From time immemorial the people of the world have been divided into rich and poor. There is nothing new about this classification according to economic status defined by income and wealth. At first the difference was rooted in the ownership of assets like land, livestock and natural resources. Creeping advance of mercantile activities created a middle class straddling the rich aristocracy and the poor vassals. Then came the industrial revolution spelling death knell of feudalism and hereditary aristocracy. Entrepreneurs became the nouveau riche many of whom amassed their wealth through hard work, ingenuity and innovation. A few rode the bandwagon of the rich using foul means and came to be known as 'robber barons'. The difference between the captains of industry and wage earners became stark. But rising wages and accompanying comfortable standard of living for the workers and the middleclass did not give rise to growing resentment against the rich. Economic growth lifted all the boats together - some faster, others tardily. Under democratic dispensation everyone hoped to have a fair shot at opportunity to move up the economic ladder.
Industrial revolution and capitalism were joined at the hips from the very beginning. As the number of capitalists grew, industries proliferated, diversifying the economy. Agriculture dwindled in size and importance. Rural-urban migration changed the demographic landscape. There was poverty and hunger as novels of Dickens would show but the poor were not condemned to poverty forever. There was hope for sharing in the wealth of nations. Simon Kuznets, an eminent economist, famously predicted that at the formative stage of economic development disparity between rich and poor would widen and then taper off as development moved upward. True to his prediction the rich countries have become richer and those described as developing are on course to higher growth. True, there are hiccups in this journey of economies, both developed and developing, caused by market volatility and debt overhang but the onward journey has been the trend for almost all countries.
In the evolution of economies of different countries driven by market forces and the helping hand of the governments the difference between the rich and the poor widen steadily proving Kuznets wrong. It has now reached the apogee ushering in the Great Divide. Even as the world cheered at the reduction of poverty, it was appalled, even shocked at the vast share of wealth owned by a handful of people in every country. It is not so much the rise of the few to unheard of economic heights, what has made observers worried and even indignant is the lack of opportunity for the people in the bottom rung of the economic ladder to climb up. Resultant poverty and deprivation have increased the number of poor faster than their graduation out of it. The steady decline in the standard of living of the poor and the middle class has jolted the conscience of many. People, particularly the poor, do not grudge the rich for their wealth. What they are railing against is the barrier erected between them and a reasonable standard of living.
It would be simplistic to say that the immiserisation (a Marxian coinage) of the poor is because of the deliberate machination of the rich. It is the play of the free market that has gradually kept the poor and the middle class at bay. As Thomas Piketty, the French economist, recently argued in his seminal book, Capital in the Twenty-First Century, the free market has an inbuilt tendency to reward the capitalist owners disproportionately compared to those who are have-nots. He has excoriated capitalism as an unjust and ruthless system that exacerbates the divide between the rich and the poor. The book could not have come at a more opportune time. Hitting the bookstores during a period of growing discontent over economic disparity the book tapped the vein of both the common people and the intelligentsia. The book conveyed the temper of the time.
Even before Piketty became a celebrity author and a familiar figure in the lecture circuit in academia, youth in the bastion of capitalism, America, rose up in revolt demonstrating against the sequestering of the lion's share of their nation's wealth by the infamous 'one per cent' of the population. Their tirade and angry demonstration against the Wall Street was a no-holds-barred critique of capitalism as it has flourished egregiously. As if taking the cue, this year in his state of the union message, the President of the United States berated the unacceptable divergence between the rich and the poor using the expression 'one per cent' popularised by the young protesters. He castigated the rich for their corrupt practices of parking money in safe havens to evade payment of tax. He also deplored the lack of opportunity for the poor and pledged to take necessary steps to mitigate their suffering and deprivation.
Almost simultaneously or perhaps on the heels of the publication of Piketty's book, Robert Reich published a book in the same genre, titled Saving Capitalism. It is evident from the title that he is very much aware about the crisis in which capitalism is mired. But unlike Piketty he wants to rescue it from the morass to which it has degenerated. He exempts free market for the insidious consequences of its functioning and instead points out that it is the government which is at fault for creating inequality because government having created free market has not overseen its working properly. He has argued that high profits at some financial firms reflect insider trading that governments have not tried to regulate effectively. Deregulation of banking and failure to regulate newer financial activities speak of government in action. Again, thanks largely due to government complicity the market power that benefits large number of workers as opposed to small number of plutocrats has declined. The International Monetary Fund (IMF) has found a close association between falling union membership and rising share of income going to the top one per cent suggesting that a strong union movement helps limit the forces causing high concentration of income at the top. Reich argues that unions are not so much a source of market power as they are owners of 'countervailing power' (a la J.K Galbraith) that limits the depredations of monopolists and others.
Why have politicians and policy makers favoured the monopolists and oligarchs? Reich gives the answer saying that rising wealth at the top buys growing political influence via election campaign contributions, lobbying and other rewards to political benefactors. Reich is spot on regarding the most important factor (government patronage) that leaves free market alone to pursue its narrow interests. Piketty ignored this feedback loop between political and market power. What is true about America is applicable about other countries, though not to the same extent. The Great Divide - the growing income inequality - is both a market failure and the result of government complicity. The onus of taking corrective action lies on government, at least as the catalyst.
The latest addition to the discussion on the Great Divide has come from Oxfam International. Its new inequality report published before this year's meeting of World Economic Forum in Davos has pointed out that extreme division of wealth is a worldwide trend. Its report entitled One per cent says that just 62 individuals now have the same wealth as the 3.6 billion people who make up the poorest half of the world's population. As recently as 2010, about 388 of the world's richest enjoyed this dubious honour. The consequences of this inequality are manifold: it can act as a brake on growth, slow poverty reduction and trigger social unrest. Almost echoing Reich's analysis the Oxfam report explains that the phenomenon of unchecked deregulation, privatisation, insider trading and globalisation have allowed big companies to sequester an increasing share of economic growth. On the other hand, the benefits have shrunk for the poor. It would be correct to say that the benefits provided to the poor through government and NGO (non-governmental organisations) interventions have been overwhelmed by free market depredations. The President of the World Bank had to admit last year that wealth was not simply not trickling down, it was being sucked up by a powerful and wealthy minority.
Unlike Reich the Oxfam report observes that tackling extreme inequality is going to require actions on many fronts - governments, business, financial institutions and industries. It also believes that the most urgent action is to put stop to tax havens.
World Economic Forum in Davos is an annual walkathon of the world's rich and powerful. Policy decisions are not made there but pressing world issues are brought to the notice of policy makers in sharp relief. The great contemporary economic challenge facing the world today, next in importance to the climate change, has been laid on table. The future will tell if anything tangible and positive was done by the world leaders, business titans and billionaires to address this problem when they gathered at Davos from January 20 to 23.
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