Are The Rich Really Different From You And Me?

Does inequality matter?

The rich are differently from you and me, Scott Fitzgerald remarked to Ernest Hemingway.

Yes, Hemingway replied, they have more money.

It’s a great retort. Unfortunately, like many famous quips that are too good to be true, the conversation never actually happened. Without Hemingway’s final word, we’ll have to resolve the matter ourselves … are the rich different? Does it matter?

A short paper by economist Branko Milanovic raises a provocative question. Looking at household data for a number of countries, it appears that while the middle classes benefit when their home country gets richer overall, the income of the very poor and the super rich is more sensitive to the country’s distribution of wealth.

Milanovic demonstrates that “for the top income classes, the gains from greater inequality tend to be disproportionately high compared to the gains from an increased overall income without a change in the distribution.”

In other words, the very richest residents of a country benefit more from an increase in inequality (i.e. from a greater concentration of wealth at the top) than they do from a total increase in the country’s wealth.

The upshot is that the economic elite have less incentive to support income growth in their own countries. Of course, our politics our determined by a complex set of factors, not merely crude self-interest, but many people hold to at least a broad ideal of market incentives coming together for the overall good.  

From inequality to equities

Can inequality more directly affect economic decisions? Sociologist Wolfgang Streeck suggests that as the concentration of wealth amongst the rich lowers the demand for goods and services from lower and middle income earners, the rich will have to pursue innovative methods for increasing their wealth.

Streeck argues that a “concentration of income at the top must detract from effective demand and make capital owners look for speculative profit opportunities outside the ‘real economy’. This may in fact have been one of the causes of the ‘financialisation’ of capitalism that began in the 1980s.”

The suggestion is that given a decrease in effective demand amongst the majority of the population (because of their decreased share in the economic pie) the wealthy turned to Wall Street for profits.

Streeck’s proposal is speculative, but it raises two interesting points.

First, we’re often told that the best way to lift South Africa out of poverty is to focus on economic growth. Inequality is, at best, a secondary concern. However, the work of economists, sociologists and other scholars who take equality seriously gives us reason to believe that widespread inequality can have profound effects on the economy as a whole, and directly influence economic policy, for better or worse.

Second, many analyses of the 2008 financial crisis blamed personal greed and lax oversight for the worst excesses of financialisation. It’s easy to blame reckless bankers, but does a more fundamental explanation for the drive towards ever riskier profit-making perhaps lie in the rational interest of an elite seeking profit outside of the normal economy?

These are provocative suggestions, not firm conclusions. What is clear is that in these uncertain economic times, a more holistic look at the world economy can help us navigate a way forward.