Is Inequality a Prerequisite for Economic Development?
In the previous blog post, I discussed the potential correlation between economic development and presence of nationalism at a state (rather than tribal) level. But of course, to incentivize economic development requires a whole host of different factors, the presence of many at the same time in equal importance, rather than any particular dominant one, allow for an economy to take off. I have no illusion that nationalism is the most important factor, and for many poor countries where nationalism is a fact of life, its presence is not even the obstacle holding back development.
Yet, if there is anything that is common throughout all economies, rich and poor, agricultural or industrial, it is is the presence of inequality, both at the very local and the very national level. Even in the most supposedly egalitarian societies of hunter-gatherers, there needs to be a leader that coordinates the collection and distribution of foods collected, so as to prioritize who ought to be fed so that the whole band of people can maximize collection of foods in the future. Such leaders, even at the most basic level, distinguish him/herself through a power to dictate resource allocation, thereby giving him/herself chance to access more resources.
As a society becomes larger and more complex, there is even more of an incentives for such leaders to entrench inequalities that favor them. Bigger economies mean more resources at disposal, and thus more resources leaders can collect to be used for their own personal gains. Greater financial power for a larger number of leaders create an elite class that semi-permanently sit above the rest of the population. To maintain such arrangements, it is in the interest of the elites to encourage general economic development, except in cases where short-term exploitation of existing resources is more profitable (as African leaders tend to think)
The general population, of course, is not stupid. They would not sacrifice their personal efforts to develop the local economy that mostly serves the interest of the elites' self-enrichment. For the elites to motivate the general populace to work, certain strategies are needed. Fortunately, the presence of a visual elite, by itself, can be that motivational factor. The premise here is that the "commoners," after seeing the materialistically comfortable lives that the elites live, would want to emulate the same lifestyle. Given how expensive that lifestyle can be, they would be motivated to work harder for more money.
However, for the general populace to correlate the luxurious lives of elites with the future visions for themselves, there is a very fundamental condition that society must (or at least, seem to) fulfill. That is the idea of social mobility. The commoners must have unshakable faith that through hard work, they can become some sort of elites or at least their equivalents in financial terms, thereby achieving the same high standards of living. In other words, even if the elites continue to become richer as an economy grows, the common people must be given a bigger share of the economic growth.
Hence, inequality can encourage common people to work harder for economic growth, but only when their perceived inequality can be rectified to favor them in the long run. If a villager sees the village leader buying a fridge to store his produce, surely the villager would want the same (very real and easily understood) benefits for his own family. But if the villager perceives the ability of the village leader to afford a fridge to be inherently tied to the position, power, and prestige of the village leader, he might not be motivated to work harder. He would simply think that hard work is not what allowed the village leader to buy a fridge.
The solution is not to promise every person a position in the necessarily small group that is the elites. Not everyone in the village can become the village leader, nor should they be able to. Instead of distributing the power to allocate resources, the elites can hold on to that power and channel it toward distributing resources that ensure the common people feel concrete movement toward better standards of living. The commoners expects and is generally fine with a small elite that will always remain richer than they are, until they are convinced that the elites are only enriching themselves without providing the same opportunity for others.
For the elites, then, the use of inequality as a motivator for economic development is a cost-benefit analysis. Some, as African leaders mentioned briefly above, can choose to think extremely short term, enriching themselves before the commoners overthrow them. Or elites can think long-term, taking a much smaller piece of the overall economic pie, give more to the common people, and encourage them to make the pie bigger. The question is, is a bigger share of the smaller economic pie bigger, or is a smaller share of the bigger economic pie bigger?
Yet, if there is anything that is common throughout all economies, rich and poor, agricultural or industrial, it is is the presence of inequality, both at the very local and the very national level. Even in the most supposedly egalitarian societies of hunter-gatherers, there needs to be a leader that coordinates the collection and distribution of foods collected, so as to prioritize who ought to be fed so that the whole band of people can maximize collection of foods in the future. Such leaders, even at the most basic level, distinguish him/herself through a power to dictate resource allocation, thereby giving him/herself chance to access more resources.
As a society becomes larger and more complex, there is even more of an incentives for such leaders to entrench inequalities that favor them. Bigger economies mean more resources at disposal, and thus more resources leaders can collect to be used for their own personal gains. Greater financial power for a larger number of leaders create an elite class that semi-permanently sit above the rest of the population. To maintain such arrangements, it is in the interest of the elites to encourage general economic development, except in cases where short-term exploitation of existing resources is more profitable (as African leaders tend to think)
The general population, of course, is not stupid. They would not sacrifice their personal efforts to develop the local economy that mostly serves the interest of the elites' self-enrichment. For the elites to motivate the general populace to work, certain strategies are needed. Fortunately, the presence of a visual elite, by itself, can be that motivational factor. The premise here is that the "commoners," after seeing the materialistically comfortable lives that the elites live, would want to emulate the same lifestyle. Given how expensive that lifestyle can be, they would be motivated to work harder for more money.
However, for the general populace to correlate the luxurious lives of elites with the future visions for themselves, there is a very fundamental condition that society must (or at least, seem to) fulfill. That is the idea of social mobility. The commoners must have unshakable faith that through hard work, they can become some sort of elites or at least their equivalents in financial terms, thereby achieving the same high standards of living. In other words, even if the elites continue to become richer as an economy grows, the common people must be given a bigger share of the economic growth.
Hence, inequality can encourage common people to work harder for economic growth, but only when their perceived inequality can be rectified to favor them in the long run. If a villager sees the village leader buying a fridge to store his produce, surely the villager would want the same (very real and easily understood) benefits for his own family. But if the villager perceives the ability of the village leader to afford a fridge to be inherently tied to the position, power, and prestige of the village leader, he might not be motivated to work harder. He would simply think that hard work is not what allowed the village leader to buy a fridge.
The solution is not to promise every person a position in the necessarily small group that is the elites. Not everyone in the village can become the village leader, nor should they be able to. Instead of distributing the power to allocate resources, the elites can hold on to that power and channel it toward distributing resources that ensure the common people feel concrete movement toward better standards of living. The commoners expects and is generally fine with a small elite that will always remain richer than they are, until they are convinced that the elites are only enriching themselves without providing the same opportunity for others.
For the elites, then, the use of inequality as a motivator for economic development is a cost-benefit analysis. Some, as African leaders mentioned briefly above, can choose to think extremely short term, enriching themselves before the commoners overthrow them. Or elites can think long-term, taking a much smaller piece of the overall economic pie, give more to the common people, and encourage them to make the pie bigger. The question is, is a bigger share of the smaller economic pie bigger, or is a smaller share of the bigger economic pie bigger?
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