Thursday 19 January 2012
Social equality
Social equality is a social state of affairs in which all people within a specific society or isolated group have the same status in a certain respect. At the very least, social equality includes equal rights under the law, such as security, voting rights, freedom of speech and assembly, the extent of property rights, and equal access to social goods and services. However, it also includes concepts of economic equity, i.e. access to education, health care and other social securities. It also includes equal opportunities and obligations, and so involves the whole of society.
Social equality requires the absence of legally enforced social class or caste boundaries and the absence of unjustified discrimination motivated by an inalienable part of a person's identity. For example, gender, race, age, sexual orientation, origin, caste or class, income or property, language, religion, convictions, opinions, health or disability must not result in unequal treatment under the law and should not reduce opportunities unjustifiably.
Social equality refers to social, rather than economic, or income equality. "Equal opportunities" is interpreted as being judged by ability, which is compatible with a free-market economy. A problem is horizontal inequality, the inequality of two persons of same origin and ability.
Perfect social equality is an ideal situation that, for various reasons, does not exist in any society in the world today. The reasons for this are widely debated. Reasons cited for social inequality commonly include economics, immigration/emigration, foreign politics and national politics. Also, in complexity economics, it has been found that horizontal inequality arises in complex systems.
A counterexample to social equality was the social inequality of medieval Europe, where a person's estate, which was usually inherited, determined the legal and social rights the person had. For example, clergy could claim the benefit of clergy to receive a more lenient punishment for a crime. Likewise, women have historically been and still are in some countries formally denied access to higher education—even if they could pay the tuition. In 19th century Europe, if female enrollment was even permitted, women had to apply for an "exemption from gender" to enroll in a university.
In apartheid-era South Africa, both blacks and whites had formal access to health care and similar public services. However, the segregated health care arranged for blacks did not meet the same standards as those for whites. That is, there was enforced social inequality.
Gini coefficient
The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" (Italian: Variabilità e mutabilità).
It has found application in the study of inequalities in disciplines as diverse as sociology, economics, health science, ecology, chemistry, engineering and agriculture.
It is commonly used as a measure of inequality of income or wealth.
Worldwide, Gini coefficients for income range from approximately 0.23 (Sweden) to 0.70 (Namibia) although not every country has been assessed.
Definition
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| The graph shows that the Gini is equal to the area marked 'A' divided by the sum of the areas marked 'A' and 'B' (that is, Gini = A/(A+B)). It is also equal to 2*A, as A+B = 0.5 (since the axes scale from 0 to 1). |
The line at 45 degrees thus represents perfect equality of incomes. The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked 'A' in the diagram) over the total area under the line of equality (marked 'A' and 'B' in the diagram); i.e., G=A/(A+B).
The Gini coefficient can range from 0 to 1; it is sometimes expressed as a percentage ranging between 0 and 100. More specifically, the upper bound of the Gini coefficient equals 1 only in populations of infinite size. In a population of size N, the upper bound is equal to 1 − 2 / (N + 1).
A low Gini coefficient indicates a more equal distribution, with 0 corresponding to complete equality, while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to complete inequality.
To be validly computed, no negative goods can be distributed. Thus, if the Gini coefficient is being used to describe household income inequality, then no household can have a negative income.
When used as a measure of income inequality, the most unequal society will be one in which a single person receives 100% of the total income and the remaining people receive none (G=1); and the most equal society will be one in which every person receives the same income (G=0).
Some find it more intuitive (and it is mathematically equivalent) to think of the Gini coefficient as half of the relative mean difference. The mean difference is the average absolute difference between two items selected randomly from a population, and the relative mean difference is the mean difference divided by the average, to normalize for scale.
Gini coefficient of income distributions
Using the Gini can help quantify differences in welfare and compensation policies and philosophies. However it should be borne in mind that the Gini coefficient can be misleading when used to make political comparisons between large and small countries
The Gini index for the entire world has been estimated by various parties to be between 0.56 and 0.66. The graph shows the values expressed as a percentage, in their historical development for a number of countries.
Forms of Social Inequality
Forms of Social Inequality
Following are the major types or forms of social inequality.
Gender inequality
One of the major forms of social inequality is in the form of gender. The emphasis on gender inequality is borne out of the deepening division in the role assigned to male and female in all spheres of human endeavor, particularly in the economic, political and educational spheres. Women are less active compared to men in political activities and decision making processes.
Gender discrimination and women’s development is a greatly discussed matter, even though awareness regarding this subject is often ignored on the lower level. The gender and development approach through gender analysis, seeks to understand the roles, responsibilities, resources and priorities of women and men within a specific context, examining the social, economic and environmental factors which influence their roles and decision-making capacity. The practice of male-female differentiation results in structural deprivation of the female life.
It has been observed that world issues like HIV/AIDS, illiteracy, and poverty are experienced more by women than men.
Girls face problems to access good education, which limits their opportunities to succeed. It is important to increase enrollement rates in school for girls and ensure they have safe, stable and good quality education.[6] Women’s participation in work has been increasing globally. But women are faced with wage discrepancies and differences compared to what men earn.
This is true globally even in the agricultural and rural sector in developed as well as developing countries.[8] An important concept related to this is the glass ceiling effect. It refers to the unseen, yet unreachable barrier that keeps minorities and women from rising to the upper rungs of the corporate ladder, regardless of their qualifications or achievements.
This is still practiced by many countries, lowering the chances of women to excel. It prevents women from succeeding and making the maximum use of their potential, which is at a cost for women as well as the society’s development. Ensuring they are entitled to women's rights promotes a sense of belonging that motivates women to contribute to the society. Once accessible to work, women should be titled to job security, a safe environment and need to be protected against gender based violence.
Racial Inequality
Racial Inequality is the belief where individuals are treated based on the race they belong to, and their racial characteristics such as their skin colour, physical characteristics, their place of origin and culture. Some races are considered superior than others, thus resulting in unequal treatments and opportunities in a society.
Racism is evident and people have the tendency to prejudge - just because one person or a group of people of a particular race does wrong, it doesn’t give anybody the right to classify them all in that same group. This classification is known as stereotyping, it is when people form pre-judgments and assumptions.
This along with xenophobia and other forms of discrimination continue to occur in societies especially with the advancement of technology and globalisation. What is shown on televisions, newspapers and the internet has a huge role to play in giving people some preconceived notions to decide their views on these races. This results in racial inequality.
Caste Inequality
Caste system is another way of treating people unequally. It exists in Nepal, Bangladesh, Pakistan, Africa, Japan, Korea and majorly in India.
Caste maybe dependant on one’s occupation (functional), based on origin or by birth (hereditary). There are a number of restrictions faced by people that belong to a certain caste.
For example, they are not allowed to exchange and share food/drinks between people from other castes, they are restricted from going to certain places, they are only supposed to marry someone that belongs to the same caste as them – this is referred as endogamy, and also their dressing sense and food habits gets determined according to the caste they belong.
Unequal treatments are faced by lower castes in the form of discrimination, physical violence and exploitation.
Age Inequality
Age discrimination is defined as the unfair treatment in promotions, recruitment, or privileges because of the age of a person. Age discrimination is seen a lot in the work environment. The Age Discrimination in Employment Act was passed in 1967 and it protects people age 40 and older from being discriminated against in the employment world. Not only does the act apply to employees but it also applies to job applicants. It is considered unlawful to discriminate against someone because of his/her age especially when it comes to employment.
Causes of Social Inequality
Causes
The reasons for social inequality can vary, but are often broad and far reaching. Social inequalities exist between races, classes and countries. The results of such social inequalities can be seen around the globe in the history of all countries.
Social inequality is different from economic inequality, though the two are linked. Economic inequality refers to disparities in the distribution of economic assets and income. While economic inequality is caused by the unequal accumulation of wealth, social inequality exists because the lack of wealth in certain areas prohibits these people from obtaining the same housing, health care, etc. as the wealthy, in societies where access to these social goods depends on wealth.
Social inequality is linked to racial inequality, gender inequality, and wealth inequality. The way people behave socially, through racism and other forms of discrimination, tends to trickle down and affect the opportunities and wealth individuals can generate for themselves.
Thomas M. Shapiro presents a hypothetical example of this in his book, The Hidden Cost of Being African American, in which he tries to demonstrate the level of inequality on the "playing field for blacks and whites". One example he presents reports how a black family was denied a bank loan to use for housing, while a white family was approved. As being a homeowner is an important method in acquiring wealth, this situation created fewer opportunities for the black family to acquire wealth, producing social inequality.
Social inequality
Social inequality refers to a situation in which individual groups in a society do not have equal social status, social class, and social circle.
Areas of social inequality include voting rights, freedom of speech and assembly, the extent of property rights and access to education, health care, quality housing, traveling, transportation, vacationing and other social goods and services.
Apart from that it can also be seen in the quality of family and neighbourhood life, occupation, job satisfaction, and access to credit.
If today these economic divisions harden, they can lead to social disadvantages. In a society, everyone should be equal, having access to certain minimum levels of social welfare, security and recognition regardless of their origin, individual positions, achievements, race, sex, etc.
Social inequality reflects the belief that deviance is not merely deviant personal behaviour, but also, behavior that is committed against other individuals of society. Social inequality involves the belief that some individuals are socially defined as disadvantaged, underprivileged, underachieved, non-important, and inferior due to their life circumstances.
Areas of social inequality include voting rights, freedom of speech and assembly, the extent of property rights and access to education, health care, quality housing, traveling, transportation, vacationing and other social goods and services.
Apart from that it can also be seen in the quality of family and neighbourhood life, occupation, job satisfaction, and access to credit.
If today these economic divisions harden, they can lead to social disadvantages. In a society, everyone should be equal, having access to certain minimum levels of social welfare, security and recognition regardless of their origin, individual positions, achievements, race, sex, etc.
Social inequality reflects the belief that deviance is not merely deviant personal behaviour, but also, behavior that is committed against other individuals of society. Social inequality involves the belief that some individuals are socially defined as disadvantaged, underprivileged, underachieved, non-important, and inferior due to their life circumstances.
Different views and solutions on Social Inequality
Marxism
Marxism favors an eventual society where distribution is based on an individual's needs rather than his ability to produce, inheritance, or other such factors. In such a system inequality would be minimal.
Marxists believe economic equality is necessary for political freedom - saying that when there is economic inequality then political inequality is assured - in such a society currency would be eliminated, the means of production owned in common and non-labor income eliminated (rent/profit or surplus value). Marxists believe that once the means of production are owned in common and worked for utility rather than profit, that all workers receive a voice in a democratic workplace and the money incentive removed, economic equality will be achieved. However, a few economists such as Ludwig von Mises have pointed out what they believe are several logical inconsistencies of this theory.
Marxist Leninists believe that, during the transitional period between capitalism and socialism, workers will be paid based on "to each according to labour" as opposed to "to each according to need".
Meritocracy
Meritocracy favors an eventual society where an individual's success is a direct function of his merit, or contribution. Economic inequality would be a natural consequence of the wide range in individual skill, talent and effort in human population and, being the result of natural variation, individual effort and voluntary exchange, would not be considered ethically problematic in its own right.
Liberalism
Most modern Social Liberals believe that, although the Capitalist economic system should be fundamentally preserved, the status quoregarding the 'income gap' must be reformed in order to achieve overall equality. Classical liberals and libertarians generally do not take a stance on wealth inequality, but believe in equality under the law regardless of whether it leads to unequal wealth distribution. Ludwig von Mises (1966) explains:
The liberal champions of equality under the law were fully aware of the fact that men are born unequal and that it is precisely their inequality that generates social cooperation and civilization. Equality under the law was in their opinion not designed to correct the inexorable facts of the universe and to make natural inequality disappear. It was, on the contrary, the device to secure for the whole of mankind the maximum of benefits it can derive from it. Henceforth no man-made institutions should prevent a man from attaining that station in which he can best serve his fellow citizens.
Libertarian Robert Nozick argued that government redistributes wealth by force (usually in the form of taxation), and that the ideal moral society would be one where all individuals are free from force. However, Nozick recognized that some modern economic inequalities were the result of forceful taking of property, and a certain amount of redistribution would be justified to compensate for this force but not because of the inequalities themselves. John Rawls argued in A Theory of Justice that inequalities in the distribution of wealth are only justified when they improve society as a whole, including the poorest members. Rawls does not discuss the full implications of his theory of justice. Some see Rawls's argument as a justification for capitalism since even the poorest members of society theoretically benefit from increased innovations under capitalism; others believe only a strong welfare state can satisfy Rawls's theory of justice.
Classical liberal Milton Friedman believed that if government action is taken in pursuit of economic equality that political freedom would suffer. In a famous quote, he said:
A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.
Arguments based on social justice
Patrick Diamond and Anthony Giddens (professors of Economics and Sociology, respectively) hold that pure meritocracy is incoherent because, without redistribution, one generation's successful individuals would become the next generation's embedded caste, hoarding the wealth they had accumulated.
They also state that social justice requires redistribution of high incomes and large concentrations of wealth in a way that spreads it more widely, in order to "recognise the contribution made by all sections of the community to building the nation's wealth." (Patrick Diamond andAnthony Giddens, 27 June 2005, New Statesman)
Claims that inequality lowers social welfare
In most western democracies, the desire to eliminate or reduce economic inequality is generally associated with the political left. One practical argument in favor of reduction is the idea that economic inequality reduces social cohesion and increases social unrest, thereby weakening the society.
There is evidence that this is true (see inequity aversion) and it is intuitive, at least for small face-to-face groups of people. Alberto Alesina,Rafael Di Tella, and Robert MacCulloch find that inequality negatively affects happiness in Europe but not in the United States.
It has also been argued that economic inequality invariably translates to political inequality, which further aggravates the problem. Even in cases where an increase in economic inequality makes nobody economically poorer, an increased inequality of resources is disadvantageous, as increased economic inequality can lead to a power shift due to an increased inequality in the ability to participate in democratic processes.
The capabilities approach
Developed by Amartya Sen, the capabilities approach – sometimes called the human development approach - looks at income inequality and poverty as form of “capability deprivation”. Unlike neoliberalism, which “defines well-being as utility maximization”, economic growth and income are considered a means to an end rather than the end itself. Its goal is to “wid[en] people’s choices and the level of their achieved well-being” through increasing functionings (the things a person values doing), capabilities (the freedom to enjoy functionings) and agency (the ability to pursue valued goals).
When a person’s capabilities are lowered, they are in some way deprived of earning as much income as they would otherwise. An old, ill man cannot earn as much as a healthy young man; gender roles and customs may prevent a woman from receiving an education or working outside the home. There may be an epidemic that causes widespread panic, or there could be rampant violence in the area that prevents people from going to work for fear of their lives.[66] As a result, income and economic inequality increases, and it becomes more difficult to reduce the gap without additional aid. To prevent such inequality, this approach believes it’s important to have political freedom, economic facilities, social opportunities, transparency guarantees, and protective security to ensure that people aren’t denied their functionings, capabilities, and agency and can thus work towards a better relevant income.
Effects of Economic inequality
Effects of inequality
Social cohesion
Income inequality and the social capital index in 50 U.S. states. Equality is correlated with higher levels of social capital
In a 2002 paper, Eric Uslaner and Mitchell Brown showed that there is a high correlation between the amount of trust in society and the amount of income equality. They did this by comparing results from the question "would others take advantage of you if they got the chance?" in U.S General Social Survey and others with statistics on income inequality.
Similarly, a 2008 article by Andersen and Fetner finds a strong relationship between economic inequality within and across countries and tolerance for 35 democracies.
Robert Putnam, professor of political science at Harvard, established links between social capital and economic inequality. His most important studies (Putnam, Leonardi, and Nanetti 1993, Putnam 2000) established these links in both the United States and in Italy. On the relationship of inequality and involvement in community he says:
Community and equality are mutually reinforcing… Social capital and economic inequality moved in tandem through most of the twentieth century. In terms of the distribution of wealth and income, America in the 1950s and 1960s was more egalitarian than it had been in more than a century… [T]hose same decades were also the high point of social connectedness and civic engagement. Record highs in equality and social capital coincided. Conversely, the last third of the twentieth century was a time of growing inequality and eroding social capital… The timing of the two trends is striking: somewhere around 1965-70 America reversed course and started becoming both less just economically and less well connected socially and politically. (Putnam 2000 pp 359)
In addition to affecting levels of trust and civic engagement, inequality in society has also shown to be highly correlated with crime rates. Most studies looking into the relationship between crime and inequality have concentrated on homicides - since homicides are almost identically defined across all nations and jurisdictions. There have been over fifty studies showing tendencies for violence to be more common in societies where income differences are larger. Research has been conducted comparing developed countries with undeveloped countries, as well as studying areas within countries. Daly et al. 2001. found that among U.S States and Canadian Provinces there is a tenfold difference in homicide rates related to inequality. They estimated that about half of all variation in homicide rates can be accounted for by differences in the amount of inequality in each province or state. Fajnzylber et al. (2002) found a similar relationship worldwide. Among comments in academic literature on the relationship between homicides and inequality are:
The most consistent finding in cross-national research on homicides has been that of a positive association between income inequality and homicides. (Neapolitan 1999 pp 260)
Economic inequality is positively and significantly related to rates of homicide despite an extensive list of conceptually relevant controls. The fact that this relationship is found with the most recent data and using a different measure of economic inequality from previous research, suggests that the finding is very robust. (Lee and Bankston 1999 pp 50)
Research by Richard G. Wilkinson and Kate Pickett has also presented evidence that both social cohesion and health problems are greater in countries or states where economic inequality is highest. For instance, crime rates, mental health problems and teen-age pregnancies are lower in countries like Japan and Finland compared to countries with greater inequality such as the US and UK.
Population health
Income inequality and mortality in 282 metropolitan areas of the United States. Mortality is strongly associated with higher income inequality, but, within levels of income inequality, not with per capita income.
There is debate regarding the cause of the SES Gradient. A number of researchers (A. Leigh, C. Jencks, A. Clarkwest - see also Russell Sage working papers) see a definite link between economic status and mortality due to the greater economic resources of the wealthy, but they find little correlation due to social status differences.
Other researchers such as Richard G. Wilkinson, J. Lynch, and G.A. Kaplan have found that socioeconomic status strongly affects health even when controlling for economic resources and access to health care. Most famous for linking social status with health are the Whitehall studies - a series of studies conducted on civil servants in London. The studies found that although all civil servants in England have the same access to health care, there was a strong correlation between social status and health. The studies found that this relationship remained strong even when controlling for health-affecting habits such as exercise, smoking and drinking. Furthermore, it has been noted that no amount of medical attention will help decrease the likelihood of someone getting type 2 diabetes or rheumatoid arthritis - yet both are more common among populations with lower socioeconomic status. Lastly, it has been found that amongst the wealthiest quarter of countries on earth (a set stretching from Luxembourg to Slovakia) there is no relation between a country's wealth and general population health - suggesting that past a certain level, absolute levels of wealth have little impact on population health, but relative levels within a country do.
The concept of psychosocial stress attempts to explain how psychosocial phenomena such as status and social stratification can lead to the many diseases associated with the SES Gradient. Higher levels of economic inequality tend to intensify social hierarchies and generally degrade the quality of social relations - leading to greater levels of stress and stress-related diseases. Richard Wilkinson found this to be true not only for the poorest members of society, but also for the wealthiest. Economic inequality is bad for everyone's health.
The effects of inequality on health are not limited to human populations. David H. Abbott at the Wisconsin National Primate Research Center found that among many primate species, less egalitarian social structures correlated with higher levels of stress hormones among socially subordinate individuals.
Utility, economic welfare, and distributive efficiency
Economic inequality is thought to reduce distributive efficiency within society. That is to say, inequality reduces the sum total of personal utility because of the decreasing marginal utility of wealth. For example, a house may provide less utility to a single millionaire as a summer home than it would to a homeless family of five. The marginal utility of wealth is lowest among the richest. In other words, an additional dollar spent by a poor person will go to things providing a great deal of utility to that person, such as basic necessities like food, water, and healthcare; meanwhile, an additional dollar spent by a much richer person will most likely go to things providing relatively less utility to that person, such as luxury items. From this standpoint, for any given amount of wealth in society, a society with more equality will have higher aggregate utility. Some studies (Layard 2003;Blanchard and Oswald 2000, 2003) have found evidence for this theory, noting that in societies where inequality is lower, population-wide satisfaction and happiness tend to be higher.
Economist Arthur Cecil Pigou discussed the impact of inequality in The Economics of Welfare. He wrote:
Nevertheless, it is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants, to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus leads securely to the proposition: Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view, will, in general, increase economic welfare.
In addition to the argument based on diminishing marginal utility, Pigou makes a second argument that income generally benefits the rich by making them wealthier than other people, whereas the poor benefit in absolute terms.
Pigou writes: Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necessaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests. --Arthur Cecil Pigou in The Economics of Welfare
Schmidtz (2006) argues that maximizing the sum of individual utilities does not necessarily imply that the maximum social utility is achieved. For example:
A society that takes Joe Rich’s second unit [of corn] is taking that unit away from someone who . . . has nothing better to do than plant it and giving it to someone who . . . does have something better to do with it. That sounds good, but in the process, the society takes seed corn out of production and diverts it to food, thereby cannibalizing itself
Aspirational consumption and household risks
Firstly, certain costs are difficult to avoid and are shared by everyone, such as the costs of housing, pensions, education and health care. If the state does not provide these services, then for those on lower incomes, the costs must be borrowed and often those on lower incomes are those who are worse equipped to manage their finances. Secondly, aspirational consumption describes the process of middle income earners aspiring to achieve the standards of living enjoyed by their wealthier counterparts and one method of achieving this aspiration is by taking on debt. The result leads to even greater inequality and potential economic instability.
Economic incentives
Many people accept inequality as a given, and argue that an increased gap between rich and poor increases the incentives for competition and innovation within an economy.
Some modern economic theories, such as the neoclassical school, have suggested that a functioning economy entails a certain level of unemployment. These theories argue that unemployment benefits must be below the wage level to provide an incentive to work, thereby mandating inequality and that additionally, it is impossible to lower unemployment down to zero. Hypotheses such as socialism, dispute this positive role of unemployment.
Many economists believe that one of the main reasons that inequality might induce economic incentive is because material well-being and conspicuous consumption are related to status. In this view, high stratification of income (high inequality) creates high amounts of social stratification, leading to greater competition for status. One of the first writers to note this relationship was Adam Smith who recognized "regard" as one of the major driving forces behind economic activity. From The Theory of Moral Sentiments in 1759:
[W]hat is the end of avarice and ambition, of the pursuit of wealth, of power, and pre-eminence? Is it to supply the necessities of nature? The wages of the meanest labourer can supply them... [W]hy should those who have been educated in the higher ranks of life, regard it as worse than death, to be reduced to live, even without labour, upon the same simple fare with him, to dwell under the same lowly roof, and to be clothed in the same humble attire? From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us (Theory of Moral Sentiments, Part I, Section III, Chapter II).
Modern sociologists and economists such as Juliet Schor and Robert H. Frank have studied the extent to which economic activity is fueled by the ability of consumption to represent social status. Schor, in The Overspent American, argues that the increasing inequality during the 1980s and 1990s strongly accounts for increasing aspirations of income, increased consumption, decreased savings, and increased debt. In Luxury Fever Robert H. Frank argues that people's satisfaction with their income is much more strongly affected by how it compares with others than its absolute level.
Inequality and economic growth
The classical theory
Initial theories stated that inequality had a positive effect on economic development. The marginal propensity to save increases with wealth and inequality increases savings, capital accumulation, and economic growth.
The neoclassical theory
The neoclassical theory ignores the relevance of income distribution for macroeconomic analysis[citation needed]. It interprets the observed relationship between inequality and economic growth as a reflection of the growth process on the distribution of income.
The modern theory
The modern theory suggests that income distribution plays an important role in the determination of aggregate economic activity and economic growth.
The credit market imperfection approach, developed by Galor and Zeira (1993), demonstrates that inequality in the presence of credit market imperfections has a long lasting detrimental effect on human capital formation and economic development.[54]
The political economy approach, developed by Alesian and Rodrik 1994) and Persson and Tabellini (1994), argues that inequality is harmful for economic development because inequality generates a pressure to adopt redistributive policies that have an adverse effect on investment and economic growth.
Evidence
Perotti (1996) examines of the channels through which inequality may affect economic growth. He shows that in accordance with the credit market imperfection approach, inequality is associated with lower level of human capital formation and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel refutes the political economy mechanism. He demonstrates that inequality is associated with lower levels of taxation, while lower levels of taxation, contrary to the theories, are associated with lower level of economic growth
In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach policy conclusions as to the optimal distribution of income. They conclude that too much equality (below a Gini coefficient of .25) negatively impacts growth due to "incentive traps, free-riding, labour shirking, [and] high supervision costs". They also claim that high levels of inequality (above a Gini coefficient of .40) negatively impacts growth, due to "incentive traps, erosion of social cohesion, social conflicts, [and] uncertain property rights". They advocate for policies which put equality at the low end of this "efficient" range.
Later studies restricted their analysis to the reduced form relationship between inequality and growth. Forbes (2000) and Barro (2000) examined the effect of inequality on economic growth in a panel of countries.[58] They find a positive and zero effect, respectively, of an increase in inequality on economic growth. These findings appear to have no bearing on the validity of the theories and are not very informative about the overall effect of inequality. First, these studies examine the effect of inequality beyond its effects through education, fertility, and investment. For instance, Barro (2000) has found that, once controls for education, fertility, and investment are introduced, there is no relationship between inequality and economic growth in the entire sample. His findings, therefore, suggest that inequality does not have a direct effect on growth beyond its effects through education, fertility and investment. In particular, if the control for fertility is dropped in Barro (2000), the effect of inequality on growth is significantly negative, as predicted by the theory. Moreover, these studies examine the effect of inequality in the short run (i.e., the effect of inequality on the average growth rate in the subsequent 5–10 years), while as suggested by the theories, inequality is likely to have a long-run effect (e.g., via the human capital formation).
The United Nations Research Institute for Social Development (UNRISD)’s 2010 report comes to multiple conclusions, some of which concur with and others that challenge the findings of previous research. The report claims that inequality has risen partly due to neoliberal economic policies that have made it difficult to have high rates of economic growth without increasing inequality.The report acknowledges that there has been a decrease of inequality in the Middle East, North Africa, and sub-Saharan Africa, but the level is still high in these regions overall (above a Gini coefficient of .40). It also notes that in a study done by the International Labour Organization (ILO), over two-thirds of the 85 countries surveyed experienced a rise in income inequality between 1990 and 2000.
The report looks to the functional distribution of income of a country as an indicator of inequality as well as the Gini coefficient. The functional distribution of income looks at how income is distributed between wage earners and profit earners: the larger the share of GDP wage earners share, the more equal the situation. The report notes that a high growth rate contributes to income inequality when a small portion of the population - profit earners – earns the majority of the money. This is common in situations in which a rise economic growth is caused by a specific sector, such as the technological sector. This picture becomes more muddled in developing countries when one takes into account large informal sectors; these workers earn profits rather than wages, so it’s difficult to say if an increase in the share of profit income is helping or harming income inequality.
The UNRISD report also states, in contradiction to Pagano’s research, that growth and equity can be “mutually reinforcing” when supported by “well-thought-out economic and social policies”.[59] It explains that reducing poverty through growth is difficult when inequality is rampant; wealth and land tends to concentrate in small groups, which in turn excludes the poor from economic participation. The poor have less disposal income to spend and as a result effective aggregate demand lowers, limiting the size of the domestic market. This in turn makes it harder for a country to industrialize, thereby hindering its development.
A 2011 note for the International Monetary Fund by Andrew G. Berg and Jonathan D. Ostry found a strong association between lower levels of inequality in developing countries and sustained periods of economic growth. Developing countries with high inequality have "succeeded in initiating growth at high rates for a few years .... longer growth spells are robustly associated with more equality in the income distribution."
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