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2017 | OriginalPaper | Chapter

4. What Kinds of Economic Inequality Really Matter?

Author : Thomas E. Weisskopf

Published in: Perspectives on Economic Development and Policy in India

Publisher: Springer Singapore

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Abstract

The chapter discusses the major reasons why economic inequality should be a source of concern and the forms of inequality that are principally implicated. It considers ten different arguments as to why inequality matters—two of them moral, two political, three economic, and three social. In each case it discusses the economic variable(s) whose unequal distribution is at issue, whether economic class inequality or ethnic group inequality is most salient, and what part(s) of the unequal distribution are the most problematic—i.e., is the problem primarily poverty at the lower end, privilege at the upper end, bipolarization, or the entire distribution?

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previous chapter Assessment of Well-Being in Multidimensional Perspective in Post Reform India

next chapter Variable Populations and the Measurement of Poverty and Inequality: A Selective Overview

There have of course always been some economists who stress the importance of economic inequality—notably Amartya Sen.

See the data compiled by the World Bank and by the U.N. University’s World Institute for Development Economics Research, on-line at http://data.worldbank.org/topic/poverty and http://www.wider.unu.edu/research/Database/en_GB/database/, respectively.

I am using the term “class” in this paper simply as a short-hand for the alternative to “group” as a distributional entity. In sociological and/or Marxist analyses, of course, classes are themselves defined as groups of people that share certain important characteristics.

To paraphrase Sen (1992, p. 117, fn.), we are interested in inequality between different groups not so much because of intrinsic interest in group differences but because of what such differences can tell us about inequality as between individuals placed in different groups. Sen (1992, pp. 121–22) goes on to note that “The way a person is viewed in a society with racial disparity may be deeply influenced by his or her visible racial characteristics, and that can act as a barrier to functioning possibilities in many circumstances. Distinctions of caste similarly have influences of their own…”.

For some purposes it may be preferable to work with the mean rather than the median. In the rest of the paper I will mention only the median, but it should be understood that one might wish to use the mean instead.

For some purposes it is useful to measure also the degree of inequality within each group—on the premise that, ceteris paribus, greater within-group inequality (which implies greater likelihood of overlap of individuals in different groups) reduces the salience of differences in group means. This is the logic of a “multidimensional polarization index” proposed by Zhang and Kanbur (2001), which is defined as the ratio of a measure of between-group inequality to a weighted average of measures of within-group inequality. I believe, however, that it is mainly differences in group medians that drive concern about group inequalities.

Sen (1992, pp. 115–16) elaborates on this point as follows: “In a country that is generally rich, more income may be needed to buy enough commodities to achieve the same social functioning, such as ‘appearing in public without shame’. The same applies to the capability of ‘taking part in the life of the community’. These general social functionings impose commodity requirements that vary with what others in the community standardly have.”

See Motiram and Sarma (2011) and the references therein. Note that bipolarization is closely related to the notion of bimodality in a distribution.

One major economic argument for reducing inequality that I do not consider in this paper is that growing inequality generates macroeconomic instability, by stimulating the growth of an increasingly fragile financial services industry. This argument has been advanced rather persuasively to explain the global financial crisis that began in 2008; see Kumhof and Rancière (2011) and Galbraith (2012). But an essential ingredient of the explanation is inadequate regulation of the financial sector, and it is not clear that this was itself a consequence of growing inequality, or that growing inequality necessarily entails an out-of-control financial sector.

Determination of exactly who should be considered a “member” of any given society is an important, but difficult, issue that I will not try to resolve here.

Furthermore, differences in economic and social status are closely linked to differences in how much control one has over one’s own life. As John Quiggin (2010, p. 165) has observed, autonomy is largely a zero-sum good within a given society: high status confers personal autonomy and low status deprives one of it.

See, for example, Wilkinson and Pickett (2009), Chap. 12; they conclude that (p. 169): “Bigger income differences seem to solidify the social structure and decrease the chances of upward mobility. Where there are greater inequalities of outcome, equal opportunity is a significantly more distant prospect.” Krueger (2012, p. 4 and Fig. 7) reports on cross-country evidence that higher inequality is associated with higher intergenerational earnings elasticity (i.e., lower mobility).

Anderson (2002) has argued persuasively that making the group composition of the societal elite more broadly representative of the population as a whole is the single most important rationale for positive discrimination in favour of historically marginalized groups.

Many observers of political development have suggested that a large middle class is an essential prerequisite for a vital democracy, and there is indeed evidence of positive correlation between the two. But it is not clear that such correlation cannot be explained largely by an effect of democracy on the size of the middle class or, more likely, by other factors that act simultaneously to promote both a middle class and a more vital democracy.

This point has been well made in the Indian context by, among many others, Chaudhuri and Ravallion (2006).

My discussion in this section draws heavily on Bardhan et al. (2000), as well as on Bardhan (2005).

As Bardhan et al. (2000) point out, there are some respects, in which greater wealth inequality is likely to enhance allocative efficiency. Most importantly: wealthy agents can afford to be considerably more risk-neutral than non-wealthy agents, so egalitarian wealth transfers will generally shift control over productive risk-taking to more risk averse agents likely to choose a level of risk that is socially less efficient. Yet in cases where a higher concentration of assets would contribute to greater efficiency, the assets will be worth more to the wealthy than to the non-wealthy; and the wealthy should be able to acquire the assets they need, since their access to credit markets is not constrained. It follows that extra-market wealth-redistributive policies are likely to be needed only when greater efficiency calls for the shifting of assets from rich to poor.

See Wilkinson and Pickett (2009), Chaps. 6 and 13. Jencks et al. (2000, 2009), among others, find the statistical evidence inconclusive.

A good example of the impact of social evaluative threats is provided by Hoff and Pandey (2004), who showed that when high and low caste children in rural India were unaware of the caste differences between them, they performed equally well when asked to solve a series of puzzles; but when they were made aware of the differences, the performance of children from low castes was substantially lower.

Even if subsidies limit the cost of attending school, a family’s purchasing power has a significant influence on children’s chances of admission to a top-tier school because it affects the quality of the parental upbringing and the residential community, as well as the prior schooling and examination coaching, that the family can finance.

Alesina, A., & Rodrik, D. (1994). Distributive policies and economic growth. Quarterly Journal of Economics, 109, 465–490.CrossRef

Anderson, E. A. (2002). Integration, affirmative action, and strict scrutiny. NYU Law Review, 77, 1195–1271.

Bardhan, P. (2005). Scarcity, conflicts, and cooperation. Cambridge, MA: MIT Press.

Bardhan, P., Bowles, S., & Gintis, H. (2000). Wealth inequality, wealth constraints and economic performance (Chap. 10). In: A. Atkinson & F. Bourguignon (Eds.), Handbook of income distribution. Amsterdam: Elsevier.

Bruno, M., Ravallion, M., & Squire, L. (1999). Equity and growth in developing countries: Old and new perspectives on the policy issues. World Bank policy research working paper 1563, November 30.

Chaudhuri, S., & Ravallion, M. (2006). Partially awakened giants: Uneven growth in China and India (Chap. 6). In: L. A. Winters & S. Y. Yusuf (Eds.), Dancing with giants: China, India and the global economy. Washington, D.C.: The World Bank.

Duesenberry, J. S. (1949). Income, saving and the theory of consumer behavior. Cambridge, MA: Harvard University Press.

Frank, R. (2011). The Darwin economy: Liberty, competition, and the common good. Princeton, NJ: Princeton University Press.

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Hirsch, F. (1977). The social limits to growth. London: Routledge & Kegan Paul.

Hoff, K., and Pandey P. (2004), Belief systems and durable inequalities: An experimental investigation of Indian caste. World Bank policy research working paper No. 3351, June 25.

Jencks, S. F., Cuerdon, T., Burwen D. R., Fleming B., Houck P. M., Kussmaul A. E., Nilasena D. S., Ordin D. L., & Arday D. R. (2000). Quality of medical care delivered to Medicare beneficiaries: A profile at state and national levels. JAMA, 284(13), 1670–1676.

Jencks, S. F., Williams, M. V., & Coleman, E. A. (2009). Rehospitalizations among Patients in the Medicare Fee-for-Service Program. New England Journal of Medicine, 360(14), 1418–1428.

Krueger, A. (2012). The rise and consequences of inequality in the United States. Available online at: http://www.whitehouse.gov/sites/default/files/krueger_cap_speech_final_remarks.pdf

Kumhof, M., & Rancière, R. (2011). Leveraging inequality. Finance and Development, 2010, 28–31.

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Mann, T. E., & Ornstein, N. J. (2012). It’s even worse than it looks: How the American constitutional system collided with the new politics of extremism. New York: Basic Books.

Motiram, S., & Sarma, N. (2011). Polarization, inequality and growth: The Indian experience. Working Paper No. 11, Indira Gandhi Institute of Development Research, Mumbai.

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Title: What Kinds of Economic Inequality Really Matter?
Author: Thomas E. Weisskopf
Publisher: Springer Singapore
Book: Perspectives on Economic Development and Policy in India
Print ISBN: 978-981-10-3149-6

Electronic ISBN: 978-981-10-3150-2

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-981-10-3150-2_4

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