Inequality in the Age of Extremism
We may be forgiven for describing our contemporary world as mired in a new dark age of extremism, writes Syed Mansoob Murshed, Professor of Economics.
We may be forgiven for describing our contemporary world as mired in a new dark age of extremism. Two noteworthy features of our age may be mentioned: the growth in extreme political ideology along with an alarming rise in economic inequality. Besides being global trends, both phenomena are interconnected; as many commentators have averred, one breeds the other. I will focus on the growth of economic inequality, briefly dwelling on how it might impact on the development of identity based politics leading to extremist group formation.
Economic inequality can be measured in different dimensions, of which the pecuniary element is only one, but the other dimensions of socio-economic inequality such as in health and educational status are highly correlated with income and wealth inequality. Wealth is the source of income, and those gifted with greater assets, as well as in possession of sought after scarce skills can command a high return to their endowments, and are therefore richer than the poor worker who can only bring his raw (unskilled) labour to market. In other words, individual or household marketable endowments or wealth determine their income; consequently, economic inequality is rooted in wealth or asset inequality, where assets include marketable skills. Most measurements of inequality, however, focus on income.
Economic inequality is normally measured across households clustered into groups of equal size. Various metrics of the degree of inequality exist, the most common being the GINI coefficient, which is a number ranging between 0 to 100, the former implying perfect equality between groups, the latter stating that one individual or group has all the economy’s income. National GINI coefficients measure the degree of income inequality within the nation state: they range from around 25 for the egalitarian Nordic European countries to 50 plus for the most unequal countries in Latin America and sub-Saharan Africa. Inequality in Asia is lower, especially in the Muslim North Africa and the Middle East where cultural factors militating against extreme inequality (and poverty) must play a part. Most reported data on inequality suffers from a serious downward bias due to the fact that the incomes of the rich and super-rich are systematically missed out in household surveys.
We can, if we choose to, treat the planet as a single nation and measure inequality for all humanity: this is known as global inequality. The number for this is around a staggering 70, considerably greater than for any nation state. The chief reason for this is that the most populous countries like China and India are still considerably poorer than richer countries the global North, despite the much vaunted recent ‘catch up’ in per-capita incomes. Global inequality can be decomposed into within country and between country inequality; the former referring to that which is attributable to the inequality within nation states, the latter measuring that part of inequality caused by gaps in average income between nations. In recent years a greater proportion of global inequality can be accounted for by within country inequality, and this is reflective of the rising inequalities in income and wealth within most nation states since about 1980, with the exception of a few Latin American countries in the early 2000s.
In recent years, a greater proportion of global inequality can be accounted for by in-country inequality. This is reflective of the rising inequalities in income and wealth within most nation states since about 1980.
The first three decades after the Second World War have been described by some, such as the late Ajit Singh, as a golden age. It is associated with unprecedented growth in most countries, along with declining inequality, the welfare state, social mobility and secure employment. Following the oil shocks of the 1970s and the ushering in of our contemporary phase of globalisation in the 1980s, inequality has steadily begun to climb in nearly all countries. In various studies, including research by Thomas Piketty, the bottom 50% of the income distribution in the USA have witnessed no increase in their real incomes for thirty years. Then there is the rise of the super-rich. At present a CEO of a company listed in the London FTSE-100 earns as much in a year as 10,000 people in working in garment factories in Bangladesh, and in Vietnam the richest person earns more in a day than the poorest person earns in 10 years, according to figures published by OXFAM. Today’s richest individuals are considerably richer than the multi-millionaires of yester-year like the Carnegies and Rockefellers. Thomas Piketty has pointed out the tendency of the increases in the value of wealth to outpace rises in wage inclusive national income in recent years. The rate of return on wealth, chiefly financial assets and real estate, grows at a faster pace than national income. Wealth is much more concentrated in the hands of the few compared to wage income; ergo, inequality is set to rise further. There are other factors that promote inequality among those who receive a salary or wage: the rise of the excessive compensation of ‘superstars’ like company CEOs, labour saving technical progress and financial globalisation.
A modicum of unequal outcomes as a reward for differential effort, talent and risk-taking is justifiable and fair, but what is both unjust and inefficient is inequality of opportunity. It can be argued that present day trends in the distribution of income, with the accelerating share of the top 1 per cent in the global income distribution, do produce inequality of opportunity and hamper intergenerational mobility, particularly because much of the wealth of the wealthiest is attributable to rents earned from speculative financial investment rather than profit from production.
Accompanying the rise in inequality has been the development of plutocracy in advanced economies and anocracy (a combination of democracy and autocracy) in developing countries. One might be tempted to rephrase the last sentence of Abraham Lincoln’s Gettysburg address and speak of government of the rich, by the rich and for the rich in many parts of the globe! In developed countries the immiserized working, and now middle, classes have used democratic channels to vote for the likes Trump and Brexit. It also encourages other forms of extremism, such as terror in the name of Islam and Maoist insurgencies. Recent developments in behavioural economics, especially in the economics of identity, argue that individuals can be spurred by developments, including the disadvantage suffered by their group into identity based action, including at the extreme, violent acts. Moreover, group action requires the framing of a narrative of proscription and disadvantage, as pointed out by Charles Tilly. In a nutshell, inequality, particularly inequality of opportunity, sows the seeds of conflict and extremism.
Our capitalist market based economic system is dynamic and capable of delivering unparalleled economic progress. However, it requires a moral basis to thrive.
Addressing inequality, short of revolutionary redistribution, requires measures that unfortunately mainly bear fruit in a generation or more. Among them are social protection expenditures: transfers to the poor, public education and health expenditure leading to the accumulation of inequality reducing human capital among the many. Work by the IMF shows that the recent growth experiences of both developed and developing countries suggest that inequality hampers growth prospects. This could be because greater inequality leaves economies more prone to financial crises, greater inequality discourages investment in education, and because inequality contains within it the seeds of conflict, all of which are detrimental to economic progress. In empirical analysis by the IMF, redistributive policies, including social protection expenditures, appear to no longer harm growth prospects. The empirical evidence, therefore, for the traditional equity-efficiency trade off seems to have weakened in recent years, linked, among other phenomena, to new forms of market failure.
Our capitalist market based economic system is dynamic and capable of delivering unparalleled economic progress. But it requires a moral basis to thrive; one that becomes frayed by excessive inequality of opportunity, when people feel prospects for the future are dismal. This breeds extremism. One can contrast our current age to the end of the historical period of Enlightenment culminating in the French Revolution, when Antoine-Nicholas de Condorcet said in 1795 that the hopes for humanity rested in eliminating both inequality between nations and within countries. The poet William Wordsworth employed these words: “Bliss was it in that dawn to be alive, but to be young was very heaven”
Mercifully, the writer of this piece on the new dark ages is no longer young.