Income inequality: Causes, consequences
Redistribution of income is one of the most important functions of a modern State.
Economic growth is no longer merely interpreted in terms of changes in the gross domestic product (GDP), but also in its effects on standard of life of the majority of people.
The market economy, through its price system, is notorious for gross inequalities of income and wealth.
In a company, a clerk’s yearly income may be less than what the chief executive officer (CEO) earns in a day.
A millionaire and his family may be basking in luxury while a kilometre away dwell indigent families.
Such gross inequalities are common in an economy which was once growing and has just become stagnant.
Fast growing economies when left unregulated produce gross inequalities in income and wealth. What are the causes and consequences of these inequalities?
One cause is natural. Those born stronger and more intelligent produce more goods and earn more income than the weaker and less intelligent.
Education also affects people’s earnings. Those who left school with university degrees earn more on average than non-graduates. Therefore, one way of improving one’s chances in life is to acquire education.
Some people are wealthy because they inherited property. These people do nothing to deserve that wealth except that they did not squander their patrimony.
This must be said because not all those born from wealthy parents remain well-off. Once their parents have died, they may not have inherited their parents’ talents in business management. Their business declines and falls and they metamorphose from riches to rags.
Modern social philosophy is in favour of taxing inherited wealth and using the proceeds to provide social services to less fortunate members of society.
Ownership of certain factors of production will guarantee incomes to some people and lack of ownership lays the foundation for poverty.
This is the case where some people own vast acres of land while others are landless.
Inequality here may be reduced through land reforms involving redistribution of land. But fragmentation may reduce total output from land. Those who own just a hectare or two are unable to use modern equipment to cultivate their land. Because such people earn little from their inadequate acreage, they are unable to save enough money from their earnings to invest in machinery.
Gross inequalities also arise from rent seeking and monopolies. Those groups who ‘capture’ governments derive undue advantages from their positions.
They may be close to the political elites and may influence the government to change laws in their favour. How often have we come across someone who was earning barely enough to keep the wolf off the threshold of his house suddenly owns a good deal of moveable and immovable property as a result of changes in government?
In other words, gross inequalities of income and wealth may also result from privilege and discrimination.
Existence of monopolies in an economy also generate gross inequalities of wealth and income.
This is the case especially if the monopolies are privately owned. Someone may obtain an exclusive licence to import a particular product such as cement or oil. He will reap hefty profits from such a privilege.
A monopoly may be in the form of a cartel in which a number of firms collude to raise prices of their products or to buy raw materials from small-holder farmers at ridiculously low prices.
The remedy is for the government to ensure that no one frustrates the wheels of competition. In the US, the State enacts legislation against what they call trusts. These are monopolistic arrangements which frustrate competition in an economy.
The evil of gross inequalities comes to the open through social conflicts. Revolts such as those the world has experienced recently are more due to inequalities of income and wealth than overall poverty. The revolts taken place in oil rich countries.
It is the duty of the State to ensure that people participate in the economy as entrepreneurs and not just as employees. Foreign direct investments (FDI) ought to bring visible benefits to the country. Time and time again, we have seen a country rich in minerals and oil burdened with gross inequalities of wealth and balance of payment problems.
People are now sensitive to economic injustices. Policies to encourage FDI must accompany indigenisation policies.
This, however, must never be at the expense of efficiency. A certain amount of inequality is essential in society as an incentive for people to work hard. Only those who can make good use of affirmative action deserve it.
