(This is part of my article in the LSE's on line magazine Europp).
Despite growing concerns about income inequality, economist Gregory Mankiw has recently argued that inequalities are an unavoidable or even beneficial aspect of
economic progress, and therefore the rich must fight to keep them.
Robert Solow has replied to Mankiw, countering that the one per cent defend themselves well enough.
Mankiw’s core argument is that inequalities are necessary as
incentives to encourage work and innovation, and that inequality is not
dangerous for democracy because wealthy people are divided in their
support for conservative and progressive causes. We should therefore go
back to a “pre-Piketty” world, he suggests, where it is important to
focus on eradicating poverty, but inappropriate to concentrate on the
issue of inequality.
While it is true that a fully egalitarian society in terms of
outcomes would be detrimental for wealth creation, it is hard to argue
that the monetary incentives (for example in the financial industry) or
returns on capital for the richest are truly necessary for value
creation. Even the typical argument that entrepreneurs deserve to be
extremely rich must be put into context, as many innovations (such as
the Internet or the touch screen) were originally developed by
government, as pointed out by Mariana Mazzucatto
In any case, the largest fortunes in the world do not exist for
meritocratic reasons. Top incomes mostly come from executives in large
companies, hedge funds, or from extremely wealthy heirs, as recently
noted by Paul Krugman on his blog and Piketty in his book.
Mankiw’s other argument is that high inequality is not a danger to
democracy. The political power of the wealthy should be considered
neutral, since the wealthy support both conservative and progressive
causes. However, the fact that they support non-conservative leaders or
political parties does not imply that they support progressive or
strongly egalitarian policies.
In fact, there are many instances of rich philanthropists focusing on
poverty and child malnutrition, but not on income inequality. They may
actually support progressive parties or politicians not because they
believe in progressive causes, but in order to have influence over them
and to pressure them not to adopt policies that might erode the position
of the very wealthy. Such attempts to control the political process may
not be successful in their own right. Nevertheless, as capital income
continues to grow more than labour income (as explained by Piketty), it
may lead to an increased risk of plutocracy. The rich will have even
more resources to control public life, while their fortunes may escape
national tax authorities (Piketty calculates world tax evasion at 10 per cent of global GDP).
Democracy might not be reducing inequality because it is not working
well enough. In the future, elites may have even more influence over the
political process. They will promote causes that make them popular, but
they will likely never call into question the mechanisms that allowed
them to amass enormous fortunes. This may lead to the increasing
privatisation of politics.
1 hour ago