State and inequality

Print edition : October 30, 2015

An Occupy Wall Street demonstrator at a march in New York in October 2011. The protest, which began in New York's financial district, spread to other cities of the United States, including Washington, Seattle and Boston. Photo: Jin Lee/Bloomberg

Inequality, especially economic inequality, has been under discussion for a long time. In the second half of the 20th century, the emphasis was both on rising incomes across the globe and on their unequal distribution. Studies conducted by the United Nations towards the end of the century showed that the global gross domestic product (GDP) had increased from about $3 trillion at the end of the Second World War to around $30 trillion in the mid-1990s, but the income gap between the top 20 per cent of the global population and the bottom 20 per cent had also increased. The gap was estimated to have been 11 to 1 in 1913, but it increased to 30 to 1 in 1960, 60 to 1 in 1990 and to 74 to 1 in 1997. If that was shocking, consider the following about another dimension of economic inequality, that of assets or wealth.

A report by Oxfam early in 2014 claimed that the 85 wealthiest individuals in the world had a combined wealth equal to that of the bottom 50 per cent of the world’s population. There have been other studies that also signal deep and growing inequalities of income and wealth. It is, therefore, not surprising that even the International Monetary Fund (IMF) admitted in a recent statement that widening income inequality is the “defining challenge” of our time. And, of course, the slogan of “the 1 per cent vs the 99 per cent” of the “Occupy Wall Street” movement during the meltdown of the last decade has now become almost universal.

Reputed scholars in many parts of the world have made careful studies of economic inequality. Thomas Piketty’s Capital in the Twenty-First Century (2014) with its focus on inequality became an immediate bestseller (as was pointed out in the November 28, 2014, issue of Frontline). Anthony Atkinson, Oxford University economist and author of the book under review, is a scholar of longer standing and has been a great influence on Piketty. Understandably, measurement and quantitative analysis are at the heart of the study of economic inequality.

The “Atkinson Index” is widely known among those who conduct studies on inequality.

However, the present volume, with its emphasis on “what can be done” is simple prose. “There are no equations in the main text,” the author assures his readers in the Introduction because “the reduction of inequality should be a priority for everyone.” The book is the result of scholarly work of nearly half a century and the author, whose credentials are unquestionable, is passionately committed to the reduction of inequality. His book is a call for action and he deals with the problem at its broader sociological level and also easily moves into the realm of politics.

This deliberately adopted approach imposes a limitation, too: the work is intimately situated in the experience of the United Kingdom, both in terms of description and prescription, though there are references to other countries, mainly the United States and European countries.

An international comparison of household income distribution for 2010, for instance, shows that Sweden, Norway, Iceland and Denmark are the ones at the top (indicating least inequality), while the bottom ones are India, Peru, China and South Africa. The U.S. and the U.K. appear in the lower half.

Social context of inequality

In this review I will concentrate on the author’s exposition of the nature of inequality and the possibilities of tackling it, making only occasional references to specific policy recommendations. The first thing to note is that though in most treatments of inequality the reference is to the economic sphere, inequality manifests itself in other areas as well, such as in the sexual sphere where males are often projected as being superior to females. But for the sake of a proper understanding of economic inequality, it has to be set in the larger context of social inequality, particularly when dealing with measures to reduce it. As will become fairly obvious soon, the reference is not merely to taxation, which brings in political considerations. Atkinson points out, for instance, that the objective should be not only to reduce economic inequality of outcome but also inequality of opportunities; otherwise, solutions are likely to be short-term. Similarly, inequality of not only incomes but also of wealth should be reduced, for two reasons. First, the distribution of incomes plays a crucial role in production and thus can lead to an understanding of how the economy actually functions. Second, “a society in which no one could afford to travel privately into space, and in which everyone could afford to buy their food from ordinary shops, would be more cohesive and have greater sense of shared interests”. Thus, before he gets into analysis and prescription, the author makes it clear that his attempt is to deal with inequality and its relation with underlying social values, for which he finds it necessary to shift the focus from the technicalities of economics to people and their social conditions.

After having clarified his objective, the author explains the reduction of inequalities in the West in the first half of the 20th century and its increase in the second half, particularly after 1980. The impact of the two World Wars reduced income from capital, thus reducing income accruing to the top-income groups. The post-War period also saw a series of measures favouring the lower-level-income groups, especially in the U.K., because of the acceptance of the “welfare state” ideal, resulting in a large increase in owner-occupied housing, for instance. The widening of inequality after 1980, frequently referred to as the “Inequality Turn”, is attributed to the interaction between the rapid growth of the financial sector and globalisation, the growing space for market transactions driven by economic forces and the consequent changes in economic and political power. This is now a widely accepted explanation. However, Atkinson substantially fine-tunes it. Unlike Piketty, who identified capital and wealth, Atkinson distinguishes between the two because “the application of capital in productive activities is different from the beneficial ownership of wealth”. He shows also that the underlying reason for the recent increases in economic inequality is the skewed distribution of wealth facilitated by the growing impact of finance in the functioning of the economy.

Technical change and inequality

The nature of technical change of the past few decades is another factor identified by the author for the increase in inequality. Capital-augmenting technology has resulted in the substitution of capital for labour and favoured skilled labour. There has also been a shift from pay scales to pay based on individual performance. Both these lead generally to an increase in profits and an increase in the wages of skilled labour, thus widening inequality. These are also accompanied by a revival of the propaganda both by the business community and by a powerful section of academics that competitive markets that establish prices by the forces of supply and demand are the best institutional framework. These sections ignore the fact that firms with considerable market power have many ways of distorting prices in their favour.

Atkinson also counters the claim frequently put forward by interested parties that when the cake (GDP) grows everyone can have more, or that economic growth is the sure panacea for problems, including inequalities in distribution.

After declaring “In this book my concern is with what happens to individuals and their families” and that “such a concern may at times seem far removed from those of economic policy-makers who talk in terms of macroeconomic aggregates such as national income or GDP”, he demonstrates through a simple figure that household incomes do not necessarily increase when the GDP increases.

This is mainly because the total aggregate household income is considerably less than the GDP, a significant part of which is absorbed by the intervening institutions. I would strongly recommend, especially to students of economics, Figure 3.1 on page 101 of the book and the discussion on the pages before and after it.

Possibility of state intervention

Against the background of such analysis, the author makes his policy recommendations, 15 in all. These, for those who want to make a quick reference, are summed up on pages 303-04.

As mentioned earlier, these are specific to the U.K., but the logic underlying them should be appreciated. The first comes immediately after the discussion on the nature of the technological innovations now going on, led largely by big corporations and consequently in their interest. However, public policy can play a significant role in influencing the nature of technological change, through the financing of scientific research, for instance. It can and should encourage innovation that increases the employability of workers. Equally important is to recognise trade unions and empower them to represent workers on public policies.

As growing inequalities are the result of wealth accumulation by those at the top of the income distribution, policies must be designed to reduce it.

Inheritance and gifts should be taxed heavily under a progressive lifetime capital receipts tax. A progressive property tax with periodic property assessments is recommended.

At the same time, to protect the interest of those at the lower levels of income, there should be national savings bonds at positive real rates of interest on savings with a maximum holding per person. A public investment authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and property.

Personal income tax should draw a sharp distinction between earned and unearned incomes with much higher rates on the latter.

A clearly worked out social insurance scheme should be established and sustained.

These recommendations show that to reduce inequality many measures other than a mere progressive income tax are necessary and possible. Public policy, that is, action by the state, in a broad sense is crucial.

Even more important is the active involvement of informed individuals convinced about the moral imperative of a more egalitarian society and actively pursuing it through their day-to-day involvement in the economy and all political processes.

In India we now have internationally comparable data on many aspects of assets, income and their distribution.

These provide an excellent opportunity for scholars to undertake a study similar to Atkinson’s on the many economic, social and political factors that lead to growing inequalities and to suggest measures to move towards a more egalitarian social order.