EC1111 Lecture 7 Outline · Introduction · Theoretical Underpinnings · Illustrative Example · Measuring Inequality . Inequality and Growth · Empirical Evidence · Conclusion Inequality The United Nations Millennium Declaration, adopted by the General Assembly, includes the following: We recognize that, in addition to our separate responsibilities to our individual societies, we have a collective responsibility to uphold the principles of human dignity, equality and equity at the global level. As leaders we have a duty therefore to all the world's people, especially the most vulnerable and, in particular, the children of the world, to whom the future belongs. · A person's earnings depend on the supply and demand for that person's labor, o which in turn depend on natural ability, human capital, compensating differentials, discrimination, and so on. . How much inequality is there in our society? · How many people live in poverty? · What problems arise in measuring the amount of inequality? · How often do people move among income classes? Political Philosophy of Income Redistribution Three Political Philosophies · Utilitarianism · Liberalism · Libertarianism Utilitarianism
· Utilitarianism is the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society. . The founders of utilitarianism are the English philosophers Jeremy Bentham and John Stuart Mill. . The utilitarian case for redistributing income is based on the assumption of diminishing marginal utility. o An extra dollar of income to a poor person provides that person with more utility, or wellftbeing, than does an extra dollar to a rich person. o By taking a dollar way from the rich and giving to the poor, society is better off! Liberalism · Liberalism is the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind a "veil of ignorance." · This view was originally developed by the philosopher John Rawls. . Public policy should be based on the maximin criterion, which seeks to maximize the utility or wellftbeing of the worstftoff person in society. · That is, rather than maximizing the sum of everyone's utility, one should maximize the minimum utility. . This idea would allow for the consideration of the redistribution of income as a form of social insurance. Libertarianism . Libertarianism is the political philosophy according to which the government should punish crimes and enforce voluntary agreements, but should not redistribute income. . Libertarians argue that equality of opportunity is more important than equality of income. Some Fundamental Questions . But what exactly is inequality? · How is it measured? · How can we make meaningful comparisons over time, or across space? · How can we begin to analyze the underlying structure of inequality? · What policies can successfully reduce inequality?
Share of world's private consumption, 2005 World's poorest 20% consume 1.5% World's middle 60% consume 21.9% World's richest 20% consume 76.6% Source: World Bank Development Indicators 2008 Our World in Data Share of Total Income going to the