October 19, 2010

Economics and Inequality

Cornell Economics and Management Professor Robert R. Frank draws attention here to the disconnect between economic research and ethical thinking, specifically on the notion of growing US inequality:
"Economists who say we should relegate questions about inequality to philosophers often advocate policies, like tax cuts for the wealthy, that increase inequality substantially. That greater inequality causes real harm is beyond doubt."

It's refreshing to hear this criticism from an economics and management professor. For he is basically exposing the hypocrisy of neoclassical economics which claims not to be advancing an ethical theory, when in fact it almost always defends growth for growth's sake (an excellent in-depth book on the ethics behind neoclassical economics is The Skeptical Economist, by Johnathan Aldred). Frank points out that the harmful effects of increasing inequality in developed countries has gotten simply too great to ignore:

"In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.

For example, even after controlling for other factors, these counties had the largest increases in bankruptcy filings.

Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates."

More disturbing information along these lines has just come out, showing that the poorest half of adults worldwide only hold 1% of all available wealth globally. While the top 2% hold 50%. And 1 in 7 Americans are now living below the poverty line.

It's difficult to know how much and how often economic growth lifts all boats as the data are extremely complicated. Globalization for example surely makes many of the world's poor somewhat better off at least in the short term, though many sweatshop workers are now revolting against exploitative practices in China for example. However, it's not at all clear that job-exporting countries such as the U.S. are treating their own citizens fairly by encouraging US-based corporations to send their jobs offshore to cheaper locales. For then mostly face-to-face service jobs become available to the populace, and many of these are in low-pay areas (retail, cosmetology) that pay precious little and offer no health care benefits.

See my article The Utility of Offshoring: A Rawlsian Critique, which argues that the offshoring trend unfairly expects the people of job-exporting countries to accept job-gain benefits to peoples of other societies as outweighing job-loss hardships they impose on themselves. When an economist as respected as Robert Frank courageously admits that these job-loss hardships cause serious harm, one can only hope more academics in business and economics begin to challenge the free-market dogma of growth for growth's sake.

Julian Friedland (2005). The Utility of Offshoring: A Rawlsian Critique Electronic Journal of Business Ethics and Organization Studies, 10 (1), 9-13

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