Tuesday, August 19, 2008

Irrelevance of economic inequality

This article (or rather a ‘perspective’) by Manish Sabharwal in ET yesterday (i.e., Aug 18) is worth reading, citing and analyzing. Manish has put forth a straight and simple argument - Does the prevalence (or absence) of economic inequality *actually* has any effect on poverty and general well being?

“India has become substantially more equal since January 8, 2008. About two hundred billionaires have turned into millionaires. The drop in stock market and real estate values means that the top 5% richest people may have lost about 40% of their wealth and making the rich poor increases equality. But does this exponential increase in equality help India’s poor?…………

………… I argue that if eliminating poverty is accompanied by an increase in inequality, we should want it. Levels of economic inequality are irrelevant; all that matters is equality of opportunity, particularly for the poor.”

Basically, Manish says that in India we have a lot of both – poverty as well as economic inequality. But what should concern policymakers should only be POVERTY. And if poverty can be reduced by increasing economic inequality, so be it (Also read - http://www.marginalrevolution.com/marginalrevolution/2007/07/is-economic-ine.html).

I am also personally of this view only. Indeed ‘equality of outcome’ is insignificant and should not be the goal; rather ‘equality of opportunity’ should me the social aim. Once it is assured that everyone has a level playing field, then equality/inequality in the next level of the game should cease to be a consideration.

The argument can be explained using a simple example – A couple has 2 sons, they send both of them to good convent schools and then both of them attend a good coaching and appear for IIT-JEE. One beta clears, the other does not. And so the beta in IIT has a higher (expected) income than the non-IIT beta. Sounds Fair… Right?

This should be the general case in the economy. Every1 gets equal opportunity. And that’s it. B’coz Intervening beyond this point is tantamount to forcing ‘the hard working ants to compensate the lazy grasshoppers for their laziness’! Sound Unfair… Right?


Swati said...

I think 'equality of opportunity' can only be ensured in the long run, if 'equality of outcome' is forcefullly applied in the short run. This brings every1 at the level playing field. & there is no other real way of ensuring that everyone gets equal opportunity.

DSE (Batch 2004)

Anonymous said...

In the example you put forth, both the individuals enjoyed the same 'opportunity'. In real life, sections of people are culturally, socially and economically backward (they were given less/no opportunities in the past). How does equality of opportunities in the present take care of that.

If all of us were the same -like the assumption in neoclassical economics, then 'equality of opportunity' in the present would work.

This is where, a knowledge of history come into play.

But, yeah the focus should be to reduce (absolute) poverty levels rather than inequality as of now.

Varun Reddy Sevva said...

Same things as mentioned above - focus should be on reducing poverty - and that doesn't mean reducing the poverty line as many govt.s have done...

Equal Opportunities do not exist as this is not an ideal world..

anand said...

Have u read Atlas Shrugged?

Prat Mitt said...

Good write up - Btw, what do you think of current controversy at Singur - who is right with respect to 'equality of opportunity', Tata group or protesters?

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