Reviewed by Professor Uwe Reindhart, Princeton.
The causes and economic effects of inequality in income and wealth have long been a focus of economic research. As a series of papers on the topic in this year’s summer issue of The Journal of Economic Perspectives illustrates, the issue is much more complex than might be imagined by the simplistic talking heads on television who seek to reduce each and every issue to “good or bad.”
A truly elegant exploration of the topic is offered in a new book, “The Great Escape: Health, Wealth and the Origins of Inequality” by my Princeton colleague, the economist Angus Deaton. It offers an erudite sojourn through history, all the way to the domestic and international policy issues pressing in on us today. Unusual for scholarly works in economics, this book is rendered in easily accessible prose, supported by fascinating statistics presented graphically.
An abstract of the book, so to speak, can be had by viewing a recent presentation by Professor Deaton. A lecture, however, is no substitute for the much richer narrative in the book, which in passing offers many historical nuggets that may be new to readers.
The book demonstrates that assessments of income inequality are basically meaningless without the backdrop of the origins of a prevailing inequality in income and wealth. Suppose, for example, that in one nation all but a handful of members of society were poor. Income inequality, as we now measure it, would then be quite low. If in a second state a substantial segment of that society had managed to create great wealth for itself, assuming the rest of society remained in its previous state of poverty, would this development be welcomed or deplored?
Leaning on a principle on economic welfare first clearly articulated by the Italian economist Vilfredo Pareto (1848-1923), most economists probably would contend that a change that makes some people in society better off without making anyone worse off must ipso facto represent an increase in economic welfare. It follows that inequality in income and wealth engendered by economic growth typically is not to be deplored.
In his sobering Chapter 5 on the United States, however, Professor Deaton asserts that economists routinely apply Pareto’s principle too narrowly, overlooking that the wealthy in societies with highly unequal distributions of income and wealth may capture the country’s systems of governance. They may then use this power to rig market processes in their favor or to exploit taxpayers through what economists call “rent seeking” – that is, profit made on government contracts that is not matched by commensurate value delivered to society. That linkage can easily make the rest of society worse off.
“There is a danger that the rapid growth in top incomes can become self-reinforcing through the political process that money can bring,” Professor Deaton warns — a process that can turn democracy into plutocracy.
This causal flow from wealth to politics and thence a perpetuation of wealth has been noted by others – among them my fellow Economix blogger Simon Johnson, formerly chief economist of the International Monetary Fund, in his “The Quiet Coup” and the economist Luigi Zingales of the University of Chicago Booth School of Business, who contends that American capitalism has been slouching more and more toward crony capitalism.
The perpetuation of wealth among top-income families can be further enhanced through the educational system. “The United States is not particularly good at actually delivering equality of opportunity,” notes Professor Deaton.
Eduardo Porter of The New York Times made the same point in his Economic Scene column this week, noting, “The United States is one of the few advanced nations where schools serving the better-off children usually have more educational resources than those serving poor children.”
Much of Professor Deaton’s overall positive book chronicles and celebrates the enormous increase in wealth, health and well-being in many parts of the world during the last two and a half centuries. That story is told in the earlier chapters of the book, supported by many fascinating visual presentations.
“The Great Escape” is a splendid story of how the creation of wealth and better health and longevity have marched forward hand in hand, although not evenly. There remains the mystery of why longevity and health still vary considerably among nations with roughly equal gross domestic product per capita and why the United States, for example, does not rank favorably among nations on that score, as the Institute of Medicine of the National Academy of Sciences noted in a report this year.
Professor Deaton does not ignore the billions of people who have remained excluded from the great escape. His lengthy concluding chapter, “How to Help Those Left Behind,” is thought-provoking and likely to be hotly debated as he explores alternative approaches to helping those who have not escaped the misery of poverty.
It may be intuitively appealing to assume that if only the rich countries taxed themselves a little more and transferred funds to the poor countries, the latter would grow out of their poverty. The sizable flow of foreign aid to the developing countries during the decades after World War II has rested on that theory.
Professor Deaton, though, comes to quite the opposite conclusion. “We often have such a poor understanding” of what the poor in the poor countries “need or want, or how their societies work,” he writes, “that our clumsy attempts to help on our terms do more harm than good.”
A great deal of foreign aid to poor countries derives from economic or political special interests in the donor countries, he says, and has propped up corrupt governments in the poor countries. By providing revenue that frees the government from having to raise taxes, foreign aid hinders the development of the social and political institutions that are the sine qua non of economic growth, in this view.
A better approach, Professor Deaton says, is for donor countries to remove trade policies that obstruct economic development — for example, import quotas or high tariffs on commodities harvested or produced and exported by developing countries. Or to take the money disbursed as foreign aid and fund more research on diseases afflicting people in poor countries or on enhancing agricultural yields. And while the military-industrial complex in rich countries profits greatly from the arms sales to poor countries, it is hard to see how that helps the residents of poor countries escape the clutches of poverty, he says.
And so on.
Professor Deaton concludes this particular chapter by telling his students “to work on and within their own governments, persuading them to stop policies that hurt poor people,” adding, “These are our best opportunities to promote the Great Escape for those who have yet to break free.”
