Why We Will Not Achieve Progress Until We Deal With Inequality

Last month, I took a trip to the beautiful town of Oxford to participate in the annual CapitOx conference, hosted by Oxford University’s economics, finance, entrepreneurship and consulting society. I decided to make a weekend of it and stay over the next day to visit the gorgeous palace of Blenheim, birth place of Winston Churchill and property of the Dukes of Marlborough.

The problem of inequality

I would define Blenheim as nothing short of the Versailles of England. Rightfully so, given that the head of Louis XIV sits right at the top of its Southern wall, overlooking the 2000 acres of landscaped Parkland and Gardens. The land was in fact a gift by Queen Mary to the first Duke, in recognition for his defeat of the previously undisputed French monarch.

The castle cost £24,000 to make at the time. Today, that would be a whopping £12m. This is money that came from an act of Parliament and hence, it was tax payer’s money!

Walking these grounds, I cannot but reflect back on the much heated topic of inequality, discussed by Professor Andrew Bernstein, who opened the CapitOx conference with a keynote on The Moral Basis of Capitalism. In his keynote, professor Bernstein eloquently described three bases of morality that underpin socio-economic institutions and decision-making. One is religious, the other socialist (or “secular religion”, in his words) and the last individualism.

My husband, who is of Asian origin, would define individualism too as a religion. But this is a story for another blog.

In the professor’s preferred base of morality, individualism, the optimum outcome is achieved when no act of force is exercised. It’s a good utopia to aspire to.

Yet, Bernstein’s keynote climaxed at the point when the professor — a self-proclaimed liberal — quoted inequality in perhaps an even more controversial way than denying its existence: the professor called upon inequality as a necessity of modern life, in the same way as poverty is a necessity for wealth to exist.

The topic of my panel was Inclusive FinTech: How can technology be used to empower the bottom of the pyramid? With Sam Mendelson (Arc Finance) as the moderator, I was joined on the panel by Eugene Amusin (Citi Bank), Maude Massu (independent), Virraj Jatania (Pockit) and Srini Sundaram (Aire). Each panellist brought their unique perspectives to the theme of financial inclusion and overall, presented a very different viewpoint to that of Professor Bernstein.

Notably, the biggest distinction that we asked to make was to look separately at inequality of outcomes and inequality of opportunity.

Here is why you should make that distinction and why you should consider the problem.

It’s in your selfish interest to do something about it

Even in the utopian, and much desirable, world of Professor Bernstein, being kind to one another would not in itself help to forego the circumstances of birth. Exceptions to this rule exist of course, but they are that: exceptions.

The only good news about inequality is that no matter what your moral compass is, mitigating inequality is in everyone’s selfish interest. Inequality in distribution of income is widening: in OECD countries inequality is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10%. That’s up from seven times 25 years ago. With rare exceptions, the trajectory is the same across developing countries and emerging economies, including China and India.

Consider how in both the periods of 1920–1929 and 1983–2008, “a large increase in the income share of the rich [led to] a large increase in leverage for the remainder, and an eventual financial and real crisis” (Michael Kumhof and Romain Rancière, IMF, 2010). Human behaviour, not principles of morality explain it: income inequality is thought to lead to status competition, which drives the increase in consumption, as people across the income spectrum spend more attempting to keep their living standards and respectability level with their peer group. Low-income households feel forced to borrow in order to maintain high levels of consumption. This results in higher levels of debt.

Further, solving for inequality can help to contain property crime and violent crime. According to UK think tank The Equality Trust, a reduction of inequality from Spanish levels to Canadian levels would lead to a 20% reduction in homicides and a 23% reduction in robberies.

Those of us working in financial services particularly should care: we are directly responsible for the mitigation of inequality, given the role financial services play in facilitating the (1) accumulation, (2) exchange and (3) trade of economic capital. Not only, but if you start looking at other forms of inequality: educational attainment (not just formal schooling), social networks, housing quality, you soon realise how they are all linked and circumstances (of birth too) matter.

So what is it that we can do about it?

The role of financial services

Without having to choose the extreme (yet famously effective) Chinese Communist experience of lifting millions out of poverty, opportunities to start to tackle inequality do exist. And within the Anthemis Institute, we are studying what these might be, starting from applied behavioural finance and digital innovation in financial services.

Take HappyMoney, for example (disclaimer: an Anthemis investment): the question that the founding team asked themselves was — how can we help break the cycle of debt for American consumers, who are locked out of formal financial services, are prey of high-interest credit, but are willing to repay a loan? Imagine having been born to a working class family in the US, who cannot afford your student loan. Why should that hold back your own chances of success in life?

Why does your own experience of success have to map that of your parents?

What financial education and loan consolidation provider HappyMoney did was to take to online dating. It’s not a joke. The team hired data and behavioural scientists, clinical and research psychologists, including from the dating site e-Harmony, to build a credit algorithm that is built to assess individuals’ willingness to repay a loan, regardless of their circumstances. This means that even if you are born in that working class family, they may still afford a reasonable student loan for you to go to a good academic institution.

I think of all of this, as I am walking the glorious grounds of Blenheim Palace. Thankfully, we no longer live in a world where mercenaries are donated properties that could accommodate an entire village, whilst an entire village — likely their soldiers — are cluttered in micro spaces. Yet, inequality is still a reality of our times and the present sometimes reminds us of that past: micro living in London, for example, is “solving” for the problem of unaffordable real estate in the capital. But are we thinking about the problem in the right way?

Within the Institute we want to start to look at big problems like inequality in a more systemic way and to address their micro as well as macro drivers. Stay tuned to learn more about the progress of our work. And if you are interested in getting involved, apply to work with us or get in touch with us!