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The big question, which also confronts South African voters as they decide who to vote for on May 7, is how to reconcile these three factors. As economics, unlike mathematics, is not an exact science, the answer is not always easy.
One assumes that nobody in his right mind can be against economic growth. The question is, how do you balance it against inequality and freedom of the economy?
Traditionally, the view has been that these last two are each others’ antithesis. Equality can only be enforced, some say, which means that freedom has to be sacrificed.
This used to be the way of the communist command economies, and to a greater or lesser extent it is still the case in countries like North Korea, Cuba and Venezuela. Therefore, if you reject communism, as most people tend to do these days, you have to accept inequality as a natural fact of life, it is said.
In recent decades several economic studies have tended to support this conclusion. The findings common to all these studies are that there is a clear correlation between economic growth and economic freedom – defined more or less as the absence of state intervention in the economy.
Economic freedom, the studies show, stimulates economic growth.
Like good academics, these economists developed a statistical model with several criteria against which numerical measures are applied. One may, therefore, accept them as being valid.
But life is never this simple. Had it been the case, governments could simply have liberalised their economies and then sat back to let things take their own course.
There are several important nuances to the above-mentioned conclusions, true as they appear to be.
In the first place, the British news magazine The Economist recently published an article analysing the findings of several new studies which apparently turn everything on its head.
The article refers to the Gini coefficient, a measurement of income inequality – 100 being a theoretical situation where everything is owned by one person, and 0 where everybody owns exactly the same.
“A rise of 5 Gini points ... knocks half a percentage point off average annual growth ... Redistribution that reduces inequality might therefore boost growth.”
These studies have to be viewed against the background of yet another study, by the development aid organisation Oxfam, to the effect that the 85 richest people on earth now own the same amount of wealth as the bottom half of the global population - about 3.5 billion people.
Additionally, the richest 1% have amassed 46% of the world’s wealth, or 65 times the total wealth of the bottom half.
Even the World Economic Forum, which organises the annual economic summit in Davos, Switzerland, recognises that this may cause “serious damage” to the world economy in the next decade.
But there is more. Societies tend to pay a heavy price for inequality in the form of social upheaval. It is difficult to quantify exactly when inequality starts disrupting society, as this depends on the subjective experience of poor people.
In one country there might be social peace with extreme inequality; in another, violence might erupt with far less inequality.
The comment of Christine Owens, executive director of the National Employment Law Project, a moderately left-wing American organisation, is apt: “Income inequality is also socially destabilizing. So it’s not just a question of fairness; it’s a question of how do we preserve a functioning democracy, and it’s difficult to do that if we don’t have broadly shared prosperity.”
Middle class feels the pressure
It is also a fact that the economic crisis which has ravaged the global economy since 2008 has not only devastated the poor, but the middle class as well. Traditionally, the middle class has been the main rock of stability in the developed world, but this may be changing.
In a previous column, I wrote that the digitalisation and automatisation of the economy may induce a jobless growth as the economy recovers. Economics Professor Sylvester Eijfflinger of the University of Tilburg in the Netherlands recently told a newspaper in an interview:
“The position of the middle class is not just undermined by robotisation on the labour market, but is also under pressure because of higher taxes and diminishing public service delivery. The limit for the middle class has already been passed.”
What should we make of all this?
It simply means that life is complicated. The world cannot be understood in all its complexity by simply one factor. Just as the Marxists were wrong to put all their eggs in the equality basket, the capitalists are oversimplifying things by emphasising growth one-sidedly.
Economic freedom and growth are related, and one should be very wary of too much state intervention in the economy.
At the same time, politicians and business alike should be aware that too much inequality not only curbs economic growth, but destabilises society – and in the end, this will probably come home to roost in the grand villas of the rich capitalists too.
