councilor.org
| 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. 409] 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 controlled. 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 michael@ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901 |
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