How I see Economic Inequality (2)

The worst form of inequality is to try to make unequal things equal.

– Aristotle

Image courtesy of: http://www.alternet.org/

Following the first of a two-part entry, this concluding post incorporates a more analytic perspective. The following cites the order with which it is structured: (I) the materials I read back in my early 20’s, (II) the measurement tool that I learned to use, (III) my most favored argument during debates and of course, (IV) a short and entertaining exercise for those curious to know how their incomes stand when compared to other people in their country. Parts I-III are some of the means which have helped me write the first part. I do hope this will be as interesting for you as it was, and still is, for me.

Note: if the amount of text is discouraging you and the mean-looking formula is too much, don’t feel bad! But at least scroll down to the “IV. FUN TIME!” section and see how your income compares to that of others in your country.

I. Words from the wise

I’ve searched some of the most famous quotes from social scientists whose works have been widely used in discussions about income inequality. The authors alluded to are not the only ones relevant to the topic, but they are the ones I could salvage from my memory (I especially recommend “The Animal Farm” by George Orwell- it is highly entertaining due to its likeness to life and very educational, too!):

“Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions.”

– Adam Smith, Wealth of the Nations

“Does inequality in the distribution of income increase or decrease in the course of a country’s economic growth?”

– Simon Kuznets, Economic Growth and Income Inequality

“Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity in which fair play, equality of opportunity, and a sense of community are so important.”

― Joseph E. Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future

“The raw fact is that every successful example of economic development this past century – every case of a poor nation that worked its way up to a more or less decent, or at least dramatically better, standard of living – has taken place via globalization, that is, by producing for the world market rather than trying for self-sufficiency.”

– Paul Krugman, The Unraveling

“A house may be large or small; as long as the neighboring houses are likewise small, it satisfies all social requirement for a residence. But let there arise next to the little house a palace, and the little house shrinks to a hut. The little house now makes it clear that its inmate has no social position at all to maintain, or but a very insignificant one; and however high it may shoot up in the course of civilization, if the neighboring palace rises in equal or even in greater measure, the occupant of the relatively little house will always find himself more uncomfortable, more dissatisfied, more cramped within his four walls.”

– Karl Marx, Wage Labour and Capital

“All animals are equal, but some animals are more equal than others.”

– Georgre Orwell, Animal Farm

II. The Gini Coefficient

No study in the field of economics is considered “complete” if there’s no measurement involved. In this case, the most commonly used measure of inequality (income, wealth or consumption) is the Gini Coefficient.

(When I realized this in relation to economic inequality, I couldn’t help but shake my head in disbelief. I came from a country where the latest Gini Coefficient dated at 2012 is 0,43- a value considered to be high, given that the highest for the same year is 0,61. Actually, the Philippines was the 14th among the 20 countries with the highest levels of inequality, and the only Asian nation in the top 20. So what I thought at that time was, “Really? measurement? Just look at the shanties outside the grand, luxurious hotels of the cities and you’ll have hard-core evidence of inequality in front of you!”. I suppose it is still highly imperative for something to be measurable for it to exist? Tsk!)

Based on the Lorenz Curve, the Gini coefficient (G) “is a measure of statistical dispersion that is frequently used in income (or wealth*) distribution analysis”. It can be calculated by this formula:

Ver imagen original

DO NOT let this mean-looking formula impress you. It really is simple once seen with an example:

Gini0

Where:

n is the number of subjects (Person- 5 in this case)

i is the order which the subjects are placed (A=1, B=2, C=3, D= 4, E=5 in our example)

Xi is the income of the subject we are referring to (X1, X2, X3, X4 and X5)

A Gini coefficient of “0” represents perfect equality (each person owns an equal share)

Using the information in the table above: Imagine 5 cousins who were given 12 pieces of candy bars to share among them. Nanay B., an excellent distributor, thus gave each kid exactly 2,4 candies so there would be no conflict. For practicality’s sake, let’s call the candies “Income” and the cousins “Population”. In this case, and following the diagram, we can apply the scary-looking formula and realize it’s not so scary at all:

Giniex1

 

 

I will even encourage you to compute the following and see for yourself how the Gini coefficient is truly zero. We may represent this in a graph similar to this one below (the Lorenz curve is equal to the 45º line of perfect equality of incomes):

Gini0gr

A coefficient of “1” suggests perfect inequality (where one person owns everything)

Meaning to say, that any value between 0 and 1 represent more or less inequality. Going back to our example (see information from the table below): imagine Uncle P. coming back from the U.S. and brings 12 packs of cookies to be shared by the 5 cousins (again, cookies=income and kids=population). Nanay B. went to the market, so the eldest cousin distributed the cookies according to his criteria. This meant that the younger ones (A, B and C) would receive less and the older ones (D and E) would receive more. The new distribution would be as follows:

Gini03

Applying the same formula, we get a Gini coefficient of 0,333333… which we could of course shorten to the value of 0,33. The Lorenz Curve will look like the line drawn in orange below (this time, the curve deviates from the perfect-income equality line):

Gini03gr

The value of G (0,33) as well as the distance of the new Lorenz Curve from the line in the middle suggest that there is evidently a lack of balance in the new distribution.

(I encourage you, dear reader, to use this measure the next time you want to prove that a certain malpractice is happening when it comes to distribution of resources- be it allowance, gifts, slices of cake, etc… Data-gathering is exhausting but it could be fun…?).

Other income inequality measures

For an easy reading about other income inequality measures, please refer to:

https://en.wikipedia.org/wiki/Income_inequality_metrics

Don’t hesitate to share your knowledge and/or opinion about these metrics!

III. An attempt at problem-solving

Aristotle pointed out that it would be more wrongful and more hurtful to make unequal things equal; it is simply against the natural order of life. However,where there is such a social and economic polarization (where the privileged are only acquiring even more privileges and making certain opportunities exclusive while the deprived ones are increasingly excluded), what becomes natural is to aspire for a more just way of life.

Even though I cannot replicate the dialouges I’ve had with different people, I can and will share my most favorite argument to battle economic inequality: if we incorporate the “human” aspect in our understanding of what is “economic”, we go beyond the concept of income as the sole measure for wealth and well-being. By doing this, we become open towards solutions aimed at developing human capacities in order for individuals and groups (families, communities…) to pursue a desired level of social and economic conditions. This is based on the human development paradigm** developed by Amartya Sen that suggests a new metric with which to base our concept of equality.

Some people would call it cheating- similar to readjusting a weighing scale to fit one’s desired outcome. I call it a necessary adjustment- similar to walking away from the mountain to get a better view of the whole.

A. Sen, Human Development approach

The most important idea is that Sen recognizes the vast diversity of individuals and how we are not equals, to begin with. It is absurd to push for equality when the fact is, life is as diverse as the people who live it- people with different cultures, ideas, preferences, values, ambitions and limitations. But, people can be given equal opportunities to develop their capacities which in turn will give them a chance to live the life they wish to (not everyone wants to be as rich as the top 50 richest people on earth, nor everyone wishes to trade their leisure time for money). This is why he has insisted on the role of human development to address the search for socio-economic equality.

Sen gives an example: a victim of famine and an affluent person who chooses to fast are both staving; materialistically they are “equals” because neither have access to nourishment. But under the human development paradigm, they are not- because the affluent man has the choice to satisfy his need to eat while the famined man has no alternative to hunger. In this sense, what would make them “less unequal” is if both possessed the freedom to choose whether to stay hungry or to eat. In other words, equality under this point of view means that both individuals are free to make real choices for themselves in order to live the lives they want to live.

According to the United Nations Development Programme (UNDP), Human Development (or Human Development approach) “is about expanding the richness of human life, rather than simply the richness of the economy in which human beings live. It is an approach that is focused on people and their opportunities and choices.”

In this sense, income is considered only as one of the means to give people access to opportunities and other resources that they need to make life choices. In the first part of this post, I mentioned how wealth distribution is important but having equal access to opportunities could partly address economic inequality more continuously; Sen goes ten steps ahead stating that inequality should be defied by confronting problems related to a person’s ability to develop his capacities, therefore, livelihood, health, education and social inclusion must be assured.

The overly simplified manner of explaining Amartya Sen’s thesis surely made me miss some very important points. However, the depth of this paradigm and the lack of time and space to expound are not very compatible elements. Thus, far from overcharging this post I limit myself to concluding that: when people claim their right to a decent job, healthcare, education and social inclusion and the society where they thrive assists them in their demand regardless of ethnicity, gender, age, income, et cetera, it means that the citizens are being treated fairly- it means that there is a serious search for equality.

 

IV. FUN TIME!

I found this very interesting page at the OECD website: http://www.oecd.org/social/inequality-and-poverty.htm

… where you can discover approximately “how much you earn compared with others in your country.” (Scroll down the page to see the tool entitled “What’s your share of the pie?”)

For our family, I made an educated guess basing on how much our household is earning per month, compared with the minimum salary and compared with the average salary of a person with my qualifications. I guessed right! (sadly…)

 

* Wealth and Income have been indistinctly used in this post. However, it must be remembered that wealth denotes a stock variable (measurable at a particular point in time), while income is a flow variable (measured with reference to a specific period in time).

** One important condition for this paradigm is for it to be studied and analyzed within the context of a democratic society.

Sources:

  1. http://data.worldbank.org/indicator/SI.POV.GINI
  2. Investopedia
  3. http://www.had2know.com/academics/gini-coefficient-calculator.html
  4. “99 Must-reads on Income Inequality”, available at: http://edition.cnn.com/2013/08/23/opinion/sutter-99-inequality-must-read/
  5. For richer, for poorer, available at: http://www.economist.com/node/21564414
  6. https://www.goodreads.com
  7. “Economic Growth and Income Inequlity”, by Simon Kuznets, available at: https://assets.aeaweb.org/assets/production/journals/aer/top20/45.1.1-28.pdf
  8. http://www.notable-quotes.com
  9. http://www.economicsdiscussion.net/difference-between/difference-between-flow-variables-and-stock-variables/555
  10. http://hdr.undp.org/en/humandev
  11. The Concept of Human Development: A Comparative Study of Amartya Sen and Martha Nussbaum”, by Christopher Ryan B. Maboloc, available at: http://www.diva-portal.org/smash/get/diva2:18358/FULLTEXT01.pdf
  12. “Desarrollo y Libertad”, by Amartya Sen, available at: http://goo.gl/9FuoFa
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