Home > Uncategorized > Inequality challenge in pursued economies

Inequality challenge in pursued economies

from Richard Koo and issue 92 of RWER

Income inequality has become one of the hottest and most controversial issues in economics not only in the developed world but also in China and elsewhere as well. Many are growing increasingly uncomfortable with the divide between the haves and the have-nots, especially after Thomas Piketty’s Capital in the 21st Century2 sparked a fresh debate on the optimal distribution of wealth, an issue that had been largely overlooked by the economics profession.

This paper argues that the determinants of income inequality changes depending on the stage of economic development. The three stages of industrialization identified for this purpose are: urbanizing era, when the economy has yet to reach the Lewis Turning Point (LTP), post-LTP maturing or golden era when the economy moves along an upward sloping labor supply curve, and pursued era, when the return on capital is higher abroad in emerging economies than at home. The LTP refers to the point at which urban factories have finally absorbed all the surplus rural labor. (In this essay, the term LTP is used only because it is a well-known expression for a specific point in a nation’s economic development; the use of this term does not refer to the model of economic growth proposed by Sir Arthur Lewis.)

At the advent of industrialization, most people are living in rural areas. Only the educated elite, who are very few in number, have the technical knowledge needed to produce and market goods. Families whose ancestors have lived on depressed farms for centuries have no such knowledge. Most of the gains during the initial stage of industrialization therefore go to the educated few, while the rest of the population simply provides labor for the industrialists. And with so many surplus workers in the countryside, worker wages remain depressed for decades until the LTP is reached.

Exhibit 1 illustrates this from the perspective of labor supply and demand. read more

  1. Bill
    August 7, 2020 at 2:04 am

    Sometimes events intrude and disrupt this mechanical explanation. A good example is the Black Death that wiped out 1/3 of the world’s population and created a great shortage of labor in cities and empty dwelling places, totally disrupting the old rural mediaeval order.

  2. Robert Locke
    August 7, 2020 at 3:13 pm

    And what of protoindustriaization a long period (16th to 20th century) when solid economic growth preceded mechanical industrialization. This protoindustrialization permits scholars to say France out stripped the UK economically in the early 19th century.(see Richard Roehl)

  3. yok
    August 8, 2020 at 5:27 am

    Richard, you did a lot of thinking and talking, all relying on marketplace type forces and responses. All to raise the marketplace on the dais. And there are true competitive forces that act. But let’s get real. In the real world wealth and power are bigger determinants. The reason medical care is so expensive here is because the doctors, as part of the wealth and power structure, make sure that they do. The marketplace has nothing much to do with medical costs. The number of doctors trained in this country is strictly limited. Foreign born are used to take the unattractive positions that native born would not take. When I was 18, about 20 percent of US doctors were foreign born. Now I’m 67 and 20 percent are still foreign born. Government has decided we should be on the cutting edge, so they throw money that way; I’ve read 80 % of basic drug research is footed by the government. They work together. Government does the grunt work and private business gets to carry the ball over the goal line. We don’t need all that complicated explanation. The reason prosperity exploded after the great depression is because private wealth and power was on its heels and great social programs enacted, allowed the people of this country to work for themselves. As the political power decreases, the share of the pie decreases. Starting with Reagan, as the inequality increases the economic growth slows. Past a certain point, increasing inequality slows economic and productivity growth. People do what they do because of who they are, more than anything else. We don’t need to worship at the feet of businessmen. To tax the wealthy and powerful at a lower rate is wrong, both morally and economically. So I disagree with the thrust of your paper.

  4. yok
    August 8, 2020 at 5:36 am

    Oh yeah Rick, I just read an article at the “Journal of American Health” about the US pharmaceutical Innovation. Those experts concluded that in an international context “Higher prescription drug pricing in the US does not disproportionately privilege domestic innovation and many countries with drug price regulation were significant contributors to pharmaceutical innovation.”

  5. gerald holtham
    August 8, 2020 at 11:28 pm

    Mechanical industrialization began in the UK in the late 18th century, rather before the 20th. Growth before then was fuelled by agricultural enclosures and colonial exploitation. Both raised output but the former surely increased inequality and the latter, involving the slaved-based production of cane sugar and, later, tobacco and cotton certainly did. That all seems consistent with Koo’s schema. (which does not attempt to account for the Black Death).

    France outstripped the UK economically in the early 19th century? Odd then that France ceded its position as the primary military power in Europe and that its population grew much more slowly than that of the UK..

  6. Yoshinori Shiozawa
    August 12, 2020 at 4:32 am

    Robert Rocke and Gerald Holtham,

    what you have pointed are right. However, I do not think they are a pertinent criticism. Your posts are good as corrections but not to the point as criticism.

    Koo’s paper (in only 23 pages) is a rough description of what happened and is happening in substantial number of countries (mainly those that are called advanced countries) for about this half century. He uses several key-concepts like Lewis Turning Point (LTP) and three stages of industrialization. We have already more than one thousand of papers that discussed it (When I searched “Lewis Turning Point” in Google Scholar today, I found more than three thousand items). For each country, there are arguments on the date or period of the turning point. There are of course arguments if the concept of the turning point is valid or not. However, we can observe in many countries a roughly common phenomenon in which long stagnated real wage starts to rise continuously. In England, it was 1850’s. Real wage of London workers stayed stagnant since 1300 until that period. After 1860, it increased rapidly and continuously. See Fig. 1 Real Builders Day Wages from 1200 to 2000 dressed by made by Gregory Clark.

    Click to access f9c4411430bd3cdaf85adca447e4acf70dc9.pdf

    Robert Allen gives more fuzzy and ambivalent vision in his small book The Industrial Revolution: A Very Short Introduction (2017). See Illustration 2 (p.8). Similar arguments were repeated in Japan, Taiwan, and now in China (and probably in South East Asian countries).

    Another important point is the turning point from golden era to pursued phase. He did not give a proper name for this turning point. But in some countries the turning point to Koo’s “pursued phase” is clear. See Rucio, Fig. 5 for the USA and Koo, Exibit 9 for Japan. Even in the case of many other countries where no sharp bending point is seen, it is clear that many advance countries are stagnating.

    It seems there are not many theoretical arguments on this point. As the comments on David Rucio’s “Wage and productivity” (August 9, 2020) show, explanations like the change of power relations between capital and workers abound, but there are few in-depth analyses. See for example, James Galbraith and Jaehee Choi’s article “A brief history of inequality in modern economics” (August 10, 2020). It contains a short history on causal arguments but major part is spent on measurement questions.

    If we argue Richard Koo and David Rucio’s articles, we should argue these points. If I add a point, LTP and the transition to pursued phase are similar. They are mirror image with each other. So, we are required to present explanations how these phenomena are widely observed. This is a highly theoretical work and it is natural that many policy oriented people can produce practically no analyses on this really crucial questions of income distributions.

  7. Ken Zimmerman
    August 17, 2020 at 3:53 pm

    I offer this counter narrative to the “stages” approach of this paper.

    After the end of the Second World War, reconstruction in Europe and Japan took off, and the result was a period of relative stability and rapid economic growth, bolstered by the Cold War system and the mutual nuclear deterrence of the Soviet Union and the United States. There were still conflicts, for example in Korea and Indochina, but generally this was a period of optimism, marked by belief in the possibility of orderly change and in the Western industrialized countries as a model to which the developing nations would gradually approximate. This was enshrined in the modernization theories of the period, such as that of Rostow (1960), with its five stages. This body of literature in turn generated its own body of criticisms (Shannon 1989: 2–11). That there was insufficient interest in conflict, that the conditions which had given rise to industrialization and industrial economic arrangements in Europe and America did not exist in most Third-World societies, and that individualism and materialism were not seen as especially desirable in many non-Western cultures. In particular, critics of modernization theory took issue with the assumption that the reason for the lack of development in many areas was their ‘traditionalism’ rather than their historical relations with, and exploitation by, the wealthier countries (particularly of the West). As these criticisms were taken on board, theories that took into account the world-system, or something like it, began to take shape. These argued that cultural and social change could only be explained by theories that were historically grounded and could consider different contexts of industrialization, relations between societies (especially between rich and poor) and processes of conflict and exploitation. The emerging theories drew on Marx’s accounts of the capitalist system and Lenin’s (1939) accounts of imperialism, trade and colonial exploitation. Exploitation therefore also became a key issue (Shannon 1989: 13). A number of ideas were also adopted from Fernand Braudel (1981–84), e.g., the idea of an international system consisting of a dominant ‘centre’ and a weak periphery, and a cyclical view of history with the rise and fall of states. These kinds of ideas were most notably developed by Frank (1966, 1969) and Wallerstein (1974), together with a number of like-minded anthropologists and historians such as Eric Wolf (1971, 1982), Peter Worsley (1984, 1987) and Paul Kennedy (1989).

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