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Social Stratification

Social Stratification

One of manifestations of ideology in economy is the conflict of social classes’ interests. Some economic theories are based wholly on the concept of struggle between the rich and the poor. However, as long as we operate within this paradigm opposing capitalists to socialists, the rich to the poor, the rightist to the leftist, no full-value analysis is possible.

Everyone agrees with two basic ideas:

  • The right of ownership must be sacred and reliably protected by the society.
  • Every person has the right to work, to social protection, and to a decent life.

However, once agreement on these two ideas has been achieved, disputes on peripheral issues arise, caused by the economists’ different ideological platforms. In order to leave this barren soil, we will not base our analysis on people’s interests stemming from their belonging to specific social groups. Instead, we will focus on people’s roles in the economic process, their ways of obtaining money, and, accordingly, their shares of economic power. Thus, different entities may obtain money in the following ways:

  • as payment for an economic activity (activity earnings, AE)

AE is economic power received by society members in exchange for their activity that is beneficial to the society. The size of AE depends on the efficiency of such activity and its helpfulness to other people.

  • as payment for social status (status earnings, SE)

SE is economic power received by people due to their certain status, a social rent. Rent-seekers are not engaged in any activity, deriving their revenue from the existing social consensus that they have the right to do so.

Perhaps you are more accustomed to the traditional terminology such as salaries, social benefits, rent, interest, royalties, etc. But since we define money as a social phenomenon, the natural continuation of our analysis technique would consist of looking at income from the viewpoint of its socioeconomic nature, rather than its legal form. Such a classification would explicitly demonstrate the income recipients’ real role in the economic process.

Note that this classification is not directly connected to social stratification: both rich top managers and low-income workers are recipients of activity earnings, while both the poor unemployed and well-to-do rent-seekers are recipients of status earnings. The same people can derive different types of revenue at the same time by, for example, receiving both a salary and a rent. Formally, the same type of revenue can include both elements of our classification. For example, dividends may be both status earnings derived from simple ownership of shares and a reward for the search for interesting and more profitable projects; this is why we often refer to these types of dividend recipients as passive and active investors.

Let us investigate the above example to see if there is a principal economic difference between government benefits and rent. What is the difference between a person receiving a social benefit due to being unemployed and a person receiving rent due to his or her status as a real estate ownership? None. Both receive money from members of society simply because of their status, without making any effort to earn it, and this is why we can unite their incomes into a common category of status income.

If unemployment benefits become taxable, then what happens is a simple reduction of the benefit, both from the recipient’s and the government’s viewpoint. If we analyze it one step further, then we will see that the situation of taxing any status income is identical. If a rent-seeker has to pay more taxes, it would mean that the society simply decreased the amount of his or her payable social benefit.

Taxing active income is quite different from taxing status earnings: if a person or a company earns money, that is, receives money from clients in recognition of services, the taxes take out what has been earned by real economic work.

In a financial system, in order to stimulate economically useful type of behavior, taxes on active income must be minimal, while rent taxes must be higher, and no interest on money (including government bonds) must be possible. Any player withdrawing money from the economic field hurts the economy by de-stimulating business activity, and such a policy must be demotivated by the financial system.

Money per se directly meets two fundamental human needs that are purely social in nature—security and self-realization. A certain cash stock makes a person confident that he or she can use social amenities for some time, while considerable amounts of money, in addition to higher security, provide a certain social status. $100,000 is a type of an insurance policy issued by the US government, and $10,000,000 is an insurance policy printed on a certificate of honor. Withdrawing money from circulation is intrinsically an insurance provided by the society that is the eventual issuer of the money. For acquiring this insurance product, the insured person must pay a premium—this would reflect the money’s real economic value. On the contrary, interest income received on money does not carry any economic sense. It is just as absurd as an insurance premium received by the beneficiary instead of the insurance carrier.

The ideology-free financial system must be focused on stimulating economic development and creating conditions that ensure the success of those who use their labor and talent to prove their usefulness to society. This system must provide absolute protection of private property, levy low taxes on income, and create conditions for a talented and hard-working person to become rich easily.

Shifting the focus from the interests of specific individuals or groups to stimulating—or restricting—certain types of economic behavior provides quite a different picture and leads to much more constructive and consistent conclusions.

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