by Kate Raworth
Wide inequalities lead to poverty in high-income countries too, where the gap between the rich and the poor is now at its highest level for 30 years, leaving a striking number of people short of their essential needs.1 In the US, for example, one child in five lives below the federal poverty line, while in the UK food banks have given out over one million packages of emergency food supplies each year since 2014.2
For the first time, ending human deprivation is becoming as much a question of tackling national distribution as of international redistribution, argues Andy Sumner, the expert who crunched the data on where the world’s poorest people now live. ‘A fundamental reframing of global poverty is approaching,’ he writes, ‘and the core variable to explain global poverty is increasingly national distribution and thus national political economy.’3 Of course international redistribution from rich to poor countries continues to be essential for the 300 million people who live in poverty in countries still classified as low-income, which are mainly in sub-Saharan Africa. But the new geography of deprivation puts tackling national inequalities high on the agenda of ending poverty for all.
If tackling national inequality is essential for getting into the Doughnut, what does economic theory have to say about it? Inequality was a topic of great interest to many of the founding fathers of economics, but their views differed widely over how income would be distributed between labour, landlords and capitalists as market economies grew. While Karl Marx argued that incomes would tend to diverge, with the rich getting richer while workers were kept poor, Alfred Marshall claimed the opposite: that incomes across society would tend to converge as the economy expanded. In the 1890s, however, the Italian engineer-turned-economist Vilfredo Pareto stepped back from theoretical debate and searched for a pattern in the data. Having gathered income and tax records from England and from German states, from Paris and Italian towns, he plotted them on a graph and saw a curiously striking pattern emerge. In each case, he found, around 80% of national income was in the hands of just 20% of people, while the remaining 20% of income was spread among 80% of people. Pareto was delighted: he appeared to have discovered an economic law, which is still known today as Pareto’s 80–20 rule. What’s more, he argued, the steep ‘social pyramid’ that his data had repeatedly revealed must be a fixed fact of human nature, making attempts at redistribution counterproductive. The way to help the worst off was to expand the economy, he concluded, and the wealthy were best placed to make that happen.4
Converging, diverging, or ever-fixed? Debates over the likely path of income inequality raged on, but in 1955 the story took a crucial turn, quite literally. When Simon Kuznets – the brilliant inventor of national income accounting – gathered together long-run trend data on incomes in the US, UK and Germany, he was taken aback by what he found. In all three countries, income inequality measured before tax had been falling at least since the 1920s, and even possibly before the First World War. Contrary to Pareto’s static social pyramid, Kuznets believed he had uncovered a different law: a social rollercoaster ride on which income inequality first rose, then levelled out, and eventually fell again, all while the economy grew.
It was an intriguing finding, but it jarred with his intuitive understanding of the Success to the Successful trap. Since the wealthy have higher savings and since savings generate more wealth, he reasoned, inequality should tend to rise over time, not fall – so what was going on? He offered up a possible explanation: the process of rural to urban migration. In the early stages of economic development, Kuznets suggested, as workers are drawn into cities, they leave behind low-paid but fairly egalitarian rural life to earn higher but more unequal urban wages, and so inequality increases as industrialisation gets under way. At a certain point, however, once enough workers are earning those higher urban wages, and they start demanding better pay for the low-waged among them, inequality begins to fall again, resulting in both a more prosperous and more equal society.5
It was a clever theory but it was wrong, not least because rural incomes were in fact far from egalitarian – a false assumption, for which Kuznets privately admitted he had ‘no evidence whatsoever’.6 But to his credit, he was cautious when publishing his conjectures, noting that the ‘scant’ data he drew on were specific to a particular historical context and should not be used for making ‘unwarranted dogmatic generalisations’. He openly admitted that his explanations came ‘perilously close to pure guesswork’, thus making his conclusion, ‘5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking’.7
So much for the caveats and warnings. His underlying message – that rising inequality is an inevitable stage on the journey towards economic success for all – was too good a story to doubt. The image that Kuznets had already sketched in every economist’s mind was soon drawn on to the economist’s page and named ‘the Kuznets Curve’. With income per person on the x axis and a measure of national income inequality on the y axis, the curve – shaped like an upside-down U – appeared to present an economic law of motion. And it whispered a powerful message: if you want progress, inequality is inevitable. It’s got to get worse before it can get better, and growth will make it better. Or, as Arnold would say, ‘No pain, no gain’.
The inverted-U rapidly became an iconic economic diagram, especially in the nascent field of development economics, where it bolstered the theory that poor countries should concentrate income in the hands of the wealthy since only they would save and invest enough of it to kick-start GDP growth. In the blunt words of the field’s founding theorist, W. Arthur Lewis, ‘development must be inegalitarian’.8 In the 1970s, both Kuznets and Lewis won the Nobel-Memorial prize in economics for their respective theories on growth and inequality, while the World Bank treated the curve as an economic law and used it to publish projections of how long it would take for poverty levels to start falling in low- and middle-income countries.9
The Kuznets Curve, which suggests that as countries get richer, inequality must rise before it will eventually fall.
Economists, meanwhile, kept searching for real-world examples of the rollercoaster’s rise and fall. Lacking good time-series data for any individual country, they relied instead on momentary snapshots of inequality across a wide array of countries. The results roughly, albeit rather loosely, seemed to fit the curve: middle-income countries tended to be more unequal than low-income and high-income ones alike. But it was still no proof that any single country had ever travelled up the painful hump and down the happy other side. It was only in the 1990s, when sufficient time-series data were available, that the Kuznets Curve could be thoroughly tested. The result? As a leading economist of the day put it, ‘the pattern is that there is no pattern’.10 As countries moved from low- to middle- to high-income, some saw inequality rise then fall then rise again; others saw it fall then rise; in others still it only rose, or only fell. As far as inequality and growth are concerned – as it turns out – everything is possible.
Striking regional events even more deeply debunked the curve’s erroneous law. The East Asian ‘miracle’ – from the mid 1960s to 1990 – saw countries such as Japan, South Korea, Indonesia and Malaysia combine rapid economic growth with low inequality and falling poverty rates. It was achieved largely thanks to rural land reform that boosted the incomes of smallholder farmers, coupled with strong public investments in health and education, and industrial policies that raised workers’ wages while restraining food prices. Far from being inevitable, the Kuznets process had turned out to be avoidable: it was indeed possible to achieve growth with equity. What’s more, starting in the early 1980s, many high-income countries that believed they had successfully made it over the curve’s hump saw their income distribution begin to widen again, resulting in the infamous rise of the one percent accompanied by flat or falling wages for the majority.
It was, however, the economist Thomas Piketty’s 2014 long view of the dynamics of distribution under capitalism that made the underlying st
ory plain to see. By asking not just who earns what but also who owns what, he distinguished between two kinds of households: those that own capital – such as land, housing, and financial assets which generate rent, dividends and interest – and those households that own only their labour, which generates only wages. He then scoured old tax records from Europe and the US to compare the growth trend of these different sources of income and concluded that Western economies – and others like them – are on track for dangerous levels of inequality. Why? Because the returns to capital have tended to grow faster than the economy as a whole, leading wealth to become ever more concentrated. That dynamic is then reinforced through political influence – from corporate lobbying to campaign financing – that further promotes the interests of the already wealthy. In Piketty’s words, ‘Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.’11
Kuznets, it turns out, had been partially right: income inequality – and even wealth inequality – did fall in the US and Europe in the first half of the twentieth century. But what Piketty’s analysis revealed was that Kuznets had conducted his study in the midst of an exceptional economic era. The equalising trend that he had ascribed to the inherent logic of capitalist development was actually due to the capital-depleting impacts of two world wars and the Great Depression, combined with unprecedented post-war public investment in education, healthcare and social security, all funded through progressive taxation. Kuznets’s first intuition had in fact been right: when wealth is concentrated in few hands – and when the returns to capital are growing faster than the economy itself – inequality does indeed tend to rise. Success to the Successful rules after all, unless governments take action to offset it.
The Kuznets Curve may have been debunked, along with the claim that inequality is necessary for progress. But, like all powerful pictures, its memory lingers on, lending credence to the myth of trickle-down economics. In 2014 even economists at the International Monetary Fund (IMF) noted with frustration that, despite evidence to the contrary, ‘the notion of tradeoff between redistribution and growth seems deeply embedded in policymakers’ consciousness’.12 Perhaps that is why, in the midst of severe recession following the 2008 financial crash, the vice-chairman of Goldman Sachs, Lord Griffiths, felt he could justify a return to lavish bonuses for his city traders with the claim that, ‘We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.’13
Why inequality matters
Inequality may not be inevitable but, in line with the neoliberal script, it was until recently seen as no cause for alarm, and certainly not as an appropriate target for policy. ‘Of all the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution,’ wrote the influential economist Robert Lucas in 2004.14 For most of the last 20 years at the World Bank, according to one of its lead economists, Branko Milanovic, ‘even the word inequality was not politically acceptable, because it seemed like something wild or socialist’.15 For others, the acceptable degree of social inequality came to be a matter of personal or political preference – as Britain’s former prime minister Tony Blair quipped of the UK’s top footballer, ‘It’s not a burning ambition for me to make sure that David Beckham earns less money.’16 Over the past decade, however, perspectives on inequality have shifted dramatically as its systemically damaging effects – social, political, ecological and economic – have become all too clear.
Societies can be deeply undermined by income inequality. When epidemiologists Richard Wilkinson and Kate Pickett studied a range of high-income countries in their 2009 book, The Spirit Level, they discovered that it is national inequality, not national wealth, that most influences nations’ social welfare. More unequal countries, they found, tend to have more teenage pregnancy, mental illness, drug use, obesity, prisoners, school dropouts, and community breakdown, along with lower life expectancy, lower status for women, and lower levels of trust.17 ‘The effects of inequality are not confined to the poor,’ they concluded; ‘inequality damages the social fabric of the whole society.’18 More equal societies, be they rich or poor, turn out to be healthier and happier.
Democracy, too, is jeopardised by inequality when it concentrates power in the hands of the few and unleashes a market in political influence. That is probably nowhere more evident than in the United States, which by 2015 was home to more than 500 billionaires. ‘We are now seeing billionaires becoming much more active in trying to influence the election process,’ observes political analyst Darrell West, who has studied the antics of his nation’s richest citizens, ‘They’re spending tens or hundreds of millions of dollars pursuing their own partisan interests, often in secret from the American public.’19 The US former vice-president Al Gore concurs. ‘American democracy has been hacked,’ he says, ‘and the hack is campaign finance.’20
Higher levels of national inequality, it turns out, also tend to go hand in hand with increased ecological degradation. Why so? In part because social inequality fuels status competition and conspicuous consumption, summed up in the only-half-joking US bumper sticker, ‘He who dies with the most toys wins’. But also because inequality erodes social capital – built on community connections, trust and norms – that underpins the collective action needed to demand, enact and enforce environmental legislation.21 Research into households’ use of water in Costa Rica and use of energy in the US found that social pressure to reduce consumption to the community norm was far stronger within communities that considered themselves to be a group of peers.22 Little surprise, then, that a study of all 50 US states found that those states marked out by larger inequalities of power – in terms of income and ethnicity – had weaker environmental policies and suffered greater ecological degradation.23 Furthermore, one study covering 50 countries found that the more unequal a country is, the more likely is the biodiversity of its landscape to be under threat.24
Economic stability, too, is jeopardised when resources become concentrated in too few hands. That certainly became clear in the 2008 financial crisis. When the high-paid took on high-risk assets that turned out to be the bundled debts of the low-paid taking on mortgages that they could not afford, the result was system fragility and financial crash. Michael Kumhof and Romain Rancière, two economists at the IMF, analysed the 25-year run-up to that crash and found it bore uncanny similarities to the decade-long run-up to the Great Depression of 1929: both eras saw a large increase in the income share of the rich, a fast-growing financial sector, and a large increase in the indebtedness of the rest of the population – culminating in financial and social crisis.25
It is clear, then, that high income inequality entails many damaging effects. For low-income economies, these might once have seemed an unfortunate but necessary trade-off for the role that inequality was believed to play in generating faster economic growth – but that myth, too, has been debunked. Contrary to the founding theories of development economics, inequality does not make economies grow faster: if anything, it slows them down. And it does so by wasting the potential of much of the population: people who could be schoolteachers or market traders, nurses or micro-entrepreneurs – actively contributing to the wealth and well-being of their community – instead have to spend their time desperately trying to meet their families’ most basic daily needs. When the poorest families in society have no money to pay for their essential needs, the poorest workers in society can get no work in supplying them, and so the market stagnates among those who need its dynamism most.
Such intuitive reasoning is backed by analysis: economists at the IMF have found strong evidence that, across a wide range of countries, inequality undercuts GDP growth.26 ‘More unequal societies have slower and more fragile economic growth,’ writes Jonathan Ostry, the lead economist behind the IMF study. ‘It would thus be a mistake to imagine that we can focus on economic
growth and let inequality take care of itself.’27 That is a powerfully important message, especially for policymakers in today’s low- and middle-income countries, and one that clearly contradicts the ‘no pain, no gain’ myth of the Kuznets Curve.
Get with the network
With the Kuznets Curve debunked, and the damaging effects of inequality now starkly clear, a new mindset is emerging. Its message is simple:
Don’t wait for economic growth to reduce inequality – because it won’t.
Instead, create an economy that is distributive by design.
Such an economy must help to bring everyone above the Doughnut’s social foundation. To do so, however, it must alter the distribution not only of income but also of wealth, time and power. A tall order? For sure. But many possibilities emerge if we set out with a systems-thinker’s mindset. A compelling starting place is to draw a new image, so what picture best encapsulates the principle of distributive design? In contrast to Pareto’s pyramid and Kuznets’s rollercoaster ride, its essence is a distributed network whose many nodes, larger and smaller, are interconnected in a web of flows.
A network of flows: structuring an economy as a distributed network can more equitably distribute the income and wealth that it generates.
As their recurring success in nature’s designs shows, networks are excellent structures for reliably distributing resources throughout a whole system. In order to better understand the kind of networks that can make us thrive, network theorists Sally Goerner, Bernard Lietaer and Robert Ulanowicz studied the branching patterns and resource flows that are found in nature’s ecosystems. From the cold-water springs of Iowa to the alligator-filled wetlands of South Florida, they found that the answer lies – as it so often does – in structure and in balance.