Inequality: Good for the rich, bad for the economy?

“Without justice, society must immediately dissolve.” The words of Scottish philosopher David Hume were quoted by Stewart Sutherland, Chair of the British Academy debate held on 4th October in Edinburgh, which was entitled “Inequality: Good for the rich, bad for the economy?” Sutherland asked what exactly “justice” might mean in a modern meritocratic society. Over the next hour and a half, four expert contributors and an erudite audience set out to find some answers to these questions.

Richard Blundell, Director of the Centre for the Microeconomic Analysis of Public Policy at the Institute of Fiscal Studies (IFS), said that with regards to inequality, there is “a growing consensus that something is going on,” and that “something must be done.” According to the IFS, those born in the 1980s in the UK were the first post-war generation not to enjoy higher incomes than those born in the previous decade. “The Gini coefficient,” a common measure of inequality, “has moved 10 points from 0.25 to 0.35” in the last 30 years said Blundell. “We have moved from a Gini you would typically find in Scandinavia [or] Germany to a Gini that you would find in North America.”

Although inequality has been a problem for many years, its effects were partially ameliorated in the 1990s by a number of factors, said Blundell: “the unprecedented increase in education attainment,” for one; as well as New Labour’s working family tax credits. In the main, though, the governments of the day thought that a flourishing economy would go hand-in-hand with reducing income inequality. After the financial crisis that consensus was obviously shattered.

It is true, Blundell said, that increased globalisation and free trade had helped countries like India and China to grow richer, which has in turn led to a reduction in income inequality between countries. But opening up trade also means people in developed countries suffer. The incentive to innovate doesn’t just come from financial aspiration: innovation needs a good family background and safe neighbourhoods, and it relies on the economic circumstances of your parents. “This is the key,” he said. “Excessive inequality in income and wealth is not, in my view, inevitable and may even inhibit growth.”

David Bell, Professor of Economics, University of Stirling, agreed with the main thrust of Blundell's argument. “Economists have long recognised that the free market does not necessarily produce just outcomes,” he said, but it is only in the last couple of years that economists such as Tony Atkinson and Thomas Piketty have become well known for their work on inequality. Recently even the Organisation for Economic Co-operation and Development (OECD) has argued that inequality has a negative impact on growth. “Low incomes affect educational opportunities and lead to poor social mobility.” Their proposals to remedy this include enhancing women’s participation in economic life, better early years education and working conditions, especially for those in precarious employment.

But little of this, said Bell, tackles top-end inequality—what economist Joseph Stiglitz calls a “winner takes all” world means the very wealthy have an undue influence on government policy. Is the system rigged at the top so that policies to help the situation will not pass? Another serious issue, said Bell, was health inequality. In the most deprived decile in England, male life expectancy was 51.7; in Scotland, in the same decile, it was 47.6. The average in England was 70.4.

Chris Giles, Economics Editor of the Financial Times, stressed the complexity of the issue. Theoretically speaking, if we had absolute equality then throwing in a bit of inequity would be good for the rich and good for the economy—“creating incentives to innovate and making the country a better place.” On the other hand, if one person had all the wealth in a country, what Giles described as a Marie Antoinette situation, that would be bad for society—and that rich person too, “because we all know what happened to Marie Antoinette.” In the real world we have to balance fairness and efficiency.

Recent research from the OECD and IMF says that income redistribution and higher growth are linked. It would be wonderful if that were true, said Giles, but the quality of evidence in those papers is rather weaker than the headlines suggest. Those organisations, like many others, tend to follow prevailing intellectual winds. In reality, the tradeoff between efficiency and justice still exists. We have to ask the questions: how much distribution do we want? Is the redistribution we want going to harm the economy? We might then conclude that it won't do significant harm, so we can get on reducing inequality.

Kate Pickett, Professor of Epidemiology at the University of York, said “I’m glad I’m not an economist,” adding that other perspectives were needed on this debate. “We don’t behave like economic man or woman,” she said. We often act in ways that will maximise our social relationships, for example. “Inequality is bad for the economy, but it is also bad for health and well-being.” Social mobility is much lower in unequal societies because a huge swathe of human talent is being wasted. Sweden, once a byword for democratic socialism, has seen its inequality rate increase dramatically in recent years, said Pickett, and children’s well-being has as a result declined.

If we look at innovation, she continued, as measured by patents-per-capita, less unequal countries do better—and again that must be because they are not wasting so much human talent. (Chris Giles later pointed out that patents tend to concentrate wealth in fewer hands and are thus not good for equality.) Pickett said that tertiary intervention by health visitors or teachers was not the answer. Instead the problem needs to be tackled at source. “We need to fix working conditions so people don’t have to work two jobs to make ends meet, don’t have to put up with zero-hours contracts or low pay so they are too tired to spend time with their children.” Ultimately the question is, “What’s the economy for? Is it for the 1 per cent or the rest of us?”

Two audience members challenged the consensus. One woman, who described herself as an immigrant, wondered why there seemed to be less get-up-and-go in western societies among a certain group of people. Had the west become decadent? Another questioner pointed out that although capitalism is “much-maligned” it had brought huge numbers of people out of poverty. Chris Giles thought that the description “decadent” was going too far. “There has been a loss of income across the distribution." Advanced economies, he said, have done “a hell of a lot worse” in the last 10 years, and people have become more miserable. Greater inequality has also, he said, led to big political consequences—including Brexit and the current political problems we are seeing in France.

This debate was organised in partnership with The Royal Society of Edinburgh. For information on further debates visit the British Academy website