Free marketeers putting on a poor show
By JAMES K. GALBRAITH *THE AGE*
Friday 27 July 2001
Adam Smith, the patron saint of free markets, had a
clear-eyed analysis of inequality. "Servants, laborers and workmen of
different kinds," he wrote, "make up the far greater part of every political
society", and he added that "what improves the circumstances of the greater
part can never be regarded as an inconvenience to the whole".
What a contrast with the dominant view in our
time! Today leading economists tell us real wages must be cut, to compete with
those whose wages are lower still. They say minimum wage laws, and trade
unions, cost jobs. They say my country, the United States, is a model of
flexible labor markets of full employment achieved by accepting poverty. They
teach that a global order of privatisation, deregulation, free trade and open
capital markets
the Washington Consensus will produce great new gains for all the world's population.
In Europe, the modern wisdom holds that high
unemployment is a legacy of socialism, social democracy and the welfare
state. Yet if you examine European countries, you discover that those with the
strongest egalitarian traditions (think Norway and Denmark) enjoy the lowest
unemployment. It is those countries which most recently left fascism behind
(think Spain) where unemployment has been highest.
There is no general case, in Europe or elsewhere, of
countries achieving sustained new prosperity by cutting real wages or
accepting increased poverty for parts of their population. Despite great
efforts, the economists have failed to show that minimum wagelaws or unions
cost jobs.
And the US, a country with strong public pensions, 90
per cent public school enrolment, vast public (as well as private) health and
university sectors, many municipal enterprises and extensive regulation and
where the minimum wage rose as pay inequalities and poverty and unemployment
all fell in the late 1990s is no model for the Washington Consensus.
The great pioneer in development studies, Simon
Kuznets, argued long ago that asindustrialisation proceeded, an urban,
democratic middle class would normally bring down economic inequalities, as
happened from the mid-19th through to the mid-20th centuries in both Britain
and the US. But today, development economists have mostly set Kuznets aside in
favor of views that emphasise the supposed efficiencies of market process.
One viewpoint favors an initial equalisation of
opportunity, particularly in education and land tenure. But then, the argument
goes, markets should be allowed to determine pay, and if the final result is
more unequal, so be it. Another view holds that inequalities per se foster
growth, perhaps because saving requires accumulation, and this is something
that can be entrusted only to the rich.
But don't the economists know about all this by now?
Unfortunately, the most widely used measurements of inequality
published in 1996 by the World Bank have only confused the issues. The
numbers are often implausible, showing Indonesia more equal than Australia,
for instance, and the coverage is so limited that you can't gauge developments
through time. Amazingly, you can't even say for sure, from these measures,
that worldwide inequality has risen in the past 20 years. But does anyone
seriously doubt it?
To fill the gap, a small group called the
University of Texas Inequality Project now offers systematic, nearly annual
measures of inequality in industrial pay for more than 150 countries, going
back to the early 1960s. With a narrow focus on pay measured accurately and
consistently through time we can cast new light on the crucial relationships
between economic inequality and economic growth.
We have found, firstly, that worldwide inequality has
been rising sharply under globalisation. While the increase did begin in the
US, back around 1970, it has been more dramatic in later years in Latin
America, central Europe, China and, above all, Russia. Among OECD countries,
New Zealand experienced the largest increases, Australia somewhat less. In a
few countries, notably in Scandinavia, pay inequalities have not risen much or
at all.
Secondly, in broad terms Kuznets was right:
inequality usually does decline as total incomes grow; high inequalities are
more prevalent in poor countries than in rich. Part of the problem in the
world economy has been a slowdown in average growth; the upcoming world slump
will almost surely make pay inequalities worse. (There is no support in our
measures for either variant of the "modern view".)
Thirdly, the global trend in inequality was stable in
the 1960s, slightly downward in the 1970s, and up sharply after 1981 and
since. What accounts for this? Technology? Trade? We think not. Rather, the
timing points mainly at the quasi-violent financial regime change of the early
1980s: rising real interest rates, debt crises and the triumph of private
global finance. In many ways the pattern resembles what we find in individual
countries (such as Chile) after a coup d'etat.
And so to policy. Above all, we think it clear
that the financial order of the past 28 years cannot deliver sustainable
economic development worldwide. Therefore it is necessary to rebuild an
architecture of financial stabilisation and control similar to the old Bretton
Woods system, but better suited to our multi-polar world.
This is a tall order, to be sure. But the
alternative, it seems to us, will be increasing political instability and
human misery, from which the richer countries of the world will not forever
remain immune.
Professor James K. Galbraith is director of the
University of Texas Inequality Project and co-editor of Inequality and
Industrial Change: A Global View (Cambridge, 2001). He is in Australia as a
guest of the Whitlam Institute.
