Paul Krugman is musing about the relationship between GDP growth and inequality. Most of his analysis I agree with, especially the “data massaging.” I’m primarily a Sociologist, but I also hold a Master’s in Economics, and find data massaging a huge difference between the two fields. In Sociology, you work with the data that you have, like it or not (more often “not”). In economics, data is what ever you want it to be after the axioms and mathematical gymnastics that would make any Olympian proud are applied.
What is missing from Krugman’s argument however, and missing from the majority of inequality arguments is the concept of poverty. Many may think that inequality sort of equals poverty (or at least leads to it), but they are two totally different concepts. Inequality is something that can usually be mathematically measured (which all economists like). Poverty however, is a social construct. Poverty cannot always be mathematically measured, and when it can, different people in different organizations have different measurements. I’m just going to focus on the measurement part.
The World Bank defines poverty as those making less than $1.25 (U.S.D. in purchasing price parity) per day. Canada has no official measure of poverty (though for statistical purposes, they usually use 57.3% of median after-tax income). Great Britain uses 60% of median after-household-expense income. Which do we use in relationship to inequality? I don’t know, because just the varying definitions of poverty make it a social construct.
There are a lot of reasons why both economists and sociologists think that inequality is a bad thing over all. Both fields have differing opinions as to why. For example, Keynesian economists think income inequality is bad because it lowers the overall GDP through the absence of effective demand. This is certainly true (and proven empirically). Sociologists usually think that income inequality is bad because of the separation of the classes (this is also empirically true). Where the common ground is however, is in the social construct of poverty.
So why is poverty bad? There are a few answers to that question in both economics and sociology. Risking being called a “heterodox heretic” however, in order to address the “poverty” issue in inequality, we have to go back to Max Weber and Thorstein Veblen; the purpose of the firm is to produce goods and services for consumption in order to survive and grow over time. Who consumes the goods and services of the firm? Households. The primary economic purpose of households is to consume goods and services produced by firms in order to survive and grow over time. When households no longer have the ability to consume for its own survival and reproduction, we could call that poverty which addresses both the sociological marginalization of classes, and the economists’ philosophy of effective demand.
If households no longer have the ability to consume within a normal distribution of income, then it could look something like this:
This is a clear picture both economically and sociologically of what marginalization looks like graphically. Those on the far end of negative standard deviations from the mean (or median in a standardized distribution) are on the margins (or fringes) of being able to participate in the normal economic activities of society.
Where inequality comes in is the skewness of the distribution. With inequality, the right tail becomes stretched out in a log-linear fashion, marginalizing more than just those on the lower end of the income distribution. In other words, you can have inequality without poverty, but you cannot have poverty without inequality. Mathematically, you can have a good aggregate demand that (theoretically) consumes without poverty. In inequality, if the GDP per capita is unequal, households on the lower end can do just fine in their consumption activities. This is why poverty in Great Britain is different than poverty in Sudan, or even the United States.
So the inequality discussion (beyond musings) must include poverty, the social construct of poverty (both politically and socially), and the household’s ability to consume goods and services produced by capital if there is going to be any headway on the whole “inequality” discussion. Otherwise, income inequality just doesn’t matter within the social context of poverty.