SO478 - week 4

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These are my notes from October 17 for SO478 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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Inequality dynamics in developing nations since 1980

Readings

Global Inequality by Branko Milanović (chapter 2)

• the Kuznets curve (which theorised that inequality would drop after a certain high point, somewhat parabolically) and how it stopped aligning with reality since the 1980s
  • many tried to alter the theory in order to preserve its relevance, for example by adding in the idea of the technological/skills gap in laboour
• then Piketty’s capital-income ratio theory came along and, effectively, displaced Kuznets’
  • he says: inequality will continue to rise unless we deliberately dampen it via political mechanisms, or some Act of God has the same effect (it’s just a natural component of how capitalism works)
  • he views the Golden Ages as a special, exceptional time (result of the war, temporary existence of competing economic systems, etc)
  • otoh, Piketty’s theory doesn’t really explain why inequality rose in the 18th/19th centuries?
    • my thought: he kind of does? need to revisit this
• Milanovic’s proposal: a modified theory of the Kuznets curve explains it
  • we have instead a wave/cycle that periodically moves up and down
  • basically you need to ensure people don’t die of starvation/etc in order to keep society functioning
  • so there is thus a ceiling on inequality levels (at least for a particular rate of growth)
  • in pre-industrial eras, when mean income is close to subsistence levels, there isn’t much room for inequality to rise (because growth is never going to be high enough to compensate without mass death)
  • then, the systemic forces of capitalism that (acc to Piketty) push toward higher inequality don’t really exist due to the lack of institutions to support them
  • otoh, when mean income rises, so does the possibility of rising inequality
• decline of ineq in the 20th century
  • Kuznets says: economic forces (urbanisation, education, rising taxes, etc)
  • Piketty says: political forces, lots of capital destroyed due to war so capital-income ratio was lower, more pro-labour policies due to war & the establishment of socialism elsewhere
  • Milanovic says: we should endogenise the factors that Piketty treats as exogenous (which I can get on board with)
    • we can see the world wars as the inevitable result of imperialist competition (high inequality means domestic demand is not sufficient, thus you need colonial markets)
    • (here he cites Rosa Luxemburg, Lenin’s book on Imperialism, etc … kinda cool)
    • we should embed this explanation within our conceptualising of the Kuznets wave
    • maldistribution of consumption power prevents the sufficient absorption of capital & commodities
    • thus we can see high inequality as resulting in an unstable state that can generate (in an aleatory, unpredictable way) processes like war, revolution to “fix” things
    • he briefly mentions that excessive “leveling” is inimical to growth and cites the Soviet Union as an example
      • I don’t think this is a good example—the problems with the Soviet Union were myriad and to blame its failures on “excessive leveling” is silly
      • after all, the whole reason the revolution occurred in the first place was because things were so bad
      • I forget who says this but there’s this famous quote about the great tragedy of socialism: it’s most likely to be attempted in the places where it’s least likely to suceed
• what’s driving up inequality today?
  • technological revolution resulting in lots of rents being levied (mostly in the form of intellectual rather than physical property)
  • more and more service jobs (with lower wages)
  • the underlying capital-income ratio explanation
  • we also have to consider trends with potentially opposing effects when it comes to global inequality: offshoring moves up the incomes of the poorest in the South, but slows the growth of the middle classes in the North
  • incidentally, he mentions Robert Allen’s argument (from Technology and the Great Divergence (PDF) that technological innovation is most likely to occur when wages are high and thus firms have an incentive to try and automate jobs
• some forces that could decrease inequality:
  • politically: higher taxation (currently unlikely to be implemented on a large scale, due to capital mobility, political disenfranchisement, false consciousness, and of course the influence of $ in politics)
  • rising supply of highly-skilled workers (the new guard class, in other words)
  • rents resulting from the technological revolution could dissipate as prices fall and competition grows (this has happened historically)
  • global income convergence as China, India catch up
  • technology could increase the productivity (and I guess bargaining power? since it’s not like income is directly tied to productivity by any means) of low-skilled workers (though this is historically unlikely)

Falling Inequality in Latin America by Giovanni Andrea Cornia (chapters 1, 3)

No notes yet.

Lecture

This lecture was given by Rebecca Simson of the International Inequalities Institute.

The project

• working on a project to look at inequality beyond the usual culprits of the developed nations
  • instead: smaller/developing nations that have often bucked trends
  • goal is to understand the extent of political agency in combatting inequality on a national level
  • our formative (non-assessed) essays will feed into this project
  • we’ll need to go through the secondary literature in an attempt to understand the main drivers (and regional dynamics) of within-nation inequality trends since 1980s
• if we just look at the top 1% share of income (Piketty et al), we find that we’re missing data for many developing nations
  • in order to hone in on those nations, we’ll need to look at change in Gini instead (much greater coverage)
  • trends are not uniform: lots of nations with high inequality increases next to those with high inequality decreases
  • lots of factors that could explain: differences in level of economic growth; effects of localised war or catastrophes

What drives decreases in inequality?

• first, we’ll have to address the sort of elephant in the room: the Kuznets curve (1955)
  • predicts that inequality will increase initially as a nation industrialises (as an inevitable result of higher national income)
  • but eventually (theoretically) as you run out of labour in rural areas, AND as the political situation changes (stronger labour unions and labour-friendly institutions/policies) then inequality should drop
• an alternative explanation: there’s a race between education and technology, and those who get ahead in that race will receive higher incomes, thus driving inequality (lots of overlap between this lecture and GV4D4 week 3)
• another theory, outlined by Walter Scheidel in his book The Great Leveler
  • on violence/catastrophe as the primary driver of inequality decrease
  • warfare, revolution, state collapse, plague, etc
• Milanovic’s approach builds on the Kuznets curve concept, but instead he posits Kuznets waves/cycle
  • due to technological revolutions, we can have multiple Kuznets curves
  • related to Kondratiev waves perhaps? not sure
• on globalisation and its limits to domestic policy (does it constrain its effectiveness?)
  • trade results in equialising of wages globally (thus lower wages in the West + deindustrialisation)
  • opening up of capital flows post-Bretton Woods makes it hard to tax capital
  • global markets for highly skilled workers (and associated immigration policies) results in convergence of exec pay (rising)
• distinctions to keep in mind
  • economic / political
  • proximate / underlying
  • malign / benign
  • global / domestic
• recall the historical context of Kuznets
  • his theory was formulated during the Cold War, and you can kind of see it as capitalist propaganda—the whole point is to convince developing nations to ignore the spectre of Communism & instead have faith that their capitalist strategy will work out fine

Inequality decline in Latin America since 2000

• economic proximate causes
  • strong growth, partly due to improved terms of trade (higher wages, less unemployment, more $ to go around)
  • demographic factors (fall in fertility ratio)
  • falling skills premium (education catching up to technology)
  • prudent fiscal policy (devalued currency to increase exports) … something, incidentally, that countries within the EMU are no longer able to do but should really be able to do
  • rise in minimum wage + safety nets for the poorest
• political factors
  • democratic consolisation (i.e., democratic institutions improving over time)
  • election of left-leaning governments (“pink tide”—I really need to read that Jacobin issue at some point)
• we can see this recent decline in economic inequality as a backlash to the era of structural adjustment
  • which ofc created stunning inequality and thus set the scene for sufficient resistance to neoliberalism/austerity
  • now inequality is roughly back at 1980s levels, so we can say that Latin America as (overall) recovered from neoliberalism (acc to some metrics, anyway)
  • but ofc the real question is what happens next?

Inequality trends in Asia since the 1980s

• trends not so clear in Asia
  • rising dramatically in China/Indonesia
  • slowly rising in India but with spikes
  • falling slightly but with wild oscillations in Thailand, Philippines, Camboadia
• rising due to:
  • shift from planned to more market-oriented economy
  • industrial take-off (corresponding to the first half of the Kuznets curve)
  • urban-rural and coastal-interior differences (hampered by policy restrictions on migration)
  • Asian financial crisis of 1997 (currency speculation, esp of the Thai baht)

Inequality trends in Africa since the 1980s

• overall, data quality is poor, no systemic trends
• sub-Saharan Africa: democratisation -> more redistribution? also conflict-related capital destruction?
  • the migration of elites elsewhere may have played a role in falling inequality (also more progressive post-war settlements)
  • did structural adjustment reduce or increase inequality? obviously the IMF/WB like to think that liberalisation reduced it
    • rural producer incomes increased relative to urban wages, but this may have been accomplished by driving farmers to focus on cash crops as opposed to subsistence farming which means heavier exposure to the vagaries of the market in the long term
    • urban poor are poorer though
    • and highly-skilled workers make more, too
  • to consider: why is inequality rising in South Africa post-apartheid? (maybe cus the larger structural issues were not addressed …)

On measurement

• Kenya data comes primarily from a household budget survey
  • surveyed only 10k households (0.2% of population) & was based on recall (i.e., asking people to estimate)
  • also based on consumption not actually income (since not everyone has a steady income)
  • some costs had to be imputed (rents, self-produced food)
• the usual problems with Gini … can be in terms of consumption vs income (not always standardised), measuring errors, cleaning problems, sampling biases, etc
• types of income inequality databases
  • consistent (they go back to original data to clean & compare): PovCal, SEDLAC, LIS
  • consolidated secondary source (may need adjustment): Milanovic’s All the ginis, WIID
  • standardised Gini (they use regression techniques to clean/standardise for you): SWIId, GCIP (extrapolated)
• data can sometimes be a distraction, though
  • there will always be outliers, exceptions, measuring errors, etc
  • you need to focus on the narrative and not get too hung up on the numbers
  • can’t remember if this is something that was actually said in the lecture or just something I scribbled down myself but I stand by this sentiment
• there’s the risk of data being manipulated or falsified by the producing body
  • e.g., a corrupt govt that wants its inequality numbers to look better than they are can massage the data
  • no data is pure!!

Some personal thoughts on neoliberalism

• maybe at some point, initially, neoliberalism was implemented in good faith by people who genuinely believed that a small amount of damage in the short-term was necessary for a better standard of living for all in the long run
  • but then it became reified, turned into an institution whose origins were forgotten
  • and as time goes by and the policies (and the underlying world) naturally evolve, the institution begins to drift away from its original purpose
  • the challenge now is to make people REALISE that, and then figure out how to readjust theories accordingly
• a somewhat unrelated thought: economists have a tendency of behaving in a way that’s almost Marxian
  • in the process of interpreting the world (by introducing their own economic theories), they can end up changing it
    • I mean basically any successful economist has changed the world in some way (either in the direction of their theory or not)
    • think the Kuznets curve, or Keynesian fiscal policy, or the Chicago school theories
    • so sometimes they end up being self-fulfilling prophecies, if the economist does a good enough job of convincing people

Seminar

(I didn’t take great notes here so these are more scattered than usual. Apologies.)

• codependency of neoliberalism & technological change—they feed back into each other
• on secular trends in rising inequality: sometimes they’re just an extension of existing race/class inequalities
• Q: is the recent tech revolution just another industrial revolution that will soon fix itself inequality-wise?
  • my take: no, due to its way of shrinking markets (Solow’s paradox), political attempts to close the field to outsiders (think “meritocracy”)
  • plus the potential of post-scarcity economics means that we may be better off with an accelerationist approach rather than hoping tech will magically sort the economy out
  • one common suggestion is to put in UBI or something similar to stabilise things but I personally think that’s a very conservative and misguided approach—instead, we need to radically transform the whole system
  • Kuznets clearly never foresaw the potential that the tech industry brings (or at least it’s not codified in his theory) so we would do well to move away from it
  • but yes anyway this is all just me spewing my own brand of extremely left-wing politics, pls talk to me if you want to know more
• failures of Milanovic: he never really addresses legacies of colonialism/slavery
• failures of Kuznets: doesn’t address barriers that may be erected for certain classes of people who want to enter the high-paying industries (in this case: tech)
• regulatory capture allows elites to preserve inequality using political mechanisms (I forget the context of this being brought up but it’s a good term)
• random thought I had: inequality discussions tend to be vulnerable to the shifting baseline problem
  • we like to compare inequality stats to those taken in different regions, or at different points in time
  • but really maybe we should be comparing to the more idealistic (but in some ways, more sensible) level of no inequality, and formulate our theories & plans based on that instead
• on Piketty’s arg
  • to add some nuance to Piketty’s theory: the actual level of r depends very much on your level of wealth (clearly not a constant for everyone) which exacerbates the effect of r-g in increasing inequality
  • Kuznets never goes into the distinction between capital & income (which is the crux of Piketty’s arg)
  • Piketty’s characterisation of Kuznets’ theory is a bit simplistic (as if Kuznets thought that a liberal economic policy w/o state intervention would magically fix things)
    • his real goal is to use Kuznets almost as a foil, so Piketty can suggest specific policy responses w/o having to actually declare a manifesto
• recall that Ginis are usually focused on income, rather than capital (which we can define as “assets that can be sold”)
  • though it’s important to remember that valuation of personal assets is often highly subjective (think Trump’s valuation of his own personal brand)
  • Q: is capital or income inequality more important?
    • obvs neither tells the whole story
    • but the rate of return to capital is, at least, somewhat captured or encapsulated in the income inequality statistics (so you can see income inequality as a higher-order measurement), though they’re ofc interdependent
    • recall that income is used when applying for mortgages (though capital—in the form of a downpayment—is relevant too)
    • another aspect to consider: income is usually on the individual level, whereas capital is sometimes considered on the household level (esp for property), though this may be a fairly Eurocentric approach
    • when looking at intergenerational inequality, capital plays a larger role since it’s inherited
  • personally, I’m kind of tired of looking at inequality statistics when we know that inequality is written into our very economic system so maybe we should think about more fundamental ways of transforming it but idk that’s just me
  • problems with underreporting of income inequality: people earning a lot (esp in illegal ways) are less likely to fill out surveys, for one (not to mention: pay tax properly)—hard to accurately account for (impute) this
  • another problem with Gini: treats different inequalities (middle vs top, bottom vs middle) as equally concerning when in practice this is not how we think about inequality
  • doesn’t take public services into account (healthcare, education, rent, etc)
  • ignores the role of growth (or other ideological factors) in changing attitudes towards inequality (if there’s enough growth, or if prices are falling, then you can keep people happy despite rampant inequality by allowing them to indulge in consumption)
  • a pretty cheeky point was raised about inequality being a problem basically forever but economists only started caring fairly recently (when it started affecting the West I guess lol)
• random thought I had: the term “political”, as used in popular discourse, is one of those that can almost function as an empty signifier
  • in the sense that its meaning is heavily determined by your own imagination
  • for example, whether all basic services (housing, healthcare, food, transport) are state-provided & free is, in some ways, a political choice
  • but most of us wouldn’t see it that way because our semantic imaginations are limited by what we’ve seen in political history (and what we consider our current political/economic system to be in the same field as)
  • so the idea of housing being free, or inheritance tax being 100%, or Greggs being a public good—they all seem fairly impossible in our current socioeconomic climate, and thus they don’t feel like political options
• another random thought: it’ll be interesting to see the extent to which any country can actually reduce inequality within its own borders while also being embedded in the global capitalist order

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