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Inequality UPSC NOTE

 Impact

  • Inequality can have deleterious economic effects 

  • Consider one form of inequality, that of concentration of monopoly power amongst capital relative to labour

  • This can have negative effects on consumption, welfare, and growth. 

  • If done properly, wealth taxes and distribution can have positive effects.

  • Billionaires draw their wealth from monopoly

  • Their business groups are dominant players in their specific market

  • This allows them to set prices instead of being determined by the market

  • The extent of mark-ups above the cost of production is determined by their monopoly power

  • Thus, for any given level of money wages, real wages — which determine purchasing power — are lower in economies with strong monopolies.

  • These monopoly effects are currently being experienced as the cost-of-living crises affecting the developed economies

  • The phenomenon of “greedflation”, or companies raising prices to increase profit margins in the wake of multiple demand-and-supply shocks due to the pandemic, has been pointed to as contributing to high rates of inflation in the West

  • Textbook economics shows us that the profit-maximising level of output under a monopoly is less than under a competitive economy, implying a welfare loss

  • Thus, the presence of monopolies can lead to lower real wages and lower levels of output and investment.

Inequality and growth

  • Assume that a company decides to set up a new factory. 

  • Before the new capital stock is created, wages are paid out to workers to build it. 

  • The income of the workers is spent on purchasing goods, which increases the income of goods-sellers, whose increased income results in purchases of other goods, and so on

  • The total increase in the income of workers and goods-sellers is greater than the initial investment

  • This process is called the ‘multiplier’ effect, wherein investment raises incomes by a greater proportion than the initial investment.

  • When companies exercise market power, mark-ups and prices will be higher. 

  • Real wages of workers are lower, and they can only purchase lesser items. 

  • However companies, because of higher margins, will enjoy the same amount of profits from the sale of a lesser amount of goods

  • The increase in income from a given amount of investment will be lesser under monopoly because of reduced consumption power

  • Thus, investment will have a weaker effect on growth under monopoly while not affecting profits.

Redistribution and growth

  • Some argue that the ‘cure’ of redistribution can prove more harmful than the disease of inequality by affecting job creation

  • Entrepreneurs would see reduced incentives for amassing wealth under a high-tax regime, resulting in a scale-back of investment and jobs

  • Investment occurs under the influence of future profit expectations, while wealth is accumulated past profits

  • As the Polish economist Michal Kalecki argued, taxes on wealth would not affect investment since it leaves expectations of future profits unchanged

  • For example, taxing Gautam Adani’s wealth will not affect investment since expected profits from airports depends on the demand for air-travel which is independent of the value of his wealth.

  • No doubt, the difficulty in converting profits into wealth may deter some business-owners from undertaking investment

  • But an economy with high expectations of profit would ensure businesses invest even if wealth is taxed

  • Redistribution can generate forces to spur growth even if some billionaires pull back on investment

  • For one, if wealth is redistributed and increases income, the multiplier process would become stronger. 

  • Businesses would be more willing to invest where purchasing power is strong

  • If monopolies are curtailed, then prices would be lower and real wages higher, leading to greater demand.

  • Consider Thomas Piketty’s proposal of taxing billionaire wealth and providing basic income

  • This might cause some to exit the economy, but can create a new class of entrepreneurs who can create start-ups, freed from the necessity of working for wages

  • Redistribution is not a silver bullet, and too high a rate of taxation can become a net drain on an economy. 

  • Used in conjunction with other policy measures, curtailing inequality can lead to a healthier economy.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Inequality UPSC NOTE
Inequality UPSC NOTE
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