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"When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist".
(Dom Helder Camera -former archbishop of Olinda, Recife, Brasil) (1984)
World indicators on the environmentWorld Energy Statistics - Time SeriesEconomic inequality
Basic Knowledge on Economics.- by Róbinson Rojas Sandford
Notes: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
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   
                    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

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
      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

  "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

  "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
(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
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:
                 (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:

                     (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
"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

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
     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
     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

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
     "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

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

Excerpts from THE INDEPENDENT 15 July 1994
by Rosie Waterhouse.-Social Services Correspondent
One-third of UK children living in poverty, study shows.

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
END OF BOX 1___________________________________BACK_____________________