When the Rich Get Even Richer
Source Michael Perelman
Date 00/01/27/12:33

Martin, here are a couple of sections from my new book Transcending the Economy:
On the Potential of Passionate Labor the Wastes of the Market, which is supposed
to appear in a couple of months.

========== Inequality and Growth
The study of Alesina and Perotti, covering a sample of 71 countries for the
period 1960-85 confirms the negative association between inequality and economic
growth (Alesina and Perotti 1996). Derek Bok, who should know about such
matters from the vantage point of his previous experience as president of
Harvard University, observed:
##The ultimate reason why we cannot ignore unjustified wealth is that it
weakens the public's faith in the fairness of the economic system. Such faith
is essential if we are to maintain support for the social order and inspire
individuals to observe the laws, undertake the duties of citizenship, and extend
the minimum of trust toward institutions necessary for communities to prosper.
[Bok 1993, p. 231]
Samuel Bowles and Herbert Gintis, two prolific graduates of Harvard's doctoral
program in economics, offered a few examples of how inequality makes society
work less well, noting:
##Inequality fosters conflicts ranging from lack of trust in exchange
relationships and incentive problems in the workplace to class warfare and
regional clashes. These conflicts are costly to police. Also, they often
preclude the cooperation needed for low-cost solutions to coordination
problems. Since states in highly unequal societies are often incapable of or
have little incentive to solve coordination problems, the result is not only the
proliferation of market failures in the private economy, but a reduced capacity
to attenuate these failures through public policy. [Bowles and Gintis 1995, p.
Bowles and Gintis expanded their analysis of the costs of inequality even
further, writing:
##Enforcement activities in the private sector may also be counted as costs of
reproducing unequal institutions. Enforcement costs of inequality may thus take
the form of high levels of expenditure on work supervision, security personnel,
police, prison guards, and the like. Indeed, one might count unemployment
itself as one of the enforcement costs of inequality, since the threat of job
loss may be necessary to discipline labor in a low-wage economy .... In the
United States in 1987, for example, the above categories of "guard labor"
constituted over a quarter of the labor force, and the rate of growth of guard
labor substantially outstripped the rate of growth of the labor force in the
previous two decades. [Bowles and Gintis 1995, p. 410]
A host of recent studies has borne out Tawney's assertion that a more unequal
distribution of income causes the economy to grow more slowly (Alesina and
Rodrik 1994, p. 485; Alesina and Perotti 1996; Persson and Tabellini 1994). One
study estimated that a reduction in inequality from one standard deviation above
the mean to one standard deviation below the mean would increase the long-term
growth rate by approximately 1.3 percent per annum; however, the measure may be
biased toward zero. Using a different technique, the increase would be 2.5
percent (Clarke 1995, p. 423).
While a change of a little over a percentage point might not seem very
significant, such differences in growth rates compounded over a couple of
decades result in a gap in the level of incomes. For example, if in 1960 the
Republic of Korea had Brazil's level of inequality, Korean per-capita income in
1985 would have been 15 percent lower, representing a loss of about two years'
growth (Birdsall, Ross, and Sabot 1995, p. 496).
To my knowledge, the existence of this weak spot in the theory of trickle-down
economics has not entered into public debates about inequality. Instead, the
bulk of the economics profession echoes the virtues of trickle-down economics,
adding that the inordinate rewards that the fortunate few can enjoy will spur
the rest to emulate them.
For example, Finis Welch, who gave the prestigious Richard T. Ely lecture at
the 1999 meeting of the American Economic Association entitled his talk, "In
Defense of Inequality." Welch proclaimed:
##I believe inequality is an economic "good" that has received too much bad
press .... Wages play many roles in our economy; along with time worked, they
determine labor income, but they also signal relative scarcity and abundance,
and with malleable skills, wages provide incentives to render the services that
are most highly valued .... Increasing dispersion can offer increased
opportunities for specialization and increased opportunities to mesh skills and
activities. [Welch 1999, pp. 1 and 15]
========== Social Problems as Symptoms of Inequality
Earlier, I discussed the inordinate magnitude of the economic losses due to
crime, especially to drugs. At the present time, cocaine seems to be doing more
damage to society than most other drugs.
I think of cocaine as a particularly "economic" drug, in the sense that it
seems to be most attractive to people on either extreme of the economic
spectrum. While crack cocaine seems to have penetrated some of the poorest
parts of our society, powdered cocaine seems to be especially welcome among some
of the richest strata of our society.
Admittedly, we have very poor data about such matters, but if my suspicion is
correct, then cocaine use might be good indicator of the degree of inequality in
our society. I would go further and make the commonsensical suggestion that a
reasonable person might expect a more egalitarian society to have less crime,
fewer and less expensive measures to protect against crime, and a more modest
criminal justice system.
I have already noted that where young people see no probable opportunity for
advancement, they are more likely to turn to crime. In addition, study after
study has shown that unemployment is strongly associated with crime. Why even
Aristotle recognized this problem, observing:
##for it is activities exercised on particular objects that make the
corresponding character. This is plain from the case of people training for any
contest or action; they practise the activity the whole time. Now not to know
that it is from the exercise of activities on particular objects that states of
character are produced is the mark of a thoroughly senseless person. [Aristotle
1908, Book 3, Section 5, 4th Para., p. 61]
In addition, inequality is harmful because, as I mentioned before, unequal
societies tend to have less widespread education (Fernandez and Rogerson 1996).
We hear much about the importance of education for our economic future, but as
long as our society maintains the wide gulf between rich and poor, we can expect
that the electorate will refuse to mobilize enough public funds to finance
adequate education for the majority of students. After all, relatively few poor
people vote. For the very wealthy, who have a disproportionate share in the
electoral process, the cost of sending a child to an expensive private school is
trivial compared to the cost of paying a fare share in a tax system that
supports quality education for all young people.
Inequality is also detrimental to good health. In fact, emerging research
indicates that inequality harms the health of rich as well as poor, although
certainly not to the same extent (Wilkinson 1997). At first, this association
might seem counterintuitive. However, unequal societies are more stressful.
Recall the earlier discussion about the need for more control in unequal
societies. This control creates stresses for the controllers as well as the
In addition, the islands of poverty offer ideal breeding grounds for diseases.
People weakened by stresses associated with poverty are less able to fight off
diseases. They may also be more susceptible to dangerous behavior patterns that
make them more prone to disease, such as the sharing of needles. Oftentimes,
diseases that arise in such conditions have more social mobility than the people
who carry them. As a result, the pathogens bred in poverty can strike the
wealthy as well.
I already mentioned that inequality tends to promote distrust. Next I will
turn to the harmful effects of this distrust.

Martin Watts wrote:

> If anyone has any references on the relationship between inequality and
> 'social dysfunction' in the USA (and Australia?), I would be most grateful.

Michael Perelman
Economics Department
California State University
Chico, CA 95929
fax 530-898-5901

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