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Thinking about the Poor and not the Rich

By PHILIP BOOTH, 14/02/15

Inequality
Credits to Shreyans Bhansali

I am passionately interested in ensuring that we have the right conditions to alleviate poverty but I am relatively uninterested in the issue of inequality.

If you take the position that inequality matters in and of itself then, essentially, you are taking the view that you are happy for poor people to be made poorer because we like to see rich people poorer still. This argument cannot be countered by arguing that a government can, in some circumstances, redistribute income and make the rich worse off, the poor better off and inequality lower. People may be in favour of this policy because it helps the poor and happens to reduce inequality at the same time. However, if you believe that then you are simply a Rawlsian. If you regard equality as a positive good in itself, then you must be willing to accept more poverty as a trade-off for more equality.

Recently more and more people have been taking that view. They argue that more equality leads to greater life satisfaction even if everybody is poorer. Indeed, such notions are very prominent in political debates. Wilkinson and Pickett (2009), authors of “The Spirit Level”, for example, are widely admired on the left of politics and in churches and other groups who get involved in public policy debates. Those authors explicitly argue that it would be better for everybody to be worse off as long as the rich are made, relatively speaking, much worse off. They argue that this leads to societies that are happier, healthier and generally better places in which to live.

Their evidence has been put under the microscope and many of the relationships they find are not consistent or robust. For example, they argue that, as equality increases, trust in society increases. However, this relationship is reliant on a very few outlying countries and, if you remove them, the relationship reverses. Furthermore, other measures of social cohesion such as charitable giving and voluntary activity both decrease as societies become more equal. So the belief in equality for its own sake is based on very shaky foundations.

 Rent seeking

Oxfam, in various reports (for example, Oxfam, 2014), and much of the discussion of Piketty’s (2014) work has focused on a different problem. They argue that inequality is caused by and leads to rent seeking because rich people are in a position to demand and lobby for favours from government – including policies that help keep certain types of rich people rich. This line of argument is interesting, important and deserves serious consideration.

Firstly, it is worth noting in passing that Piketty’s work has been widely criticised since publication – including from the left. Some argue that there are major problems with data which affect the results. Others J point out conceptual issues such as the implicit assumptions that the rich do not spend down their wealth and that some rich families do not become poor again. Larry Summers (2014) has noted that when Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012 and that the share of the Forbes 400 who inherited their wealth is in sharp decline. There may always be some very rich people and families but they are not the same rich people and families in each generation. The fact that human capital is now an important source of income also does not fit well into Piketty’s model (see McCloskey, 2014).

Despite these problems with Piketty’s work, the concern about what is known as ‘rent seeking’ amongst the rich is an important one. The Institute of Economic Affairs (IEA) has been publishing about this issue for about 40 years (see Tullock (2006) which was first published in 1976) and, of course, it was a concern of Adam Smith. After decades of dismissing its importance, the left have suddenly become interested in rent seeking because of the link they believe they have found with the issue of inequality.

There is no real evidence that rent seeking is more common in unequal developed countries than in more equal ones. The political dynamics in poorer countries are very different in any case and inequality can often arise directly from the political rather than from the economic system. However, I oppose rent seeking. I oppose crony capitalism. If inequality arises because of people justly earning a living through business and serving the needs of others then I am comfortable with that. I am not comfortable with any business or privileged individuals obtaining favours from the state. This includes, I should add, systems that ensure that banks are bailed out by governments. We should not have a ‘welfare state for bankers’. I strongly repudiate rent seeking and strongly repudiate crony capitalism and the inequalities to which it can give rise. Yet those who lament inequality all too often simply look at the outcome of the distribution of income without asking how that outcome may have occurred – whether it comes from returns to entrepreneurial activity or talent, or as a result of cronyism.

 Inequality in rich countries

The debate about inequality in rich countries tends to focus on the relatively narrow issue of the very, very richest. There is a reason for that. Since 1986, inequality in the UK, as measured by the Gini coefficient, has actually fallen. The trend in the ratio of incomes of the top 10 percent to the bottom 10 percent has been broadly the same. The incomes of the poor have increased. Between 1979 and 2012, the income of the poorest quintile roughly doubled (see Snowdon (2015) for a discussion of all these figures). What has happened, and what worries people, is that the top one per cent has tended to pull away from the rest of the top ten per cent.

To a large degree, this can be explained by globalisation. Sports stars are the most obvious example, but the same principle applies in a number of other industries. If you go back to the 1950s, the ratio of the earnings of a top cricketer such as Len Hutton to that of the barman at Headingly would have been rather low. But, then, very few people could watch Len Hutton – or even listen to him batting. Kevin Pieterson, however, is able to benefit from marketing his talents to a wide audience through worldwide television and his earnings are an order of magnitude greater relative to those who work behind the scenes at his county ground than Len Hutton’s were. Of course, these trends are reflected in the fact that around 30 percent of income tax is now collected from the richest one per cent.

 The market economy and the poor

If we are primarily interested in the poor, then we must be primarily interested in poor and middle income countries where the vast majority of the world’s poor live. Perhaps the most important statistic of our age is that the share of desperately poor people in the world has fallen more rapidly than at any time in human history. This has not happened by accident. It has happened because the policies espoused by interventionists – the same people who campaign against inequality today – were rejected in favour of policies of free trade by a number of countries (see Irwin (2009) for a wide discussion of the benefits of free trade in developing countries).

But this is not enough for Oxfam, who increasingly attacks the rich rather than focus on the poor. Amongst other extraordinary propositions they argue that, when it comes to China, “…the benefits of growth have increasingly accrued to the richest members of society, pushing income inequality ever higher,” (Oxfam, 2014, p.30). In fact, Oxfam’s own charts show clearly that inequality is not going ever higher: it levelled out some time ago. But, more to the point, real national income per head in China in 1980 was $193 and today, it is $6,807 per head (IFAD, 2014, p.5). You really do have to suffer from a special type of envy problem to prefer the situation in 1980 to that today.

It is impossible to conceive of a country such as China developing but not becoming more unequal. If China’s starting point were an authoritarian government with oligarchs owning all the land and natural resources, perhaps development would have led to more equality. However, China’s starting point was, pretty much, an equality of misery and it is the development of previously poor countries that has led global inequality to fall.

Oxfam’s (2015) more recent work on the wealth of the top one percent has been shown to be meaningless (Bourne, 2015), focusing as it does on a measure of wealth which is likely to place a Harvard graduate at the bottom of the world’s wealth distribution and a subsistence farmer in Africa close to the middle. It is time to stop producing statistics designed to get headlines and focus instead on policies that encourage development.

 Equality and envy

If some in society are willing to make the rich much worse off simply to reduce inequality without making anybody better off, they are succumbing to the temptation of envy. Envy is a very bad basis for public policy. If some people go around coveting the beautiful wives or good looking husbands of others, should the government respond by arranging marriages in order to equalise outcomes to a greater degree than would be achieved by free choice in this area?

But the fact that we should not be concerned about inequality as a matter of principle does not mean that the position of the poor should not be a major concern for us. This is true when it comes to both international and domestic policy. The paradox is that it seems that the left have become obsessed by the rich whilst supporters of a free economy are most interested in the poor.

About the author

PHILIP BOOTH is Professor of Insurance and Risk Management at Cass Business School and Editorial and Programme Director at the Institute of Economic Affairs.

References

Bourne, R. (2015, January 19). Beware Oxfam’s dodgy statistics on wealth inequality. Retrieved from:

http://www.iea.org.uk/blog/beware-oxfam’s-dodgy-statistics-on-wealth-inequality

IFAD. (2014, November). People’s Republic of China: Country Programme Evaluation. Retrieved from:

http://www.ifad.org/evaluation/public_html/eksyst/doc/country/pi/china/china.pdf

Irwin, D. (2009). Free Trade Under Fire (3rd ed.). Princeton: Princeton University Press.

McCloskey, D. (2014). Measured, unmeasured, mismeasured, and unjustified pessimism: A review essay of Thomas Piketty’s Capital in the twenty-first century. Erasmus Journal for Philosophy and Economics, 7(2), 73-115.

Oxfam. (2014). Even it up: Time to end extreme inequality. Oxford: Oxfam GB.

Oxfam. (2015, January 19). Richest 1% will own more than all the rest by 2016. Retrieved from:

http://www.oxfam.org/en/pressroom/pressreleases/2015-01-19/richest-1-will-own-more-all-rest-2016

Piketty, T. (2014). Capital in the twenty-first century. Cambridge: Harvard University Press.

Snowdon, C. (2015). Selfishness, Greed and Capitalism Debunking Myths about the Free Market. London: Institute of Economic Affairs.

Summers, L. (2014, Summer). The Inequality Puzzle. Retrieved from:

http://www.democracyjournal.org/33/the-inequality-puzzle.php?page=all

Tullock, G. (2006). The Vote Motive. London: Institute of Economic Affairs.

Wilkinson, R., & Pickett, K. (2009). The Spirit Level: Why More Equal Societies Almost Always do Better. London: Allen Lane.

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