Ethics@Work: How worrying is worldwide inequity of income?

There are several reasons for optimism, but not for complacency.

October 18, 2007 20:33
Ethics@Work: How worrying is worldwide inequity of income?

Business ethics 88. (photo credit: )


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One of the most prominent economic ethics issues is income inequality, and the International Monetary Fund just released probably the most thorough study ever done of trends in income inequality in nations worldwide. The most interesting thing about this study is that it was done at all. A few years ago we would not have expected income inequality to figure in the agenda of the IMF. If we consider the main world organizations concerned with economic issues, we find that the IMF has traditionally been focused on financial stability; the World Bank on growth; and the agencies of the UN on development and social issues. If we take the analogy of a country, the IMF would be parallel to the central bank; the World Bank to the Treasury; and the UN to the Welfare Ministry. The IMF was famous (or infamous) for its draconian austerity packages imposed on debtor countries as a condition for bailout - austerity packages that crimped not only social spending but in fact tended to severely limit growth in the short run. But the traditional boundaries have become blurred, both within countries and between them. Previous Bank of Israel governor David Klein created a special adviser on poverty and inequality, and so it now seems only natural that the IMF is also augmenting its research into this area. I think that one reason for this is that there are just fewer financial crises than in the past. Thomas Friedman's famous "golden strait jacket" - the limitations on government policy dictated by globalization - means that there are fewer wildly irresponsible governments than in the past, so the IMF has some breathing room to deal with other issues. Criticism that the austerity plans were counterproductive also contributes to the desire to broaden the perspective. Finally, income inequality and stability can have a lot to do with each other; if income gaps are perceived as unfair they can harm social stability in countries. The results of the study are stated succinctly in two sentences. (I do not know why these sentences are buried deep in the middle of the report and not at the beginning or the end where a reader would naturally expect to find a punchy summary of findings.) "[O]ver the past two decades, income growth has been positive for all quintiles in virtually all regions and all income groups during the recent period of globalization. At the same time, however, income inequality has increased mainly in middle-and high-income countries, and less so in low-income countries." Is this continued growth in inequality worrisome? There are several reasons for optimism. Inequality is most oppressive when the haves are exploiting the have-nots, by exploiting their labor at unfair wages. It is also bothersome when the haves exploit national resources that should be the inheritance of all. Neither of these is characteristic of the technology- and globalization-driven inequality described by the IMF. In fact, part of the problem was that in the old days in order to get rich you needed to exploit (politically correct word for hire) a lot of poor people or buy up some natural resource, so the money naturally trickled down. Nowadays a bunch of 20-somethings in a garage can make millions without their neighbors even realizing what they're doing. Another reason for calm is that income inequality is a poor measure of substantive inequality in rich countries. In a poor country, when A has 10-times the income of B it means that A drives a car and B has to walk or bicycle. In a rich country, when A has 10-times the income of B, A drives a luxury car and B a cheap import - hardly the same difference in standard of living. Inequality is the most worrisome when the poor fall behind not only relatively but also absolutely - "the rich get richer and the poor get poorer." But the IMF points out that the rich are getting richer and poor are getting richer too, though somewhat more slowly. Inequality is also oppressive when it is inherited. The stereotype is that in America you didn't mind being poor because you were sure your kids could make it big, as opposed to old-world wealth, which was class controlled. Recent studies show that class mobility in the US is far less than had been thought, and less than in the past. Here the picture is less rosy. Money stays in families for a variety of reasons. Before capital markets were well developed, it stayed in family because it takes money to make money and so people who were already rich were best positioned to make money. This reason is less important today, as well-developed credit markets mean that if you have a good idea you have a good chance of obtaining financing. Another reason for class continuity is the golden rule - "he who has the gold, makes the rules." The wealthy tend to be powerful and to promote rules which favor their ilk. This is also not as important in today's participatory democracy as it was in aristocratic or oligarchic systems. By contrast, social mobility is greatest when money depends on luck and pluck, which are fairly evenly distributed among rich and poor. As the IMF report makes clear, in today's economy, education plays a dominant role. Educated parents tend to have more educated children. This is because of transmission of values esteeming education, because of the ability of smarter parents to help their children, and because education today is extremely expensive and so the wealthiest parents are most able to give their children the kind of education that will make them wealthy too. Heredity also plays a role; intelligence is more inheritable than industriousness, though of course far less inheritable than money. It seems to me that the key to preventing the future development of a destabilizing income distribution is developing the educational potential of all young people. But this is easier said than done; in many countries this is done by subsidizing higher education across the board, but often the result is that the competition for university positions favors the rich and the consequence is that these end up being subsidies for the rich, financed by the middle class. The IMF study is one of the most thorough of a number of studies showing increasing income inequality in developed countries. As of now, the income gaps lack the characteristics that would make them destabilizing or worrisome, but steps should be taken to ensure adequate income mobility for the children of today's have-nots. The author is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.

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