Atanu Dey On India's Development

Inequality in America

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The title of this post echoes the title of Alexis de Tocqueville’s two-volume “Democracy in America” (1835 and 1840). Inequality in America is the subject of Joseph Stiglitz’ piece in Vanity Fair (May 2011), “Of the 1%, by the 1%, for the 1%.” Fittingly, in the concluding bit of the essay, Stiglitz quotes Tocqueville.

Tocqueville was prescient. The Wiki (see “Democracy in America” link above) notes:

Tocqueville’s work is often acclaimed for making a number of correct predictions. Tocqueville correctly anticipates the potential of the debate over the abolition of slavery to tear apart the United States (as it indeed did in the American Civil War) and the rise of the United States and Russia as rival superpowers, which they did become after World War II, with Russia as the central component of the Soviet Union. Noting the rise of the industrial sector in the American economy, Tocqueville also correctly predicted that an aristocracy will rise from the ownership of labor, warning that ‘…friends of democracy must keep an anxious eye peeled in this direction at all times’, saying further that the route of industry was the gate by which a new found wealthy class may potentially dominate; Karl Marx would later expand on this theme. Tocqueville also explained the alienation and isolation that many have come to feel in modern life.

Let’s pause to marvel at the fact that Tocqueville was only 25 years old when he visited from France to study the US for only nine months in 1831. His acute observations — still studied over a century and three quarters later — at such a young age goes to show that deep insight is an extraordinary ability.

Here’s Stiglitz:

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

Another phrase which means the same things as “self-interest properly understood” is “enlightened self-interest.” Talking of enlightenment and Tocqueville reminds me of a connection that I find interesting. It is in the movie, “A Fish Called Wanda.” One of my favorite funny movies, starring John Cleese, Jamie Lee Curtis, Kevin Kline and Michael Palin. If you are a fan of Monty Python, you already love Cleese and Palin. Anyway, Otto West, the character played by Kline, is the male equivalent of the proverbial dumb blonde. Otto goes around with a copy of “Democracy in America.” Wanda, played by Jamie Lee Curtis, is constantly calling him stupid. Otto repeatedly tells her not to call him stupid.

Here’s a bit of dialog:

Otto: Don’t call me stupid.

Wanda: Oh, right! To call you stupid would be an insult to stupid people! I’ve known sheep that could outwit you. I’ve worn dresses with higher IQs. But you think you’re an intellectual, don’t you, ape?

Otto: Apes don’t read philosophy.

Wanda: Yes they do, Otto. They just don’t understand it. Now let me correct you on a couple of things, OK? Aristotle was not Belgian. The central message of Buddhism is not “Every man for himself.” And the London Underground is not a political movement. Those are all mistakes, Otto. I looked them up.

Anyway, getting back to the point that Stiglitz makes in the essay: inequality in the US is high and increasing. The top 1%, owns around 40% of the total wealth and earns around 25% of the income. Which, as he explains, is bad because that leads to inequality of opportunity; inequality of opportunity means the most value asset of a society — its people — is not being used most productively; that it leads to distortions that causes economic inefficiency; that it leads to failure of “collective action” which is necessary for creation of public goods.

Stiglitz argues that the current state of inequality in the US is because the top 1% wants it that way because it is good for them. Wealth buys political power which is used to make the rules of the game favor the rich. It is a positive feedback loop.

Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

What’s the relationship between inequality and development? Simon Kuznets (1901-1984), the man who revolutionized econometrics, and who invented the macroeconomic measure “gross national product” (and therefore the number “gross domestic product” that so many people obsess over), revealed it.

Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. Kuznets saw a curve-like relationship between level of income and inequality, now known as Kuznets curve. According to Kuznets, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality. [Wiki.]

Bill Easterly put it very succinctly: development is uneven, get over it: “success is intrinsically uneven, so development and growth is intrinsically uneven, not “inclusive”.”

My guess is that economic inequality in the US is here to stay. Regarding India, the trend of increasing inequality will continue. I am neither for nor against economic inequality — I accept it as an unalterable fact of nature. What I am against is the inequality of opportunity. That is within our control. But let’s not forget that even if we achieve perfect equality of opportunity, the outcome will most certainly be unequal. That is the law.

It’s all karma, neh?

  • sk

    Atanu, You might find this interesting.

    HERMAN DALY APPLIES A BIOPHYSICAL LENS TO THE ECONOMY AND FINDS THAT BIGGER ISN’T NECESSARILY BETTER.

    Herman Daly is an ecological economist and co-founder and associate editor of the journal Ecological Economics. As the World Bank’s senior environmental economist from 1988 to 1994, Daly focused on Latin American poverty and development and helped to establish the discipline of ecological economics. Today, based at the School of Public Policy at the University of Maryland, Daly spoke with Seed editor Maywa Montenegro about growth, technology, happiness, and the steady-state economy….

    http://seedmagazine.com/content/article/rethinking_growth/

  • TiredProf

    “I accept [economic inequality] as an unalterable fact of nature. What I am against is the inequality of opportunity. That is within our control.” — Atanu, this makes no sense. Even with a strong and solvent government, children of affluent parents will inevitably get better opportunities than children of the indigent. In India, where the government is broke, stupid and corrupt, how are you going to implement equality of opportunity in the face of gross inequality of (parental) wealth? Even American economists are falling back to good sense and saying that inequality of wealth beyond some sane limits is bad for society. Yes, perhaps the daily output of the Ambani brothers may perhaps justify 10 times, or even 100 times my salary. But I am neither stupid nor lazy. In my profession (by “profession” I am ruling out “owing a large business”) I am in fact better known than the Ambani brothers. What do they do per day that they make, I don’t know, 500,000 times my salary?

  • Prakash

    Hi Atanu,

    I accept that inequality is a part of life, but if we truly develop a liberal society with equality of opportunity, I believe that inequality will be much lesser than today. Most human talents/attributes seem to be along a bell-curve, a gaussian distribution. Most measures of income and wealth inequality seem to be in a paretian distribution. Wonder why the difference? Might it be due to inequality of opportunity?

    regards,
    prakash

  • Oldtimer

    Since you are so irrational and prejudiced and hateful and, and … well, all those things that people rightfully say about you .. when it comes to the Congress party, I’m surprised you like a flick in which a thief goes orgasmic when Italian is spoken to her.

  • Loknath

    Atanu,

    How does inequality in India contrast to inequality in the USA. Economists measure it by Gini coefficient based on “publicly” available information. Gini coefficient shows India as a moderately equal society in terms of wealth distribution. For a moment ignoring the “equally poor” paupers on the streets of India, and just making a comparison of income differences between the CEO of a company in India and his well fed chauffer, where is the difference more stark- US or India? I bet its India. Savour this- the CEO for sake of it… an Indian corporation like Birla, gets paid 25Crores per annum but his chauffer may get about 150K per annum, that’s 1700 times disparity. The security guard at my building still gets paid 3500 rupees a month, a sum that probably is less than your monthly newspaper bill. By Indian “measures”, the security guard is above poverty line because he can afford two “square” meals a day…what if he has 3 children and a wife to be fed?

    I don’t think that one needs to experience poverty and the circumstances surrounding poverty to be able to make policies that can eliminate poverty. Poverty or for lack of better word income disparity is a problem that cannot be solved by economic genius. Its a complex social problem. In every society only a certain sections of people are largely poorer than others and they continue to remain poor.
    Given successive Governments in India have fed them free and doled out free stuff and money, albeit for their electoral gains, poverty and income disparity has only increased manifold. Let me put it this way- poverty by and large is a result of individuals or the particular class’s assessment of self-worth. It takes a war or two to actually come out of it. Look at French and Germans or for that matter 18th century UK-before war 0.5% was nobility and rest were peasantry in debts to their lords. After 2 wars that wiped out half the population, their economies are now more egalitarian. So if you were a taxi driver in Europe, you still can make a decent 2500 Euros a month and feed your wife and children, whereas an engineer out of college may make 4000 Euros a month to begin with. The children of both these people go to the same school.

  • TiredProf

    “The children of both these people go to the same school.” — that’s the crux. Only when such “generational amnesia” is implemented can we have a society that has some fairness. IMO, that will never happen in India. Not before the sun turns red giant.

  • pankaj

    disparity the lifeline of Bloody revolutions eg egypt,tunisia etc.

  • MJ

    Inequality might well be natural and unavoidable. But, can it worsen to unnatural levels or with unnatural speed with bad policies – bailouts, keynesian economics misapplied, socialism or socialistic policies to protect the incumbent capitalists, etc can all take it to an extreme, no?

    In other words, one can redistribute wealth by social welfare programs, yes. But, also by creative destruction and true capitalism – this method is currently being hijacked in the US.

    Btw, ran into these awesome videos of Keynes vs Hayek:

    http://www.youtube.com/watch?v=GTQnarzmTOc

    http://www.youtube.com/watch?v=d0nERTFo-Sk

  • Srini

    @TiredProf: I agree with your point on parental wealth and inequality of opportunity. But your comparison to Ambani brothers may not be really relevant to that point. I guess Ambani senior was also making something similar to 500K times your salary? And he had middle class parents. I guess the real difference is that he went to bed everyday thinking ‘how can I make more money tomorrow’, where as you go to bed trying to solve a problem in your chosen field of study.