Efficiency versus Equity: The Economist’s Take on Income Inequality

Yes, even the staunchly “neo-liberal” Economist has detected income inequality as a topic for special discussion (“The rich and the rest, The Economist Jan 22-28, 2011). The authors agree that there is much discussion about income inequality, the agree that in many countries in the world inequality has risen, but conclude (quoting Sala-i-Martin) that – at least up to the crisis – inequality between countries has fallen, especially due to the fast growth of China, India and some Latin American countries.

The Economist also quotes the concerns of some economists that increasing inequality may have contributed to the financial crisis, since falling incomes of the less affluent might have been compensated by a credit boom which increased households’ indebtedness. There is also a brief discussion of whether income inequality, i.e. the increasing spread between high and lower incomes matters, or whether it is the number of poor that matters. For the latter view, which the authors favour, they also quote the (now infamous) Tony Blair as saying he was “intensely relaxed” about the exorbitant salaries of footballers and entertainment persons as long as child poverty fell.

Correctly, the Economist also quotes some of the worries in the minds of some analysts that increasing inequality (or poverty) might lessen social cohesion and lead to political instability. But the journal maintains that many of the ills ascribed to unequal societies are rather due to a few statistical outliers than general trends.

And this is where the Economist’s “sympathy” for the inequality topic ends. They relish in some positive developments in some countries, notably China, India and the Latin American countries, which had been long the paragons of income inequality. For the authors, GDP growth forms the overriding goal of economic policy and globalization, since they see it as “trickling down” to the poor, thus lifting them (or at least some of them) over the poverty line. Thus, economic growth automatically would solve the inequality problem, or at least, the poverty problem.

The authors come out strongly against “redistribution”, because they can detect only negative effects (presumably on growth and on the incomes of the rich) as a result of such policies. In true neo-liberal, unreconstructed vain, anything that might impede “efficiency”, and be it for the sake of “equality” or, as the Brits would say, “fairness” is to be condemned. Social cohesion and its purported effect on the wellbeing of citizens, is unmasked as a myth, or at least, as of no concern, if it impedes growth (= efficiency). Consequently, the Economist argues for efficiency-enhancing breaking down of mobility barriers, of breaking up monopolies, of combating protectionism, in short, of unleashing the forces of globalisation to the benefit of the masses. They acknowledge that the increased opportunities via globalisation favour the skilled, thus they argue for better education, but not by spending more money on it, but rather by breaking up the power of teachers unions which “have stopped poorer Americans from getting a good education”.

So we are back at the old debate of efficiency versus equality. One might have thought that the perennially falling wage shares, the increasing inequality in rich,  emerging and developing countries, the shifting of the burden of cleaning up the financial mess on the average taxpayers, the continued payment of obscene salaries to financial engineers and CEOs and the ensuing fragility of modern societies with weaker and weaker governments might have given rise also to the Economist to rethink its priorities. But this probably would be asking too much. Let them eat their hope that promoting growth will trickle down to the poor and get on with the work to stop the most egregious excesses that the prioritization of efficiency over equity or fairness has caused. The path towards better-off societies does not lie in pursuing maximum growth (=efficiency), but in a socially and environmentally sustainable development which serves people, not only businesses. To me, this is at the root of the distinction between a preference for efficiency, or equity: efficiency is concerned with the way businesses are run, equity concerns the fate of the people. It would have been surprising if the Economist, for all its merits, would have been more concerned with how people and societies progress.



Filed under Global Governance, Socio-Economic Development

4 responses to “Efficiency versus Equity: The Economist’s Take on Income Inequality

  1. I wanted to remark first that the findings of the “Economist” are at odds with statistics provided by the late Tony Judt ( in one of last years issues of the “New York Review of Books” ). These point to the high social – but also economic – costs of inequality. Second, it should be noted that European countries with low inequalitry weathered the crisis better than those with high inequality. And third I wondered as to the gauges used to substantiate the Economist’s claim that inequality between countries has lessened. There are several methods to measure distances in wealth (countries pure andsimple, counties weighted by population; and finally inequalities per persons so as if frontiers would not exist; that is looking at the world population as a whole, as if it were one single unit. The latter is, I believe, the most relevant gauge ( also used by the IBRD ). And I wondered whether this gauge would indeed point to a lessening of inequality.

    • kurtbayer

      Thomas: I analyzed this in “Does globalization make the world more equitable”? Intervention 5(1), 2008 where I came to the conclusion that on your last measure this is only true if the remarkable success of China is included in the data sample. Without China (which is of course important) there is no proof for narrowing income inequality. A lot of empirical work has been done on this issue over the years and different authors – as always – come to very different conclusions, dpending on method, time period and data used. I think that Judt is right on this point that inequality causes many other social and economic problems – and he is not alone by stating this.
      The basic neoclassical idea that increasing inequality means that more effort is duly rewarded, thus positive for “efficiency” = growth, is just an extension of extreme “homo oeconomics” assumptions, i.e. that most/all human decisions are based on income (=welfare) maximization. Gary Becker has been one of the prime exponents of this school by attributing wedlock, family size, crime and others to mainly economic/financial calculus.

  2. Joanne Bayer

    I will send this blog to Tony, who is just attending our So African meeting on “Poverty and Equity” to supposedly guide IIASA’s research on this topic. You might have said more about education, perhaps worth another blog. Note article by Wolfgang Lutz and Warren Sanderson (others?) in Nature, where they claim that the main driver of poverty is lack of education. Not sure I agree, but interesting.

    • kurtbayer

      Of course, Joanne, education is an important factor, but in many economies (see North African rim) it is the highly educated unemployed who topple governments because they see no future for themselves and their families. Education is one of the Millennium Development Goals, thus is recognized as important. Access to services, jobs and fiannce are at least as important for combating poverty. And then: there is still inequality as an extra factor.

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