Is inequality good for growth?

Whether inequality affects growth is an interesting question for at least two reasons. First, today inequality is a hot topic, and many claim it is bad for our economy. Is there any truth to these claims? Should we actively try to reduce inequality?

Second, if wealth distribution matters for growth, then differences in development among countries can potentially be (partially) explained by their initial, historical wealth distributions. For instance, if inequality is good for growth, then it could be that countries with high inequality at the dawn of the Industrial Revolution (i.e. when growth kicked off) have done better than those with low inequality.

How far can cultural differences be traced back?

Cultural differences between countries are quite large, and likely affect differences in economic development. But how did these differences arise in the first place? Consider recent history: it’s not a stretch to believe that Europeans who immigrated to the US were generally individualistic, adventurous, entrepreneurial people who potentially did not fit in well with their existing society; they were possibly non-conformist, less obedient that those who stayed.

Values such as individualism, innovativeness and entrepreneurialism gave these immigrants an edge in the longer term, and this made the US very successful, even relative to Europe. Can such a story apply over the much longer term? Can it explain how cultures diverged thousands of years ago?

What if robots take our jobs?

Robots are becoming more sophisticated and common, and consequently they will inevitably displace a large number of workers (they have already done so). But historically, while technological progress generally resulted in painful transitory periods, in the long run it was always for the better. The question is whether this will remain the case.

Recently, even middle class jobs were replaced by machines because of the IT revolution. This might exacerbate inequality as the upper classes and those who can adapt to the new technologies will be able to reap the benefits of higher productivity (thanks to machines), but others will lose their jobs or will be forced to lower paying positions. Until now, for the most part new jobs have been created for the displaced workers in various industries. But what if this ceases to continue? What if labor gets replaced by robots and no new labor-intensive jobs arise?

Science, the religious right and inequality

Science, politics and religion have often been intertwined over the course of history. Think of the Muslim Golden Age and the subsequent lack of tolerance for science in the Muslim world, or the Roman Inquisition and its effects on people like Galilei. For a more recent example, one can look at the US where the religious right likes to stall advances in science (e.g. creationism, stem cell research, climate change denial).

Why is science sometimes the enemy of, other times tolerated by the church? Why do the US and European political landscapes differ so much, with the former much less enthusiastic about redistribution and much more willing to let religion influence politics? And how does income inequality affect the dynamics between science, religion and politics? Read on to find out.

Should natural resources be publicly owned?

Natural resources are a special kind of property, because in a sense they belong to the public. But their extraction is also possible by private corporations. There are in fact pros and cons to both. Private ownership has been shown to be more efficient and more profitable. But public ownership may be better at benefiting the region or country the resources are located in.

Of course, efficiency and profitability are important, but a country’s goal should be to maximize the welfare of its citizens. So what happens if we take a look at the effects of resource ownership on economic growth? Is private ownership still preferable to public ownership?

Is industrialization conducive to economic prosperity?

Conventional wisdom suggests that industry is important for economic development. And while indeed the rise of industry coincided with the time when economic growth took off in the Western world, historically industrial regions (such as the Rust Belt in the US, the Midlands in the UK, or the Ruhr Valley in Germany) are currently struggling economically relative to other regions within their respective countries.

This post not only looks at why this is the case, but also at whether conventional wisdom is wrong: was it really industrialization per se that allowed economic growth to skyrocket in the 19th century? Or did these two events just happen to coincide?

Can inequality affect growth?

Both theoretical and empirical research have found conflicting evidence as to what the relationship between economic growth and inequality is. There is some evidence for monotonic, linear positive or negative relationships. And then there is the much more plausible-sounding nonlinear, hump-shaped relationship.

My understanding is that more recent (empirical) evidence supports the nonlinear view. But there are still open questions such as what kind of shape the relationship takes exactly, or where exactly the turning point is.

Novelty-seeking traits and development

When we compare the economic performance of former colonies with high European populations (e.g. Australia) to those without one (e.g. most African and Latin American countries), we can see that the former are generally more successful. One reason behind this is that Europeans already knew how to make an economy successful when they settled down in those colonies. They then transferred this knowledge to their offspring. Such an intergenerational transmission of traits that are favorable to development was missing in colonies with few Europeans.

One question that may arise is what kind of knowledge/traits are we talking about here? And is it transmitted genetically or culturally? Of course, economic development has many other determinants, but such intergenerationally transmittable traits are very important as well. In this post, I’ll look at the case of novelty-seeking traits: that is whether one likes to explore and try new things.

The Dutch disease and the distribution of resource revenues

The decline in a country’s manufacturing sector after new resources (e.g. oil, gas) are found is referred to as the Dutch disease. The classical manifestation of the Dutch disease is due to an appreciation of the exchange rate. In other words, the resource-rich country exports a lot of natural resources, which makes its currency appreciate in value. This will then render (manufacturing) exports less competitive, and hence the subsequent slump in the manufacturing sector.

While this may be the original definition, the Dutch disease is actually more complicated. Certain countries feel it more severely than others, and in many cases it occurs even when exchange rates do not enter the picture at all.

Islam, trade and development

The popularity of a religion is probably determined by various forces, one of which is – as with any activity involving humans – economic incentives. This post examines how certain practices of Islam helped historical Arabia become more prosperous, and how those same practices later limited economic growth in the region.

When Islam arose it provided an important solution to some problems, namely the constant raids of traders from richer oasis cities by poorer nomadic tribes in the desert. It did so by aligning economic incentives in such a way that it was better for the poor not to raid, and for the rich to redistribute some of their income to the poor to prevent raids.