Inequality in the Classical Economics Texts

I have a fascination for political economy and theoretical economics. Going through different texts on this matter gives me surprising, almost shocking, knowledge. Take for example this excerpt from The Theory of Economic Growth: a ‘Classical’ Perspective, Edward Elgar, edited by Neri Salvadori, pg 83:

Malthus’ analysis of the process of growth in an industrialized economy is found in Book II of his Principles of Political Economy. According to Malthus, the basic obstacle which may slow down growth in an industrialized economy is the lack of ‘an adequate stimulus to the continued increase of wealth’ (The Works of Thomas Robert Malthus, edited by E.A. Wrigley and D. Souden, 1986, p. 288). This stimulus consists in an adequate level of ‘effectual demand’ mainly determined by income distribution and the structure of property rights. For Malthus a wide class of relatively well-off farmers is able to generate a level of expenditure much higher than that generated by few large landowners (when land ownership is too highly concentrated) or by a multitude of poor peasants (when land ownership is too fragmented). By the same token, the extent of internal and external trade and the level of consumption from Smithian ‘unproductive labourers’ need not be too low for effectual demand and industrial production to grow pari passu (Latin for “at an equal rate”).
Added underline, note in bracket, and colour to a sentence.

Two things come out of this paragraph.

  1. Growth in an industrialized economy slows down when demand for wealth is lowered. The lowering of demand for wealth slows down the rate of wealth generation, in other words, economic activity is lowered when demand is low.
  2. Too high wealth inequality or too little aggregate wealth dispersed among the population both lead to low economic activity.

The colored text is making me wonder as it seems to be saying the exact opposite of what Malthus said. Without any reasoning.

#1 is the Keynesian view of economics, i.e. demand-side factors are important for growth. (In fact, Wikipedia lists him as someone who influenced Keynes.)

#2 gives the same conclusion that economists are coming to after numerous studies and a trove of data has become available. This point gives the solution to two problems being faced by the world currently, that of low growth, and that of poverty.

The solution to both is to begin reducing wealth inequality. Like the government uses income taxes to reduce the effects of income inequality, the government will need to use some form of wealth tax to reintroduce idle wealth into the economy. Piketty had made the same argument in the end of his “Capital in the 21st Century”. He received a lot of criticism for that. Criticism that can only be made subjectively and will not withstand objective scrutiny.

To understand why, I will provide a small example. Imagine there are 10 people in a closed village. The entire wealth of the village is in the possession of one person only. Due to this inequality, beginning any economic activity in the village is impossible as whatever is produced cannot find enough buyers.
Cannot economic activity be begun on credit? How will the economy produce more than the overhead (interest payments) wanted? Assuming that happens, what’s the guarantee that the same will happen every time?

However, that is going off on a tangent. The primary focus is that it is wealth inequality that has been pinpointed by at least one classical economic thinker as a reason for low growth. Yet Malthus’ most famous contribution is that he had predicted a world population growing beyond the world’s ability to sustain the population leading to a dystopian future. There is almost next to no talk about his other ideas. Neither was I introduced to any such material when doing “History of Economic Thought” in my third year of my undergraduate studies.

Why are those beginning to study economics taught nothing about inequality? More than anything, that is the question that bothers me the most. It has led to generations of economists who are unable to comprehend the effects of inequality (which results in studies that point out obvious truths and end up glorified beyond worthiness) or know how it comes about (leading to a misleading ideological bickering of “left” vs. “right”).

In the first year, the distinction between normative and positive economics is made clear. Normative is that which deals with subjective matters and cannot be measured (inequality was thought to be one). Positive is that which can actually quantified and is the result of a market exchange (like the price of a good or service). However, inequality is not just a “normative” variable, it has been proven to be a negative factor in economic growth.

Adding to the discussion is this from a working paper on the INET website that says1:

…there has recently been a shift of the focus of attention from merely looking at income inequality to analysing the longer-term implications of income inequality for wealth inequality.

“Recently”, when it was wealth inequality that was identified by the classical thinkers as the reason for class differences and overall economic impact. Of the two effects, the social effect by creating class differences is what grabbed attention because it was adopted by the leftist groups and was a special focus of leftist economic ideology. The macroeconomic effect of inequality, particularly wealth inequality, came to be ignored such that economists who are focusing on it now are thought to be breaking new frontiers in the study.

The new frontiers are no more than just going back to the start.


Footnotes

1Inequality, the crisis, and stagnation, Till van Treek, 2015, URL: http://ineteconomics.org/ideas-papers/research-papers/inequality-the-crisis-and-stagnation

Leave a Reply