SESSION 2

…IN WHICH WE EXPLORE WHY SOME ECONOMISTS THINK REDUCING

INCOME INEQUALITIES IS IMPORTANT TO ENSURE JUSTICE
TO READ

• 1. Introduction to The Great Escape by Angus Deaton

• 2. Chapter 4 of The Price of Inequality by Joseph Stiglitz.
ANGUS DEATON
• Important points raised in the previous quote:
• 1. Luck can lead to inequalities. The luck of Deaton’s father implied he was in a position
to give Angus Deaton a good life. Others are not as lucky. Luck egalitarians would
therefore say intervene to help those affected by “bad luck”.
• 2. But how? What if intervening caused other inequalities? For instance, using fiscal
policy to make labour markets tight might cause inflation and hurt savers.
• 3. Even if “bad luck” accounted for, what if people not as hard-working as Deaton’s dad?
Might cause inequality over generations. Is that fair?
• Angus Deaton writing in livemint (Jan 2018):
• “…inequality is not the same thing as unfairness; and, to my mind, it is the latter that has
incited so much political turmoil in the rich world today. Some of the processes that
generate inequality are widely seen as fair. But others are deeply and obviously unfair,
and have become a legitimate source of anger and disaffection.”
• Important distinction between inequality and fairness. Inequality a problem only if arises
due to unfair practices. But what constitutes unfairness? The process? Or our evaluation
of the process?
• “In the case of the former, it is hard to object to innovators getting rich by
introducing products or services that benefit all mankind. Some of the greatest
inequalities today are a consequence of industrial and health revolutions that
began around 1750. Originally, these processes benefited just a few countries in
North-West Europe. But they have since improved living conditions and health
outcomes for billions of people around the world. The inequalities stemming
from these advances—both within and between countries—are beneficial and
fair, and a key feature of progress generally.”
• Are all profits from innovation “fair”? For example, are the windfall
profits enjoyed by Pharma companies for covid vaccines fair, even if it
provides incredible help for humankind?
• Under what conditions would inequality arising due to innovation be fair
or unfair?
WHY INEQUALITY SHOULD BE CONSIDERED IN
THEORIES OF JUSTICE
• The “sufficiency” view: Income inequality not a problem if everyone has enough of some
basic needs.
• Relational egalitarianism: Equality should be fundamentally about social relations, rather
than only about distribution of goods. Even if sufficiency achieved, social relations may
be damaged by high inequality.
• Relational equality view would say that inequality in incomes fine as long as people can
still relate to each other as social equals.
PROBLEMS OF HIGH INEQUALITY

• 1. Social instability. Can affect political processes, breed disenchantment with system.
• (Counterpoint to be argued: isn’t the problem anti-social acts by individuals, and not
inequality? Is crime justified if caused by inequality?)
• 2. Hurts health and general well-being. Civic engagement, social trust etc falling (some
connection with inequality, not one-to-one). Causes huge loss in well-being and quality of
life.
• 3. Can heighten relational inequalities, entrench historical inequalities. For eg, existence
of wage gaps between men and women, racial/caste income and wealth gaps.
MACRO PROBLEMS OF INEQUALITY (SEE CH 4
OF STIGLITZ – THE PRICE OF INEQUALITY)
• High inequality, with low share going to wages, means lesser aggregate demand. If
marginal propensity to consume is higher at lower levels of income (why would it be so?)
then the multiplier is smaller, and hence impact of given investment on income is lesser.
• Stiglitz: Fiscal policy can offset this by increasing public works (like NREGA), policy
can mandate higher minimum wages etc. But in US, it was largely monetary policy that
was expected to hold centre-stage, fiscal policy used only in recessions.
• Lowering of interest rates to spur investment meant asset bubbles. Deregulation increased
short-term growth, but increased fragility and risk in the system.
• High inequality can lead to greater inefficiency. High costs of education and high
inequality means less skilled workforce, less innovation.
• Increasing of “rent-seeking” by monopoly firms, rather than catering to expanding
demand. Lobbying etc.
• Inequality and perception of unfairness leads to unmotivated workforce, increases worker
fatigue and alienation, increasing anxieties, lessening productivity.
• Argument by Stiglitz: There is no inequality-efficiency trade-off. Efficiency, growth etc
can be increased by reducing inequality.
INEQUALITY AND INSTITUTIONS

• Inequality can actually hurt free market. Consider two entrepreneurs, one rich, one poor.
Rich entrepreneur can contribute capital, poor entrepreneur might find it hard to borrow
in presence of credit constraints (what collateral can she give?). Thus, inequality hurts
efficiency by limiting entrepreneurship.
• Rising inequality means rising divergence between private and social costs and benefits.
If rich people more willing to pay, then public investment projects that benefit few rich
people will pass cost-benefit valuations (for example, building more roads in cities vs
improving public transport).
• Rule of law and political systems can be hurt by high inequalities.
HEALTH AND WELL-BEING
INEQUALITY TODAY CAN HURT FUTURE
GENERATIONS
CAN WE MAKE ETHICAL JUDGEMENTS IN
MEASUREMENT?
• Consider a distribution of incomes F with mean income m(F). This distribution gives a level of
social welfare W(F). This depends on the specific nature of the utility function, and how
incomes are translated into utility.
• Now imagine a level of wealth per household, E, which, if equally distributed amongst all
households, would give the same social welfare as distribution F.
• We can define the Atkinson’s index as A = 1 - .
• Ranges from 0 – perfect equality – to 1 – perfect inequality.
• It gives share of income that can be sacrificed to bring about equality and maintain social
welfare. If index = 0.7, means that if income equally distributed, the same social welfare can be
secured with only 30% of income.
• Since it is tied to social welfare and utility, calculation of the index heavily relies on
choice of the utility function (no need to get into it now).
• Assume an “inequality aversion” parameter ε. 0 < ε < ∞. If ε = 0, then the researcher
doesn’t care about nature of the income distribution. As ε rises, more importance given to
lower reaches of the income distribution.
• If ε = 0, social welfare increases with marginal increase in income irrespective of whether
that income goes to rich or poor. For higher values, social welfare will only rise if income
given to someone poorer.
“RIGHTIST” AND “LEFTIST” MEASURES OF
INEQUALITY
• An important property of inequality measures: scale invariant. If all incomes increased by
same proportion, inequality measure should stay the same.
• If incomes rise from (10, 40) to (20, 80), inequality measure stays same. But absolute
difference of incomes has risen. Total income has risen by 50, and rich have taken 80% of
that increase.
• Translation invariance: Inequality stays same only if incomes rise by equal absolute
amount.
• Serge-Christian Kolm: Measures that focus on scale invariance “rightist”, that focus on
translation invariance “leftist”.
• (See Subramanian and Jayraj, 2013)
APPLICATION TO DEBATES IN INDIA

• Economy grows at 7%. But incomes of rich grow much more than poor.
• Sufficiency view: as long as basic needs met, it is ok.
• Relational egalitarians: Deviation in growth of incomes affects ability to relate as social
equals.
• “Rightist” equality advocates: Incomes of poor should also grow at same rates as incomes
of rich, at 7%. Then inequality will not rise.
• “Leftist” equality advocates: Equal rates of growth mean gap between rich and poor
rising, rich capturing greater share of increases in income. For true equality, poor’s
incomes should grow at faster rate than rich.