The latest G20 gathering is about to happen in Johannesburg and as part of that economics Nobel laureate Joseph Stiglitz and co-authors published a report on global inequality.
The authors consider inequality one of the most urgent and important global concerns. I just happen to have been thinking about inequality a lot and have had many long and illuminating discussions with Leon Louw of the Freedom Foundation on it, so my responding to this report is apt.
We measure inequality via a number of metrics. The main one is the Gini coefficient but others like share of wealth of the bottom 10% or top 1% are also common. The standards for high and low inequality are Gini coefficients of over 0.4 and less than 0.3 respectively. Wealth is badly measured and wealth inequality very misleading. It is very volatile, especially investments and houses.
Country wealth statistics are extremely variable and even the best is not good. For example, the Netherlands was the most unequal country in the world by wealth in 2019 in spite of high taxes and progressive policies to reduce welfare inequality. It is also one of the world’s most equal countries by income. Its poor live in rented homes that are very generous, and do not live in shacks, which is what wealth inequality is supposed to be. Most citizens own their own house.
Much of our wealth is not even recorded. For example, your watch, old cars or beds and state pensions. Those omissions can be profoundly consequential. When including pensions, Netherlands drops from 1st place in the wealth inequality rankings to 146th among 169 countries.
One claim is that mature capitalism is to blame for the high wealth inequality of the Netherlands because wealth accumulation and inheritance concentrate wealth in families over generations. However, most of the Netherlands’ super rich did not inherit their money and are not aristocrats. Furthermore, the Netherlands is 6th on social mobility index.
Every year the charity Oxfam publishes a claim that some miniscule fraction of the world own half of global wealth and that half the world’s population do not own anything at all. Well, if they calculate wealth like they do in the Netherlands they will get misleading meaningless figures like that.
Reliable meaning
Income figures are much easier to obtain reliably than wealth figures, so inequality metrics of income do have a reliable meaning. Let us dwell for a moment on the problems allegedly caused by inequality. Firstly, the report’s authors say it results in extreme concentrations of political and economic power.
These are threats to peace, prosperity, sustainability and the ability to deal with global challenges. Secondly, they say that the huge disparity and the suffering of those at the bottom drive perceptions of unfairness, undermine social and political consensus and reduce trust in authorities and institutions.
I agree that both claims are mostly true and the effects mostly bad. I have doubts about sustainability and dealing with global problems. Sustainability is mostly about better technology and the usual proposed solution to global problems, world government, would be a lot worse than the problems themselves. That brings me to the question of solutions.
Thomas Sowell says that when there are limited resources, and there always are, there are no solutions, only trade-offs. The only sane approach is to consider both sides of the trade-off. The trade-offs will depend on the causes of inequality and the proposed counter measures and could be either a loss of the benefits of inequality or bearing the price of the means used to combat it.
Some, particularly the authors of the report or Oxfam, may be surprised to hear that inequality could have any benefits at all. One obvious benefit is that status seeking, a zero-sum game where equality makes no sense, is a central human motivation. The prospect of rising up the status ladder is an enormous driver of achievement and that in turn benefits everyone.
Secondly, inequality of outcome is fair when there is a massive difference in contribution to the collective welfare. CEOs often do contribute 300 times more to the fortunes of an enterprise than the lowest paid worker. Thirdly, the existence of some richer people make the initial release of new but expensive products viable. Soon these new products become affordable, and the benefits shared widely. The need for greater equality must be balanced against these benefits.
Very different costs
Inequality could be due to inborn differences in ability or preferences. It could be due to privilege and oppression. It could be due to luck – good and bad. These causes imply different methods of combating inequality and very different costs associated with each method.
Economic historian Gregory Clark established that socio-economic status is extremely stable across generations, regardless of political system.
The purged and oppressed elite in the Soviet Union bounced back in two generations with the former upper classes dominating professional and academic fields. The same applies to Sweden, America, Japan and the UK.
Clark argues that socio-economic status is extremely heritable in the biological sense. If that is the case, then any attempt to produce equality of outcome must involve massive oppression of the upper class and will only achieve the impoverishment of that class. It will not improve the lot of the poor who may in fact end up even poorer. The elite will of course fight back and historically they win more of these class battles than do the lower classes.
Fighting this cause in the belief that it can and must be overcome, is a highly destructive strategy for everyone. Mitigating the inequality from this cause via some sort of negotiated noblesse oblige income transfer, or welfare system, would be a wise trade-off compromise.
If, like the Indian caste system, the cause is oppression and privilege the solution is to end it – preferably without violent revolution. To its credit India is trying to do just that. If the cause is good and bad luck, then perhaps the fortunate contributing to a national insurance system is a trade-off most people would buy into.
We would all be better off if we were to think more about the complexity and interconnection between things rather than responding ideologically to one side of an issue.
[Image: Mediamodifier from Pixabay]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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