Understanding inequality

August 1, 2019

The Political Economy of Inequality
By Frank Stilwell
Polity, 2019

The existence of stark economic inequality within and between different nations is one of the most reprehensible facts of modern society. Some simply dismiss it as natural and inevitable, but most people would at least recognise it as a serious problem. Efforts to change it have largely failed or been too meagre to stem the tide.

Welcome attention was drawn to the issue with the 2014 publication of Thomas Piketty’s Capital in the Twenty-first Century which, surprisingly for a book on economics, became an international bestseller. It highlighted the rising trend of inequality and did much to dispel arguments that differences in wealth had any close connection to merit.

The Political Economy of Inequality by Frank Stilwell, Emeritus Professor of Political Economy at the University of Sydney, gives a more rounded overview of the issue in a more manageable volume than Piketty’s hefty magnum opus.

While it doesn’t hide its political commitments, it gives a critical outline of different theoretical perspectives on the issue of inequality.

This includes conservative views that try to defend the existence of inequality; liberal views, such as Jospeh Stiglitz and Paul Krugman, who see the problem as one of market distortions requiring state intervention to correct; and radical views which see it is an intrinsic, structural aspect of capitalism.

It also covers some of the criticisms raised with Piketty’s work, which have come even from those who have praised it.

Looking at the figures globally, a person exactly in the middle of global income distribution, on the 50th percentile, has an income of €6757 per annum.

“Below that average income,” Stilwell writes, “the numbers fall away markedly, down to a mere €853 for people at the fifth percentile.

“Above the average, the incomes climb increasingly sharply, reaching 102,671 at the 98th percentile and a stupendous 30,783,073 at the 99.999th percentile.”

Stilwell points out that it is important to look not only at income inequality, but also the inequality of accumulated wealth. The inequality trend is all the more dire when we look at the later.

“Almost half the total private wealth in the world is owned by 36 million people. These comprise just 0.7% of the global population of just under 5 billion adults. The other half is almost wholly in the hands of 1.5 billion people, leaving 3.5 billion people with a mere 2.7% of the total.

“Drilling down even further into the wealth holdings of the super-rich … 3 million people each have assets worth between $5 million and $10 million, while just under 150,000 households have over $50 million.”

The book also examines the trends in inequality over recent decades, finding that there has been rising inequality within almost all nations. This is despite strong economic growth in poorer countries such as China and India somewhat narrowing the gap between nations.

From 1978 to 2015, incomes in the US grew by 59%. Over the same period, those in the bottom 50% of incomes experienced a 1% drop. For the group in the next 40%, they grew by 42% while for the top 10% they grew 115%.

Moving to the seriously rich, income growth was 198% for the top 1%, 321% for the top 0.1%, 453% for the top 0.01% and 685% for the top 0.001%.

China’s spectacular economic growth over the same period has resulted in huge benefits for its poorer population. But those benefits have been outstripped by those going to the wealthy minority.

From a total increase in incomes of 811%, the bottom half gained 401%. The top 1% gained 1,898% and the top 0.001% gained 3111%.

The overall pattern of changes in global incomes in the last few decades can be captured in what has come to be called the “elephant curve”.

Starting with the lowest incomes, there is a bulge in the graph forming the elephant’s body where the world’s poorest majority have increased their incomes, primarily in booming emerging economies such as China.

From 1980 to 2016, the bottom 50% captured 12% of income growth. However, this growth still leaves them relatively poor compared to wealthier countries.

The graph then drops off as the generally better off people who form the poorer 90% in North America and Western Europe have gained little or nothing of income growth.

The graph then rises sharply to form a “trunk” as it reaches the top 1% who, over the period, have captured 27% of income growth.

One major trend in inequality since the middle of last century has been the change in the functional distribution of income. Some derive their income from their labour, while others derive their income from their ownership of land or capital — some from “doing stuff”, others from “owning stuff”. This roughly maps onto the division between the working and landowner/capitalist classes.

The share of income to labour has been significantly declining. In the advanced economies it has fallen from around 55% in 1970 to under 40%. The trend in poorer countries is likewise downwards.

Stilwell cites a famous quote from US billionaire Warren Buffett: “There’s a class war all right, but it is my class, the rich class, that’s making war, and we’re winning.”

This is something to keep in mind next time we hear anyone putting forward policies that might address inequality being targeted with the refrain that they are promoting “class war”.

Among the interesting issues that the book also looks at is social mobility. This is significant since it is frequently a part of the argument as to why we should accept inequality: that at least anyone can get ahead if they try.

We can get a measure of social mobility by comparing people’s income with those of their parents. The highest rankings for social mobility tend to be the Nordic countries. They also are among the lowest in income inequality.

At the opposite end of the social mobility scale are some South American countries such as Brazil and Peru and also China. These are also among the most unequal.

Of the advanced economies, the US is about the most unequal while being close to the bottom for social mobility.

This all suggests that far from allowing people to “climb the ladder”, inequality keeps the poor poor and the rich wealthy.

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