Inequality’s many dangers
One of the realities of the present global economic setup is the historically high levels of income inequality. As research after research surfaces to lend credence to this reality, a wave of allied questions has also surfaced. Two prominent questions relate to the historical antecedents and events that gave rise to unequal income distributions, and why we should be worried about this development.
Factually speaking, inequality has had a presence since civilisation and organised agriculture became a part of human existence. Available evidence from ancient civilisations points to the fact that there existed a considerable degree of income inequality, which ultimately reflected itself in social standing. Most of the modern debate about income inequality and its effects, however, focuses on the recent past.
There is almost unanimous consensus among economists that the industrial revolution is the focal point in the debate about modern inequality. As it spread from Britain to other parts of the world, this monumental event significantly altered the course of history. Life’s quality, described as ‘nasty, brutish and short’ by Hobbes, received a much-needed lift as it gradually escaped the Malthusian spectre. But this was accompanied by a worsening of the gap between the haves and the have-nots. Scholars like Eichengreen, for example, have concluded that the main beneficiaries in England were the landed gentry in the rural areas and the urban middle and rich classes.
From this point on, certain major events and phases only served to strengthen the process. The first was the gradual spread of the industrial revolution to other parts of the western and northern hemisphere. Between 1750 and 1970, it produced tremendous variability in terms of per capita income. The purchasing power parity of the US was only twice that of China in 1800. By 1970, the per capita income in US stood at 30 times that of China.
Whereas the income levels diverged considerably between the industrialised West and the East, the difference between per capita income of industrial nations shrank considerably during the same time frame. This convergence was precipitated to a large extent by mass migration during the first true age of globalisation (1850-1914). As masses of people (mostly poor) migrated from Europe to the US, their per capita incomes increased over time, thus bridging the difference between these two regions.
The growth of the financial industry proved to be another noteworthy propeller of income differences, especially for income inequality within industrialised nations. Its spread went squarely in favour of the wealthy who were able to take advantage of gradual financialisation of economic activities. And it happened in a way that any deleterious outcomes in this industry mostly damaged the masses rather than the CEOs. What better example to cite for this than the Great Recession of 2008. Despite the fact that the financial engineering instruments of high complexity (traded by leading financial firms) led to this downfall, CEOs and big guns have largely remained unscathed while the common man has suffered. The Wall Street vs the Main Street movement is a poignant reflection of this reality.
The antecedents of the 21st century debate on income inequality centre on the observed divergence between the incomes of different groups, especially the outsized gains going to the top 10 and 1 percent respectively. As these groups saw their incomes rise spectacularly, the share of total national income accruing to labour and middle classes has declined. While the factors that gave rise to this continuing divergence are still being debated, most countries are now debating what remedial measures to enact in order to arrest this alarming trend.
In short, between 1750 and now, inequality has continued its march largely uninterrupted. The only instances where this trudge has been disturbed came in the form of catastrophic events like WWI and WWII. This contention perfectly mimics historical record, which supports the findings that only catastrophic events like the Black Death and major wars have truly put the brakes upon inequality.
Quiet surprisingly, inequality was once confined to the margins of research in economics which concentrated its energies on sassier topics like economic growth and trade. Not anymore. In the last decade or so, research on inequality has exploded. Policymakers are now more than interested in hearing about this issue. What is the cause of this sudden uptick in interest in this debate?
There is now a wide recognition that severe income inequality tends to propagate perverse forces that threaten the social fabric and harmony of a society. Political influence exercised by the rich is an excellent example of how increasing inequality puts society as a whole at a disadvantage. It is no secret that the ultra rich are able to influence the political and legislative outcomes in their favour. This comes courtesy of modern democracy’s close nexus with money. A wannabe politician and a leader would find it next to impossible to run a campaign without financial resources. And what better source to finance their campaign than a rich person willing to help out? In return, the financier’s demands centre around legislating such processes that help further their interests and increase their already sizeable wealth. In Pakistan, for example, sugar barons are a distinct reflection of this fact. Unfortunately, the gains of this small minority usually come at the expense of the majority.
A consequence of the widening income disparities tends to find its way in lower aggregate expenditures, which in turn implies lower business activity and thus lower economic growth. It is an established fact that the propensity to consume out of every additional unit of earning differs by groups. The poor and the middle class have the highest propensity to consume, meaning that out of their additional earning they will devote the largest share to consumption spending. But that’s not true of the rich, whose consumption is a small portion of their budget. The majority of their additional earnings go to savings and avenues which beget more wealth in the future.
But their share in national income has been going down. The lower growth in the earnings of these classes means lower aggregate expenditure, lower levels of economic activity and thus lower economic growth. Since it is growth that creates employment (which in turn raises aggregate income), therefore concentration of income at the top spells a worrying scenario for policymakers faced with low growth rates around the globe.
The phenomenon of national wealth’s major share ensuing to the rich has another serious implication. As the middle and poor classes have seen their income growth stagnate (relative to the rising cost of living), the prospects of imbuing their children with good, quality education have also withered away. This is worrisome because education has traditionally remained a great leveller within a society, providing the means for the lower classes to climb up the ladder of income distribution. But as access to quality education has now increasingly become a function of wealth, the opportunities for the poor and the middle class to permeate their offspring with them have declined respectively.
Last, but not least, is inequality’s undesirable fallout on social order and cohesion. Unequal societies tend to revert more to extremist ideologies, and are more likely to vote for candidates who takes a radical stance. Political process, in essence, becomes an outlet to vent extremist propaganda and gain political credence.
Inequality is no longer a subject of academic interest, but a matter that should be taken seriously due to the dangers that it presents. Policymakers would do well to institute a well-thought-out plan to arrest increasing inequalities that may threaten the social fabric and global order.
The writer is a freelance contributor.