Modern economies struggle to contain inequality. Headlining most political manifestos, the fight to halt, or at least subdue, the flow of wealth from the bottom to the top, while promoting the advancement of humanity, is a universal aim. Despite the application of copious cognitive capacity, and repeated, interminable political speeches on the subject, the rich get richer while the poor get poorer.
This concept was dubbed ‘The Matthew Principle’, named for the book of the Bible in which Jesus told his gathered disciples, “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.” It is likely that this effect permeated societies for millennia before the time of the New Testament. The anthropologist, David Graeber’s book, ‘Debt, The First 5000 Years,’ supports this view.
Misconceptions and ignorance appear to play a major role in the apparent political impotence on conquering inequality. A large majority of politicians and economists, in a position to influence policy, seem to perceive the economy through an unnecessarily narrow frame. Viable options are outside this frame of reference and rendered invisible.
The main weapon in the economic armoury, to control the distribution of resources, is taxation. In modern times, (the last 5 decades or so), low tax policies have dominated, irrespective of which party was in office. UK individuals in the highest tax bracket, in this time, have their wealth reduced by less than half of that lost to HMRC in the post war period. With the rich retaining wealth, to balance the economy, one would think that Government would want to increase spending at the margins, to improve the living standards of those at the bottom.
Politicians, advised by orthodox economists, have an aversion to Government spending without the balancing effect of taxation. The ideal, to this school of thought, is a balanced budget. It is easy to understand why the politicians believe this to be the case. From their understanding of business or household economics, the idea that spending is constrained by income, is completely rational. There are no such excuses for economists.
The reality is that a balance between Government spending and taxation, in an economy, like the UK’s, causes a downward spiral of living standards of the most vulnerable in society. The missing link, is the fact that the Government is the monopoly issuer of the national currency. There is no purely monetary limit to Government spending. Without this knowledge, it is easy to see why politicians find the Matthew principle so hard to counteract.
In the non-Government sector, the situation is very different. No private sector actor can add to the net financial assets of the private sector. It may appear that commercial banks create money when authorising loans or mortgages, however, each additional deposit of funds is counter-balanced by the liability of the repayment agreement.
It may be useful to visualise the metaphor of a vortex to describe the private sector economy. With the public in fixed positions distributed at random through the contours within the whirlwind, currency is sucked towards the centre. The citizens are both buyers and sellers as they constantly work and spend to supply their daily needs and desires. At each transaction some tax is whisked out of the vortex completely and destroyed. This occurs at every contour of the vortex.
People who work to provide goods and services receive regular wages against the flow of the vortex, however, the encouragement to take on debt through mortgages or loans reduces the ability to save. Marketing influences the public to spend to their limit by the hinted temptation towards hedonistic thrill-seeking and the fulfillment of desires. Thus, most of us become stuck in our own seller/buyer – seller/buyer cycle within the vortex, as we sell our labour and buy, what we perceive as, life’s essentials.
Crucially, for our investigation of the Matthew Principle, at each transaction in the private sector economy, a percentage of profit is made. This behaves in a very different manner to the taxed or earned money. Profit is, an arbitrary addition to the true value of a product or service, justified by the idea that business owners require an incentive to innovate and develop technology with the aim of improving the population’s standard of living.
It appears that profit creates money out of thin air - a form of alchemy. This is not the case. The truth is, profit is a re-distribution of the fixed money supply. In the vortex, at each transaction, the percentage of profit is sucked towards the centre. Over multiple daily transactions, at the macro level, currency is sucked inwards, being gathered at the inner layers by an elite few.
It should be obvious, from the vortex metaphor, that a balanced budget, where any Government spending into the economy is balanced by taxation and borrowing is a flawed concept. The outer contours of the vortex, the most vulnerable in society, require the net Government spending to mitigate the magnetic draw of funds to the wealthy heart of the whirlwind. Without a net input by Government, the rentier sector must impoverish those with least, over time.
It should also be evident that Government spending alone, will not solve inequality. The spending must be targeted to those in need. The UK currently runs a sizable deficit, but still, the wealthy thrive while poverty increases. A look at the way the Government ‘offsets’ this net spending, reveals a reason for the persistence of the Matthew effect.
At present, the UK Government has a (completely unnecessary) policy, of balancing all deficit spending with the sale of gilts to that value. Gilts are UK Government bonds, sold to “borrow” back some of the money government had already spent into the economy, in the days when pounds were convertible to gold. Those days are long gone, and bonds are now a policy choice used to manage debt and liquidity, and support the policy interest rate, however, they do play a lead role in the Matthew Principle story.
Gilts are interest-bearing forms of money, slightly less liquid than a cash deposit, but still relatively easy to transfer into cash if required. This interest portion is a form of UK Government deficit spending. It is money that Government spends into the vortex, and it is targeted. However, these interest payments are targeted at the very centre of the vortex. This money goes to the already wealthy in direct proportion to how much wealth is held. In 2022 UK Government debt interest payments totaled £111 billion.
The UK Government deficit for 2022 was £137 billion. Therefore, only £27 billion of net Government spending found its way into the economy outside of the interest payments on gilts. Admittedly, institutions like pension funds and insurance companies invest in gilts, so there is a pathway for a percentage of the spending to find its way into the main economy.
The sad fact is, that this system of paying wealthy people for having money, not only perpetuates the Matthew Principle, but exacerbates it.
If we are serious about defeating inequality, there are several steps that must be taken. By introducing a fixed interest rate, at zero or just above zero, then bond issuance becomes obsolete and can be stopped. Over time the interest payments will fall to zero as the gilts are paid off.
Economists will argue that manipulation of interest rates is the Government’s main tool for inflation control. The reality is that there are as many ‘tools’ for inflation control as there are reasons for inflation (which are numerous). The policies with most influence in conquering inequality would be a job guarantee scheme, as described by Pavlina Tcherneva in her book, ‘A Case for a Job Guarantee’, and an increase in state pensions to a rate that would provide reassurance, security, and comfort for all in their later years.
Government spending would be targeted to the precise areas of need in the economy and will, over time, reduce the width of the vortex and with it the distance between the privileged and the most vulnerable.
Just as poverty is a sign of a dysfunctional economy, so too are billionaires. The Matthew principle is society’s canary in the coal mine. When the effect is obvious, society is in danger of breaking down. Instead of complacently ignoring the growing inequality in the UK, it may be worth questioning whether we, the UK public, should carry on acting like hedonistic teenagers, or whether it is time to get a grip and seek a bit of maturity.
Filter By:
