Inequality: Looking at the beast, conceptually

| Updated: January 07, 2023 20:57:29

Inequality: Looking at the beast, conceptually

Thoughts on equality of the economic variety (there being social and political ones) conveyed by analysts and economists have been simmering for quite some time. It surfaced, almost surreptitiously, in early '30s when Simon Kuznets published his report on the national income accounts of America. Commissioned by the United States (US) Federal government, the objective of his statistical survey was to assess the size of the American economy to facilitate the war time budget of the country. Revelation of inequality of income among groups of American citizens, particularly between those in the top income bracket and the rest below, was a by-product of this seminal exercise.He was more explicit on this finding in his article 'Economic Growth and Income Inequality' where he postulated the celebrated 'U' curve which showed income inequality occurring at early stages of economic development and diminishing   subsequently as growth gained momentum (The American Economic Review,1955).Since then the subject of inequality has surfaced intermittently in scholarly studies, statistical analyses and various forms of public discourse. More recently, awareness about this became heightened during and after the Covid pandemic that wreaked havoc in economies of countries across the world, widening income inequality dramatically.

According to Joseph Stiglitz, inequality built up, slowly but steadily,  over a period of three decades before the Great Recession of 2007-2008 (The Price of Inequalty,2012).For this egregious development he holds government policies, or lack of it, as much responsible as market forces of supply and demand for capital and labour, with rent seeking by those wielding power and authority in market place and elsewhere as the most potent third contributing factor.According to him, inequality is not only about income and wealth; it includes social and political power exercised in society and polity for rent seeking impinging on it. Following this thesis, it is perceived that income (and wealth) inequality is reinforced and firmly entrenched by social and political inequality. Unlike the chicken and egg conundrum, one can conclude, following the argument of Stiglitz, that income and wealth inequality precedes social and political ones in the first place and thereafter these become mutually reinforcing, feeding each other. Mitigation, not to speak of reversal, of inequality, therefore, depends on simultaneous moderation, if not outright regulation, ofpolitical and economic forces at play. For this, government interventions are called for. The problem of inequality thus appears as embedded in political economy, freeing it from economic determinism. The catch-22 involved in any attempt at addressing income and wealth inequality should become apparent when   the mutually reinforcing process of political and economic forces at work is unravelled.

Stiglitz has sought to explain the mutually dependent and reinforcing relationship between economic and political power through the dynamics of political patronage of public representatives in exchange for financial contributions or donations by captains of industries and heads of corporate bodies, including financial institutions. In the process, political power is corralled by the private sector disproportionate to its electoral strength, concentrating economic and political power in the hands of the few, in contrast to many. Income and wealth inequality grows apace free from encumbrances of rules, regulations and taxes that might be imposed to circumscribe the burgeoning income of business, industries   and financial institutions. As an example of political patronage Stiglitz has mentioned the exemption of Bill Gate's Microsoft from the application of anti-trust law even if it was liable to give up monopoly of the browser Explorer, incorporated in its computer operating system Windows, allowing  other competitors in the field like Netscape's stand-alone  browser. Reduction of corporate income tax from 40 per cent to 25 under President Trump provides another example of corporate power in America which thrives under neoliberalism. The example of other countries in these regards is no better than America. In the view of Stiglitz, 'government failure', often deliberate, lies at the heart of income and wealth inequality.

Stiglitz considers 'market failure' also responsible for income and wealth inequality but not to the same degree as that of the government. The culpability of market in this regard is attenuated   as one of the major cause of engendering and worsening income inequality, because 'rent seeking' is seen by him as a non- market phenomenon, distinguishing it as separate  from market forces of supply and demand for labour and 'government failure'. But apart from rent-seeking (as unearned income) by politicians and government functionaries, monopoly profit by firms and corporate bodies operating in the market is also in the category of 'rent seeking', in so far as it is disproportionate to costs incurred in producing the goods or services sold by the monopolies. Perhaps Stiglitz does not consider monopolies as market institutions because these operate outside and beyond competition, the hall mark of 'free market'. But that is not how monopolies have been viewed in neo- classical economics. Another flaw in his analysis of 'rent- seeking' as a contributory factor to income inequality is excluding unearned income which restricts the coverage of beneficiaries (politicians, bureaucrats) under this form of earning or income. If ' rent seeking' is considered as a non-market exercise, then to be consistent with this concept monopoly in the market has to be kept out of its ambit.

Among market forces, supply and demand for labour, particularly of the unskilled category, receives major attention from Stiglitz. Decline in their wages or stagnation, in contrast to those who belong to the skilled category and the managerial class, is seen as the main cause for inequality of income between them and others, particularly the managerial class and the shareholders and owners of non- public firms. But to concentrate on declining wages, ignoring the countervailing role of income transfer through taxation and redistribution to the low income group and the unemployed is to view inequality of income   merely as a function of market forces. To be realistic and accurate, inequality should be seen as the joint outcome of market and government failures.

In contrast to the conceptual analysis of income inequality by  Stiglitz, the analysis by Thomas Piketty concentrates on the alleviating aspect through redistribution (The Economics of Inequality,1997). Among the contributory factors to income inequality, only the disproportionate returns on capital and labour receive his attention. Non-market factors like political patronage, inadequate provision of 'common goods' (education, health etc.) hardly figure in his conceptual analysis. But he is brilliant in his analysis of what are the possibilities of mitigating inequality of income and wealth and their welfare implications. In this regard he outpaces, even overwhelms, the conceptual analysis of Stiglitz. Giving a broader picture of inequality, he juxtaposes the views of the right-wing free market advocates with those of the traditional leftwing analysts and critics. He observes that while the former believe in the long run when market forces, individual initiative and productivity growth will be the  major determinants of distribution of income, the left-wingers holds the view that the only way to alleviate the misery of the poor and low income group is through political struggle and intervention by the government for redistribution at every level of the productive process. Instead of taking a side, he poses a question, as if trying to comprehend the dilemma facing policy makers: Should the market and its price system be allowed to operate freely, with redistribution effected solely by means of tax and transfers,  or should one attempt to alter the structure of market forces that generate inequality? It is obvious that here he is referring to the jargon of economics that contrasts between 'pure redistribution' and 'efficient redistribution'. As is known to economists, pure redistribution occurs when the market equilibrium is 'Pareto efficient', meaning that it is impossible to alter the allocation of resources and output in such a way that everyone gains. Efficient redistribution, on the other hand occurs when  market imperfections allow direct intervention in the productive process to achieve Pareto- efficient  improvements in the allocation of resources and equitable distribution of resources.

Piketty is more statistical and empirical in his treatment of the causes of inequality than conceptual. His  focuses on relative market returns on  capital and labour  using data and this opening gambit is followed by examination of inequality of income  among different groups of wage labour( skilled, unskilled). He then delves more deeply into the key issue of the conditions under which redistribution becomes possible and the policy instruments for achieving it. The vast and varied array of analytical concepts brought to bear on the causes of inequality has eluded him though he mentions about 'socio-economic' factors. Perhaps he is seized with the idea of the functioning of laisez faire capitalistic market so obsessively that other non-economic issues appear as incidental to him for the analytical purpose. Unlike Stiglitz, he does not think in terms of 'political economy' while looking at income and wealth inequality. But neither does he believe in the inherently competitive nature and efficiency of market. With this caveat it must be said once again that his treatment of 'redistributive' tool as the solution of inequality is conceptually convincing and simply brilliant. Though he is not explicit about his support for 'pure redistribution' or 'efficient redistribution' as the preferred policy tool, it is not difficult, however, to perceive his inclination.

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