Introduction 3
Problem Definition 3
Economic Theories 3
Analysis 6
Conclusion and Recommendations 12
Bibliography 14
Are the Rich Getting Richer and the Poor Getting Poorer Still Today
Introduction
Nowadays there is a lot of discussion whether the rich are getting richer and the poor are getting poorer in the modern world. The answer to this question lies in the very understanding of poverty. Various economic schools employ different approaches when describing the causes of poverty. Therefore, they give different answers to the question mentioned above. Some of them think that the statement about the enrichment of the rich and the impoverishment of the poor is true, whereas other believe that modern economy allows everyone to benefit from participating in it. That is why it is necessary for us to investigate this issue in order to analyze the problem.
Problem Definition
We are going to conduct research on the issue whether the rich are getting richer while the financial position of the poor is deteriorating. As we can see, this statement consists of two parts – the first one deals with the rich and the second one touches upon the poor`s condition. That is why we will consider each part separately because it may occur that this statement is true in one part, whereas another one is definitely wrong. We will use statistics in order to confirm or to refute the statement`s parts. Furthermore, we will have to define poverty and welfare, thus ensuring the deep understanding of these terms. To sum up, our major goal is to answer whether or not we can apply this statement to the modern world.
Economic Theories
The idea of the enrichment of the rich at the expense of the poor belongs to the Marxian economics. Karl Marx, the prominent economist, formulated his theory of immiseration (that is sometimes called emiseration thesis) in the 19th century. This theory employs the basic principles of Marx`s analysis of capitalism nature. It states that capitalism leads to the stabilization of real wages, i.e. the wage growth is quite low in respect to total value creation. Thus, the workers` conditions change for the worse. In other words, capitalism increases the gap between capitalists and working class because the first group will lower the wages of the second group in order to become richer. Of course, the living standards of the working class will fall, and all the actions indicated above will result at the revolution of the working class. These were the assumptions and thoughts expressed by Marx, but another question is whether the real figures and facts can confirm it (Marx and Engels, 2002).
On the other hand, the theory of liberalism that tends to be the leading one in the modern world provides us with another vision. Liberals believe that the economy based upon the principles of “laissez-faire”, i.e. free trade, liberalization of borders and non-interference of government, can benefit all layers of society. It means that the rich actually become richer, but at the same time the poor do not become poorer. The poorest layers of society also increase their welfare. The theory of liberalism considers globalization to be the main way of achieving global prosperity and fair equality. Nevertheless, liberals recognize that even despite the fact that the incomes of both the rich and the poor have increased over time free market can lead to the deepening economic and social inequality due to the different rates of such increase for different groups of society (Borders, 2015).
Although the two theories that we have listed above are the major contributors to the heated debates there are even more approaches that try to explain the reasons of poverty and the ways of its elimination in the modern world. One of the prominent theories that despite the constant criticism continues to attract economists is the one expressed by Thomas Piketty in his book, Capital in the Twenty-First Century. Piketty employs math in order to support his statement that wealth inequality is inevitable in the modern world. He argues that the rate of return r is higher than the rate of wages growth g, thus capitalists receive more wealth than workers do. That is why we can state that this theory is close to the principles of Marxian school. However, many scientists deny these statements because according to them, the real data show another picture (Kotlikoff, 2014).
Another group of theories deals with states rather than with individuals. For example, the dependency theory developed by Hans Singer and Raul Prebisch explains the differences between wealthy states and poor nations. According to it, poor states act as sources of natural resources and raw materials. Wealthy states actively influence poor states using economic means. Therefore, poor nations do not have any possibility to develop and achieve the living standards of wealthy countries. This theory largely focuses on the principles of the Marxism. Another famous modern economist Erik Reinert wrote in his book How Rich Countries Became Rich and Why Poor Countries Remain Poor that free trade is the cause of economic inequality between states. He criticizes David Ricardo`s theory of comparative advantages because it allows countries to specialize on being poor and export, for example, raw materials. This specialization can discourage states to modernize its economy, so states can get to the trap of so-called Dutch disease. Moreover, he analyzes the disadvantages of Samuelson theory of income alignment and states that Gunnar Myrdal`s approach is much better in explaining trade between counties. On the other hand, the theory of liberalism constitutes the major counterparty in this discussion, and currently it is winning the debates. Liberals believe that free trade is the key to the better world and the better future.
Although some theories analyze the distribution of wealth among the states and other pay attention to the individuals, they all share some key concepts in their very essence. Generally, there are two camps. The first one states that free market and free trade play negative role and lead to the unfair distribution of wealth, thus the rich become richer and the poor become poorer. The second camp argues that the implementation of liberal ideas will favor global prosperity and welfare for all.
Analysis
First of all, modern economists tend to believe that every capitalist country has improved the standards of living since Marx times. That is why they deny his theories and consider them misleading. One of the good examples of the capitalist countries where incomes have increased for each group of society is the United Kingdom. Despite the fact that this country has always been the leading free-market economy, the position of working class here has been constantly improving since the beginning of the 20th century.
Now we should look at the actual data that illustrates changes in incomes of people in the United Kingdom. We have retrieved all the data from the Office for National Statistics. The major point is that disposable incomes in this country increased every year between 1970 and 2009 with some small decreases in 1973-1977, 1980-1981 and 2006-2007. The British GDP was twice bigger in 2009 than in 1970, with disposable incomes being two-and-a-half times higher than 40 years ago (Snowdon, 2014, p. 67).
One may say that the average increase in incomes is not the reliable indicator. Therefore, we should look closely at how these incomes were distributed. Figure 1 shows us this information. As we can see, the disposable incomes have increased for every quintile over the given period, including the poorest one and the richest one. The incomes of the bottom quintile have grown by 93 per cent, whereas the incomes of the top quintile have increased more dramatically, i.e. by 149 per cent (Snowdon, 2014, p. 68). Of course, such data allows us to assume that although incomes have grown for the whole society, the economic inequality has also deepened. We can agree with this statement. Nevertheless, the assumption that the rich become richer, while the poor become poorer seems not to work here.
Figure 1. This figure illustrates the distribution of income among different quintiles (Snowdon, 2014, p. 68).
The explanation may be following. Many people consider wealth to be a fixed amount, or in other words, a fixed pie. It means that the process of the wealth accumulation resembles the zero-sum game, i.e. the profits of one party will necessarily constitute the losses of another. But this approach does not pay attention to such important factors as productivity, efficiency, innovation and so on. These factors can contribute to the increase in the pie, i.e. one party can still have more profits, but another party will benefit, too. The proportion of how much each party will receive is a tough question to answer because it depends on the wide range of variables. On the other hand, the system with increasing pie, i.e. wealth, can be appropriate for everyone. Of course, it is better to hold 10 per cent of the pie worth $100 than to hold 50 per cent of the pie with estimated value of $10.
The same situation is with accumulation and distribution of wealth in the world, particularly in the United Kingdom. The total wealth of this country has increased, i.e. the pie has become larger. However, the bottom quintile has received lower benefits from its increase. Nevertheless, the condition of the poorest people has improved comparing with the previous position.
Let`s continue our analysis. Now we should look at the distribution of wealth within the British society. Although we have used terms “income” and “wealth” quite interchangeably in our analysis, there are certain differences in their meanings. In theory, people who obtain the largest wealth can receive small income. The real practice shows that today wealthy people and individuals with high income largely overlap. We use wealth to describe everything the person owns minus his debts. Income is the flow of money that the person gets due to his work, dividends, interest, rents and so on. Therefore, some scientists assume that increase in incomes does not necessarily evidence the increase in wealth.
However, statistics show that in 1970 the poorest half of the British population controlled only 0 per cent of the total wealth of the country. The share has grown meaningfully since 1970. In 2010, it constituted approximately 14 per cent. At the same time the share controlled by the richest 1 per cent of population fell in the 20th century, i.e. in 1923 the rich had 61 per cent of country`s wealth and in 2003 they had only 21 per cent (Dorling et al, 2007). Therefore, we can state that the British society has become more economically equal than it was in the beginning of the 20th century.
On the other hand, we should emphasize that there are another opinions with regard to the social and economic equality of the United Kingdom. For example, the research held by the Social Market Foundation (SMF) revealed the widening wealth gap between the rich and the poor. The SMF reckons that the richest twenty per cent of the British population increased their average wealth by 64 per cent and accumulated their savings between 2005 and 2012, whereas the poorest twenty per cent faced the drop in their net wealth by 57 per cent due to the growing amount of debts. The SMF suggests that the downturn helped the rich become richer, but the poor were left without any protection (Morris, 2015). We agree that such situation may occur due to the recession, but despite the decreases and falls the general trend remains to be upwards, i.e. incomes and wealth increase for both the rich and the poor.
Moreover, another confirmation that refutes this statement is that our efforts to divide people into two major groups, i.e. the rich and the poor, tend to be useless. If we look at the lists of the wealthiest people prepared by Forbes, we will see that the majority of names presented there will differ from the people listed in these tops 30-40 years ago. This happens because the layers of society are not stable and they always change their composition. That is why sometimes statistics can be misleading because it cannot trace all the movements and transfers between these nominal groups. We should understand that one person could move up or down the social ladder during his life. When we stick ourselves to these statistical categories, we start to deny the social mobility of population.
Furthermore, some economists say that we should use the relative poverty to indicate whether the social and financial position of the poor has improved (Snowdon, 2014, p. 74). Vast majority of countries establish the relative poverty line in accordance with the following principle. They calculate the average income across the country and establish the poverty line equal to 60 per cent of the median. All the household that earn less than 60 per cent of the median are considered pure. A lot of left-wing politicians and economists state that relative poverty is constantly increasing nowadays. However, another group of scientists believes that this indicator illustrates not the poverty itself, but the economic inequality. They provide the argument that during the recessions the rate of relative poverty falls because the average income becomes lower, thus the poverty line goes down, enabling more households to be above it. On the other hand, when incomes of the poorest layers of society become higher, i.e. the poor become richer, the median can also go up, and thus these people will continue to be considered as poor in spite of the increase in their earnings. For instance, during the latest recession after the world financial crisis the rate of relative poverty was one of the lowest in history of the UK. Meanwhile, real poverty was growing because of the sharp decline of absolute incomes.
Another problem with the relative poverty is that some countries that are obviously richer than another can face higher rates of poverty. For example, in 2012 the official poverty in the United Kingdom constituted approximately 16 per cent, whereas the share of poor population in such African country as Namibia approached zero per cent (Adams et al., 2012). On the other hand, the comparison of absolute incomes allows us to see the true state of affairs.
Moreover, the meaning of the word “poor” has evolved in some countries. For example, one hundred years ago people who did not have their own car were considered poor in the USA. Now, when almost every citizen of the USA can afford the car, this principle cannot serve as a division line. Even if you have a car, the US government may continue to consider you poor because you cannot afford some other things or your income is lower than the median. This example illustrates that the very essence of being poor has changed over time. In addition, today people enjoy better social protection, including healthcare, educations, human rights and so on. Despite different concerns, it seems that the world has become a better place to live in.
What is more important, we should emphasize that in 1900 people worked more hours. The official statistics prepared in the United States shows that nonfarm workers worked 60 hours a week in the beginning of the 20th century. Today the average length of the working week is approximately 40 hours. Despite the decrease in working hours, people earn more money, i.e. they become richer. Previously we discussed the example of the United Kingdom where the poor have increased their wealth share of the time. Now let`s look at the USA. According to numerous works, the economic inequality in this country is very high. However, the statistics confirm that even here the poor have become richer since 1990 because the wealth share of the poor has not changed during the 20th century (Mathews, 1997).
On the other hand, economic inequality in the United States remains to be very high. As we have already mentioned above, many left-wing economist blame market forces because the absence of regulation and “invisible hand of the market” encourage the uneven distribution of wealth. However, two political scientists Jacob Hacker and Paul Pierson developed another explanation of the sharp inequality. They formulated their judgments, using the economic reality of the United States. Firstly, according to their research, the causes of inequality lie not in market itself, but in the inefficient public policies. Hacker and Pierson argue that policies conducted by the American government in the second half of the 20th century resulted at the concentration of economic gains at the hands of wealthy people. They state that since the late 1970s public policies have become rich-oriented (Lieberman, 2011).
For example, the American government reduced tax rates on high incomes and improved the tax treatment of other investment incomes, thus increasing the profits of the rich Americans. In addition, the labor policies have become more disintegrated, resulting at the weakening of trade unions. Workers lost their power to counter their management decisions. Corporate governance policies have also changed, allowing corporations to reward their top management with high payments regardless of their businesses` performances. Another vital decision was the adoption of Gramm-Leach-Bliley Financial Services Modernization Act. This Act allowed commercial banks to participate in the investing activity that was previously prohibited for them by the Glass-Steagall Act. Moreover, the deregulation of financial markets and the widespread of new financial instruments called derivatives have contributed to the enrichment of the rich and the certain worsening of the position of the weak.
Furthermore, the second cause of the policy inefficiency is the time lag between the appearance of new problem and the adoption of the decision aimed at its solution. According to Hacker and Pierson, the policymaking in the United States is very slow and bureaucratic. That is why the process of finding the solution to the particular problem can take many months or even years. To make things even worse, corporations and other large businesses traditionally have a great impact on the American government. Therefore, they always try to defend their own interests, thus the interests of their shareholders, i.e. very rich people.
Conclusion and Recommendations
We have examined the current financial position of the rich and the poor and now we are ready to answer whether the rich are getting richer and the poor are getting poorer still today. We think that this statement is not true because statistics and facts refute it. On the other hand, we believe that while the rich become richer, the poor become richer as well. Therefore, the financial position of the whole society changes for the better.
Previously we have mentioned that basically there are two camps that have different views on the influence of free market and neo-liberalism that rules in the modern world. The arguments expressed by the followers of the theory of liberalism seem to be more persuasive because the examples from the real economy confirm them. Obviously, free market forces and globalization contribute to the rise of global prosperity and welfare. The vast majority of people can benefit from the modern development of the world economy.
However, we have also indicated that during recessions and downfalls incomes of the poor can start to fall, whereas the rich continue to become wealthier. Furthermore, the economic inequality is sharper then it was one hundred years ago due to the different speed of the income increase, i.e. the rich become richer faster than the poor do. We believe that the hypothesis expressed by Hacker and Pierson explains the deepening of inequality. Inefficient public policies cause this problem, while free market forces have nothing to deal with it.
Therefore, we can formulate the following recommendation. Firstly, countries should develop the free market economy because it benefits everyone. Secondly, free market will enable governments to improve the democratic institutions aimed at the protection of rights of different layers of society. Thus, every citizen, either poor or rich, will have the voice to influence the decision-making in his country. This will lead to the improvement of public policies and the increase in their efficiency and productivity.
Bibliography
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