Continuation of notes made by Karthik Chandra during Conference 2014. The full 25-pages notes are
posted in http://efnasia.org/wp-content/uploads/2015/10/EFN-Asia-2014-Conference-Report.pdf
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Day 1, November 6, 2014
Opening Key Note Address: “Economic Growth and Income
Inequality”
Dr. Razeen Sally
The National University of Singapore (NUS)
• As liberals, we always face this rather fundamental
issue of why at all should we bother to address the issue of income inequality.
• Such inequality has two facets: inequality of outcomes
(a “collectivist approach” of typical socialists, communists, or do-gooders)
and the inequality of procedures/treatment (eg. rule of law, equality, etc.).
We need to clearly distinguish between the two.
• There is also a need to go back to the basics (abstract
approach) of Schumpeterian capitalism:
* Capitalism is
always dynamic. Schumpeter said that ‘capitalism is a perennial gale of
creative destruction’. Enormous progress takes place due to this creative
destruction. This is not just an economic cycle but the story of our civilization
itself.
* At the heart of
this powerful engine of capitalism is the entrepreneur, who is not necessarily
a rational, objective person. Several impulses and incentives guide him. This
engine thrives on inequality.
• Capitalism and Asia & the Global Financial Crisis
(GFC):
* Originally,
economic freedom and capitalism was primarily a European idea. Subsequently, it
became an Atlantic idea. Later, Asia too has witnessed greater economic freedom
and increase in prosperity.
* However, after
the GFC, we saw assaults on economic freedoms and increase in restrictions. Capitalism
is currently under assault and therefore pessimism is back. GFC saw a shift in
policies and approaches: now there is much greater state intervention in both
macroeconomic policy (debt, interest rates, deficits, etc.) and microeconomic
policies (in the form of governments intervening in the smaller
details of markets like car standards, energy, pollution,
etc).
* Note: we need to
understand the contrasting takes of Schumpeter and Keynes on capitalism.
* More
importantly, what unites such macroeconomic and microeconomic anti-capitalist
intervention is the ‘social engineering’ mindset among a small group of
high-minded, smart people who think that they can intervene in the micro- and
macro-economic and the institutions.
* But such
interventions are inevitably counterproductive and harmful because the
assumption that these individuals are fully knowledgeable is incorrect because
100% of information is never at their fingertips (much of the real information
is tacit and non-formal).
* Rarely are the individuals themselves disinterested in
the outcomes. Such interventions (even if beneficial) are deeply offensive to
the very concept of freedoms and individuals.
• Given the above, the classical liberal take on
inequality runs somewhat like this:
* Globalization
has improved incomes but also has driven inequality upwards. Yes, there is
currently greater income inequality.
* New technologies
(3D printing, automated data storage, management and analysis systems, etc.)
are destroying jobs – not just the blue collar ones - but also middle class
white collar jobs (accountants, analysts, etc.)
* And, what about
the solutions to inequality? The classic interventionists (typically, social
democrats) talk about greater taxation, etc. to “fix this problem of greater
inequality”
• However, we need to look at the issue of inequality
from a different perspective:
* Usually, when we
talk about inequality, we usually talk about income inequality within a country
and not between countries. While economic liberalization has increased
inequality within a country (E.g.: China, city states like HK, Singapore, etc.)
it has actually reduced global income inequality (see Surjit Bhalla’s article
saying that global inequality is at its lowest since 1850) i.e. between
countries.
* Increase in
consumption, arising from greater liberalization of economies, has depressed
incomes in some areas/countries but has greatly reduced overall inequality both
within a country and between countries.
* Education (see
S. Bhalla’s article/ppt) actually is a great improver of averages.
* However, a major
challenge is the lack of big innovation. Yes, innovation is taking place at a
big level but in narrow sectors and benefitting a narrower group of people. The
IT sector serves as a good example where companies are getting easy money from
globalized markets, and are getting great profits, and therefore are not seeing
incentives to invest in innovation in other sectors. For instance,
Apple spends more on lawyers than on innovation of new
products. At the same time, even though some people say that innovation results
in job destruction, in the long run, innovation actually creates new and better
jobs.
• In summary, the current state of affairs, post GFC is
as follows:
* at a
macroeconomic policy level:
Greater state
intervention
Redistributive
approach (taxes)
Debt/deficit
financing with the threat of inflation always hanging over the head
Central banks
interfering in fiscal policies
* Similar state of
affairs at a micro-economic policy level also.
* But, such
interventionist approach is wrong on a more fundamental, constitutional basis
and is based on several false assumptions, etc.
• Therefore, the unfinished business and important
pending items to be done to liberalize product and factor markets: Making
systems inclusive. (See reformulation by Daren Acemoglu and team on inclusive
vs. exclusive systems.) In exclusive systems, esp. in Asian countries, the
political and economic freedoms are closely intertwined. One cannot happen
without other. Even the city states of HK and Singapore are lacking in
innovations. This is because their systems are still bureaucrat-dominated.
• Finally, there is good news and bad news:
* Compared to the
past century (1914 to 2014), we have a more prosperous world: we are enjoying
greater incomes, better health and better lifestyle overall. While today’s
interest groups are still a problem they certainly are not as big a problem as
interventionists of World War I.
* But in the short
run, post GFC, the pendulum has swung in the wrong direction i.e. towards
greater state intervention. However, we should have greater liberalism and
lesser state interventions in both micro and macroeconomic policies.
