few skyrocketed, but they have also been
accruing to an ever smaller fraction of the population (0.1%). The income of the rich as a
multiple of that of the working people has gone up to astronomical levels, not seen in more
than a century. Moreover, for the first time since the Great Depression, the wealth and income
of the people below the top few percent is said to have been stagnant or diminishing over the
last 40 years, and young people no longer expect to have the same or higher standard of living
as their parents.
The cause of all this, we are often told, is the unbridled development of neoliberal
capitalism and its capture of the political system in the United States. The new wealth of the
few is said to be in large part a “rent” from monopolistic control of economic life,
unprecedented state-enabled growth of corporate behemoths, and the destruction of the
power of labor through globalization, with its huge offshoring of industrial production, and
the consequent (as well as state-supported) demise of the unions. Inequality is not only
systemic, we are told, it is also largely hereditary. Indeed, the intergenerational conveyance of
inequality is said to be accomplished these days not just through inheritance law, but also
(perhaps mainly) through pervasive lifetime transfers via educational privilege, social
connections, and an increasingly corrupting role of money in the social and political spheres.
No surprise, then, that the long-disfavored word socialism has reappeared in American
political vocabulary. This is not just a sign that McCarthyism no longer frightens people
aspiring to political office. It is also a clear call for more state intervention in economic and
social life, designed to restructure and reform the whole economic base of the American
society and to assure a more just distribution of the national wealth. Democracy is no longer
just a political concept—it is also increasingly seen as an economic desideratum.
The rise of income and wealth inequality between those at the top and those in the
middle and at the bottom of the social scale is indeed an unquestionable fact in the United
States, especially as compared with the earlier post–World War II period. But both the causes
and the consequences, as well as the moral significance of this fact, are much more complicated
than is usually presented.
While income and wealth inequality between the working classes and the rich has
certainly increased, the same inequality between the traditionally disfavored groups, mainly
women and ethnic minorities, and the “mainstream” population has quite dramatically
decreased at the same time. Moreover, while racism and sexism have certainly not ceased to
play a significant role in the American society, the weakening of labor unions, often seen as
one of the main drivers of equality in the past, may in fact have had a lot to do with the opening
of economic opportunities to people other than white men.
But most importantly, the increase of inequality in the United States and some other
advanced economies has been dwarfed by the historically unprecedented increase in human
equality on the global scale. While American industrial workers may be relatively less well off,
as compared to their employers, world hunger has dramatically diminished in the very same
period, and hundreds of millions, perhaps billions, of people around the world have moved
from utter poverty and destitution into a relatively decent life standard.

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 Rapaczynski: Capitalism and the Challenge of Inequality

Now these two phenomena—the increase in world equality and domestic inequality—
are not unrelated because they are both tied to the phenomenon of globalization, another bête
noire often blamed for the poor state of the American working people. But even though
American workers are no longer paid as many multiples of the wages of their equally or more
productive counterparts in other parts of the world as they used to be, they are still hugely
privileged by living in the richest country in the world. Contrary to what we hear all around,
their life standard, while it has not been growing as fast as in the earlier postwar period, is
actually significantly higher, not lower, than it was at the height of postwar prosperity.1
It is in fact arguable, indeed plausible, that the period of increased globalization has
been one of the highest points in the US moral leadership of the peacetime international order.
The only historical period parallel that comes to mind is that of the Marshall Plan, when the
United States, having won the war that had fatally undermined the old European imperialist
order, not only did not use its victory to keep the Europeans weak but also taxed itself to an
unprecedented extent in order to make sure that the enemies and allied rivals of yesterday
could restore their prosperity. But while the original Marshall Plan was directed toward helping
mostly white Europeans, its more recent counterpart in the form of globalization benefitted
primarily Third World countries, including the rising rivals aspiring to reduce the American
influence in the world.
The jury is still out on whether globalization will follow the Marshall Plan in also
leading to a genuine democratization of its beneficiaries. There is, however, no doubt that,
with all its warts, China today is way more tolerant than its Maoist predecessor and that the
Chinese people live infinitely better and enjoy infinitely more personal freedom than in, say,
1980. Like the European prosperity of the 1950s, the economic rise of China, India, and others
has also contributed mightily to the well-being of most Americans. True, some jobs have
moved offshore and the wages of some American workers may not be as high as they would
have been under the old protectionist system. But we have less unemployment than we had
for most of the postwar period, while globalization has provided Americans with access to all
kinds of high-quality and lower-priced industrial goods.
Globalization is only one of the causes of increased domestic inequality. The other, in
the long term likely more fundamental, is the deep structural change of the whole economic
order. In this respect, the most significant development of the last four decades is not, after
all, globalization or the rise of the neoliberal Washington Consensus, which enshrined the free
market as the most successful model of economic growth. The main factor underlying the
widening scope of inequality is probably the technological revolution transforming every
corner of economic life. A single cheap computer replaced hundreds of paper-shifting clerical
jobs of the 1980, to say nothing of how computers transformed the face of modern finance,
insurance, education, and so on. The motion picture and other cultural products of today are

1 Between 1980 (Reagan’s election) and 2023, worker’s wages in the US grew by 17.5%. Since 1960, the wage
growth averaged 6.20%. The claims that wages have been stagnant or even fell in recent decades are grounded
in cherry-picking the comparison dates: If you pick the highest pre-Reagan point (1973) and compare it to
2023, the wage levels do in fact appear stagnant (and even fall if you end before 2020). But this is largely due to
a secular decline between 1974 and the mid-1990s as a result of the prolonged stagflation in the wake of the
Great Society and the Vietnam War. The real wage growth since 1995 has been high and nearly constant (over
20% total in constant dollars and close to 40% using the personal consumption expenditure price index). For
more on this question of recent wage stagnation, see Strain 2022.

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 Capitalism and Society, volume 18 (2024), issue 1, article 6

produced and delivered to the consumer in ways that were unimaginable 50 years ago. Soon
even a car will likely become unrecognizable to someone who might have gone into a deep
sleep only a few years ago.
The recent technological revolution has not yet led to far-reaching automation and an
attendant dramatic reduction in available jobs; it has not in this way shifted economic power
from labor to capital and management. To be sure, computerization, like all technological
progress, eliminated some jobs, but the overall number of jobs today is greater, not smaller,
than it ever was, even correcting for population growth, and unemployment is at historically
low levels. Some say that artificial intelligence may soon make the Luddite hypothesis truer
than it was in the past, but whether or not this happens, automation is so far not among the
main reasons of the growing gap between the rich and the working people.
What technology did in the last few decades is to create a world in which fewer and
fewer people are responsible for a greater and greater share of the overall wealth production.
Some fatuous critics notwithstanding, Steve Jobs, Bill Gates, Mark Zuckerberg, Larry Page,
Jeff Bezos, Elon Musk, and yes, even George Soros did not make their fortunes by getting
state monopolies, underpaying the people who work for them, or stealing from consumers.
They, together with an army of inventive and highly technologically savvy entrepreneurs,
analysts, programmers, and so on, started with no or very little nonhuman capital and within
an incredibly short time created the most dynamic part of the world’s richest and most
productive economy.
The reason why this is happening is because technology has moved us into a largely
new economic reality (the postindustrial era?). Technological progress was always decisive on
the frontiers of economic development. But while previously this progress consisted largely in
making relatively unskilled industrial labor more productive, twenty-first-century innovations
can often result in a very valuable product being brought to consumers in next to no time and
with very little need for unskilled labor along the way. What changed is not the need for labor
in producing industrial goods and traditional services that are still consumed daily by most of
the population. What changed is that the frontiers of development moved, at least in a significant
part, beyond the employment of any but the most highly sophisticated and often unique form
of human labor. It is here that much of the new wealth is produced, and the rates of return
are enormous.
This has another important consequence that is not often observed. While mass
education has been long seen as the main hope for improving the skills and the life standards
of working people, and thus as a driver of social mobility and decreasing inequality, the levels
of skill required on the frontiers of today’s economy may have become so high as to be beyond
anything that a mass education system can deliver. Education will still be very important of
course, both to train people for traditional jobs and to nurture the new entrepreneurial elite,
but it is unlikely that today’s inequality is due to working people’s artificially limited access to
education or the low quality of the one that is available. More likely our expectations with
respect to the role of education as the economic “great equalizer” need themselves to be
modified.
Let’s make it clear: All this does not change the fact that inequality has indeed
dramatically increased in recent decades and that this increase may have all kinds of undesirable
economic, social, and political consequences. Even if generated by legitimate economic
activity, striking inequality of results may produce resentment and provide fertile ground for

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 Rapaczynski: Capitalism and the Challenge of Inequality

demagoguery that can seriously threaten both political stability and economic prosperity. No
matter how questionable, the calls to “soak the rich” have been known to cause problems (and
indeed revolutions) in the past. In this sense, the recent populist and authoritarian political
developments make it especially foolish to put too much faith in the old theory that “it can’t
happen here.” In fact, we may perhaps be approaching a point at which the cost of not dealing
with the problem may ultimately lead to a greater decrease in the freedom and economic well-
being of everyone than a rigid adherence to the principles of liberalism.2

* * *
So how are we supposed to react to the challenge of the rising inequality?
In the context of today’s politics, the main danger is succumbing to the collectivist
perspective on the link between inequality and capitalism. To be sure, capitalism, unless
supplemented by a social policy of redistribution, does inherently produce inequality: diverse
and unequal individual contributions to the collective wealth in a market society based on
voluntary transactions among free individuals inherently result in an uneven wealth and
income distribution. But in the anti-liberal perspective, unequal results are quickly identified
as caused by the allegedly illegitimate and unfair advantages that some people have over others
in market exchanges under capitalism, so that inequality of result by itself becomes
indistinguishable from injustice. A fuller presentation of my argument would include a
refutation of this dangerous ethical position, which ignores the unavoidable trade-offs between
freedom and equality and threatens the very basis of a free society. But time does not allow
me to go into this issue today.
What I want to focus on today is a less ideological response to the problem of
inequality, which contains two basic elements. The first is to recognize that some forms of
inequality are indeed due to injustice and their remedy ought to be an important part of the
liberal agenda. Some of these injustices may be due to various well-known market
imperfections, but others, such as the heritage of slavery or the persistence of racism, sexism,
and xenophobia, have very little to do with the economic order and are due to various social
and political factors, sometimes deeply rooted in the past. So policies directed at undoing these
inequities may have the effect of lessening inequality while also contributing to the perception
of the legitimacy of the status quo and thereby increasing political stability, without at the same
time undermining the productivity of the capitalist economy.
The second part of the liberal strategy of facing inequality should be a pragmatic
recognition that even if there is nothing deeply wrong with the inequalities produced by a well-
running market economy—that is, even if the protests against inequality are mostly driven by
resentment or difficult-to-justify ideological commitments—there may be a clear political
danger of doing nothing about it. In fact, it may make perfect sense to adopt certain
redistributive policies that not only “buy” greater political peace but also potentially transform
the social and cultural constitution of American life by redefining the relation between work

2 The word liberalism is most often used in the US with reference to a left-of-center political position committed
to social justice and far-reaching economic equality. Throughout this paper, I am using liberalism in its more
traditional sense, referring to the worldview committed to political individualism, economic freedom, and a
relatively narrow role of the state. Liberalism, in this sense, is also strongly committed to equality of
opportunity, but it stresses the dangers to freedom from a pursuit of an extensive equality of results.

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 Capitalism and Society, volume 18 (2024), issue 1, article 6

and leisure. Such an approach could give a new meaning to the concept of citizenship, perhaps
providing the young with a material stake in the maintenance of the economic and political
order. This strategy might of course carry a significant financial cost, and the real challenge is
to design the relevant policies in a way that strengthens, rather than undermines, the capitalist
foundation of the economy, and does not weaken the material basis of the whole American
social order. In other words, we should reject the idea of a radical revamping of the economic
order and focus of social policy measures, making sure that both the nature and the cost of
these measures are tailored in such a way as not to kill the economic goose that lays the golden
eggs.3
So let me mention briefly a couple of redistributive social policies that I think we
should consider. I want to begin with one that few conservatives support, but which I think
is very much in tune with the liberal values underlying the American project, mainly because
it is aimed at rectifying a clear past injustice, one that is neither seriously questionable nor a
pretext for a broader ideological restructuring of the economic order. In the American context,
the most important historical injustice still scarring our present is of course slavery. Its
lingering effects are, on the one hand, indubitable but, on the other hand, difficult to define
and delimit, which makes them politically very charged. We have had, however, in recent years,
an increasingly lively conversation about the idea of simply paying the descendants of the
American slaves the present value of the labor that was forcibly taken from their enslaved
ancestors without any compensation (beyond the miserable subsistence allowed by the slave
owners). The idea may seem strange at first, given that slavery was abolished over 150 years
ago, but it resonates well with the values embodied in the very institution of private property
at the core of a liberal capitalist society. The laws of inheritance are also very deeply embedded
in the American legal system. So, extending somewhat the usual prescription period, restitution
of the value of the labor stolen from the slaves is not that different from the widely accepted
idea of returning Jewish property taken by the Nazis to the descendants of the victims.4 The
reparations system, if taken seriously, might not drastically diminish many forms of inequality
and it might be quite costly for a while. But it would also reaffirm the commitment to the
value system of the capitalist society and be both more effective and less subject to partisan
struggles than any welfare payments. It could also potentially help cure the extremely costly
racial divisions in the United States that still poison the political life of the country.
Another redistributive policy that liberals might consider to counteract the negative
effects of rising inequality is of a broader significance. Most Western societies have long
recognized that a certain amount of redistribution, designed to make sure that all members of
the society have the minimum resources enabling them to live in dignity and be free to make

3 I am not saying, of course, that that there is nothing that can be done to improve the US economic
performance or curtail some abuses of economic power. But I do think it is very important to realize not only
that is there nothing fundamentally wrong with the American economic system, but also that, despite the
various social problems arising as a result of the incredible pace of innovation and despite the occasional
hiccups often misrepresented as major “crises,” the American economic system has performed as well or better
in recent decades as at any other time in the country’s—and the world’s—history. Both in terms of life
standards and in terms of international justice, we are doing pretty well.
4 Not only did the Nazi crimes involved take place over 75 years ago, which is longer than most prescription

periods, but the restitution is also made these days mostly to people who were not even born at the time the
dispossession occurred.

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 Rapaczynski: Capitalism and the Challenge of Inequality

the most important life decisions, is not only compatible with the liberal theory but is also a
deeply rooted imperative of human solidarity. The problem with this general commitment,
however, is that what constitutes such a minimum is sometimes extremely controversial. Some
on the left will not be satisfied by anything short of nearly total economic equality. Many on
the right and in the liberal center fear that providing generous, yet unconditional and work-
unrelated, benefits (such as a universal minimum income) to a broad spectrum of individuals
will destroy the work ethic, create a culture of dependency, and ultimately result in a dramatic
loss of social wealth and an overwhelmingly dominant role of the state. Nevertheless, perhaps
a universal program that, like Social Security, does not narrowly target assistance to
nonworking (or even just poor) individuals but delivers important benefits to an otherwise
defined large segment of the population, might not be unrealistic. Some, like Ned Phelps,
would advocate subsidizing wages of the working people whose earnings are too low to
provide a dignified form of life. Others might prefer endowing all young people at the
threshold of their working life (perhaps at the time of high school graduation) with a certain
amount of capital that they could use over their lifetimes to start a business, improve their
education, make a down payment on a house, and so on (Ackerman and Alstott 1999). A grant
of this kind might widely increase the opportunities available to the young people generally
and give them a stake in a society committed to individual initiative and entrepreneurship, as
well as perhaps transform in the liberal direction the whole concept of American citizenship.
There may of course be other redistributive social programs to alleviate social
inequality without undermining the productivity of the capitalist economy. As AI increases
productivity and perhaps reduces the need for labor at nearly all levels of skill, the position of
the working people may indeed come to be more seriously threatened than in the past, and
this might lead to a deeper redefinition of the existing social relations. A significantly shorter
work week, introduced as a response to the lesser demand for labor, would protect
employment while also offering an opportunity to rethink the role of leisure as more than just
a rest. Greater educational opportunities for adult population might restore the role of learning
as more than just a form of job training. Increasing state subsidies to cultural institutions may
contribute to the good life of future Americans. But it is not my purpose here to design an
elaborate system of social improvement. My only purpose has been to argue that the inequality
produced by the capitalist system can be recognized as a problem calling for new social policies
designed to reduce its destabilizing effect without weakening the extremely productive and
freedom-enhancing capitalist system. Indeed, it might offer an opportunity to creatively
rethink our view of citizenship and the conditions of human flourishing.

References
Ackerman, Bruce, and Anne Alstott. 1999. The Stakeholder Society. New Haven: Yale
University Press.
Strain, Michael R. “Have Wages Stagnated for Decades in the US?” AEI.org, June 27, 2022.
https://www.aei.org/articles/have-wages-stagnated-for-decades-in-the-us/.