Inequality in Economics and Sociology

New Perspectives

Gilberto Antonelli, Boike Rehbein

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781317193142
• Topic: Business
• Subtopic: Business General
• Index: Business

Inequality remains one of the most intensely discussed topics on a global level. As well as figuring prominently in economics, it is possibly the most central topic of sociology. Despite this, there has been no book until now that unites approaches from economics and sociology.

Organized thematically, this volume brings international scholars together to offer students and researchers a cutting-edge overview of the core topics of inequality research. Chapters cover: the theoretical traditions in economics and sociology; the global and national structures of inequality in the contemporary world; the main dimensions of inequality (including gender, race, caste, migration, education and poverty); and research methodology. In presenting this overview, Inequality in Economics and Sociology seeks to build a bridge between the disciplines and the approaches.

This book offers an encompassing understanding of an increasingly fragmented and highly specialized field of research. It will be invaluable for students and researchers seeking a single repository on the current state of knowledge, current debates and relevant literature in this key area.

Part I

Theoretical background

1 Theoretical approaches to inequality in economics and sociology

Giovanni Guidetti and Boike Rehbein

This chapter discusses approaches to inequality that have been advanced in the disciplines of economics and sociology.¹ It argues that a communication between both disciplines is necessary to make sense of the drastic increase in socioeconomic inequality that we are observing at present. The aim of the chapter is neither to trace the history of research in the field nor to give an overview of all available data. It rather seeks to assess the most relevant contributions in view of a research agenda that encompasses the virtues of existing approaches while avoiding their shortcomings and pitfalls. The main goal, however, is to build a bridge between economics and sociology. Both disciplines have advanced research on inequality, partly in a parallel fashion. It is time to establish a transdisciplinary research agenda.

The first part of the chapter distinguishes between three traditions of research on inequality, each of which has been elaborated in both economics and sociology. The second part discusses the main issues of contemporary inequality that have been acknowledged by the three traditions and that need to be taken into account. In the final part, we draw conclusions of the discussion by critically assessing the explanatory power of existing approaches and by pointing to desiderata in theory building.

Theoretical traditions

Sociological research on inequality can be divided into three main traditions, which could be called quantitative, structural and intermediate. While the quantitative tradition grew out of economics and was developed in sociology by the school of Talcott Parsons, the structural tradition certainly draws on Karl Marx. While the quantitative tradition is more descriptive, the core of the structural tradition is theoretical. A third strand, trying to link theory with empirical research, can be traced back to Max Weber but it does not form a homogeneous school.

The quantitative tradition is linked to the development of economics as a discipline but has deeply influenced the discipline of sociology as it evolved in the twentieth century. Economic theories of inequality have been largely quantitative and focused on the relation between inequality and growth. Adam Smith has taken inequality for granted. In his Wealth of Nations (2007; originally 1776), he develops the idea of a free market for goods and labour that leads to an increasing division of labour and thereby to economic growth. The overall product is distributed among the population so that everyone profits from this growth. However, the product is distributed not equally but proportionately. The “universal opulence … extends itself to the lowest ranks of the people” (2007: 7). Of course, Smith worked and thought in the framework of a feudal society, where rank largely determined profession and life-chances. Even though there is a tension between the idea of unfettered competition in the market and feudal ranks, Smith does not explicitly address the issue. Economic growth is the prime goal and its distribution is secondary as long as everyone gets a share. However, following Quesnay’s approach, Smith shows that value added is distributed among three classes: the rentiers, the capitalists and the workers and, even though his interest was mainly focused on economic growth, he develops an embryonic theory of income distribution among wages, profits and rents. Interestingly, Smith is probably the first economist of the modern ages who refers explicitly to the conflict between capitalist and workers for the determination of wages. The Scottish economist was convinced that even though wages can temporarily peak over the subsistence level, eventually the greater bargaining power of capitalists with respect to workers prevails and pushes wages down to this subsistence level.

Smith also offered the first statement of what Lassalle called, a few years later, the iron law of wage: wages fluctuate around the subsistence level (2007). A couple of decades after Smith, Ricardo (1815) developed a framework of analysis based on the idea that the value of commodities depends on the amount of labour contained. In this approach, the distribution of income among the three classes, rentiers, capitalists and workers, Ricardo demonstrates that when the economic system reaches the steady state, the rate of profit tends to nil and the output will be distributed between rents and wages. In the mathematical outline of Ricardo’s analysis, Pasinetti (1977) emphasises the distributive conflict between wages and profit, before the system reaches the steady state.

Marx made this conflict more explicit in economic analysis, introducing the notions of surplus value and exploitation (Marx 1953ff). According to Marx, profit depends on the surplus value that capitalists manage to extract from workers’ productive activity. Roughly speaking, it can be defined as the difference between the value of the output produced by workers and their wages and as such it is a measure of worker’s exploitation by the class of capitalists. In Marx’s treatment one can also find the origins of the classes of capitalists and workers. The former are the owners of the means of production, the latter are the individuals exploited in the productive process. Conclusively, in classical economics one can find a deep analysis of functional income distribution, i.e. income distribution among different classes in society.

With the advent of the marginalist school around 1870 the approach to economic analysis changes drastically. The focus shifts from the analysis of production and the distribution of income to the analysis of exchanges among individuals with a given endowment of resources and the allocation of these resources. As a result, the level of wages depends on the interaction between labour demand and supply and the relative scarcity of supply with respect to demand. As far as income distribution is concerned, Wicksell (1954) demonstrates that, assuming a highly specific production function,² the remuneration of productive factors equals the factors’ marginal productivity. This idea presupposes perfectly competitive markets and a correspondence of earnings of productive factors with their productivity. Income inequality is simply a result of the contribution of each productive factor to the production of income. The focus of analysis shifts from functional income distribution to personal income distribution. As the operation of markets entails that productive factors are paid on the basis of their contribution to production, income inequality is no longer a problem to be addressed through specific public policies. Inequality disappears from the agenda of mainstream economics.

In this tradition, Lucas (2004) in an often-quoted assertion has affirmed: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution”. Economic analysis should not focus on problems of either inequality or income distribution but rather on issues concerning growth and poverty because the “potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production” (Lucas 2004).

The seminal contribution in modern economic literature addressing explicitly the issue of economic inequality was developed by Kuznets (1955). Based on empirical evidence, Kuznets maintains that inequality tends to rise in the early stages of economic development, as a consequence of industrialization, then it declines in later stages, as capitalism matures. In this way income inequality presents the classical inverted-U shaped trend in time. In this stream of analysis, Kuznets’ hypothesis has been questioned, especially in empirical economic literature, and the most relevant conclusion (Fields 2001) states that it is not growth per se, which gives rise to economic inequality but it is the nature of economic growth which determines the development of inequality. More precisely, Fields claims that the effect of growth on inequality depends on the factors which characterize the economic environment such as the structure of output, the degree of economic dualism, the structure of employment, the distribution of land, the operation of capital markets and the overall level of human capital.

In recent years, Kuznets’ approach has been even more radically questioned, reversing the causation relation between growth and inequality underlying Kuznets’ seminal contribution. Basically, the idea is that economic inequality affects the pace and the nature of economic growth and not the reverse as in Kuznets’ analysis (Stiglitz 2012). This stream of the economic literature provides neither a direct causal link between inequality and rate of growth, nor a unique explanation. Actually, different theoretical frameworks point to different factors explaining the reason why inequality can affect economic growth (Bourguignon 2004; Ehrhart 2009). There seems to be a wide consensus on the ideas that inequality can hinder economic growth and that country specificities matter in order to understand through which channels inequality slows down the pace of economic growth.

The quantitative tradition in economics focused on growth has not been able to explain inequality. Predictions about inequality trends extrapolated from the 1990s have been proven wrong – because they had focused on numbers and not on structures. This is particularly true for the influential World Bank publications (Jomo and Baudot 2007; cf. the Human Development Reports). These studies neglected the rise of the global South, as it was scarcely visible at the time. In the 2000s the discussion has mainly focused on the question of whether the world has become more or less unequal. Branko Milanovic (2005) has published the classic study of the topic, in which he compares different systems of measurement and earlier assessments of the question. In the end, he settles for a global comparison of weighted household consumption. Although Milanovic’s predictions have not materialized either, his retrospective analyses are pertinent to any study of inequality. The absolute number of poor has remained almost unchanged over the past few decades, while the wealth accumulated by the richest individuals has risen to unprecedented levels, and multinational corporations report record profits virtually every year (Milanovic 2005: 108). There seems to be a consensus that these trends are alarming by most standards. Milanovic calculates the Gini index for the global population at 64, for the US at 80 and for the countries of the world taken as a whole at 53 (2005). And it is increasing in most countries, including most emerging societies.

The quantitative tradition in sociology did not contribute substantially to research on inequality in economics except for the attempt to look at the social structure behind the Gini index and other quantitative measures of inequality. Talcott Parsons (1939) developed the concept of social structure as the differentiation of society into social groups. He also established an explicit link between social structure and the division of labour without confounding the two. Following economics and Marxism, however, the distinction between social structure and division of labour was more or less forgotten. The quantitative and the structural traditions in sociology have basically identified social structure with the division of labour by presenting social structure as a hierarchy of professions.

This confusion is very evident in Goldthorpe’s class model, which is the basis of the mainstream of quantitative research on inequality in many European countries. Goldthorpe (2007, vol. II: 104) groups the entire population of a nation state in seven to eleven classes. These classes are types of professions; the highest class comprising leading academic professionals, leading managers and entrepreneurs having more than 50 employees, the lowest class consisting of manual and routine labourers. Of course, the majority of the population is excluded from this analytical framework, as even in European countries less than half of the population is engaged in wage-labour. Furthermore, the criteria for distinguishing the classes are descriptive and somewhat arbitrary. This is problematic because Goldthorpe’s empirical research focuses on social mobility. If the criteria for distinguishing classes are arbitrary, the observation of mobility from one class to another is arbitrary as well. In fact, research by the Goldthorpe school exemplifies this (e.g. Breen 2004). Unfortunately, many governments and influential organizations rely on this research in their assessment of inequality and mobility. National statistics are rarely more than a combination of quantitative economic approaches with a descriptive notion of class as a professional group.

The notion of class also forms the basis of the structural tradition in sociology. However, here it is not a descriptive but a theoretical term. The main argument is that inequality exists and persists because different social groups have unequal access to socially relevant resources and power. This unequal distribution persists because each generation passes on its resources to the next, so that power and resources “remain in the family”.

Karl Marx is probably the founder of the structural approach, which he developed out of a critical reading of Adam Smith. While Smith bases his theory on the idea of an unalterable individual, Marx claims that human nature is historical and social (MEW 40: 537). Through action, the human being creates him- or herself. Each historical condition constitutes the framework within which this creation takes place, each generation carries with it the entire history of the human species (MEW 8: 115). The human being embodies history as a tradition and applies it to contemporary reality. Thereby, reality and the human being are transformed. The individual, according to Marx, is not the original human being but its contemporary manifestation as the result of a long history (MEW 13: 615).

According to the young Marx, the self-creation of the human being through his or her interaction with the world changes in each social configuration. In unequal societies, only some segments of society perform interaction with the world as labour, while others reap the profits without having to perform labour. This is the basis of class divisions in society. Capitalism changes nothing in this unequal relation between the classes but transforms labour into a commodity. The essence of the human being, which is activity, is hereby transformed into an abstract, commodified and transferable entity (MEW 40: 514). Any commodity can be traded for money in capitalism, which includes labour.

The structure of a capitalist society, for the old Marx, consists in the opposition of the class that possesses enough money to buy labour and put it to work and the class that has to sell its labour force. Following Smith, Marx interprets society as economic reproduction and its capitalist manifestation as accumulation of capital through investment into means of production and labour. Against this background, inequality is merely the surface of the invisible structure, which consists in the unequal distribution of capital and labour. Other types of activity and being in capitalist society are irrelevant for the analysis that Marx presents in his seminal work, Das Kapital (MEW 23–25). Division of labour and social structure are identified, just as in the quantitative tradition. The owners of the means of production are also the class that holds the power within the nation state (MEW 13: 640). This also implies that the redistribution of economic capital would abolish inequality (see also Rehbein and Souza in this volume).

Between the structural and the quantitative tradition, a third strand of sociological research on inequality emerged. After Marx, Max Weber (1972; originally 1921) argued that social structure was more complex. On the one hand, there are many groups that are neither capitalists nor workers; on the other, he proposed that factors apart from occupation and wealth should be considered. However, Weber also focussed his analyses on occupation and wealth. Theodor Geiger (1932) and his disciples came up with a complex model of stratification. These stratification theories follow Weber in his critique of Marx and set up elaborate and complex models of social structure. They are less theoretical than Marxism, and less focused on economic and historical factors.

Stratification theory has become especially sophisticated in Germany (cf. Hradil 1986; Schulze 1992). One of its leading representatives, Rainer Geißler (1996), has developed a model of social structure that might serve as an ideal type of the national social structure analysis. It is derived from Ralf Dahrendorf’s “house model”. Each group in society inhabits a room in the house, although walls and individuals are mobile. The basic criterion for the distribution of groups into “rooms” is their occupation (Geißler 1996: 85). In addition, ethnicity, mentality, life-chances and subcultures also play a role. Looking at Geißler’s model, it immediately becomes evident that he cannot fit everyone into the house. Foreigners remain outside. Furthermore, as he explains, the walls have become extremely permeable, rooms overlap and intermingle and social agents themselves are hardly aware of their own distribution (1996: 87). On the theoretical level, these inconsistencies ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of illustrations
• List of contributors
• Introduction
• Part I Theoretical background
• Part II Inequality and globalization
• Part III Dimensions of inequality
• Part IV Methodology
• Index