Session 7
The economics of income distribution. Causes of income
inequality. Trends in income inequality. The case against
income inequality. The case for income inequality. The
"invisible" poor. Two points of view: personal shortcomings?
Social victims? The rationale of a social security system.
Discuss, bringing some evidence to the discussion, the cases
against and for income inequality in a capitalist system
CONCEPTS FOR REVIEW:
underemployment, relative poverty,
absolute poverty, welfare state
In the 1970s there was a big debate among economists on income
inequality as created by the capitalist system. In the 1990s, the
debate is different. It is about the capitalist system being unable
to "afford" alleviating poverty and exclusion created by free market
forces.
At the end of the 1970s capitalist economists argued that:
"Price system is an impersonal mechanism. It has no conscience, and it
does not cater to any set of ethical standards concerning what is an
"equitable", or "just", distribution of income. In fact, the basically
individualistic environment of the capitalist economy is more than
permissive of a high degree of income inequality. Some of the more
specific factors contributing to income inequality include:
"1. NATIVE ABILITIES. Nature has been very arbitrary in apportioning
mental, physical, and aesthetic talents. Some individuals have had
the good fortune to inherit the exceptional mental qualities
essential to entering the relatively high-paying fields of
medicine, dentistry, and law. Others, rated as "dull normals" or
"mentally retarded", are assigned to the most menial and
low-paying occupations or are incapable of earning income at all.
Some are blessed with the physical capacity and coordination to
become highly paid professional athletes. The clumsy and frail
must settle for much less. Some have the aesthetic qualities
prerequisite to becoming great artists or musicians. Others are
not blessed with such talents. In brief, native talents put some
individuals in a position to make contributions to total output
which command very high incomes. Others are in much less fortunate
circumstances.
"2. TRAINING, EDUCATION, AND OPPORTUNITIES TO ADVANCE. Opportunities
to develop talents and to acquire new abilities are not equally
available to all. Discrimination on the basis of race, religion,
ethnic background. and sex blocks many paths to self-betterment.
The virtual closing of certain occupational doors by unions or
professional associations are equally effective obstacles.
Furthermore, the acquisition of the training and skills one needs
to enter highly paid occupations can be extremely costly. Most
poorer families are unable to afford such investments in human
capital, implying that income inequality may tend to be
self-perpetuating. In short, EVEN IF EVERYONE WERE BLESSED WITH
IDENTICAL PHYSICAL AND MENTAL TALENTS, INCOME INEQUALITY WOULD
STILL RESULT BECAUSE OPPORTUNITIES TO DEVELOP AND EMPLOY THOSE
TALENTS ARE NOT EQUALLY AVAILABLE.
"3. PROPERTY OWNERSHIP. The ownership of property resources, and hence
the receipt of property incomes, is very unequal. The vast
majority of households own little or no property resources, while
the remaining few supply very great quantities of machinery, real
estate, farmland and so forth. For example, a study of the
ownership of private assets indicates that, in 1962, the poorest
25 percent of all families had no net worth, that is, their debts
equaled their assets, while the wealthiest 20 percent of the
population owned over 75 percent of all private assets.
Furthermore, the richest 8 percent of the population owned 60
percent, and the wealthiest 1 percent owned over 26 percent, of
all private assets. Basically, property incomes account for the
position of those households at the very pinnacle of the income
pyramid. The right of inheritance and the fact that "wealth begets
wealth" reinforce the role played by unequal ownership of property
resources in determining income inequality.
"4. ABILITY TO EXERT MARKET POWER. Ability to "rig the market" on
one's own behalf is undoubtedly a major factor in accounting for
income inequality. Certain unions and professional groups have
adopted policies which limit the supplies of their productive
services, thereby boosting the incomes of those "on the inside".
Exorbitant initiation fees, prolonged apprenticeship periods, flat
refusal to accept new members, and the setting of unrealistic
standards of performance are well-known and frequently employed
tactics for manipulating the market on the behalf of a particular
group. Legislation which provides for occupational licensure for
barbers, beauticians, accountants, taxi drivers, and so forth can
also be a basis for exerting market power in favor of the licensed
group. THE SAME HOLDS TRUE IN THE PRODUCT MARKET: PROFIT RECEIVERS
IN PARTICULAR STAND TO BENEFIT WHEN THEIR FIRM DEVELOPS SOME
DEGREE OF MONOPOLY POWER.
"5. UNEQUAL DISTRIBUTION OF MISFORTUNE. Many households are at the
base of the income pyramid as a result of economic misfortune. A
host of economic hazards in such forms as prolonged illness,
serious accident, death of the family breadwinner, and
unemployment may plunge a family into relative poverty. The burden
of such misfortunes is borne very unevenly by the population and
hence contributes to the degree of income inequality.
"6. MISCELLANEOUS FACTORS. There are obviously other important forces
which play a part in explaining income inequality. Luck, chance,
and "being in the right place at the right time" have all caused
individuals to stumble into fortunes. Discovering oil on a
run-down farm, meeting the right press agent, and making a
favorable impression on the boss's daughter have accounted for
many high incomes. Nor can personal contacts and political
influence be discounted as means of attaining the higher income
brackets."
(from C. R. McConnell, "Economics", McGraw-Hill, 1978).
Drawing from my lectures on markets and marginal theory of wages, it
is clear that the fundamental causes for income inequality in a market
system are the outcome of the internal dynamics of the price system,
which antagonizes economic efficiency with social efficiency. Thus,
point 2 bottom, point 3, and point 5 bottom are the main makers of
income inequality in the capitalist system. The other factors developed
by C. R. McConnell, are just secondary factors which can become major
factors just because of the original contradiction between economic
efficiency and social efficiency.
Official figures from "Social Trends 1996" show how original income
is distributed in the market place in Britain:
Group (quintile) Original
Distribution of equivalised Income
household income (%) 1977 1995
---------------------------------------------------
Bottom 20% 3.6 2
2nd 20% 10 6
3rd 20% 18 15
4th 20% 26 25
Top 20% 43 51
---------------------------------------------------
Income per household as
a percentage of national
average
Bottom 20% 18% 10%
2nd 20% 50% 30%
3rd 20% 90% 75%
4rd 20% 130% 125%
Top 20% 215% 255%
---------------------------------------------------
Because the market became 'more efficient', the difference of
income between the bottom fifth and the top fifth increased from
11.9 times to 25.5 times. Without social welfare, the bottom fifth
cannot survive, and the level of poverty (half the average income)
would have risen from less than 40% of the population to more than
50% of the population.
The above technical distribution of income meant that marketable
wealth ( assets that can be sold or cashed in, for example, stocks,
shares, unit trusts or dwellings) was owned by the British population
as follows:
MARKETABLE WEALTH OWNED BY:
(in billion sterling pounds of each year)
---------------------------------------------------------
1976 1993
---------------------------------------------------------
Top 25 % 199 1,302
Next 25 % 67 360
Bottom 50 % 22 144
---------------------------------------------------------
In 1976 there were around 18.7 million households in the U.K.,
and by 1993, the number rose to around 23.1 million. Therefore,
the following table emerges:
MARKETABLE WEALTH PER HOUSEHOLD:
(In sterling pounds of each year)
-------------------------------------------------------
1976 1993
Top 25% 42,567 225,455
Next 25% 14,332 62,337
Bottom 50% 2,353 12,468
-------------------------------------------------------
Difference between bottom 50% and top 25%:
18.1 times in 1976 and 18.1 times in 1993
Difference between next 25% and top 25%:
3.0 times in 1976 and 3.6 times in 1993
The general picture is:
1.- a widening gap between the top 25% of the households and the
rest of society.
2.- a closing gap between the next 25% and the bottom 50%.
3.- from the above, a deepening economic fracture which will call
for more social services, at a time when the prevailing ideology
is that social services should be paid by the users. The latter
will add, in the long-term to the social fracture created by
the economic fracture.
(see also
R.Rojas: Notes on economics: about obscenities, poverty and inequality)
It is beyond any doubt, that the market system distribute income
in such a way that creates a two tier society. The point of view
of the defenders of the capitalist system is expressed below by
one of its most outstanding modern economists:
From Arthur M. Okun, "Equality and Efficiency: The Big Tradeoff",
The Brookings Institution, 1975:
"One of the most profound changes in our society in the past
half-century has been the emergence of a strong egalitarian movement.
The roots of this movement are embedded in a fundamental divergence
between our political and social institutions, on the one hand, and
our economic system, on the other.
"In principle, at least, our political and social institutions are
based upon notions of equality; but our economic institutions, centered
on the market system, generate substantial disparities in income and
wealth.
"This inherent conflict has undoubtedly been a critical factor in
providing societal support for egalitarianism.
"More specifically, efforts to redistribute income and alleviate
poverty are a public response to the tensions created by the conflict
between the political principles of democracy and the economic
principles of capitalism.
"But egalitarianism poses a fundamental trade-off between economic
efficiency and economic equality.
"The contrasts among American families in living standards and in
material wealth reflect a system of rewards and penalties that is
intended to encourage effort and channel it into socially productive
activity. To the extent that the system succeeds, it generates and
efficient economy. But that pursuit of efficiency necessarily creates
inequalities. And hence society faces a trade-off between equality and
efficiency."
By and large, defenders of the market (capitalist) system, will support
income inequality as follows:
1.-income inequality is conducive to a high rate of saving,
a rapid rate of capital accumulation,
and therefore
rapid economic growth;
2.-income inequality is essential as an incentive to work and
invest;
3.-income inequality is essential to a viable, progressive society.
On the other hand, three arguments constitute the case against
income inequality:
1.-income inequality impedes the maximization of consumer
satisfaction;
2.-income inequality impairs productivity, and
3.-income inequality fosters noneconomic inequalities
Of course, the ones who are against income inequality and pose the above
arguments are not aware that
a) the capitalist system is NOT about consumer satisfaction but about
MAXIMIZING PROFITS producing goods and services that groups of
consumers can PAY FOR;
b) the capitalist system fosters productivity as a device to maximize
profits, and not as something positive that must be improved for
the sake of it. Therefore, productivity will fosters even more
inequality in the long-run; and
c) non economic inequalities (ethnic, gender, religious, age) are
non economic tools used by the owners of capital to maximize even
more the amount of profits.
Therefore, income inequalities are a component part of the dynamics of
the capitalist system, and they will go through cycles in accordance
with political struggles. Left to market forces alone, income inequality
will always grow parallel to economic growth.
Writing in 1978, C. R. McConnell, "Economics", McGraw-Hill, stated:
"The distribution of personal income in American capitalism reflects
considerable inequality. Though income inequality lessened quite
significantly between 1929 and the end of World War II, little
change has occurred in the postwar period.
"Current statistics suggest that about 12 percent of the nation
lives in poverty. Although the poor are a heterogeneous group,
poverty is concentrated among the poorly educated, the aged, and
families headed by women. The incomes of blacks and other
minorities are very substantially below those of whites, primarily
because of wage, employment, occupational and human-capital
discrimination".
Writing in 1996, the U.S. Bureau of the Census, "Poverty in the
United States, 1995", U.S. Government Printing Office, stated:
"In 1995, the number of people below the official government poverty
level was 36.4 million, representing 13.8 percent of the Nation's
population"...which..."it is still higher than the 1989 rate of
13.1 percent, the most recent low point achieved during the
economic expansion of November 1982 to July 1990..."
"In 1995 the poverty rate for all persons under 18 years of age was
20.8 percent and the poverty rate for people 18 to 64 years of age
was 11.4 percent, both significantly greater than the 10.5 percent
rate for those 65 years and over. About half of the Nation's poor
in 1995 were either under 18 years of age or 65 and over
(49 percent).
"Children under age six have been particularly vulnerable. In 1995,
the overall poverty rate for related children under six years of
age was 23.7 percent. Of related children under age six living in
families with a female householder, no spouse present, 61.8
percent were poor, compared with 11.1 percent of such children in
married-couple families.
"In 1995, the poverty rate was 11.2 percent for all Whites, 8.5
percent for non-Hispanic Whites, and 29.3 percent for Blacks. For
persons of Hispanic origin (who may be of any race), the poverty
rate was 30.3 percent, not significantly different from that for
Blacks.
"Even though the poverty rate for Whites was lower than for the
other racial and ethnic groups, the majority of poor people in
1995 were White (67 percent) and 45 percent were non-Hispanic
White.
Further information:
US Bureau of the Census:A brief look at postwar U.S. income inequality
From the above:
----------------------------------------------------------------------
Table 1. Mean Income Received by Each Fifth and Top 5 Percent of
Households, 1973 to 1994
(Households as of March of the following year.
Income in 1994 CPI-U-X1 adjusted dollars.)
Lowest Second Third Fourth Highest Top 5
Year fifth fifth fifth fifth fifth percent
1973........ 8,063 19,988 32,661 46,993 83,271 126,903
1994........ 7,762 19,224 32,385 50,395 105,945 183,044
----------------------------------------------------------------
% gain -3.7 -3.8 -0.8 +7.2 +27.2 +44.2
________________________________________________________________
Table 2. Share of Aggregate Income Received by bottom Sixty percent,
top Five percent and next Fifteen percent. 1967 to 1994.
(Households as of March of the following year)
1947 1957 1967 1977 1987 1994 Relative gain
Bottom 60% 33.9 35.9 35.1 34.3 32.1 29.9 -11.8%
Top 5% 17.5 15.6 16.4 15.7 17.2 20.1 +14.9%
Next 15% 25.5 24.8 25.0 25.8 26.6 26.8 + 5.1%
____________________________________________________________________
MEASURING INEQUALITY.-Source: Human Development Report 1995
Countries are listed in ascending order
of GNP per capita, 1993
Income share: Ratio of Social
lowest 40% highest 20% security
of households to lowest 20% benefits
(%, 1980-92) (%, 1980-92) % of GDP (1992)
-------------------------------------------------------------------
Hungary 25.7 3.2 14.0
Spain 22.0 4.4 11.3
United Kingdom 14.6 9.6 6.9
Italy 18.8 6.0 11.0
Netherlands 21.3 4.5 18.1
France 17.4 7.5 17.7
Sweden 21.2 4.6 18.5
United States 15.7 8.9 7.0
Norway 19.0 5.9 11.3
___________________________________________________________________
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BOX1_______________________________________________________________
Excerpts from THE INDEPENDENT 15 July 1994
by Rosie Waterhouse.-Social Services Correspondent
--------------------------------------------------
One-third of UK children living in poverty, study shows.
GULF BETWEEN RICH AND POOR INCREASES
Inequality has increased dramatically since 1979, with the richest
10 per cent of the population becoming 60 per cent richer and the
poorest 20 per cent no better off, government figures published
yesterday reveal.
The incomes of the poorest 10 per cent have fallen by 17 per cent in
real terms since the Conservatives came to power, and the number of
people living on an income below the European 'poverty line' -half the
average income- has risen from 5 million to 13.9 million, a quarter of
the population in 1991-92.
The figures, described as 'scandalous', show that nearly one-third of
all children are now living in poverty, from 3.9 million to 4.1 million
since 1990-91, according to statistics in the report "Households Below
Average Income", published by the Department of Social Security.
The number of people in jobs and experiencing poverty has trebled to 12
per cent since 1979. This contrasts with the number of people earning
more than the equivalent of £700 per week, which soared from 100,000 to
1.4 million. The income of the richest tenth rose by almost two-thirds
between 1979 and 1990-91, but was stagnant of fell slightly by 1991-92,
an analysis by Steve Webb of the Institute of Fiscal Studies showed.
The income of the top 10 per cent, after housing costs, rose by 62 per
cent; the income of half of the population rose by 50 per cent; but the
income of the bottom half rose by only 10 per cent.
The analysis reveals a change in the type of people in the bottom 10
per cent. Pensioners have moved out of the poorest bracket, but more
self-employed people have moved in. In 1979, 31 per cent of the poorest
10 per cent were pensioners, compared with 9 per cent in the latest
report. The proportion of self-employed in the bottom bracket (after
housing costs) rose from 10 per cent to 15 per cent. The number of
unemployed people in the bottom 10 percent has doubled from 16 to 34
per cent.
Of those living below the poverty line, the proportion of lone parents
rose from 19 per cent to 59 per cent, single pensioners rose from 12
per cent to 40 per cent, and two parents with children trebled from
8 per cent to 24 per cent- one in four couples with children.
Although the income of the poorest 10 per cent has declined in real
terms, individuals are not necessarily poorer. More people on lower
incomes have joined the bottom group, pushing higher-earning people
into the second lowest 10 per cent and so lowering the median income
of the bottom group.
This enabled Peter Lilley, Secretary of State for Social Security, to
say: "The results certainly do not show that the poor have become
poorer, though they inevitably reflect changes in the number of
unemployed people. But they do show how government policies have
continued to increase the prosperity of the population as a whole".
However, Donald Dewar, Labour's social security spokesman, said: "These
figures back up the claim that Britain is more divided now than it has
been for a generation. It is a condemnation of this Government and the
easy chatter about increasing prosperity that the bottom tenth of
families are 17 per cent worse off that they were in 1979.
"We all pay the price of inequality on this scale. It means higher taxes
to fund welfare bills, and rising crime and social decay. These figures
show that Tory 'trickle-down' economics have failed today. Wealth has no
trickled down. Poverty, like rising damp, creeps ever higher."
Sally Witcher, director of Child Poverty Action Group, said: "Britain is
a wealthy country. There is no excuse for this level of poverty and we
should be deeply ashamed. Not even being in employment will mean staying
out of poverty".
Paul Goggins, national co-ordinator of Church Action on Poverty, said:
"Poverty has increased remorselessly, reaching utterly scandalous
levels. Yet we still have no indication of regret or remorse from the
Government, nor any signs of a plan to reconnect those who are
systematically cut adrift from mainstream society."
NET REAL INCOME AFTER HOUSING COSTS Index(1979 bottom fifth = 100)
------------------------------------------------------------------------
Quintile groups of individuals
Bottom Next Middle Next Top Average
fifth fifth fifth fifth fifth
-------------------------------------------------------------
1979 100 138 177 226 312 197
1981 96 135 174 225 323 196
1987 99 143 200 267 406 236
1988-89 100 153 217 289 438 255
1990-91 97 155 227 304 467 267
-------------------------------------------------------------
Net gain/loss
1979-1991 -3% +12% +28 +35 +50% +36
------------------------------------------------------------------------
source: Social Trends, several years
------------------------------------------------------------------------
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END OF BOX 1___________________________________BACK_____________________
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