One of the consequences of the neo-liberal orthodoxy that has dominated economic thinking for the last two decades, and which was imposed on us from 1989 by the International Monetary Fund (IMF), was the premise that inequality was a necessary evil for national economic growth. In the 1970s, the theory was established by Arthur Okun in his highly influential book “Equality and Efficiency: The Great Trade-Off.” We have certainly seen this income inequality manifest itself in Guyana.
Stewart Lansley, author of “The Cost of Inequality: Why Economic Equality is Essential for Recovery,” offers a new perspective. He asks, “Does inequality trigger economic instability? A few years ago this was an issue that did not register on the political Richter scale. Nor did it attract much attention amongst professional economists. According to economist James Galbraith, those few working in inequality research were in an economics “backwater”. Proving his point, the academic Journal of Economic Literature has no section examining inequality and economic instability.
There is one key reason for this lack of interest. For the last thirty years, the economic orthodoxy has been that inequality is a necessary condition for economic success. We can have greater equality or faster growth, but not both. That orthodoxy emerged out of the global crisis of the 1970s when, it was claimed, the move towards more equal societies in the immediate post-war decades had gone too far and had led to economic sclerosis. What was needed to put economies back on an upward and sustainable path was a stiff dose of inequality.
Since the late 1970s that theory – for theory it was – has been put to the test in a real life experiment in both the US and the UK, and more latterly in a number of rich countries. As a result, the income gap in America and Britain has grown to levels last seen in the inter-war years.
So has the experiment in “unequal market capitalism” worked in the way predicted by the theory? The answer appears to be no. The income gap has surged, but without the promised pay-off of wider economic progress.
The main outcome for the countries that have embraced the post-1980 model of market capitalism most fully has been economies that are more polarised and much more fragile, culminating in the great crash of 2008 and today’s increasingly prolonged and intractable crisis.
So does this mean the theory is fundamentally wrong? Do high levels of inequality lead to economic collapse? Was rising inequality from the 1980s in fact a central player in driving the global economy over the cliff in 2008, and in the dogged persistence of the current slump?
The official view is that inequality played no part in the present crisis. Two years ago, the handful of economists who argued that inequality was the real cause of the current crisis, were easily dismissed as an insignificant and heretical minority. The political consensus remained that inequality was not an economic issue. Yet gradually, opinion is beginning to turn.
At the 2011 World Economic Forum in Davos, Min Zhu, former Deputy Governor of the People’s Bank of China and a special adviser at the IMF, told his audience: “The increase in inequality is the most serious challenge facing the world.” Last December, President Obama attacked the long period of stagnant earnings facing most Americans, or what he called the erosion of the “basic bargain that made this country great”. “But this isn’t just another political debate,” he continued, “This is the defining issue of our time.”
Not only has the rise in inequality failed to deliver on faster growth, history shows a clear association between inequality and instability. The great crashes of 1929 and 2008 and the deep-seated recessions that followed were both preceded by sharp rises in inequality. In contrast, the most prolonged period of economic success and stability in recent history – from 1950 to the early 1970s – was one in which inequality fell across the rich world, and especially in the UK and the US.
Who’s listening in Guyana?
Dec 13, 2019A four-member Guyana squash team left the country last week to participate in two tournaments in North America and was very competitive in the Canadian Junior Squash Open which ended on Tuesday at...
Dec 13, 2019
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In its Wednesday, December 4 issue, the International Business Times, with the caption, “Guyana on the Brink of Unimaginable... more
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