Saturday, July 5, 2014

Galbraith, 2012, Inequality and Instability (Political economy)

James K. Galbraith is son of John Kenneth, and brother of Peter, who was ambassador in Zagreb when I was there with UNPF in 1995. Inequality is one of the major themes in his work.  In this fairly dense tome, he provides a pretty convincing description of the empirical relationship between the bubbles of concentrated wealth that are chasing better returns, and the tendency of the bubbles to burst, causing economic crises. But there’s a lot more to this.  His Ch. 5, on economic inequality and political regimes, is a much more globally comparative take than Bartels (2008) focused only on the US.  While Bartels is clear about the widening gap under Republicans, Galbraith is more circumspect. In general social democracies and democracies are associated with lower inequality, using UTIP-UNIDO data, but a narrower range of more complete data is less conclusive. Other political classification schemes are more contradictory still: the Chibub-Ghandi index shows democracy associated with lower inequality, but the Polity/Freedom House and World Bank indices show democracy significantly related to greater  inequality. Galbraith concludes that economists need to redefine the nature of inequality in order to study it more effectively.  Inequality is largely driven by financial factors, rather than wages, productivity or non-investment income. The 1980-2006 super-bubble had a disproportionate impact on poor countries and poor people, as a direct consequence of aggressive high interest rate policies. National experiences tend to parallel global statistics on concentration of wealth and inequality. The ability or willingness of market states to affect inequality is limited, and there aren’t many alternatives (communism has all but disappeared and Islamic republics aren’t mature systems). In social democracies (mainly Northern Europe), it is economic structures rather than political systems that preserve equality. More egalitarian states tend to have lower unemployment, discrediting advocates of ‘labour market flexibility’.  There’s a neat connection to Morton Jerven’s Poor Numbers, at a more general level: “The mysteries and puzzles in the literature do owe something to the desire, often noted among economists to cling to a point favoured by prior theory, but they also owe a great deal to the efforts of researchers, operating in perfect good faith, to draw more information from inadequate records than those records are willing or able to disgorge.”

Perhaps the reason that Galbraith sounds like a voice crying in the wilderness lies in sponsorship of mainstream economics; there’s a wonderful scene at the end of the movie “inside job” in which advocates of free-market laissez-faire are asked why they didn’t disclose sponsorship by major financial institutions and banks; they didn’t see it as relevant. 
(also posted on Amazon, minor edits)
David Last, 22 May 2012

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