Nobel Prize Puts Global Inequality Center Stage
But Failure to Focus on Power and Greed Spoils the Performance
By David Demers (708 words)
I was delighted but nonplussed when three economists who conduct research on global inequality were chosen to receive the Nobel Prize in Economics.
Delighted because this award turns the spotlight onto the dire problem of rapidly growing wealth and income gaps between and within nations — gaps that threaten democratic processes and people’s health.
I was nonplussed because the focus of the award and the research itself is on the effects of institutions rather than on how political and economic elites use those institutions to promote their own financial interests.
Nobel Prize winners Daron Acemoglu, Simon Johnson and James Robinson cogently argue in their research that political and economic institutions — not climate, culture or geography — are primarily responsible for a nation’s wealth or poverty. Nations that have or create inclusive institutions that promote rule of law, equality, and democracy tend to be wealthier than those with extractive institutions, which are controlled by powerful elites who enrich themselves at the expense of everyone else. Inclusive institutions are expected to keep inequality and greed in check.
Although this greed-checking proposition seems to hold when comparing across nations, it often doesn’t apply within nations. In fact, inclusive institutions, like Congress, often create and promote wealth and income gaps.
In the United States, wealth and income gaps stem in large part from federal tax breaks that the wealthy and corporations have orchestrated over the last four decades during the presidential administrations of Ronald Reagan, George W. Bush, and Donald Trump.
To justify the tax cuts, proponents initially argued that the cuts would stimulate the economy and generate more tax revenues. Economists quickly debunked this supply-side economics theory during Reagan’s presidency, yet the tax cuts kept coming.
Why?
Greed and power.
Proving that greed is the prime motivator isn’t easy, because none of the proponents of tax cuts has ever admitted that greed motivated them. But the circumstantial evidence is stacked heavily against them. Proponents of the cuts continued to assert that they would generate more tax revenue even though the scientific research proved this wrong and that benefits would not trickle down to working and middle classes. All three presidents and every member of Congress also benefited financially from their tax cut bills, through their tax filings and donations they received from well-heeled constituents.
The heavy focus on institutional effects ignores and downplays the role of agency (greed and power) in understanding economic inequality. To be sure, the inclusive/extractive theory is useful for explaining differences between countries, but it offers no real solution to the problem of economic inequality within a country, because it fails to account for how political and economic elites use (manipulate) so-called inclusive institutions to achieve their goals.
To solve the problem of economic inequality in America, Professor Acemoglu does offer a suggestion: People should create a grassroots movement to force Congress and other institutions to make changes. “At the moment, the political parties are not really listening, but I am an optimist,” he told Five Books in 2017. “Perhaps in the next few years, there will be more openness to their complaints, and the political system can self-regulate itself.”
The working and middle classes are still waiting seven years later.
But even if a grassroots movement materialized, it likely would have little to no effect without strong support from powerful elites in Congress and the White House. This is one of the conclusions that can be drawn from the historical research of Walter Scheidel, author of The Great Leveler. He found that substantial reductions in economic equality are almost impossible through benign political change. Violent action appears to be a prerequisite, such as major wars (e.g., WWI, WWII), “transformative revolution” (communism, French revolution), state failure (Roman Empire, Somalia), and major pandemics (bubonic plague, Justinianic plague). Even a big depression doesn’t help much.
A solution to the problem of economic inequality within a country begins with a recognition that much of the gaps in wealth and income stem from greed and power, not from some abstract institutional force that takes decades or centuries to develop. Then contemporary elites must be convinced that it is within their interest to spread their wealth, at least a little of it.
Barring that, a grassroots revolution (but not a movement) would do the job.