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An Entangled Political Economy Perspective

Mikayla Novak

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An Entangled Political Economy Perspective

Mikayla Novak

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'This book is a thoroughly researched and well written exploration of one of the most divisive topics in modern democratic discourse. Novak brings careful and clear thinking to a topic too often clouded in emotion and guided by moral intuition. '
—Peter Boettke, Professor of Economics and Philosophy, George Mason University, USA'Inequality has bred a climate of hostile political discourse reminiscent of the cold war. In this lucid book, Novak explains how we can transcend that hostility by recognizing the deeply entangled character of politics and economics within modern societies.'
—Richard E. Wagner, Hobart R. Harris Professor of Economics, George Mason University, USA'Mikayla Novak has provided a bold new intellectual foundation for social policy analysis.'
—Jason Potts, Professor of Economics, RMIT University, AustraliaIn recent years the degree of income and wealth inequality within developed countries has been raised as a central issue in economic and social policy debates. Numerous figures across diverse ideological affinities have advocated policy measures to significantly alter income and wealth distributions, while the inequality debate has become infused with other subjects such as social justice and identity politics. This book presents an account of economic inequality from a contemporary classical liberal perspective. Inequality is seen as a by-product of entangled relationships within society, bringing to the fore key ideas from complexity, evolutionary and network sciences.Novak illustrates that inequality is problematic insofar as it generates pro-rich redistribution and constrains progress by the less well off. Economic inequality has important links with issues such as fiscal and regulatory policies, discrimination and social exclusion, and institutional design.
This unique book is important reading for social science academics, policy makers and people interested in exploring the dimensions and solutions to inequality, a critical issue of our time.

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© The Author(s) 2018
Mikayla NovakInequalityPalgrave Studies in Classical Liberalism
Begin Abstract

1. Introduction

Mikayla Novak1
RMIT University, Melbourne, VIC, Australia
End Abstract

Inequality as Focal Point

The concept of the “focal point” underlines much of the human discourse. A focal point refers to that issue, or sets of related issues, upon which discussion and debate are drawn together. The focal point may encompass matters of great disputation among individuals and groups; nevertheless, it tends to elicit sharing of opinions and perspectives amidst a crowded space of public concerns. In recent years, income and wealth inequality (frequently referred to here as “economic inequality”) within developed countries has been raised as a critical matter in economic, social, and political debates.
A proxy measure of interest in economic inequality is the frequency of appearance of that term within the approximately 5.2 million books digitised by Google. The phrase “economic inequality,” as a percentage of all two-word phrases cited in Google’s digitised English-language book portfolio, increased considerably over the past two decades.1 In 1980, there were approximately 2.5 × 10−5 references to economic inequality, increasing to over 3.5 × 10−5 by 2008. The validity of NGrams has been questioned by some (Pechenick et al. 2015; Koplenig 2017), so one should be cautious about drawing broad inferences using this tool and similar word-counters. Nonetheless, it can hardly be denied that interest in economic inequality, and other variants of inequality (e.g. gender, health, racial, social, spatial), appear to have escalated in recent years.
Another indication that economic inequality has become a focal point is illustrated by the fact that economists and other social scientists have published best-selling books, exploring the dimensions of the issue and advising how to deal with it. One of the leading works in the contemporary inequality literature is an English translation of Capital in the Twenty-First Century, written by French economist Thomas Piketty . The book quickly achieved the status as the top-selling book on Amazon and the New York Times listing, something of a rarity for a book whose subject is firmly situated within the intellectual confines of political economy.
Thomas Piketty’s essential idea is that inequality is determined by two key economic variables growing at different rates. The first is the annual growth rate of total income generated in the economy (denoted by the letter g). The second is the average annual rate of capital returns (denoted by the letter r), which incorporates profits, dividends, interest earnings, rents, and selective other income flows from capital.2 Piketty contends that situations whereby r exceeds g are consistent with worsening inequality: “[w]hen the rate of return on capital significantly exceeds the growth rate of the economy … then it logically follows that inherited wealth grows faster than output and income” (Piketty 2014, p. 26).
Piketty claimed a build-up in the relative importance of private sector capital to national income in several developed economies, subsequent to the Great Depression and World War II. Piketty suggests that recent trends merely affirm his fears about a “new patrimonial capitalism” (Ibid., p. 173). Drivers of this trend, as Piketty saw it, were population ageing slowing economic growth on the one hand, and privatisations and accelerating financial asset prices, which bolster returns on capital, on the other.
The future, according to Piketty, portends a worsening of the inequality trend . Assuming the rate of income growth will gradually decline to 1.5 per cent per annum, and with savings rates stabilising in the long run, Piketty forecasts returns on (pre-tax) capital to consistently exceed the growth rate in income over the course of this century. Piketty warned of powerful economic and financial forces threatening more heavily skewed income and wealth distributions:
The overall conclusion … is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based. … The consequences for the long-term dynamics of the wealth distribution are potentially terrifying. (Ibid., p. 571)
Putting aside the riskiness of some capital ventures necessitating higher-than-average returns, Piketty nonetheless proclaims a tendency whereby r exceeds g as a reflection of “[t]he central contradiction of capitalism” (Ibid.). Without countervailing forces at play, “the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future” (Ibid., p. 571).
The Nobel laureate in Economics Joseph Stiglitz has emerged as another anti-inequality figure. In his best-selling book The Price of Inequality, Stiglitz suggests: “[o]ne of the darkest sides of the market economy that came to light was the large and growing inequality that has left the American social fabric, and the country’s economic sustainability, fraying at the edges: the rich were getting richer, while the rest were facing hardships that seemed inconsonant with the American dream” (Stiglitz 2012, p. 2). Stiglitz feared that unequal distributions of income and wealth would also lead to political polarisation, in turn diminishing the possibility that citizens and policymakers would reach agreement about the most appropriate responses to the inequality problem.
Another contribution to inequality as a focal point came from the late Sir Anthony (Tony) Atkinson . In his book Inequality: What Can Be Done?, Atkinson surmised that “the present level of inequality is excessive” (Atkinson 2015, p. 9). Referencing trends in the United States (U.S.), Atkinson explains there has been an “Inequality Turn” from the late 1970s, with a more skewed income distribution benefiting the wealthy: “[a]t the top of the distribution, the share in total gross income of the top 1 per cent increased by one-half between 1979 and 1992, and by 2012 it was more than double its 1979 share” (Ibid., p. 18).
Atkinson suspects that an excessively skewed distribution of income and wealth not only worsens economic performance, but is morally dubious. Using the analogy of a foot race equally positioning everybody at the starting point, Atkinson claims “most people would find it unacceptable to ignore completely what happens after the starting gun is fired” (Ibid., p. 10). The inequality experienced by the present generation could detrimentally affect opportunity enjoyed by future generations because, among other things, “the beneficiaries of inequality of outcome today can transmit an unfair advantage to their children tomorrow” (Ibid., p. 11). Furthermore, a severe sense of distance between the rich and the poor creates perceptions of unwarranted injustices prevailing within society.
Concern about inequality is not restricted to members of the economics profession. Social protest movements mobilised, to some extent, as a consequence of inequality becoming a focal point of discourse (Pickerill and Krinsky 2012; Snow and Owens 2014; Corcoran et al. 2015; Della Porta 2015; Gaby and Caren 2016; for an alternative view, see Solt 2015). Arguably the most notable of those movements was the “Occupy ” movement, gaining precedence in the years immediately following the 2007–08 “global financial crisis ” (GFC). The issues raised by Occupy protestors varied, yet a common rallying theme was their enmity towards the economic interests of those people situated within the top one per cent of the income distribution. Referring to their being a part of the remaining 99 per cent of the income distribution,3 Occupy protestors forcefully contributed towards the crystallisation of economic inequality as a major concern.
Since the peak of the Occupy movement other protests have organised in response to economic, political, and social problems. These include the “Black Lives Matter ” movement, with a chief focus on institutionalised violence and systemic racism against members of the African-American community, and British protestors against official responses to the 2017 Grenfell Tower fire in London. Inasmuch as these social protest movements are disparate in their specific aims and objectives, many of them sought to make some connection between their unique causes and inequality issues more generally.
Disquiet about economic inequality is, to be sure, not limited to the participants of social protest movements. Opinion surveys of community attitudes suggest inequality is, indeed, a more widespread concern. An international survey undertaken by the Pew Research Center found that over half of the people surveyed living in developed countries said that inequality is a “very big problem,” with similar sentiments shared by respondents in emerging and developing countries (Pew Research Center 2014).
Where the intellectuals and public sentiments go, the political class invariably follows. Political figures of diverse ideological affinities have elevated inequality as a policy problem, advancing proposals to significantly realign income and wealth distributions as they are found in their respective countries.
A candidate for presidency in the 2016 U.S. election, Bernie Sanders, galvanised numerous progressive-leaning voters to his cause by suggesting that extreme inequalities demonstrated the American economy was “rigged” against the lower and middle classes. His main rival, Hillary Clinton, ultimately selected as Democratic Party candidate for the presidency, also campaigned on the subject of fixing inequality. Clinton lost her bid to become U.S. president to the Republican candidate, businessman and television celebrity Donald Trump, despite winning a majority of the votes cast. Although inequality did not principally inform Trump’s campaign strategy, most American political observers agreed he controversially tapped into a sense of disgruntlement and unease amongst voters in regions with limited prospects for upward mobility. Trump attracted a sufficient groundswell of electoral support by blaming groups—such as immigrants, and traders from emerging economies such as China and Mexico—for the relatively difficult circumstances faced by Americans in the lower echelons of the income and wealth scale (Reeves 2016).
In 2016, another Nobel laureate in economics, Peter Diamond, referred to unique ways in which economic inequality is more of a pressing issue in the U.S. than elsewhere (Diamond 2016). Even so, political concern about ...