Adam Smith played an important part in our understanding of how society affects the evolution of civil society and business. As mathematics and reason improved economic theory through the development of rational choice theory, econometrics and mathematical modeling, economists took an important role at the governance table of most democracies.
The current deep and long recession and the troubling recovery, however, have cast some doubt on prevailing economic theories and their pundits and disciples. Perhaps the turning points were the Enron scandal and Madoff caper because the inequality that pervades America today is not going away. Somehow we have arrived at the moment when we are looking at values and relative differences between those who climb the ladder and those for whom there seems to be no ladder at all. As America continues to be decided on ideological grounds and social space and social relations continue to be segregated in terms of education, access to higher paying jobs and wealth, it becomes increasingly difficult to see an American future where a large middle class supports the notion that everyone who tries hard can make it here. That is a significant problem that is now seemingly being institutionalized as the American economy fails to create a necessarily clear and reasonable path between birth and upward mobility.
“One interpretation of the Pareto Principle, which suggests that 20% of the people own 80% of the wealth, is that there\’s no point in being angry about that inequality. Maybe the 20% is doing better than you because they went to college and you didn\’t — but that\’s not hurting you.
Dr. Deaton: I agree with the Pareto Principle, but you can be hurt by that kind of inequality, and that can happen in many different ways. If a bunch of people get extremely rich but nothing happens to your income, that\’s OK. But if they use their wealth to start buying the government, for instance, then it\’s not OK, because you don\’t get your share in the democracy anymore.
I\’ll give you an example from the U.S. right now. If you\’re a drug manufacturer and you come up with a blockbuster drug that does very well, eventually the patent runs out. Your business could let the patent run out and let the generics manufacture that drug, which is what\’s supposed to happen. But your company could also spend a lot of money lobbying Congress to get an extension of your patent. That\’s an example of blocking equality, and it hurts people. And economists have been very weak on that.
Like everyone, we economists specialize in what we do. So economists think we\’re the gods of income; we tend to think about well-being in terms of income, and we don\’t worry too much about the other things that contribute to well-being, such as health, education, or participating in a democratic society. But not having access to an important medicine doesn\’t show up as a share of GDP.
When we think about well-being, we can\’t just think about wealth. That\’s one of the things we\’ve learned from the Gallup World Poll — how important many other elements are to a person\’s satisfaction with his life.”
via What’s So Bad About Income Inequality?.
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