Considering inequality: its dimensions and intersections

Each of us is somewhere in that grand parade. We may wonder what determines where we are, whether near the front among the almost imperceptibly tiny figures, somewhere in the middle or at the rear among the towering giants. Is it all a matter of luck, or of how much effort we spend in our lives, studying hard, working hard, being thrifty and generally doing whatever it takes to achieve a higher standard of living? Did the people in the first half of the parade really ‘deserve’ to be so stunted because they failed to make those efforts? Did the giants at the rear work extraordinarily hard for their rewards; or did they just get lucky, ‘choosing their parents wisely’ and growing up in wealthy households that gave them enormous advantages from the start? Reflection on these matters can heighten awareness of what gives some people vastly greater opportunities and thereby perpetuates extreme economic inequalities.

We may also come to see economic inequality as multi-dimensional, forming distinctive patterns according to location, class, gender, race, ability and disability. Of these, location is the most obvious initial marker. The countries, regions or towns where people live vary enormously in their average standards of living. The opportunities for economic advancement are so much greater in some places than in others. Geography matters. So too do the intersections between location and the other factors bearing on people’s life-chances, determining their economic situation and prospects. In terms of average incomes, the USA is a rich country while Nigeria is poor; but not all people in the USA are rich and not all people in Nigeria are poor. Indeed, some Nigerians are much richer than many people in the USA.

Class position is a key variable shaping who gets what. People who own substantial capital can get large incomes in the form of interest payments, profits or dividends paid on their shareholdings. People owning substantial tracts of land can get rental income and may benefit from capital gains as land values rise, all without expending any physical effort. These capitalists and landowners have a collective advantage over people whose only source of income is the sale of their personal capacity to work, receiving wage payments for their labour. Yet others, having neither income from property nor paid work, must do the best they can with whatever welfare payments or charity is available to help them subsist. Class is a pervasive influence on inequality within both affluent and poor nations.

Race is another dimension of economic inequality, interacting with location and class. The very tall people whom we witnessed during the last few minutes of that grand parade were mostly white-skinned, whereas Africans, Asians and Latinos were disproportionately numerous earlier on. Even when people migrate from poor to affluent countries, the markers of race may still loom large: in most multi-ethnic societies, the different groups vary considerably in their average incomes and living standards.

Likewise, gender is a major seam of economic inequality. In nearly all countries, there is a significant pay gap between the average wages paid to men and women and there are significant obstacles to achieving equal economic opportunities. These gender-based inequalities intersect with the inequalities according to class and race too. Working-class women of colour face much greater obstacles to achieving economic security and prosperity.

Abilities and disabilities also matter. Personal attributes that are greatly prized can lift particular individuals above the ranks of people with otherwise similar characteristics of location, class, race and gender. People with distinctive talents or skills that are highly valued ‘in the market’ may benefit from handsome remuneration. Not having these attributes can mean consignment to more marginalized positions. People with disabilities almost invariably face restricted economic opportunities.

Our social status, as well as our incomes and wealth, depends substantially upon these inequalities. So too may our personal identity. Status reflects how society sees us, whereas identity is more a matter of how we represent ourselves. These elements introduce a subjective element. Whereas location, class, race and gender are relatively objective attributes, status and identity are more malleable according to social judgements and personal emphasis. You may assert a personal identify according to your sexual preferences, your musical tastes or the sporting team you support, as well as where you live or what work you do. These can be important markers of life-style, sometimes compensating for an economically disadvantaged position by providing local prestige.

Sociologists exploring these features have traditionally distinguished between class, status and power. Class is all about economic position, based on relationships to the means of production – whether as employer or employee. Status relates to social esteem and may involve differentiation between people of the same class position according to whether they are blue- or white-collar workers, for example. Power derives primarily from command over resources, particularly where that involves control over other people, such as the power of business executives to hire and fire or the power of politicians to set the social rules. These three dimensions of inequality – class, status and power – tend to be broadly reinforcing but they are less than completely so. Therein lies considerable social complexity.

Looking primarily at the economic dimension of inequality is a way of cutting through this complexity. It focuses attention on who owns what and who gets what. It also directs attention to the drivers of inequality, such as the processes of globalization, financialization, neoliberalism and technological change that have been significantly re-shaping the economic environment during recent years. Studying inequality also requires analysis of the economic, social, environmental and political implications of these processes. We need to consider whether we are headed towards a more prosperous or a more insecure, inequitable and unsustainable future.

Recognizing competing viewpoints

Describing patterns of inequality – and considering their causes and consequences – almost invariably leads into discussion of what is fair and what is unfair. That, in turn, leads into asking what, if anything, should be done – and by whom? Should governments seek to narrow the gaps? It is at points like these that disagreements are likely to arise. Indeed, controversy is inevitable on a topic where consideration of the facts intertwines with ethical and political judgements. To clarify the principal positions, it is useful to broadly distinguish three competing viewpoints: conservative, liberal and radical.

A conservative view tends to regard whatever inequalities currently exist as ‘natural’. Some people taking this view may have never thought seriously about the topic: theirs is a passive conservatism, based on disinterest in – or scepticism about – the possibility of change. Other, more assertive conservatives tend to be explicitly pro-inequality, believing that the current pattern of rewards directly reflects people’s productive contributions and that meddling with this meritocratic situation would do more harm than good. This view is characteristic of neoliberal thought in the modern era. Implicitly, it assumes a trade-off between equality and economic growth, believing that attempts at egalitarian policies would reduce overall living standards. From this perspective, any attempt at social levelling would impair incentives, thereby ‘killing the goose that lays the golden eggs’ (that some people currently enjoy).

A liberal perspective produces a more critical view, inclined to an ‘interventionist’ politics. This is quite different from the neoliberal perspective, although the terminology is confusingly similar. The liberal view is not anti-capitalist, but it is less complacent than the neoliberal view about the beneficial effects of ‘free markets’. Recognizing that monopoly can cause ‘market distortions’, liberals see a need for public policies to produce more meritocratic outcomes. Government taxes and expenditures that reduce income inequalities are the characteristic focus. Reformist views of this sort have a long lineage, nurtured by liberal and social democratic political philosophies and aspirations. They have received a renewed boost because of the difficult material conditions since the global financial crash of 2008–9. The stagnant wage incomes in the advanced capitalist nations during the last decade loom large in such deliberations.

A third view is more radical, echoing the liberal concerns about the adverse effects of excessive inequality but seeing the need for more fundamental political economic changes. The focus shifts from seeking reduced inequality of opportunity to seeking greater equality of outcomes. A more radical, even revolutionary, agenda beckons, challenging the dominant power of the wealthy. This is a more directly anti-capitalist perspective, emphasizing the embeddedness of existing inequalities in processes of exploitation that are innate to a capitalist economy. This view does not deny the legitimacy of liberal redistributive reforms but regards ‘band aids’ as insufficient to resolve the systemic injustices arising from extreme inequalities.

As always, when trying to deal with controversial issues, it is important to acknowledge the rival viewpoints. Subsequent chapters will explore and critically examine their theoretical foundations, raising questions about political possibilities for reform and transformation. Is it sufficient to promote equality of opportunity, or do we need to be concerned with greater equality of outcomes? If we actually want a more equal society, do we need to be trying to ‘raise the floor’ and ‘lower the ceiling’ as well as creating equality of opportunity in the intervening space? And how might this be done? Looking through a political economic lens can help when considering these controversial issues.

Taking a political economic approach

What does taking a political economic approach to the topic imply? Like any systematic study, it requires observation and analysis, facts and judgements. The modern meaning of the term ‘political economy’ also signals an alternative to mainstream economic orthodoxy. To see how the world actually works, we can draw from heterodox economic thought to develop a more coherent analysis of markets and states, economic institutions and the factors shaping production, distribution, exchange, accumulation, reproduction, growth and crises. It is a huge agenda (see, for example, Varoufakis, Halevi & Theodorakis 2011; Stilwell 2013; Reardon, Madi & Cato 2018; Tae-Hee, Chester & D’Ipolitti 2018). Four aspects of political economy are most relevant to our current purpose: its focus on inequality, its pluralist method, its transdisciplinary inclination and its ethical orientation.

A political economic approach makes analysis of inequality central to understanding the economy. The dominant and most influential school of economic thought – neoclassical economics – has been notably deficient in this respect. Historically, some of its pioneers explicitly sought not only to explain but also to justify the economic inequalities generated in free-market economies. Others developed theories about why economic welfare might be improved by making the distribution of incomes more equal. During recent decades, however, concern with economic inequality has tended to drop out of the picture. The mainstream economic models often simply take the existing distribution as given. Microeconomics focuses largely on efficiency in the allocation of resources by markets. Macroeconomics has a dominant concern with overall economic performance and growth. Concern with the distribution of incomes or wealth is often said to be ‘political’ and hence not properly a matter for ‘scientific’ economic inquiry. Or it is set aside because of a belief that equity could only come at the considerable cost of lowered economic growth. This marginalization of inequality has raised the ire of many critics who see it as indicative of the narrowness and political bias of the orthodoxy. Giving greater prominence to the study of inequality is therefore central to the political economists’ alternative.

Second, political economy has a pluralist method, recognizing that there are many ways to study economic phenomena. In this respect, modern political economy walks in the footsteps of the great thinkers from the eighteenth century onwards, including Adam Smith, David Ricardo, Karl Marx, John Stuart Mill, Thorstein Veblen and John Maynard Keynes. All of these pioneers of political economic analysis considered inequality an important issue in their attempts to understand how, and for whom, the capitalist economy functions, although they came up with notably different answers. A similar inclination continued during the second half of the twentieth century among leading contributors to the institutional, Marxist and post-Keynesian traditions of political economy: J.K. Galbraith, Michal Kalecki, Gunnar Myrdal and Joan Robinson made the study of economic inequality integral to their political economic analyses. Other modern scholars concerned with the problems of economic development and underdevelopment, such as Samir Amin, Ha-Joon Chang and Amartya Sen, have also placed the issue of inequality at the forefront of their studies. In other words, all the ‘big thinkers’ about economic issues have seen the study of inequality as an important aspect of economic inquiry. We need to draw on their diverse insights – and on the arguments and evidence of other modern researchers – to develop our political economic analysis. We need to look at heterodox economic perspectives – classical, institutional, Marxist, post-Keynesian, feminist and ecological – to see what is most valuable in understanding how the world actually works. A focus only on neoclassical economic theory and its offshoots cannot suffice.

Third, political economy has a transdisciplinary inclination. This is particularly important because of inequality’s multi-dimensional character. While its most obvious economic manifestation is in terms of incomes (who gets what) and wealth (who owns what), people’s social positions are also involved, as are questions of political power. Which of these aspects gets primary attention usually reflects the choice of social science perspective – geography, history, sociology, anthropology or political science, for example. The personal interests and goals of the investigator may also influence the focus of the inquiry – whether highlighting sources of class exploitation, challenging racism or gender discrimination or planning for less divided cities, for example. The analytical frame that is adopted influences what is regarded as worthy of investigation or simply what is seen. A neoclassical economic view, focusing on individuals rewarded according to their personal productivity, needs to be compared with more critical political economic perspectives that highlight the power-plays responsible for exploitation, discrimination and other forms of social injustice.

Fourth, a political economic approach has an ethical orientation, putting values, as well as matters of fact, on the agenda. Because the analysis of inequality is a study of winners and losers, it would be difficult, if not impossible, to maintain a completely ‘value-free’ stance on the topic, especially as discussion shifts from explanation to prescription. Therein lies much of the action in weighing up the pros and cons of conservative, liberal and radical views. Ethical and political judgements are necessary, especially when assessing the capacity of governments to undertake progressive reforms. Analysis of policy prescriptions requires consideration of the goals that those policies are supposed to serve. In practice, values infuse all policy-oriented study: a political economic analysis simply says the values should be explicit rather than implicit – better blatant than latent. As the book progresses, the basis for making judgements of this sort will be carefully considered.

Studying what shapes inequality

Some degree of abstraction from the mind-boggling complexity of the real world is necessarily involved when analysing inequality. We need to develop a framework for identifying and analysing the interrelationships between the key variables. Figure 1.1 on the next page makes a start, providing a foretaste of what is to come. This is the book’s ‘road map’ for studying the political economy of inequality.

The top left of Figure 1.1 distinguishes between public wealth and privately owned property. The top right notes the other great economic resource – people’s capacity for labour. It also acknowledges the presence of people who have neither wealth nor income from work. The next row indicates the forms in which those who have private wealth hold it (whether as financial assets, physical capital or land) and the types of income that these assets produce (interest, profits and rents). The profit generated by businesses flows partly to (some) households as dividends on shareholdings. Meanwhile, (most) people are primarily reliant on selling their capacity to work for wages. The relative sizes of these different types of income – from wealth and work – is shown a little lower in the diagram as the ‘functional distribution of income’, so named because it reflects the different economic functions performed by the owners of assets and the suppliers of labour. Looking into this distribution shows what proportion of the total income in the economy goes to the owners of income-generating private wealth and what proportion goes to workers. People having neither income from assets nor the capacity to work do not feature here at all.

Then, moving to the lower parts of the diagram, we see the other main determinants of the ‘personal distribution of income’ among individuals or households. The key additional influences here are: (a) inequalities among incomes from interest, profits and rent; and (b) inequalities among the wage incomes. Rates of return to asset owners can be highly variable, which is why people and institutions seeking capital accumulation frequently adjust their asset portfolios to get the best rates of return. Wage incomes vary enormously too, ranging from the enormous salaries paid to the chief executive officers (CEOs) in transnational corporations to the more modest payments most workers receive for their efforts, sometimes so modest that their recipients live in poverty. Those workers may not be much better off than people who lack the capacity or opportunity for waged work and are dependent on welfare payments or charity.

The inequalities in the personal distribution of income, as shown at the bottom of the diagram, therefore reflect a multiplicity of interconnecting factors. To categorize the individuals as rich, middle-income or poor is a crude first approximation, of course, but it is an early pointer to where the analysis takes us. It is the relationships between who owns what (in the top half of the diagram) and who gets what (in the lower half) that is crucial.

This depiction of the key variables gets us started on the analysis of inequality. It introduces the four key dimensions:

• the division between public and private wealth;
• inequality of private wealth;
• the division of total income into labour and non-labour shares;
• inequality in the distribution of personal incomes.

The principal focus here is on what economists call ‘market incomes’: that is, before the effects of any income redistribution by government are considered. Yet governments in practice do play significant roles in distribution and redistribution, and we will have much more to say about this in later chapters: a glance ahead to Figure 10.1 on p. 178 provides a foretaste.

Looking ahead

The following chapters develop the political economic analysis of inequality by looking at patterns, processes, problems, policies and prospects. These ‘five P’s’ raise sequential questions. What patterns does economic inequality take around the world today? What processes drive those inequalities? What problems result? What policies might make a difference? What are the prospects for future change?

Some preliminaries come first. A chapter on methodological issues immediately follows this general introduction. It explores what we mean by inequality and introduces useful concepts for its systematic study. It looks at different interpretations of income, wealth, wellbeing, poverty and development, and at the different ways in which these may be measured. It also considers the bases on which we may make judgements about equity. This chapter is not light reading, and readers impatient to get to see the evidence on patterns of inequality ‘out there’ in the real world could consider skipping it. Better not to, however, because it is important to be aware of what shapes the political economic lens through which we will be looking.

The bulk of the empirical evidence comes in the next three chapters. This is the most data-rich section of the book. Chapter 3 shows the principal contours of current inequalities – between nations, within nations and globally. Chapter 4 looks at how the shares of income and wealth have shifted during recent years between the world’s richest and poorest people and the broad group in-between. Chapter 5 takes a more disaggregated approach to studying inequality, recognizing location, class, gender, race, age, ability and disability as seams along which major socio-economic divisions occur. This shows the social dimensions that structure inequalities and what attributes shape where people stand in unequal societies.

Seeking to make sense of these patterns, the following two chapters begin the process of explaining who gets what. This is not ‘theorizing for theory’s sake’, but a process of trying to understand the forces that shape the nature and extent of inequality. Chapter 6 looks at rival theories that have featured in the development of economic analysis. It explains the conventional economic theories of ‘marginal productivity’ and ‘human capital’, liberal economic views that emphasize ‘market distortions’ and radical views that analyse class power. Then, in chapter 7, we look at processes that cause inequality to increase over time, as has been the case within nearly all nations in recent decades. The focus is on the broad political economic drivers, including globalization, financialization, neoliberalism, technological change and urbanization. This chapter seeks to develop the ‘big picture’ of income inequality and wealth concentration in a changing world.

The next part of the book poses the ‘so what?’ question, asking why inequality matters anyway. As already noted, some people see inequality as ‘natural’, even beneficial for economic prosperity. Chapter 8 reviews evidence and arguments that strongly support a contrary view – that extreme inequality reduces social wellbeing. It discusses the links between inequality and the intensity of economic, social, environmental and political problems. It also raises concerns about peace, prosperity, democracy and human rights. Chapter 9 follows on with a complementary but somewhat different line of inquiry, discussing what makes us happy. Will becoming richer do the trick, as many people surmise? Or does it depend on our relationship to how others are faring? Does the happiness of a society depend, more generally, on how evenly incomes and wealth are distributed? The chapter concludes that the elimination of poverty is necessary but not sufficient. The size of the rich–poor gap is also crucial for our collective wellbeing, perhaps even for our survival. Here is a strong case for pursuing egalitarian policies and strategies.

What could governments do to narrow the gap? The next three chapters examine the policy options. Chapter 10 considers how different forms of taxation and government spending redistribute incomes. Chapter 11 digs deeper, looking at strategies to reshape the ‘market’ distribution of income and wealth before any such redistributions occur. Chapter 12 then turns attention to the challenge of reducing international inequalities. The capacity of the existing international institutions to promote balanced and sustainable development is necessarily in the spotlight here.

Finally, the book asks about the overall prospects for change. Should we be optimistic or pessimistic about the potential to create equitable societies? Can radical reforms, or even mildly progressive redistribution, be effective? The concluding two chapters weigh the options. Chapter 13 looks on the gloomy side, identifying four big obstacles – ignorance, ideologies, interests and institutions – and discusses how to address them. Then, putting on rather more rose-tinted spectacles, chapter 14 presents a positive assessment, signalling principles and prospects for progress.

The book’s overall structure is summarized in Figure 1.2. Moving from the study of patterns to processes, problems, policies and prospects has a sequential logic, as explained above. It also has a progressive character because it takes us from the study of what is and why to the study of what could be and how it might occur.

Treating the topic in this careful, sequential manner is an alternative to remaining in a state of ‘blissful ignorance’. Some people evidently prefer the latter, regarding discussion of inequality as a ‘turn-off’. Conservatives claim it fosters unnecessary social conflict and call it an ‘economics of envy’, a ‘politics of discord’, even fostering ‘class warfare’. Liberals also tremble at the last prospect. True, analysis of inequality does put contentious issues in the spotlight. However, as we shall see, the conflicts do not derive from talking about the topic: they reflect the underlying material conditions. Ignorance is not ‘blissful’ if it leaves the way open for increasing social stresses. Better to seek knowledge of the sources of inequality and the potential remedies. This is the antidote to both ignorance and prejudice, and the prerequisite for purposeful action. By the end of this book, readers should have a clearer understanding of the situation and a better sense of what could be done about it.

Conclusion

Concern with the distribution of income and wealth has a central place in political economic analysis and needs to have a similarly central place in strategies for social progress in the real world. This book seeks to contribute by clarifying the dimensions of economic inequality, analysing its causes and consequences and considering the challenges of reducing it. This introductory chapter has set the scene by:

• presenting a simple but dramatic depiction of how economic inequality looks in the modern world;
• showing why economic inequality matters and what we need to know about it;
• indicating how the necessary knowledge and understanding may be advanced.

‘Mind the gap’ is a familiar, cautionary warning on trains, ferries and buses. Using the phrase as the title of this introductory chapter sends three pertinent signals – to be mindful, to care and to beware. We need thoughtful awareness of the gap between rich and poor people’s material living conditions in modern societies. We need to be mindful of the ramifications for our collective wellbeing and future prospects. We need to consider actions that could address the challenges posed by inequality and make a difference. For these purposes, our first requirement is clear concepts and effective tools for studying incomes, wealth, poverty and equity.