Income Disparity Is Not Malevolent
For centuries economists have pondered whether disparity is terrible or useful for long haul development. There are those who view it as a necessary “tool” to boost personal wealth, while there are those who think economic stability will remain shaky when income growth is not properly distributed.
On one hand, settled in imbalance undermines to make an underclass whose individuals’ insufficient training and low abilities abandon them with poor prospects for full interest in the economy as workers or customers. It can bring about political precariousness and in these manner stances dangers to speculation and development. Then again, some contend that in light of the fact that disparity puts more assets under the control of industrialists (rather than workers), it advances funds and venture and catalyzes development.
Therefore, we say the marginal utility of an extra Rs100 at this income level is very limited. As income increases, the extra marginal benefit to individuals declines.
Income inequality has different outcomes for life expectancy and mobility. It is not as simple as giving poor people some money so that they can educate their kids, and then those kids can get a nice job when they grow up and everybody lives happily ever after. Income inequality has implications for social mobility by either restricting, or maximizing or optimizing opportunities for social mobility for different segments of the society. Money impacts access to all these resources.
It is not morally important that everyone should have the same. What is morally important is that everyone should have enough.
What does it mean for a person to have enough?
A first step for a place like India is of course to make sure that people should have enough for today at least. This is more important than worrying about economic inequality in India. Of course, the rich should be encouraged to share their wealth, but by setting up disincentives for people to seek economic wealth, we run the risk that entrepreneurship will move offshore, tax evasion will increase and we will revert to the low rates of growth that we saw before the 1990s.
The point is that the same amount of money has different values, based on where you want to add it to.
The reason I say income inequality is not bad is because
1. Income inequality does not imply injustice or wrongdoing
2. Income inequality is a poor indicator of personal happiness or social welfare
3. The alternative to market-based distribution of income is coercion, which is incompatible with a free society
4. If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output – so everyone can benefit.
5. Inequality is necessary to encourage entrepreneurs to take risks and set up new business. Without the prospect of substantial rewards, there would be little incentive to take risks and invest in new business opportunities.
6. Trickle Down Effect. If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers. There may be a gap between highest and lowest earners. But, the lowest earners are still better off than without the entrepreneur.
7. People deserve to keep higher incomes if their skills merit it. If a top cricketer gets paid Rs 1,00,000 a week, this is a reflection that people are willing to pay that kind of money to watch him.
8. Not all wealthy people spend their money on positional goods. Some wealthy people may use their wealth for philanthropy or set up new business, which creates employment. This can have benefits for the rest of society.
9. Higher wealth and income will lead to higher demand for luxury services, such as chauffeurs, gardeners, teachers. Therefore, this will create employment and push up wages for those who work in the service sector. This will benefit other people in society.
10. Also, even if the wealthy save money, you could argue, this gives banks greater funds to lend to small business or mortgages.
Conclusion
Of course I agree that we have to walk as slow as your slowest person to keep society moving. Societies do not face a choice between efficient production and equitable wealth and income distribution. When growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth.
While new research is challenging some traditional view that inequality is a necessary evil for a “dynamic” society, there are those who remain firm that it is never acceptable. The varying views and opinions mirror the great divide in terms of solutions ranging from moderate changes to very radical shifts.
Despite this, we’ve also discerned that great minds can unite when it comes to the more pressing issue – income distribution. In the words of Yugoslav economist and World Bank’s research head Branko Milanovic, “despite the impression that nothing more substantial can be said on the topic, economists and political philosophers have worked out, within fairly consistent frameworks, the ideas about what the optimal, or a better, distribution of income would be.
For centuries economists have pondered whether disparity is terrible or useful for long haul development. There are those who view it as a necessary “tool” to boost personal wealth, while there are those who think economic stability will remain shaky when income growth is not properly distributed.
On one hand, settled in imbalance undermines to make an underclass whose individuals’ insufficient training and low abilities abandon them with poor prospects for full interest in the economy as workers or customers. It can bring about political precariousness and in these manner stances dangers to speculation and development. Then again, some contend that in light of the fact that disparity puts more assets under the control of industrialists (rather than workers), it advances funds and venture and catalyzes development.
Above figure depicts differences in national income equality around the
world as measured by the national Gini coefficient. The Gini coefficient
is a number between 0 and 1, where 0 corresponds with perfect equality
(where everyone has the same income) and 1 corresponds with absolute
inequality (where one person has all the income, and everyone else has
zero income).
IMF on the issue says – “Inequality tends to cause economic volatility. Sustainable economic reform is possible only when its benefits are widely shared.”
IMF on the issue says – “Inequality tends to cause economic volatility. Sustainable economic reform is possible only when its benefits are widely shared.”
The IMF has strongly debunked the Okun theory which states that
pursuing equality can reduce efficiency and not only can more equal
distribution of incomes reduce incentives to work and invest, but the
efforts to redistribute—through such mechanisms as the tax code and
minimum wages—can themselves be costly.
Nouriel Roubini – Professor of economics at Stern School of Business says “Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, public protests will become more severe, with social and political instability eventually harming long-term economic growth and welfare.”
To understand more let me introduce the concept of Diminishing marginal utility of income. It suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness.
Utility means satisfaction, usefulness, happiness gained. Utility could be measured by the amount you are willing to spend on a good.
For example – let’s say you have zero income, and gain Rs 100 a week. This Rs 100 will improve your living standards significantly. With this Rs100 you will be able to pay for basic necessity of life – food, drink, shelter and heating. Without this basic Rs100 a week, life would be tough.
However, if you already gain Rs500 a week, an extra Rs100 has a proportionately smaller increase in utility. You may be able to eat out at restaurants more often, but it doesn’t significantly affect your standard of living and happiness. At Rs 500 a week, you can afford most things you need. But, still most people would be happy to gain an extra Rs 100 to spend on luxuries like going out.
If you are earning Rs 10000 a week – you would hardly notice an extra Rs100 a week. You may not even have time or ability to spend it; this extra income is liable to be just saved.
Nouriel Roubini – Professor of economics at Stern School of Business says “Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, public protests will become more severe, with social and political instability eventually harming long-term economic growth and welfare.”
To understand more let me introduce the concept of Diminishing marginal utility of income. It suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness.
Utility means satisfaction, usefulness, happiness gained. Utility could be measured by the amount you are willing to spend on a good.
For example – let’s say you have zero income, and gain Rs 100 a week. This Rs 100 will improve your living standards significantly. With this Rs100 you will be able to pay for basic necessity of life – food, drink, shelter and heating. Without this basic Rs100 a week, life would be tough.
However, if you already gain Rs500 a week, an extra Rs100 has a proportionately smaller increase in utility. You may be able to eat out at restaurants more often, but it doesn’t significantly affect your standard of living and happiness. At Rs 500 a week, you can afford most things you need. But, still most people would be happy to gain an extra Rs 100 to spend on luxuries like going out.
If you are earning Rs 10000 a week – you would hardly notice an extra Rs100 a week. You may not even have time or ability to spend it; this extra income is liable to be just saved.
Therefore, we say the marginal utility of an extra Rs100 at this income level is very limited. As income increases, the extra marginal benefit to individuals declines.
Income inequality has different outcomes for life expectancy and mobility. It is not as simple as giving poor people some money so that they can educate their kids, and then those kids can get a nice job when they grow up and everybody lives happily ever after. Income inequality has implications for social mobility by either restricting, or maximizing or optimizing opportunities for social mobility for different segments of the society. Money impacts access to all these resources.
It is not morally important that everyone should have the same. What is morally important is that everyone should have enough.
What does it mean for a person to have enough?
A first step for a place like India is of course to make sure that people should have enough for today at least. This is more important than worrying about economic inequality in India. Of course, the rich should be encouraged to share their wealth, but by setting up disincentives for people to seek economic wealth, we run the risk that entrepreneurship will move offshore, tax evasion will increase and we will revert to the low rates of growth that we saw before the 1990s.
The point is that the same amount of money has different values, based on where you want to add it to.
The reason I say income inequality is not bad is because
1. Income inequality does not imply injustice or wrongdoing
2. Income inequality is a poor indicator of personal happiness or social welfare
3. The alternative to market-based distribution of income is coercion, which is incompatible with a free society
4. If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to a higher national output – so everyone can benefit.
5. Inequality is necessary to encourage entrepreneurs to take risks and set up new business. Without the prospect of substantial rewards, there would be little incentive to take risks and invest in new business opportunities.
6. Trickle Down Effect. If some people gain extra income, then this can ‘trickle down’ to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide incomes for other workers. There may be a gap between highest and lowest earners. But, the lowest earners are still better off than without the entrepreneur.
7. People deserve to keep higher incomes if their skills merit it. If a top cricketer gets paid Rs 1,00,000 a week, this is a reflection that people are willing to pay that kind of money to watch him.
8. Not all wealthy people spend their money on positional goods. Some wealthy people may use their wealth for philanthropy or set up new business, which creates employment. This can have benefits for the rest of society.
9. Higher wealth and income will lead to higher demand for luxury services, such as chauffeurs, gardeners, teachers. Therefore, this will create employment and push up wages for those who work in the service sector. This will benefit other people in society.
10. Also, even if the wealthy save money, you could argue, this gives banks greater funds to lend to small business or mortgages.
Conclusion
Of course I agree that we have to walk as slow as your slowest person to keep society moving. Societies do not face a choice between efficient production and equitable wealth and income distribution. When growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth.
While new research is challenging some traditional view that inequality is a necessary evil for a “dynamic” society, there are those who remain firm that it is never acceptable. The varying views and opinions mirror the great divide in terms of solutions ranging from moderate changes to very radical shifts.
Despite this, we’ve also discerned that great minds can unite when it comes to the more pressing issue – income distribution. In the words of Yugoslav economist and World Bank’s research head Branko Milanovic, “despite the impression that nothing more substantial can be said on the topic, economists and political philosophers have worked out, within fairly consistent frameworks, the ideas about what the optimal, or a better, distribution of income would be.
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