The higher the inequality, the more likely we are to move away from democracy


In every political system, the rich tend to hold more power – but the relationship between politics, economics and inequality is complex. To better understand these critical issues, we must look to Big Data

I am asked this question very often: why should we care about inequality? There are three reasons.

First, every inequality in the treatment or position of individuals – including inequality in income and wealth – requires understanding and justification, because we are all fundamentally the same. That does not mean we should all have the same incomes because our effort and luck may vary, but we need to think about the reasons for any and every inequality.

For example, we can adopt Rawls’ perspective – that inequality can be justified only if it is in the interest of the least well-off (that is, so long as it raises the absolute income of the poorest). Or we can agree with Hayek that inequality is acceptable so long as the rules of the game, such as equal access to the market, are observed. Or we can provide another rationale.

But no matter which philosophical opinion we find the most attractive, we have to address the reasons for the existence of inequality.

Second, we want to study inequality and its effects on economic growth – not only on the growth of the mean, like GDP per capita, but along the entire income distribution: for the poor, the middle class and the rich. This, unlike the first reason, is a very instrumental reason: we want to find out whether inequality helps or retards economic progress.

Common sense, some heuristics and empirical evidence suggest that neither of the extremes – that all incomes are the same, or that inequality is extremely high – are desirable.

The former might stunt incentives to work hard, study or take risks, meaning economic growth will suffer: communist economies are a case in point. The latter might imply perpetuation of inequality across generations, where people who do not work or study still remain on the top of the pyramid thanks to the wealth of their parents, while those with talents are stuck at the bottom because they cannot pay for school, for example. Latin America is, broadly speaking, a good example of this extreme.

So the objective is to find out what types of inequalities may be good for growth (for example, inequality due to differential effort) and what are not (inequality due to gender, race or parental wealth).

Finally, we need to look at the relationship between inequality and politics. In every political system, even a democracy, the rich tend to hold more political power. The danger is that this political power will be used to promote policies that further cement the economic power of the rich. The higher the inequality, the more likely we are to move away from democracy toward plutocracy.

The implicit theme in all three reasons is that nuances are important. In each case, we are dealing with a continuum: justification of inequality is not black or white, and nor are our conclusions about its effect on growth or democracy. There is also a spillover from one sphere to another: suppose that more equality is good for democracy, but bad for economic growth of the poor. How do we work around these trade-offs?

Such problems are not likely to be solved theoretically, nor once and for all. They will have to be dealt with empirically. And this is why the new and up-and-coming areas of inequality studies will benefit enormously from Big Data.

The current interest in inequality should be seen as an important instance of the general growth of interest in heterogeneity of phenomena, as opposed to our hitherto almost exclusive focus on averages (such as GDP per capita and the consumer price index), “representative agents” and the like. As often happens in history, this interest has fortuitously coincided with much greater availability of data to study such heterogeneity.

Let me conclude with the four areas where I think this rising interest and ability to address difficult questions leads us to expect most progress:

  1. Inequality of opportunity: we should empirically show its magnitude and (presumably negative) impact on growth.
  2. Intergenerational inequality: tracking the transmission of wealth and advantage across generations, then (linked with 1) showing how noxious are its effects.
  3. Empirics on the political influence of the wealthy.
  4. Global inequality of wealth and income: this topic’s importance increases as the world becomes more globalised, and capital and labour move more easily (despite the recent setbacks) than ever in history.

 Branko Milanovic is the visiting presidential professor at the Graduate Center, City University of New York. He is the author of Global Inequality: a new approach for the age of globalization.


By : Branko Milanovic
Date : May 2, 2017
Source : The Guardian

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