This section of the blog has been looking at the effects of distribution of income on the economy, and argues that a markedly unequal distribution weakens the economy overall. This would appear to be the conclusion that a logical analysis of the empirical evidence, free of political ideology, brings us to (the ideological interference in mainstream economic thinking will be considered further in the final section of the blog).
The scientific evidence for the importance of income equality is fully outlined in what I regard as one of the most important books so far this century – The Spirit Level: Why Equality is Better for Everyone by Richard Wilkinson and Kate Pickett. This book does not concern itself with the economic arguments discussed on this blog at all, it approaches the subject from a completely different direction. But I am summarising it here because the conclusions are of such significance that they would have to be taken into account by any rational politician considering economic policy. More information can also be found at equalitytrust.org.uk, the website of an organisation founded by the authors following the success of their book.
Wilkinson and Pickett’s original area of specialism was the link between income inequality and poor health. There is a mountain of research proving this link, which is well known amongst those working in the field of deprivation and community regeneration (my professional field). Building on this, the authors went on to research the link between income inequality and a range of other social problems for those wealthy countries where comparable data was available (23 in total). Many studies had been carried out across various disciplines, and they compiled and analysed all this research, covering areas including:
- level of trust
- mental illness (including drug and alcohol addiction)
- life expectancy and infant mortality
- children’s educational performance
- teenage births
- imprisonment rates
- social mobility
Their research therefore involves the analysis of hundreds of studies conducted over decades. It is hard to imagine anything more comprehensive.
They combined the data for all these issues into a single index, and compared it to the level of income inequality in the world’s richest countries for which comparable data was available. The results show an incredibly close link between income inequality and the prevalence of these problems.
By contrast, there is only a very weak link between the average income of a country and the incidence of these issues. So the USA, which has the highest average income per person but the most unequal distribution of wealth, also has the worst score on the index of social problems. In sum, at the national level it does not appear to be the level of income that is the problem, but the inequality in its distribution.
These results are described on pages 18-23, as a way of introducing the main point of their book. One could argue that creating an index of so many problems is highly subjective, and can hide a lot of divergence within the individual data sets. But the book goes on to look at the data for each of these areas separately, with a chapter on each (9 chapters in all). In each case, the data shows the same pattern. The results are so identical that the book itself becomes a bit repetitive – but this only serves to hammer home the evidence for their case.
There is one point that needs to be made absolutely clear – it is the crux of the entire book. It would be easy to assume that the reason social problems correlate so closely with income inequality is that more unequal countries will have a higher proportion of poorer people, who tend to suffer disproportionately from such problems.
This misses the point of the research. In a more unequal society, the prevalence of these problems is higher across the whole population. The richest 10% in the USA and UK suffer far higher incidences of these problems (including ill-health) than the richest 10% in Denmark and Japan. It’s a remarkable finding, particularly because the richest 10% in the former countries will typically be wealthier in monetary terms than their counterparts in the latter. (This finding crops up repeatedly in the book, but you can find a summary of it on page 176.)
This is truly staggering. Read that last paragraph again if it hasn’t struck you yet. If we compare the richest countries in the world at this time, all social problems correlate directly to levels of income inequality, and barely correlate at all to levels of average income. And the richest in the most unequal countries fare worse than the richest in more equal countries, regardless of their levels of actual income.
Once a country is rich enough to provide a basic income to all, greater income inequality will make the richest in society worse off across a range of health and social issues.
Income inequality in general is seen as a political issue. Our opinions on it will depend on our perception of social justice, and therefore questions around distribution cannot be determined scientifically. Economists therefore typically excuse themselves from considerations of distribution in their theories: their job is to determine how economies function, and it’s up to the politicians to choose whether to aim for greater equality or not.
However, this section of the blog has presented the case that economists cannot, in fact, ignore the distribution of income, because that distribution has a direct effect on the performance of the economy. Specifically, highly unequal distributions destabilise economies by reducing demand for real goods and services and increasing demand for financial assets. The former slows down the growth of the economy, making everybody poorer overall, while the latter causes asset price bubbles and the resultant financial crashes and economic crises. If we approach economics scientifically, we reach the conclusion that greater equality is good for the economy. This argument was summarised 2 posts ago.
“The Spirit Level” likewise proves scientifically that income inequality is bad for everyone, regardless of notions of social justice. By demonstrating that all people in the society, including the wealthiest, are better off if the distribution of income is more equal, it provides a scientific reason for economists to be concerned with equality and factor this in to all their models. Economic models are in fact based on an assumption that any individual will “maximise utility” (this is the phrase they use) if they are wealthier. The research underpinning this book – and remember it is many hundreds of studies carried out over decades – proves that this assumption is false. A more unequal distribution of wealth will reduce “utility” for all members of that society, even the richest.
And all economic theories that do not take into account this scientifically proven fact are flawed and need to be revised.