Inequality as a cause of macro-instability and productive inefficiency

Abstract

These essays will examine the impact of inequality from both macro and micro perspectives. The first issue to be raised will be the contribution of inequality to macroeconomic instability. In the third chapter the focus will expand to determine whether an optimal level of inequality can be found. Much of the examination will be informed by principles outlined in the Progressive Utilization Theory (PROUT) developed by the philosopher P. R. Sarkar. As this dissertation was written during the recovery from the Great Recession, a timely controversy is addressed in the first chapter – whether growing inequality contributes to economic instability. Arguments for and against the proposition are critically examined in detail. It is concluded that the accumulated weight of the arguments favor the position that inequality can indeed help destabilize economies. In the second chapter econometric evidence is presented to show that high inequality contributes to the severity of economic downturns, both in terms of GDP declines and in consumption losses. Attention is also given to the impact of inequality in contributing to the global crisis leading to the Great Recession. While the initial evidence presented here cannot be considered conclusive in demonstrating a causal link between inequality and that specific crisis, it is shown that rising inequality was present in most of the 15 countries included in the study which were suffering recessions. An attempt to define an efficient limit to inequality will be the focus of the third chapter. The discussion will extend from the PROUT principle that any inequality that is accepted by society is only justified to the extent that it provides incentives for greater service to society by those receiving more than others. Any amount of income or in-kind amenities provided to a person that is beyond the minimum requirements by the standards of that society should not exceed the value of the extra services coaxed from that person by the extra incentives. A humanistic model of motivation for productivity is developed that suggests that people are productive for a variety of reasons besides material rewards. This is intended to place the need for incentives, and by extension inequality, in a perspective that suggests wide inequality is unnecessary and economically inefficient. Diagramatic analysis that introduces the Sarkarian Individual Productivity Curve demonstrates reasonable limits to inequality.