Inequality in the Classical Texts II

I had previously posted about inequality in the classical thinkers’ texts and discussed one philosopher, Thomas Malthus, in this regard.

The first question that should come to one’s mind is, “If the classical thinkers were talking about inequality, how did it end up so ignored a topic in economics?”

I think I have a(n) (partial) answer for that now. From the same book, The Theory of Economic Growth by Edward Elgar, edited by Neri Salvadori:

In a stationary agricultural economy an increasing taste for ‘luxuries’, usually imported from abroad, provides landowners with a powerful stimulus to modify their routine economic behaviour. Landowners are willing to change the lease conditions to their tenants in order to allow the latter to implement more efficient agricultural techniques and, consequently, to pay higher rents. Thus productivity in the key sector of the economy, agriculture, increases. Landowners’ increasing expenditure on luxuries makes domestic production of these commodities profitable. According to Smith, in fact, ‘finer manufactures’ were introduced into agricultural economies either through the gradual refinement of domestic primitive manufactures or through the imitation of foreign manufactures.

The quoted paragraph above discusses Adam Smith’s ideas of economic growth. The part in bold is the section that will be the focus of my discussion.

Smith says that if productivity increases then total output increases. That is plainly obvious. The point to be focused on here is Smith saying that landowners will be willing to change the terms of the lease contract so that the tenants themselves will pay a higher rent to the landowner since their income from the land goes up as a result of being able to be more productive.

Here’s the catch. Smith implied that the tenant would pay a higher rent to the landowner but he did not delve into how much, that means this approach to economic growth omits looking into the distribution of increases in productivity. As Smith went on to become the primary philosophical source for the field of economics, particularly laissez faire economics, distributional issues came to be a much maligned topic. I suppose it will not fall far off the mark to say that whatever contract is handed out to the renter, it will be a “take it or leave it” offer with the landowner grabbing the largest possible share of the output produced.

Where does this leave income and/or wealth inequality? The renter has two options, work at subsistence wages/salary or lead a miserable existence. A better return on their labour means the owner of the hard capital will make a lower return; the result is a low pay is offered to the renter. As productivity goes up, inequality will gradually increase in favour of the already wealthy unless there is an external force that drives up labour’s share of the productivity increases. This is the unusual circumstance that came to define the post-WW2 period in the US till the mid-1970s as noted by Thomas Piketty in Capital in the 21st Century.

Since that period, the majority of income growth was actually increases in income for the top 10% of the population.

The trend in labour productivity and wages matches the concept outlined above. A large part of the gains in productivity was captured by the employers and labour was left with a raw deal. This was not a uniform trend for all industries and this effect was stronger for jobs that required a lower skill level. A side-effect of this was to make economists suggest expanding access to higher education as a solution to income inequality. A poor solution as inequality has grown differently between different categories of earners. Getting into the details now would be going off on a tangent though.

The result is that nearly two centuries later, inequality is threatening to undo the meritocratic society that Western progressive thought had sought to establish. Actually, it’s not two centuries. In the US, it’s forty years or so. Take a look at these charts showing wealth inequality in the US over the last 50 years. Wealth inequality was growing, no surprises there.

It is high time that economists reviewed the philosophical and theoretical bases of economics to ensure the field remains relevant to progress instead of debating, “Is economics a science?”.

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