Where the Rule of Law has been established- and every country has areas where this has not happened- Economic inequality doesn't matter any more than inequality in I.Q or Beauty or musical talent
Pranab Bardhan, writing in 3 Quarks, takes a different view.
In general, it is argued, allowing inequality is a way of encouraging entrepreneurs and other fortune-seekers, whose enterprise, new ideas and innovations enrich them but also improve the conditions of the whole economy from which others can benefit. The wealthy are more willing and able to take risks with new ideas, and hence redistribution may reduce productive risk-taking if it transfers wealth from less to more risk-averse agents (unless there is a public risk insurance policy to cover it so that even people with limited means are induced to take more risks). It is also the case that the rich save more than the poor, so inequality can generate more savings and investible funds which can expand the productive base of society. Such expansion or growth may eventually trickle down to the poor (though economists on the opposite side usually argue that such trickle-down is not enough). Both sides, however, can agree that high inequality may weaken the poverty-reducing powers of the same growth rate.
But the last few decades of advance in economic theory and empirical findings have raised questions about the general applicability of the very idea of equality-efficiency trade-off. In the rest of this essay we shall enumerate and examine some of the relevant issues here.
When there is information asymmetry between the two sides in a given economic transaction the above-mentioned trade-off may not hold. For example, creditors do not have enough information about the viability of a project brought to them by a potential borrower. You may have a project that you know is very much worthwhile from both private and social point of view, but the creditor may not be aware or convinced of it, and you do not have sufficient collateral to persuade the creditor to take the risk of lending to you. A rich man with an inferior project may get that loan, not you, because of the former’s larger assets, and hence collateral value. Thus inequality here promotes the less efficient outcome.This is silly. The rich guy should nick your idea and, after you have bankrupted yourself trying to assert your intellectual property rights, employ you at a lower wage to manage the project. The wealthiest corporations drive down the valuation of potential unicorns. In any case, what people with collateral do with the money they borrow is up to them. They can piss it up the wall if they wish. Furthermore, there is money to be made in talent-spotting. Thus, the market itself removes this source of inefficiency- at least, it would, if there is enough economic inequality to make the thing worthwhile.
Similarly, your low savings or collateral may not permit you to finance or borrow for investment in higher education for which you may otherwise have the talent and proficiency, whereas the less talented children of your rich neighbor go through college and university, while you drop out. This is a loss to society as well as yourself.This problem still exists if you have open access to education. Poor kids who spend many years at University- as happens in India- may end up unable to speak English and with their heads full of shit.
The solution is Friedman's Income Share Agreement whereby the University or Training Provider contracts to take a portion of future earnings. Thus they have an incentive in raising the student's productivity rather than teaching them any old shite.
Some Corporations and are bypassing Higher Education by hiring School Leavers and training them themselves. But this is an inferior outcome because they are less likely to provide training which maximizes transfer earnings. Furthermore, allocation of economic rent would remain opaque- possibly monopolized by 'Dad's lads'- i.e. nepotistic coalitions.
There is, of course, a great deal of socially unproductive risk-taking by the rich (with ‘collateral damage’ for the poor), say, in financial or real-estate speculation.So what if the Rich gamble? It's not as though they still own serfs or slaves who may be sold to a cruel new master. Real estate speculation is indulged in by people of all classes. In general it is a good thing. Neighborhoods improve as a result. Financial speculation, too, is a good thing. It means risks of various type are being insured against.
Even if we ignore this, it is important to keep in mind that not all dynamic innovations and productive risk-taking are by private fortune-seekers. In the US much of the basic or foundational research and great innovations of recent times (like the Internet, GPS, Digital Search Engine, Supercomputers, Human Genome Project, Magnetic Resonance Imaging, Smart Phone Technology, Hydraulic Fracturing for Shale Gas, and a whole host of others) have been facilitated by or been the outcome of public investment funded to a large extent by taxpayer money. Scandinavian countries with a high-tax redistributive economy have not been lagging in innovations.Prior to the Bayh-Dole Act, a lot of federally funded research resulted in patents being hoarded by the Government. No one had the incentive to take it up and run with it. One reason the US escaped stagflation was because researchers could get rich even if the Govt. paid for a lot of their research. The Scandinavians abandoned 'solidarity wages' and rationalized incentives back in the Seventies. They aren't as redistributive as they were and will become less so because of immigration.
Even in the private sector assuring temporary monopoly and thus great fortune for the innovator through the patent system has not been the only or the best way of encouraging innovations. Patents on a new technology often make things costly or obstructive for future innovators and thus may hamper further advances in technology. Open-source programs are often more conducive to new developments of technology.It is not the development that is important, what matters is that large investments can be made with greater security. Rents aren't a bad thing in themselves. They reduce uncertainty and provide an incentive to protect existing property rights and methods of contract enforcement.
If inequality is generated by market power of big firms in product and labor markets, then there is a direct loss of efficiency (in output and employment) if that market power enables those firms in their attempt to maximize profits to restrict output (and labor hiring) below the amounts for a competitive firm.So what? This is a question about competition policy. It has nothing to do with inequality. If I shoot you in the head and steal your wallet, your main grievance against me would not be that I was contributing to economic inequality. It would be that I'm a fucking murdering, thieving, bastard.
Historically, the case where inequality and inefficiency have stubbornly persisted together relates to land, which is usually very unequally distributed. In traditional (and in some non-traditional) agriculture the empirical evidence suggests that economies of scale in farm production are not inherently substantial (except in some plantation crops) and that the small farm is often the most efficient unit of production (if credit, insurance and marketing facilities are not inadequate).Empirical evidence more strongly suggests that agricultural involution of the Indian type is a recipe for backwardness and poverty. Get people off farms and into cities. They'll stop having babies like crazy and prefer to educate the one or two babies they confine themselves to.
Yet the violent and tortuous history of land reform in many countries suggests that numerous road blocks on the way to a more efficient reallocation of land rights are put up by the powerful landed interests for many generations. Why don’t the large landlords instead voluntarily lease out or sell their land to small farmers and grab in the bargaining process much of the surplus arising from this efficient reallocation?Contract enforcement- save by musclemen who beat and rape and loot- is costlier in agriculture of this type. There are well known problems relating to agricultural income stabilization. Even if these are sorted out to save the peasant farmer, sooner of later the entire sector is dominated by geriatrics.
There clearly has been some leasing out of land, but problems of monitoring the tenant’s work and application of inputs, insecurity of tenure (discouraging long-term land improvements by the tenant), and the landlord’s fear that the tenant will acquire occupancy rights on the land have limited efficiency gains and the extent of tenancy. The land sales market is often rather thin (and in many developing countries the sales sometimes go the opposite way—from distressed small farmers to landlords and money-lenders). With low household savings and collaterals, the potentially more efficient small farmer is often incapable of affording the going market price of land.This 'potentially more efficient' small farmer is a figment of Indian economists' imagination. All you get is involution and more land fragmentation and a new generation trapped in rural isolation far away from job opportunities.
Landlords on the other hand often resist land reforms particularly because the leveling effects reduce their social and political power and their ability to control and dominate even non-land transactions in the village.But their holdings get fragmented anyway because they are sitting around in rural isolation having babies like crazy. The village is a shithole which must be fled. The cities too are shitholes but demographic transition means fewer babies keep getting born because there are other things to do there.
Large land holdings may give their owner special social status or political power in a lumpy way—for example, the status or political effect from owning 1000 acres is larger than the combined status or political effect accruing to 50 new buyers owning 20 acres each. Thus the social or political rent of land ownership for the large landowner may not be compensated by the offer price of numerous small buyers. Under the circumstances the former will not sell and inefficient (from the productivity point of view) land concentration persists.So, there are problems peculiar to agricultural economics and the politics of rural areas. But this has nothing to do with economic inequality per se. Wealthy people may be more likely to snort a lot of coke. But the drug problem is not a problem about inequality.
Then there is the demand-side impact of inequality. There is a story of a Ford company executive in conversation with a union leader, pointing to the arrival of a bunch of robots in the factory and asking, “can you collect union dues from them?”, to which the union leader replied, “can you get them to buy Ford cars?”.The union leader is being silly. The guys who make the robots can buy Ford cars. Or they can buy other stuff from guys who want to buy Ford cars. By contrast the UAW can't collect union dues or gain political influence representing people who may live in other countries and whose mind-set is very different.
Particularly, in times of depressed aggregate demand and idle capacity, inequality may hurt macroeconomic performance by making it difficult to stimulate enough mass consumer spending.But then again, it may not. Anyway, one can tackle problems of Aggregate Demand without changing Income or Wealth distribution. One good way is to increase risk pooling. Well insured rich people may have a higher propensity to consume than poor people who are outside all sorts of social 'safety nets'. Look at China's saving rate and then look at America's. It is clear that this is happening. If the Chinese could trust their Government more, there would be less Capital flight and more imports- thus, no 'Trade War' would exist.
Recent research suggests that a long-term rise in inequality can push the economy into a deep recession.China saw a steep rise in long-term inequality, as did India to a lesser extent, because of rapid growth. Inequality decreased in countries like Greece where there was a steep recession.
There is also some evidence that inequality has encouraged excessive risk-taking in the financial sector, and along with household indebtedness may have been responsible for the financial crisis that originated in the US in 2007-8.Lack of inequality as between smart and prudent market makers and stupid and greedy ones encouraged excessive risk taking till there was a shakeout. The same point may be made about household borrowers.
Under inequality not merely the aggregate consumer demand may be deficient, but the pattern of consumer spending may also get distorted.The same is more likely under equality. Consumer demand is deficient because of grinding poverty and a lack of incentive to innovate or work harder. At the margin, people may prefer to cultivate their garden rather than work for a wage.
Certain types of consumer spending on status goods (houses, cars, and other easily visible conspicuous consumption items) can, in the context of inequality and community norms of emulation and the resultant ‘expenditure cascade’, lead to a race to the bottom among neighbors and reference groups: clearly an inefficient outcome.Rubbish! Having no money curbs consumer spending. Bardhan is talking senile rot about how villagers 'keeping up with the Jones' may do irrational things like buy soap and shirts rather than just daub themselves with mud and roam around naked. Leftists economists in India thought 'luxuries' like soap and textiles should be kept out of the reach of poor villagers. The Naxals have the same idea.
The link between inequality and crime has often been pointed out both in scholarly and popular discussion. There is empirical confirmation of the association between inequality of visible or conspicuous expenditure and violent crime, as there is also evidence from several countries of a positive relation between income inequality and property crimes and violent crimes like robbery, homicide and murder.So, the solution to gangsters raping you and stealing your stuff is being very poor because poor people don't get raped, nor have their heads kicked in. There is no empirical confirmation of anything so foolish. The reason we all want to move to affluent neighborhoods is because the local police force has the upper hand. But this is only because the affluent can pay for such protection. Bardhan is not a very poor man living in a ghetto. That's why he writes this nonsense.
A visit to cities like Nairobi, Johannesburg and Rio de Janeiro, to take the cities in three highly unequal countries, often makes it plain even for the most casual observer.There are safe parts of Nairobi- coz neighborhoods employ security guards to beat and kill gangsters. The police too are on side. Thus rapists and thieves confine their attention to the residents of the slums. If there were less inequality in these cities, then- as happens in Venezuela- there would be no safe areas.
The problem with the cities Bardhan mentions is that they exist in countries where a lot of poor people have babies like crazy instead of having a chance to compete with each other so as to become unequal enough to each other to be able to collectively employ security guards to kill off the gangsters.
Similarly, the link between inequality and social and political conflicts (and hence economic disorder and instability) is also often suggested. Here the evidence is more mixed. There are several reasons for this. First, one is not always clear about the nature of conflict one wants to study—conflicts can range from industrial strikes and agitations all the way to violent civil wars.Syria and Libya had less inequality than Saudi Arabia or Oman. That's why they are in such a horrible mess. Higher inequality means more money is available to kill off insurrectionists and maintain the status quo.
Secondly, for most of these conflicts grievance arising out of economic disparity is not enough; one needs resources, organization, agency, initiative and leadership to mobilize action that takes the form of conflict, and, more importantly, to sustain it, as the long history of failed rebellions and suppressed popular resentment would testify.Higher inequality does not necessarily mean greater safety against the nutters 'mobilizing'. There has to be an expectation that the inequality can safely get higher yet. Otherwise the most highly unequal turn their operations in the country into cash cows and capital flight occurs. Rich people stop paying for collective security coz their kids have been settled in rich countries abroad.
Thirdly, when group conflict arises out of inter-group disparity, the measure of disparity that may be more relevant than that of usual inequality is what some scholars measure as polarization, which takes into account the depth of cleavage or distance between the groups, as well as their size.Polarization gets worse when the very rich get spooked and start preparing their exit. They no longer have an interest in developing the country and thus helping the next rung lower down climb up. You do have a 'circulation of elites' but the top one exits to safer pastures so the one lower down exits at a lower capital point and so forth till you get a Venezuela type situation.
Fourth, conflict may originate in the tension that may grow more from the change in the relative income status of two even similar groups rather than the over-all level of inequality. Then there is what is called the Tocqueville paradox– in his words: “The hatred that men bear to privilege increases in proportion as privileges become fewer and less considerable, so that democratic passions would seem to burn most fiercely just when they have least fuel”.Coz expected inequality is going down, it makes sense to fight for scraps right away rather than wait around for a smaller, but more than adequate, slice of the pie.
Just as the evidence on the relation between inequality and conflict is mixed, that between inequality and the obverse of conflict, i.e. cooperation (whether in team production efforts, or in resolving disputes in collective action, or in the management of the local commons like forestry, fishery or irrigation water) is also not straight-forward. I have a co-edited book, Inequality, Cooperation, and Environmental Sustainability (Princeton University Press, 2007) on this subject.Economists are stupid. Their work is worthless. Did this book, published a dozen years ago, have any positive effect? Of course not.
A review of the empirical literature on, for example, the relation between inequality and cooperation in management of water resources for irrigation in developing countries shows the complexity of the relation. There are sometimes important initial set-up costs in an irrigation management regime, which the rich and powerful people in the village often provide or take the leadership in mobilizing and sustaining.The 'rich and powerful' people in the village are the guys who have two shirts. But if they stay in the village having babies like crazy then they end up with no shirts just like everybody else. The Indian economists had an obsession with 'wealthy and powerful' villagers and schemed to get them to share and make nice with the rest of the rural population. But, since everybody kept having babies like crazy, this entailed a half starved, half naked guy sharing nothing with other three quarters starved, fully naked, dudes.
Why don't economists of this stripe share their own 'wealth and power' with their Teaching Assistants?
On the other hand, there is quite- a bit of evidence that relative equality helps in the formation and maintenance of water user associations, in the following of water allocation rules and in the broad-based resolution of water disputes.So what? There can still be a Malthusian trap. During the Bengal famine, starving people did not try to loot grain but just quietly walked to the cities to die there in a ditch. The absence of disputes and the following of collective rules is not a good thing in itself if what then follows is a complete collapse of livelihoods.
There is also similar evidence in the community management of forests, fisheries and grazing lands.But this evidence won't stop a bunch of guys with kalashinkovs turning up and raping and looting everything in sight. Once they abduct the kids to turn into child soldiers the thing becomes self-perpetuating. The highly egalitarian folk stuck in a Malthusian trap either evolve more unequal power structures of high tail it elsewhere to increase inequality.
The empirical evidence is, however, often deficient in providing sufficiently refined data to discern among varied theoretical hypotheses about norms, bargaining power and perceptions of fairness under situations of inequality.But even if the evidence were provided by Archangels, Economists are too stupid to do anything with it.
Experimental evidence suggests that people whose fallback positions are very different are less likely to come to agreements than are more equally-situated ones.That's a good thing. Agreements paralyze initiative. People sleep-walk to their doom coz that doom is the fault of the collective. In any case, in Societies where such Agreements are normative, you'd feel you were a bad person if you try to protect your family from clear and present dangers. Superman, it will be remembered, only escaped Krypton because his Dad decided the ignore the collective agreement Kryptonians had made to ignore evidence that their planet was about to explode. I suppose a Krytponian economist could have said 'If we let even one person escape then there will be competition to get hold of rocket ships. This will cause violent conflict. Moreover it will raise inequality. Thus it is better we are all annihilated as a species rather than that we suffer inequality of life-chances to increase.'
Also, under inequality bargaining failures may occur because inequality heightens informational asymmetries among the bargaining partners, or because very unequal offers based on disparities in initial wealth or bargaining power are likely to be perceived as unfair and rejected (as one usually finds in experimental play of what are called ‘ultimatum games’).Again, this is a good thing. Bargains should fail so that people have an incentive to acquire information and gain hedges on their own. Academia only exists because there is information asymmetry. Sadly, in Bardhan's case, its arrow is the reverse of what usually obtains. The Professor should read the Superman comics of his stupidest student. Then he would see the absurdity of his position.
It is quite common to observe in the labor market (which is qualitatively different from markets in say, vegetables, as it more directly involves social institutions and norms) that perceived inequality may disrupt norms of individual dignity and autonomy of the worker, and thus affect labor discipline, loyalty, turnover, and ultimately productivity.If I see a smart guy get paid more than me, it is quite true that I feel raped and treated like a slave and thus I get bolshie and don't show up to work. If I'm lucky, I get fired. My wife leaves me. I spend a lot of time drinking. Then I become homeless. One fine day I decide to either top myself or emulate that smart guy who earned more than me. Either way, Society is now better off. Tardean mimetics is a cheap way of lifting up an entire people. It occurs at multiple points. You imitate the guy getting paid more, but you also imitate the guy who gets lots of tail. Suddenly your movements are more brisk and purposeful and you don't smell like shit. Why? It's coz you have better role-models.
Looking particularly to the future patterns of work, as the nature of human work is likely to involve more personalized or customized (including care-giving) services and more of production and dissemination of knowledge, the role of intrinsic motivation (i.e. when you do something largely for your own satisfaction/esteem not just for external rewards) and of shared norms inherent in these lines of work will be increasingly important—perceived inequality palpably affects these motivations and norms.Again, this is a good thing. We don't want a Society where kids grow up thinking they should all earn minimum wage while cleaning up the poop of the elderly. Since land is scarce, our country will soon be overrun by Nationalities which have a less miserabilist conception of ethics. The smarter of our kids will imitate them and tell us to either just fucking die already or clean up our own poop. I think this is a very cruel outcome coz I'm 56 years old and thus far too old and fragile to wipe my own bum. Society should provide me with appropriate geriatric care- preferably a shapely nurse in fishnet stockings. But it must do so quickly, I feel another bowel motion coming on and can't be bothered to get out of bed and go to the toilet.
It has been widely observed and commented upon that economic inequality enables the rich and the corporate sector to pour resources in the political influence machine to get the system to work in their favor, particularly through lobbying (not just in improving access, but in the US the lobbyists now actually develop and draft the legislation in some cases, and even are put in charge of its implementation) and election finance. This often results in laws and regulations in favor of wealth concentration and perpetuation of plutocratic power and away from efficient outcomes, apart from undermining democracy. Corporate power in lobbying, bribing, election-funding and media-shaping is rampant in many developing countries as well.Very true. But that's also why truly egalitarian societies, more particularly those that don't seek to exclude migrants, aren't democratic at all. Instead they have norms about not owning two shirts or using soap coz that will provoke envy which will lead to crime which will lead to the emergence of authoritarianism which will cause a backlash towards Democracy under the Law which in turn will lead to increased inequality and Pranab fucking Bardhan or Amartya sodding Sen turning up to lecture us on the inequity of our ways.
Another political mechanism through which inequality can affect efficiency in the delivery of public services is what is called ‘secession of the rich’: rising inequality is usually associated with the rich opting out of public services and turning to private providers (private schools, nursing homes, gated communities for safety, etc.); this ‘exit’ results in a lowering of the general quality of public services as they lose influential political support (‘voice’).But, this 'internal exit' does not stop there. Ultimately these guys send their kids abroad. They don't come back. That's one way to reduce inequality. Let the cream be ladled away.
Social inequalities also have adverse economic efficiency effects. In countries of acute gender inequality women’s education, health and work participation suffer, and this has negative consequences not merely for the women themselves, but also for the children that these women bring up. Thus society pays the price of gender inequality across generations.Acute gender inequality arises where economic and political equality- i.e. an involuted miserabilism- prevails. Increased inequality means some women are safer and more educated and so their kids get a head start. That's why people like Bardhan have an affluent life-style while their second cousins, whose families chose to remain equal to their neighbors in the village, are dressed in rags. Bardhan's daughters may well earn more than his sons. By contrast, back in the village, their distant cousins are either having babies like crazy or are broken down husks of humanity.
Similarly, if there are serious inequalities across neighborhoods and localities, a child born in a backward area will have inferior schools, roads and other facilities, and less exposure to good networks, peer groups, and role models in the neighborhood and other forms of social capital. This has obvious effects on future economic performance of the child.Unless his parents decide to increase inequality between themselves and those from their natal milieu by doing smart things- like moving home, changing job and acquiring a new habitus. Bardhan was born in a relative backward area but he was mobile. Even this senile shite of his is earning him money and increasing inequality as between himself and other senile shitheads. There is a globalized market for shite economists. Bardhan supplies that market so as to escape Equality's miserabilist trap.
We have thus considered several reasons why inequality can have serious inefficiency consequences even from the narrow point of view of economists, belying their traditional dogma of equality-efficiency trade-off. Inequality is thus not just ethically distasteful, it can be economically harmful, even ignoring problems of absolute poverty.Is it really distasteful that Bardhan gets to spout this shite while dressed in clean clothes whereas his second cousins back in the village smell like shit though they are saying the same thing?
No. Bardhan may be shitting through his mouth but he is not causing a nuisance to his neighbors by defecating in the open. He has an indoor toilet. He can afford soap and aftershave. The boy done good. He climbed out of his natal shithole and, at least to outward appearances, looks like he has embraced an affluent society's disdain for economic equality. It would be churlish to suggest he ought to go back to where he came from so as to participate in water sharing agreements in his ancestral village such that well water is equitably shared between various caste and gender groups in a manner which does not yield any one of them sufficient liquid to wash their bum.
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