Excessive Inequality and Socio-Economic Progress

Ona Gražina Rakauskienė, Dalia Štreimikienė, Lina Volodzkienė

• Publisher: Routledge
• Year: 2022
• eBook ISBN: 9781000612905
• Topic: Physical Sciences
• Subtopic: Human Geography

The growing inequality in the global economy across the planet is reaching unprecedented levels. This book seeks to develop frameworks for the assessment of excessive inequality and its impact on social-economic progress and sustainable development.

It begins by summarizing the theoretical approaches of economic inequality, its specificity, and questioning what economic inequality really is and how it progresses. Next, the book explores issues of methodology for addressing the growing excessive economic inequality. It then applies these concepts to examine inequality across a range of the European Union (EU) countries. A variety of factors are considered, such as the impact of economic inequality on socio-economic progress, when normal inequality turns into excessive inequality, and its impact on economic growth, quality of life, and the environmental sustainability across different groups.

1THEORETICAL BASIS OF ECONOMIC INEQUALITY

DOI: 10.4324/​b22984-2

1.1 Development of economic inequality theoretical approaches

Economic inequality is one of the most pressing and debated topics in today's world. There are different approaches to the justification of inequality, its factors and causes, and the nature of the impact on socio-economic progress.

In the absence of a unified systemic approach to economic inequality, questions are often raised: (1) does the accumulation of private capital inevitably affect the increasing concentration of wealth in a very small (rich) group of people, as in the 19th century noted by K. Marx; (2) perhaps S. Kuznets in the beginning of 20th century was right in believing that the prevailing forces of economic growth, competition, and technological progress reduce economic inequality and promote harmony between classes in society; (3) is the distribution of income in the 18th and 19th centuries different from distributional inequalities in the modern world; (4) how the unequal distribution of income and wealth affects economic growth and quality of life (T. Piketty, 2014)?

The sources of economic inequality are demographic change, the need for food, and poverty. The issue of economic inequality became relevant at the end of 18th century and in the beginning of the 19th century, when in Great Britain and France underwent radical changes in society, influenced by extremely rapid demographic growth, the urbanization of the impoverished rural population, the need to feed themselves, and the ongoing industrial coup. These processes have affected the unequal distribution of wealth, changes in social structure, and political balance.

During this period, the widely known theory of T. Malthus emerged, which was published in 1798 and named “An Essay on the Principle of Population”, indicating that the main threat to the stability of society is the surplus of the population. The findings of T. Malthus were based on the experience of France at a time when large numbers of poor rural people were flocking to the cities. T. Malthus, worried and trying to ensure that the same fate befell Great Britain, proposed the immediate cessation of any supply or support to the poor and the limitation of its reproduction in order to prevent a population surplus leading to chaos and trouble.

Principle of unequal distribution. At the end of 18th century and in the beginning of the 19th century, radical economic and social changes took place. The insights of most economists at the time about long-term economic inequality and inequality in the distribution of society were gloomy and pessimistic. Some of the most famous and influential economists of the 19th century, D. Ricardo and K. Marx emphasized that a small social group (landowners and representatives of industrial capitalism) will inevitably absorb an ever-increasing share of income (Piketty, 2014).

In 1817, D. Ricardo in the book On the Principles of Political Economy and Taxation emphasized that landowners are absorbing an increasing share of total income, while the share of income of the rest of society is decreasing proportionally, thus disturbing the overall social balance. D. Ricardo considered that the only logical and politically acceptable solution was a steady increase in the taxation of land rental income (Piketty, 2014).

As history has shown, D. Ricardo's gloomy predictions were not correct: although land rent fees have remained high for some time, the value of arable land has also eventually declined as the importance of agriculture has diminished. D. Ricardo could not have foreseen the importance of future technological progress or industrial growth. Neither T. Malthus nor D. Ricardo could have imagined that the need for food would no longer be one of society's most pressing problems.

The insights of D. Ricardo on land prices have argued that the principle of unequal distribution and rapid price increases in a given area, can upset the balance around the world (Piketty, 2014). The latter principle can be applied to the economic inequality of recent decades. The increase in arable land prices mentioned in the D. Ricardo model can be compared with the real estate prices in the big cities of the modern world. As history has shown in 2008, the rapid rise in prices, especially in real estate, has upset the economic, social, and political balance, not only between different countries but also within each country.

Principle of unlimited capital accumulation. Fifty years later, economic and social trends have changed dramatically – the key issue was not whether farmers could feed a growing population or prices continue to rise, but the key question was how to explain the growth of industrial capitalism, which was flourishing at the time.

Like D. Ricardo, in 1867, K. Marx based his book Capital (volume I) on the analysis of the contradictions of the capitalist system. He sought to distance himself from bourgeois economists, who, based on A. Smith theory of the “invisible hand” and J. Say's “rule” argued that the output of production itself creates demand for itself; that the market is a system that can create and achieve a perfect balance on its own.

K. Marx used the D. Ricardo principle of unequal distribution as a basis for an already much more detailed analysis of the dynamics of capitalism, in a world where capital was more industrial (machinery, factories, etc.) than agrarian, which meant that accumulated capital could be unlimited. The main conclusion presented is often called the principle of unlimited accumulation – it is a relentless trend of capital accumulation, with an increasing share of it reaching an ever-smaller group of people, and which is not hampered by any natural barriers.

The source of many ideas of inequality is K. Marx theory of stratification and class. According to K. Marx, the stages of development of human history depend on the method of production. The method of production describes each economic organization, which includes technology, division of labor, and, most importantly, human relationships in the production process. These interrelationships play a central role in the Marxist class theory.

According to K. Marx, any economic organization has a ruling class that owns the means of production (factories, raw materials, etc.) and controls those means of production. In the theory of capitalism, it is the bourgeoisie (the owners of the means of production) that decides the fate of the exploited – the proletariat. K. Marx also introduced the concept of a lumpenproletariat, meaning degraded individuals, criminals, and other marginalized people who were completely excluded from the society.

According to the K. Marx's theory, the essence of the relationship between the ruling class and the exploited class is that the ruling class exploits the working class. The form of exploitation depends on the method of production. In capitalism, property owners buy the work of workers. K. Marx emphasizes that added value is created by workers. K. Marx predicted and argued that with the development of capitalism, the bourgeoisie would become even richer and the proletariat even poorer. Maturing class conflict leads to a revolution and the collapse of capitalism. However, K. Marx predictions did not come true, capitalism did not collapse.

Despite the shortcomings, T. Piketty describes K. Marx analysis as relevant to this day in several respects. Firstly, he highlighted the problem of the huge concentration of wealth in the years of the industrial revolution and tried to analyze it using all available methods. Secondly, no less important is the principle of unlimited accumulation, the essential insights of which can be applied in modern research as well. If the growth of population and output conditionally declines, accumulated wealth becomes particularly significant, especially if the situation reaches extreme and becomes socially destabilizing. In other words, low economic growth cannot offset the Marxists’ principle of unlimited capital accumulation: although the imbalance will not be as extreme as K. Marx predicted, it is extremely significant. Accumulation will stop sooner or later, but the equilibrium may have reached a destabilizing level (Piketty, 2014).

S. Kuznets theory of economic development. According to the S. Kuznets theory, introduced in 1955, economic inequality in any country is defined by a bell-shaped curve (“U” curve). It has been declined that inequality increases in the early stages of industrialization, as only a minority receives the benefits and wealth generated by industrialization. In the later stages of the process, inequality decreases as more and more people can enjoy the fruits of economic growth.

According to the S. Kuznets’ theory (1955), economic inequality in the world should decrease in the later stages of capitalism development, despite differences between states or economic and political decisions. And, finally, after reaching a certain level, it should stabilize. According to S. Kuznets, people have to wait patiently and the economic growth that has begun will benefit everyone.

A similar optimism is characteristic for the study performed by R. Solow (1956), who analyzes the conditions necessary for sustainable economic development. According to the study, if all variables, output, income, profit, wages, capital, asset prices, etc., progressed at the same pace, each social group would benefit equally from this growth. Thus, the latter conclusions were completely contrary to the ideas and predictions of D. Ricardo and K. Marx.

S. Kuznets’ theory was the first to be based on a large number of statistics. Only in the 20th century, in the middle of 1953, when S. Kuznets’ “Shares of Upper Income Groups in Income and Savings” was published, the first historical statistics on income inequality appeared. S. Kuznets described a period of 35 years (1913–1948) in only one country (the United States). However, it was an invaluable contribution based on two sources of information. The other authors of the 19th century have no chance of getting closer to US federal income tax refunds and estimates of US national income made by S. Kuznets himself several years ago. This was one of the first attempts to assess the extent of economic inequality at such a level (Piketty, 2014).

T. Malthus, D. Ricardo, K. Marx, and others have been discussing economic inequality for many decades, without quoting any sources or using any comparable methods. Thanks to S. Kuznets, objective data became available for the first time. Data collection was carefully documented in S. Kuznets’ major work, published in 1953. The sources and methods used were described in such detail that each calculation could be reproduced. And most importantly, S. Kuznets confirmed his prediction that economic inequality was declining.

As history has shown, the reasons for creating S. Kuznets’ curve were not correct, and its empirical basis was extremely fragile. The sharp decline in economic inequality in almost all the developed countries of the world, which was observed between 1914 and 1945, was mostly caused by the world wars. The tragic economic and political shocks, as consequences of wars, affected the richest people the most.

Since 1970, economic inequality has risen sharply in rich countries, especially the United States. Analogous trends are observed in the 21st century: income concentration in the first part of the 21st century reached the level of the second decade of the 20th century (Piketty, 2014). The rapid development of poor countries (especially China) had a major impact on reducing global economic inequality, as well as the development of rich countries during 1945–1975. However, the imbalance of the financial, real estate, and oil markets at the beginning of the 21st century raised legitimate doubts about the sustainable development of the economy. It was discussed by R. Solow and S. Kuznets, arguing that all economic variables should develop and change at the same pace.

After the Second World War, during the rapid development of economies in Western Europe and North America, economic inequality was almost forgotten. However, in the last decades of the 20th century, the issue of poverty has become relevant in the United States, Great Britain, Sweden, and other European countries. In this way, the growth strategies reducing poverty emerged, and the phenomena of growth and equality (in terms of the income distribution) were singled out as separate strategic measures influencing poverty reduction. Increasing the income of poor households became a major challenge.

The growing interest in economic inequality has been discussed in academic papers: “Economic Inequality”, “On Economic Inequality”, and others (Salverda, Nolan, & Smeeding, 2013). Since then, several significant studies, based on increasingly accurate data, examining the causes and concepts of inequality, measurement tools, trends, and research methods, have been conducted. It should be noted that economic inequality has been stable enough for some time.

However, in the 1980s, wage differentiation in Great Britain and the United States increased significantly and led to the emergence of new large-scale research. Studies sought to determine whether inequality exists only in the two countries mentioned or whether it is prevalent in all developing countries (Salverda, Nolan, & Smeeding, 2013). It has become clear that income inequality between the population and households, the key aspect of all economic inequality, is growing rapidly in all countries.

In the first decade of 21st century, it became clear that economic growth and inequality are inseparable, and economists focus on reducing extreme poverty in the past decade was not fully effective: although progress in reducing extreme poverty had been made, economic inequality continued to rise in many developing countries.

Modern theoretical approaches to economic inequality. According to the authors, two important approaches can be distinguished in the modern theory of inequality: liberal – inequality is justified and it must exist; and conversely, inequality is not necessary. Many countries have pursued economic policies based on a liberal approach (in which inequality is inevitable) until these days. Countries have to choose: either the economy grows together with growing inequality, or the economy slows down with an equitable distribution of income and wealth. And, as the economy grows, the rise in inequality will come to a halt over time and move closer to the situation in developed countries. The liberal approach says that inequality is the price we pay for economic growth. If higher economic growth is a priority, the widening of income disparities must be reconciled. However, the data from modern theoretical and practical research suggest that such an approach is questionable. The first argument is based on the theory of welfare economics and states that growing income inequality slows economic growth, and the second, the argument of proponents of the Austrian school, says that growing inequality promotes economic growth.

Theory of economic welfare. The theory of economic welfare examines how an economic activity should be managed in order to maximize economic prosperity. A. C. Pigou, V. Pareto, A. Bergson, P. A. Samuelson, K. J. Arrow, J. K. Galbraith, A. Sen, and others are known as proponents of the theory.

A. C. Pigou was one of the first to point out that economic inequality is slowing economic growth. The researcher, referring to the theory of marginal utility, suggested drawing attention to the importance of income redistribution, as transferring part of the rich income to the poor would increase the common good. V. Pareto proposed a concept of maximum benefit for society to assess changes that improve the well-being of all individuals. A. Bergson highlighted the function of social welfare – the expression of the welfare dependence on the factors determining the economy and quality of life (Daugirdas et al., 2019).

In the modern context, the EU Council (2019) defines the welfare economy as the one that:

• expands the opportunities for people to have bigger social mobility and improve life in the areas that matter to them now;
• ensures that these opportunities lead to welfare outcomes for all segments of the population, including those at the bottom of the distribution chain;
• reduces inequality; and
• ensures environmental and social sustainability.

The welfare state takes care of the well-being of its population, distributes national income fairly, and supports social satisfaction, health care, education, and other systems. Welfare state institutions take responsibility for the well-being of each individual, and a high standard of living must be guaranteed for all. This was influenced by the ideas of the prominent English economist D. M. Keynes (1883–1946), who emphasizes the necessity of state participation in a market economy. Such a provision became very popular in many Western countries, especially in Scandinavia.

The concept of the welfare state originated (matured and nurtured) in Europe seeks to alleviate or prevent social problems. However, the welfare state can exist in various forms/types. Different types of welfare states provide different social guarantees to the citizens of countries and (at the same time) generate different levels and scales of threats to social security. It has been proven that the more generous (high benefits and high quality of social services), the more comprehensive (takes into account different needs), and the all-encompassing (high coverage) activities of the welfare state, the milder negative effects of a market economy and globalization are (Aidukaitė, Bogdanova, Guogis, 2012).

The welfare state encompasses whole institutions of the state – a social policy with the social security system (consisting of social support and social insurance), education system, and institutions guaranteeing the security of citizens (police and national defense structures) play an important role. These institutions were created to reduce all forms of inequality (income, social, gender) to create equal opportunities for all citizens of the country, regardless of their gender, age, disability, racial, ethnic, religious, or other affiliation, and to ensure socio-economic security for all citizens. Also, the concept of the welfare state is inseparable from such characteristics of the 20th century as industrialization, urbanization, feminization, relatively high stand...

Table of contents

• Cover Page
• Half-Title Page
• Series Page
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• Introduction
• 1 Theoretical Basis of Economic Inequality
• 2 Methodology for Assessing Excessive Inequality
• 3 Assessment of the Impact of Excessive Inequality on Socio-Economic Progress
• 4 Guidelines for Reducing Excessive Inequality
• Conclusions
• Literature
• Index