The Upside of Income Inequality
By Gary S. Becker and Kevin M. Murphy From the May/June 2007 Issue
Filed under: Economic Policy, Public Square
Much of the widening gap in incomes reflects the rising payoff for a college education and other skills. Rising payoffs are a development that the authors, economists who have won the Nobel Prize and the Clark Prize, call ‘beneficial and desirable.’
Income inequality in China substantially widened, particularly between households in the city and the countryside, after China began its rapid rate of economic development around 1980. The average urban resident now makes 3.2 times as much as the average rural resident, and among city dwellers alone, the top 10 percent makes 9.2 times as much as the bottom 10 percent.[1] But at the same time that inequality rose, the number of Chinese who live in poverty fell—from 260 million in 1978 to 42 million in 1998.[2] Despite the widening gap in incomes, rapid economic development dramatically improved the lives of China’s poor.
Politicians and many others in the United States have recently grown concerned that earnings inequality has increased among Americans. But as the example of China—or India, for that matter—illustrates, the rise in inequality does not occur in a vacuum. In the case of China and India, the rise in inequality came along with an acceleration of economic growth that raised the standard of living for both the rich and the poor. In the United States, the rise in inequality accompanied a rise in the payoff to education and other skills...
american.com
Pareto principle vs. Gini coefficient
When professional economists think about economic policies, they generally start with the principle that a change is good if it makes someone better off without in making anyone else worse off. That idea, first suggested by the Italian economist Vilfredo Pareto, is referred to as the Pareto principle. I find it hard to see how one could disagree with such a principle, which is why it is the widely accepted foundation for the evaluation of economic Policies
Not all policies can be evaluated in reference to the Pareto principle. There are policies that make some people better off while making others worse off. The desirability of such a policy depends on how much the gainers gain, how much the losers lose, and the initial income and circumstances of the individuals involved. But that difficult evaluation is not my concern here. I am interested only in evaluating changes that increase the incomes of high--income individuals without decreasing the incomes of others. Such a change clearly satisfies the common-sense Pareto principle: It is good because it makes some people better off without making anyone else worse off. I think such a change should be regarded as good even though it increases inequality.
Not everyone will agree with me. Some see inequality as so intolerable that they regard increasing the income of the wealthy as a 'bad thing," even if that increased income does not come at anyone elses expense. Such an individual, whom I won describe as a 'spiteful egalitarian," might try to reconcile this with the Pareto principle by saving, " It makes me worse off to see the rich getting richer. So if a rich man gets $1000, he is better off and I am worse off. I dont have fewer material goods, but I have the extra pain of living in a more unequal world." I reject such arguments and stick to the basic interpretation of the Pareto principle that if the material well-being of some individuals increases with no decrease in the material well-being of others, that is a good thing even if it implies an increase in measured inequality.
nber.org |
