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Does Inequality Matter?

24/2/2013

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One of the main objections to modern capitalism that is levied by the Occupiers is that it generates a situation that is manifestly unfair. The unfairness of the situation are the large disparities in wealth that have come about during the years of the 'Washington Consensus' (free market economics combined with a minimalist approach to state intervention and regulation). The Washington Consensus has given rise to an unparalleled increase in prosperity across the planet, but one has to ask whether this is  sustainable in the longer term. If the increasing disparities in income and wealth were to lead to increasing levels of social unrest, then the gains to prosperity that have been achieved in recent decades could well be called into question.

An important point raised in Will Hutton's book 'Them and Us' [1] is that for a society to prosper, there needs to be a broad consensus within that society that the distribution of income has been reached through a fair process. Indeed, we have previously argued that the perceived unfairness of our current social arrangements is the result of many of our institutions that are no longer 'fit for purpose' [2]. It has always been argued that, for a harmonious society to occur, an appropriate balance has to be reached between economic efficiency - which normally involves the operation of unfettered markets - and social justice - which normally involves some form of re-distribution  of wealth and income. This point has recently been made by Jerry Muller [3], and is at the heart of the demands of the Occupy movement.

There is, however, more to the issue of inequality than fairness alone. Economists have a concept called the marginal propensity to consume. This is a simple device, which answers the question: if you were given an extra £1, how much of that would you spend? One of the answers that has been consistent over decades is that poorer people in the income distribution will spend more of that £1 than richer people in the income distribution. They have a higher marginal propensity to consume. If we find ourselves in a recession that is typified by a lack of demand in the economy - as we do now - then one of the more effective ways in which to get the economy moving again would be to re-distribute to the lower end of the income scale rather than providing benefits at the higher end. Which seems close to what is asked by the Occupy movement.

The Occupy movement does not speak with a single voice, so it is difficult to characterise exactly what their proposals are. Indeed, I had an interesting afternoon at the Tent City University at Occupy London discussing economic futures, listening to why I was wrong. However, there are those who argue that the present distribution of income is wrong and inefficient. In an interesting Special Report, The Economist reviews various aspects of what reform might look like and argues that institutional reform is more likely to generate more sustainable results than yet more tax, spend, and regulate [4]. This is an interesting idea and has some merit.

Does inequality matter? Yes it does. Inequality produces an feeling of unfairness within society which undermines the social cohesion that we all rely upon. It also prolongs a period of idleness in the economy, when productive resources - especially labour resources - remain under-utilised, which further erodes the social capital that has been built up. We live at a point in time where the root cause of this situation is structural, which means that the most effective remedies are likely to be structural in nature. We are likely to achieve more by attacking crony capitalism than by relying upon the traditional policies of income re-distribution, which is very close to what the Occupiers have been saying.


Stephen Aguilar-Millan
© The European Futures Observatory 2013

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References:

[1] http://www.guardian.co.uk/books/2010/sep/26/them-and-us-will-hutton

[2] http://www.eufo.org/uploads/1/4/4/4/14444650/the_new_enlightenment.pdf

[3] http://www.foreignaffairs.com/articles/138844/jerry-z-muller/capitalism-and-inequality

[4] http://www.economist.com/node/21564414

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