Inequality and conventional economics

Nobel laureate economist Amartya Sen's On Economic Inequality is a seminal work that stimulates rigorous studies of inequality.  It is considered one of the most structured and constructive presentations of economic inequality which examines and experiments diverse instruments to explore the issues of economic inequality. Secondly, Sen has relevantly and profoundly showed in this epoch-making book the limitation of the so-called Pareto rule - the most influential instrument used in the welfare economics - and the utilitarian perspective to economic inequality which is credited to the eighteenth-century British philosopher Jeremy Bentham.
Sen in his book laid down several theorems to prove and show that Pareto rule altogether rules out any distributional judgment and makes all Pareto allocations or outcomes virtually incomparable. What does this mean is that given several Pareto outcomes, to say, A, B, and C, a social ranking of these alternatives would yield that A is as desirable as B; B is as desirable as C; and therefore, A is as desirable as C. That means we are left with a blank statement and that is Pareto incomparability. It is therefore wise to shut our mouth and not to raise any question regarding economic inequality. But irony is that in all textbooks, Pareto outcome is hailed with such extreme importance that it is the best and supreme state that a person should desire. To say, Pareto teaching has been such a doctrine which has hardly even explored in details and we are taught that an allocation is a Pareto allocation if the move from it makes one well off and hurts other. What a cryptic statement is it! Had an economist experienced such move in reality, he would have thought himself living in a paradise!
However, Such a paradise would instantly turn into a hell if one is presented with the  following question: If state A is a Pareto outcome, then why I am secluded from having access to, for example, the consumption of a goods called X? Well, the shrewd economic theorists would say that it is all about demand and supply and, above all, scarcity and the value relation embedded in scarcity and usefulness.
This kind of so-called economic teaching is still spreading its poison in the classrooms. The story doesn't end here even. One of the most serious problems in economics has been that studies of inequality and studies of mainstream and conventional income, unemployment, money and finance are disintegrated. When we study macroeconomics, for example, consumption function, our concern about inequality almost vanishes and we become accustomed to the feeling that we live in a land which is totally even. It turns out that sometimes the question that hits our conscience is: Does economics teach that my choice of actions should be such that it generates outcomes that are not only best for me but also for others? Unfortunately, we hardly get this kind of lessons from this conventional teaching. Therefore, the concern about economic inequality under such domain of economics seems often puzzling and contradictory.
LAWRENCE SUMMERS ON ECONOMIC INEQUALITY: Reuters on February 17 carried an article titled On Inequality by Lawrence H. Summers, the Charles W. Eliot University Professor at Harvard and former U.S. Treasury Secretary. Lawrence Summers is apparently concerned with the rising inequality in the USA and has suggested some measures to counteract such outrageous inequality. He argues: "It is easy to conceive of policies that would have reduced earning power of a Bill Gates or Mark Zukerberg by making it difficult to start, grow and globalise businesses. But it is far harder to see how such policies would raise the incomes of the remaining 99.9 per cent, and such policies would surely hurt them as consumers." He adds: "The challenge is knowing what to do. If total income were independent of efforts at redistribution, the case of reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom would be compelling. Unfortunately, this is not the case. Technological changes and globalisation have made it possible for those with great entrepreneurial talents to operate faster and on a larger scale than ever - and gather profits on an unprecedented scale".
Now the question is how to overcome such inequality problem? Summers gives the answer as follows: "So it is not enough to identify policies that reduce inequality. To be effective, they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play here". That means ultimately the burden of reducing inequality falls on the shoulder of government and its redistribution policies.  Time to time people have raised demands that wealthy class should be taxed more or tax benefits for such class should be reduced but consensus is yet to be achieved and Summers also considers such issue as he points "it is ironic that those who profess the most enthusiasms for market forces are least enthusiastic about curbing tax benefits for the wealthy."
While Summers looks at the end product or the extent of inequality and the measures to curb it, he doesn't address the issue how such widespread inequality has emerged. The same question has not been sufficiently addressed by Amartya Sen either. Such tax measures may appeal easily to somebody who is much concerned about the rising inequality but it is, of course, less appealing in terms of the explanation of the origination of economic inequality. Therefore, it has become imperative to ask the vital question: How much inequality is due to the so-called market mechanism and how much is due to other non-economic factors such as physical handicap? Before Summers justifies such tax measures he should answer the first question. And if the answer turns out to be affirmative, then tax-based measures to reduce inequality and to raise the incomes of the poor is justified; otherwise, justifying such tax measures would be really difficult.
However, such justification would create another dilemma: How much desirable is such tax reform measures to curb inequality from the time perspective? That means is such tax-based measure a permanent solution to increasing inequality? We argue that it is not. Why is this so? Take, for example,  Summers' statement: "Technological change and globalisation have made it possible for those with entrepreneurial talents to operate faster and on a large scale than before - gather profits on an unprecedented scale". If such scale of profits over time increases, then we need to catch up such increasing trend increasing the tax rate also. But in the end such measure would prove futile and question of addressing inequality would be deserted. Moreover, the question remains whether the unprecedented gathering of profit by technological change and globalisation should be a cause of inequality. We argue that if market forces work in such a way that it includes the poverty and inequality in consideration, then inequality should be independent of the scale of profit. But the scale of profit would be a big problem if inequality and poverty remains out of consideration of the conventional operation of market economy.
ECONOMIC INEQUALITY AND TRADITIONAL ECONOMICS: While a rational person studying economics would not expect a totally even world, he would definitely try to make the degree of unevenness of our contemporary world as small as possible and that should be the actual spirit of the study of inequality in economics. But doing this is also a daunting task and often requires thinking out of the box. In fact, this is what we presently need in the study of inequality in economics. It can be argued, at least, that the present set-up of economic theory, so disintegrated and segregated, offers us little hope in the rigorous study of economic inequality.
When somebody says that competitive market equilibrium is a Pareto outcome, then it becomes a matter of frustration for those who are concerned with economic inequality but a total joy for the theorists who advocate such a development. What we need is that we have to seek an approach that can take care of both - not one at a time and in an isolated manner. If the analysis is about the market equilibrium, then such market equilibrium should be inclusive of economic inequality and not exclusive of economic inequality. But the traditional economics has been so conservative in its approach that it has set aside the study of economic inequality in the North Pole and the study of other things such as market mechanism in the South Pole.
The contributor writes from the University of Denver, USA. [email protected]