When inequality is the problem

There is a large argument about inequality these days. When some say that it doesn't matter, total wealth is the important, other dudes, as Joseph Stiglitz or Paul Krugman (both Nobel laureates), say that matters and is a fact that the gap between rich and poor is growing. Many people have been experienced it, as movements as Occupy Wall Street, Indignados and other demonstrations have shown us. But what is the deal about it? Here two deep insights into the issue.

Inequality in poverty: Impeding Development.

In the book Why Nations Fail, the economist Daron Acemoglu and the political scientist, James Robinson, try to answer the question why some countries are wealthy while others are stuck in poverty. Their answer lays on something we have talked before, and could be considered part of culture: Institutions.

Although in the first place they reject plain explanations about culture, they thought about it like "ideological issues", as a work ethic or wealth ambition. They noticed that places with same culture actually have different income, as Nogales town in the US-Mexico border, a "mexican culture" town splitted in two, with one side rich (US) and another side poor (Mexico). Or Korea, a country splitted in two, one very rich (south) and other very poor (north), but with same cultural basis. So they relay their explanations in something more specific: political institutions (+economic institutions). To put it simple, there are two kinds: extractives (poor countries) and inclusives (rich ones).

For these two famous researchers (the gossips say that Acemoglu will be Nobel Prize soon), extractive institutions are those that have typically a group called "elite" that extract wealth and resources from the rest of the society. Thus, the rest of the society loses all incentives to be more productive, because more effort doesn't mean enhance of profit for them, but for the elite. Besides this elite will do everything possible to preserve their privilege as discourage any innovation that can produce a dynamic society (fear of creative destruction). It also will destroy in advance any opposition or competition to their power.

Sadly, oppressed people will continually try to free themselves despite elite efforts, turning the system in very unstable society. And if one group achieve overthrow the elite, it is likely that they fall into "the iron law of oligarchy", and the victorious group become the new elite, holding privileges and keeping extractive institutions with the rest. Power tends to corrupt, isn't it?

Forced work fields of Khmer Rouge in Cambodia. While Khmer was looking for terminate with elite power and colonialism in Cambodia. Once in the power, they emphasized extractive institutions, they even killed 2 millions of people. Others extractive institution examples are feudal servilism, slavery and most common, oligarchies of crony capitalism.

However if such revolution is widespread and inclusive, there is a chance to create institutions to put a limit on political power of new rulers (as, but not necessarily, division of power, effective power alternation, voting system) and open opportunities to everyone can influence policy, creating changes and dynamism. Inclusive institutions are created and that allows improvements and innovation. The benefit is more likely to be distributed by individual o collective effort, so there is incentive to improve productivity, and talents of people will be better distributed, leveraging different part of the whole society. Then, there is less institutional inequality and no distortion on a system that could be caused by a too powerful elite.

When queen Elizabeth I of England was introduced to the first spinning machine design, she was astonished, but she rejected to give a patent to their inventor. She said that machine does the job of 10 workers and 10 workers without a job do revolts. Thus, she, as a queen, should avoid riots, in order to maintain the order and her head over her shoulders. Everything changes after Glorious revolution in 1688, when parliament (with widespread interest representation) granted patents to many invents which led to industrial revolution.

The book also point out that such political institution allows a more fair scenario and economy growth, destroying inefficient economies and creating some new and better (creative destruction). Of course there should be a political guarantees to maintain economic inclusive institution, like markets, as such. For instance, an accessible justice system in which the less powerful were in the same stance than the most. By all means, it is possible that the economic system tends to segregation, specially if there is no political guarantees, specially if inclusive economic institutions aren't backed by inclusive political institutions.

This could be the case for China and Singapore, in which inclusive economic institutions are under extractive political system. Then, economic growth won't last. Repeating rapid economic growth under extractive institution (as it happened with URSS in the '50, '60 and '70s), but unsustainable in time. Even under inclusive political institutions there are other threats, as it happened with the trust crisis in 1890 and financial crisis in 2008 in US, while markets created high concentration of wealth (inequality), making american democracy tremble.

Unfortunately, when some countries became rich because of their new inclusive institutions, they have increased global inequality. Because their powerful influence among the rest, it led to colonialism. It is a kind of inequality that has left rich countries as extractors of natural resources of the rest, preventing the development of their own inclusive institutions, supporting local elites to keep the world status quo.

Inequality in wealth: Impeding Well-being.

The epidemiologist Richard Wilkinson and Kate Pickett, in the book "The Spirit Level: Why Greater Equality Makes Societies Stronger", give us some reasons to worry about inequality.

If we take some data of economic income per person and compare it with data about well-being (mainly health, more familiar issue for the authors) will see there is a relation between income and well-being. That is, the higher the income per person in a country, better welfare. However, this relation is completely blurred over $ 20,000 per capita, when add to more money does not ensure any improvement.

However, the researchers took the data of the rich countries and compare with inequality of income rather than plain income. Its result is quite impressive. Among high income countries, the well-being increase when inequality decrease.

The authors explain some effects of inequality in well-being through permanent stress (cortisol levels). As they say, inequality generate stress. People is more worry about others opinion, is more insecure and depressed. They develop some feelings of superiority and inferiority, which impacts on health and also on well-being, not just the poorer, but also with the rich. Have you ever felt the pressure of social inequality? the anguish of constant comparison?

Sources:

Richard Wilkinson and Kate Pickett, 2009 ,The Spirit Level: Why Greater Equality Makes Societies Stronger.
Daron Acemoglu and James Robinson, 2012, Why nations fail.