The Inequality Debate: A Contrarian Narrative (Part I)

 

Even if you were to have only the most passing of interests in the social sciences or the state of the public debate, you would be hard-pressed to overlook inequality (most commonly of incomes or wealth, but also of gender, race, etc.) as one of the most fiercely discussed political and scholarly debates of the last decade.

The global economic downturn following the 2007-2008 financial crisis and subsequent years of stagnating or even falling standards of living for large shares of populations round the world, reinvigorated the interest in the questions of economic mobility, redistribution, and income/wealth inequality. Public figures such as the ex-President of the United States Barrack Obama, and Pope Francis famously spoke against inequality on numerous occasions, with Obama calling it the “defining challenge of our time” back in December 2013. While scholars such as Thomas Piketty have painted inequality as a symptom of capitalism’s inevitable path towards plutocracy.

Piketty especially became an intellectual leader to millions round the world who cry out for a shift towards a radically reformed capitalism, or a different social order altogether. His 2013 (2014 in English) book Capital in the 21st Century has sold over 3 million copies, with a documentary movie adaptation confirmed recently.

In recent years books, journal articles, policy studies, documentaries, and opinion pieces about inequality are being mass-produced round the globe, it seems. Yet, in the following series of posts, I will make the claim that much of the debate has missed the mark. More provocatively, I propose the majority on both sides (i.e. those who raise inequality as one of the most important problems of our time on one side, and those who argue inequality is not a problem at all on the other) are largely wrong in the way they are addressing the issue of inequality.

 

Part I: Doing away with mythology and starting an intellectually honest conversation

 

For any policy debate to be successful, we have to begin from factually accurate foundations. This first part addresses three myths that are prevalent in the public discussion of inequality and stand in direct opposition to an intellectually honest conversation about it. These are statements that you will usually not hear scholars make (regardless of which side of the debate they belong to), because they are demonstrable falsehoods and as experts in the field they will recognize them as such. Reporters, columnists, politicians, and the average citizen engaged in the debate, however, can commonly be found regurgitating these sensationalisms with a passion.

To have a productive conversation about inequality, we must first do away with mythology.

 

Myth 1: “The rich are getting richer while the poor are getting poorer!“

 

We commonly see this statement used to fuel resentment in a populist rhetoric of class warfare. As an empirical statement about living standards round the world, or a (supposed) observation of trends generated by the move towards freer markets, it is simply false. A myth that is anchored by the widespread misconception that the economy is a zero sum game where for each winner there must be a loser.

On the contrary, the freer the exchange of goods and services the more positive sum an economy becomes. Individuals who freely choose to participate in trade do so because it is to their benefit not to their cost. Thus, either poor or rich, both sides of the exchange are made better of. Trade is made of win.

Indeed, liberalization (even if limited in extent) has coincided with the rise of billions out of extreme poverty in the last few decades. Poverty and even starvation have not been eliminated in the world we live in. A regrettable fact, to be sure. Yet, we have made enormous strides, and we live in a time when the proportion of people, who suffer under poverty and starvation, has fallen to its smallest value in history. This, too, is a fact – one which we should celebrate!

 

 

In the early 1800s more than 80 per cent of the global population was living in extreme poverty, under constant threat of starvation and disease. As recently as the early 1980s this was still the case for over 40% of the global population. Since then, that share has fallen to about a tenth of the global population. This is even more remarkable given that global population rose from about 4.4 billion in 1980 to 7.4 billion in 2016.

People in the developed world are often shockingly ignorant about the decline in poverty. In fact, a survey carried out by Oxfam (a charity organization from the UK, better known for their activism in campaigning for anti-inequality policies) among citizens of 24 countries, reveals that 87 per cent of respondents were ignorant of declining poverty trends. This is particularly true for rich countries such as the US and Germany where only 8 per cent of the respondent correctly answered that extreme poverty has been declining. Less surprisingly, the majority of people in developing countries such as China, are significantly less ignorant of the increase of living standards.

Having participated in public debates and lectured on the issue of inequality in both my home country of Slovenia, and more recently to international students in the Czech Republic, I have seen this in action even among students of social sciences. Often they respond with disbelief and think that the data such as the one shown on the chart above is some sort of trick; that I am trying to manipulate them somehow.

It is no trick. Yes, the World Bank extreme poverty threshold of $1.90 per day is adjusted for purchasing power differences among countries. Yes, the same declining trend can be observed if you set the threshold higher, at say $3.10 per day. And yes, we can look at other indicators such as prevalence of malnurishment falling or life expectancies rising to further substantiate the observed trend as well.

You can also find more detailed regional breakdowns at ourworldindata.org, a project dedicated to battling ignorance and pessimism about global trends in living standards, started by Oxford economist Max Roser.

The rich may be getting richer, but so are the poor! As long as their countries avoid war or attempts at socialism (which have been the only two factors to hinder the decline of poverty in the long-term) The Great Enrichment is hard to stop.

 

Myth 2: “The living standards might be rising, yes, but there is ever greater inequality (of opportunity)!“

 

This is the usual go-to line when we do away with myth 1. The narrative will go something like: Yes, fewer people than ever are starving, lack a roof over their heads or basic access to healthcare, but the poor have no opportunity to be anything else than the poor. Opportunities are reserved for the haves, not the have-nots.

Let us think about this critically. What are some of the most basic preconditions for opportunities in life? Well, first we must be alive to have any opportunities! Therefore, health and lifespan will surely be the first necessary preconditions.

The increases in life expectancies, most importantly due to decreases in child (and childbearing mother) mortality, have meant a phenomenal increase of opportunity for people round the globe. Indeed, the inequality of this most basic precondition of opportunity has fallen too. I offer a very rudimentary graphical representation of this empirical fact bellow, but more sophisticated approaches to measuring it can also be employed and show a similar story; see (Peltzman 2009) for example.

 

 

Again, some historical context might help the reader imagine the human dimension of the indicators I reference.

My great-great-great grandparents Gotthard and Elizabeta Novak had 20 children in the mid 1800s when Slovenia was just beginning to industrialize (the Austrian Southern Railroad running through the Slovenian lands from Vienna to Trieste was being built at the same time). Nine of their twenty children did not live past their 5th year. This sounds horrifying today, but was quite common at the time, with estimates putting average child mortality before the age of 5 at about 40 per cent globally in 1840. Even more than a century later this was not an extraordinary occurrence: in 1960 child mortality before the age of 5 ranged from 2 percent in Sweden to still well over 30 percent in less developed parts of the world. Nowadays even in the least developed parts of the world it is rarely (read: almost exclusively in war zones) past 10 percent, and child mortality levels are converging towards minimum values all over the globe.

Opportunity – the most vital one of all: to live – has increased by orders of magnitude. And by no means just for the “haves”.

The next factor of immense importance for our employment possibilities, income, and with that most other aspects of our lives, is education. A similarly optimistic state of affairs can be observed. Basic attainment of education, that is basic numeracy and literacy, has risen rapidly in all regions of the world. Moreover, whereas the differences between a couple of developed countries and the rest of the world was immense even as recently as 1950, the majority of the global population now enjoys almost universal basic education attainment.

 

 

Of course, you may say this is all a rather low standard of opportunity, which I have set. Yet, clearly, the access to opportunities has improved, not declined. For the have-nots too; or even especially for them, given that those were the groups where most progress was left to be made.

Additionally, the story remains similar if we raise the bar of opportunity, which we are looking at. Instead of just basic attainment of education, for example, we can look at total years of schooling.

 

 

Again we can observe an enormous increase in education round the world, with total years of education increasing on average by nearly a factor of three since 1950. There is still a big gap between the developed and the developing world, but while it was more than 5 to 1 in 1950, it was already closer to 2 to 1 in 2010. We could continue along these lines by observing how civil liberties and the more equal treatment of both genders has spread round the world, but for the sake of brevity I will leave  those for the reader to explore.

How then, given these trends, is it reasonable to paint a bleak Dickens-like picture of increasing inequality of opportunity? And if these aren’t improvements in equality of opportunity, how would improvements then even look?

I should stop here for a moment and point out why taking equality of opportunity in a too idealized way is actually quite dangerous. Of course, in principle, equality of opportunity sounds wonderful. After all, this is what the classical liberal project, the Smithian plan of “liberty, equality, and justice for all” is about! Yet, taken literally, equality of opportunity has little to nothing to do with liberty or even just basic human dignity.

We are importantly shaped by our early upbringing, our personalities, temperament, our vocabulary etc. are all dependent heavily on who our parents are and how they interact(ed) with us. For a literal equality of opportunity we would need not just equality of income/wealth (which is where anti-inquality activists usually focus their efforts), but also equality of upbringing. We would need nothing short of a nationalization of children and their regulated “rearing” in state run institutions which would ensure no one got an “unfair” advantage of opportunity. Children’s opportunity would have to be reduced to the lowest common denominator of available opportunity.

This is why when Adam Smith, or Milton Friedman, or now Deirdre McCloskey write about equality (of opportunity) they do not mean it literally. A literal equality of opportunity is impossible under any arrangement, which would also have a basic respect for human dignity. But equality of opportunity where everyone is “given a go” – whether rich or poor, men or women, black or white… – is possible, and has historically been increasing rapidly – particularly so in the last few decades.

 

Myth 3: “But globally income inequality IS rising! This is a well known fact, just read Piketty!”

 

Actually, it isn’t. Global income inequality has been declining at least since the beginning of the third millennium. In fact, this is not even a particularly controversial claim. Numerous scholars have called our attention to it over the years, using a variety of different empirical methods.

Due to these differences in approaches, the results of the various studies shown in the following graph are not actually mutually comparable, but my point lies in the declining trend they share. In addition, Mauro and Hellebrandt 2015 project a continuation of inequality’s decline by 2030.

 

Older type studies like (Pinkovskiy and Sala-i-Martin 2009) employ measures where macro data is taken as a proxy rather than using micro data on incomes/consumption. With improvements in availability of micro data on incomes across the world in recent years, studies which use these more direct measures have become possible. The current cutting edge approach in the field is (Lakner and Milanovic 2015).

Based on their data Max Roser compiled the following visualization of the change in incomes across the world in the period 1988-2011:

 

inequality animation

 

There is little doubt that while a great majority of humanity has moved towards higher real incomes, the global distribution of those incomes has also become more equal. People claiming the contrary are simply misinformed, and when they pretend to quote their hero Thomas Piketty, they are actually misconstruing his position. In Capital in the 21st Century (or to the best of my knowledge anywhere else) He never writes anything directly contradicting the above data. What Piketty says is that within a couple developed Western countries income inequality has risen, not that it is rising globally.

 

To be sure, there is a lot of disagreement on the fringes of the three myths I have presented. Is poverty reduction more important than inequality reduction, is the rising inequality within countries like the US a symptom of unfettered free markets or of something else… My agenda in Part I has not been to attempt to settle these debates. Rather, I have picked the low-hanging fruit as far as myths go and shown the falsehood of three of most uncontested, yet crucial and still too often misunderstood issues. From this starting point we are now better equipped to start asking the really interesting questions. What drives inequality? is it ever a problem? Is it always a problem? What (if anything) should we be doing about it? Parts II and III will try to shed some light on those questions as well.

 

 

 

 

The additional sources used on the penultimate chart and not mentioned and linked within the text are:

  1. Clark, Rob. 2011. Social Problems, Vol. 58, No. 4, pp. 565-592.
    World Income Inequality in the Global Era: New Estimates, 1990-2008
  2. Bourguignon, François. 2015. The Globalization of Inequality. Princeton University Press.

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