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Posted: 21 January 2015 in Uncategorized
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inequality-690-532-19203053 oxfam1

sources*

Contemporary capitalism faces a real legitimacy crisis, based on two fundamental problems: instability and inequality.**

As we know, capitalism has shown itself to be inherently unstable, with twelve recessions just since the end of World War II. And, of course, the most recent, the so-called Great Recession, was the worst downturn since the Great Depression of the 1930s. No matter how you measure it—in terms of lost output or lost lives—the cost of these economic crises, especially to the majority of people, has been enormous.

Capitalism has also returned to creating, especially in recent decades, a widening gap between a tiny minority at the top and everyone else. Whether we measure it in terms of the distribution of income or wealth, grotesque levels of inequality—in the United States and across the world—are year by year becoming even more obscene.

Both problems have, in the period since the crash of 2008, called into question the legitimacy of organizing the economy on the basis of capitalist institutions.

But I sense a pivot taking place these days, from instability to inequality. Last night, President Obama declared in his sixth State of the Union address that “the shadow of crisis has passed” and that it’s time to turn our attention to the problem of inequality:

“Will we accept an economy where only a few of us do spectacularly well? Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?”

Meanwhile, following on last year’s conference in London, first Larry Summer and Ed Balls and now Thomas Edsall have begun to focus on the prospect of creating an “inclusive capitalism.” (Even some of the Republican not-yet-officially presidential candidates are talking about poverty and inequality.)

So, it seems, worries about capitalist instability are giving way (in my view, too soon) to capitalist inequality (not, of course, soon enough).

risks-2015

It’s all the more surprising then that “economic disparity,” which had been the number one risk three years running at the Davos World Economic Forum, has dropped off the list of the top five risks altogether.

The authors of the report itself [pdf] do, in fact, discuss the problem of inequality.

A major driver of social fragility is rising socio-economic inequality within countries, although it is diminishing between countries. Among the members of the Organisation for Economic Co-operation and Development (OECD), the average income of the richest 10% has now grown to about nine times that of the poorest 10%. In other countries, the ratio is even higher: for example, more than 25 times in Mexico.

Income inequality is widening quickly in large emerging markets. The People’s Republic of China has seen its Gini Index rise from about 30 in the 1980s to over 50 in 2010. While extreme poverty (less than $1.25 per day) was reduced from afflicting over 50% of the world’s population in 1990 to 22% in 2010, the same reduction did not take place in those earning under $3 per day. The story is of people escaping extreme poverty, yet remaining poor. Widening income inequality is associated with lower and more fragile economic growth, which reduces the scope to meet rising social expectations in emerging markets.

Rising structural unemployment drives both inequality and social pressures. Lower economic growth and technological change are likely to keep unemployment high in the future, also in developing countries. The spread of connectivity enables protest movements to mount more quickly, increasing the risk of unrest and violence that could easily spill over from individual countries to affect the global economy. While inequality and unemployment contribute to social instability, social instability in turn impacts negatively on equality, employment and wealth creation. The multidirectional cause-and-effect relationship makes it harder to address the related risks.

But inequality has been displaced from the list of the top five global risks (which is now headed by “interstate conflicts”) as well as from the list of global risks with the largest global impact (led by “water crises”).

I don’t have a good explanation as to why there appears to be such a large gap between the growing concern with inequality here in the United States and the seeming lack of worry about inequality within the rest of the global elite gathered in Davos.

However, it seems clear to me that the patterns of exclusion—together with the ongoing forces of instability—associated with contemporary economic institutions are sure to haunt capitalism now and for years to come.

 

*The source of the chart on the left is Vuahini Vara; for the chart on the right, Ofxam.

**To which, of course, we could add a third: climate change and the natural environment more generally.

Update

As if on cue, a reader sent me the link to an article from the BBC [ht: sm], in which the argument is, the world on average has more stuff (e.g., goods and service, cars, and a longer life expectancy) but inequality has been growing.

OECD-Gini

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