Inequality and growth

Tyler Cowen says no intelligent left-winger could agree with this:

Redistribution of wealth has some role in maintaining a stable democracy and preventing starvation.  But the power of wealth redistribution to produce net value is quite limited.  The power of wealth creation to produce net value is extraordinary...We should be putting our resources, including our advocacy and our intellectual resources, into wealth creation as much as we can.

One reason we can't agree with it is that it might be a false dichotomy. There's some evidence that inequality is bad for growth, and so redistribution might help the wealth creation process. See for example this paper (whence the chart) or this pdf. There's also evidence that inequality is bad for growth in both rural India and China (pdf).
Of course, the evidence isn't all one way. This paper (pdf) finds a positive relationship between inequality and subsequent growth in US cities. And this pdf finds that any change in inequality (up or down) hurts growth. And this pdf finds that it's only inequality after redistribution that's bad for growth.
Nevertheless, it's worth considering the possible mechanisms through which inequality can hurt wealth creation, for example:
1. Poverty causes credit constraints. This stops the poor investing in businesses or education; the low aspirations caused by poverty can have the same effect.
2. Inequality can create the threat of redistribution which can blunt incentives to invest. Or it can lead to state interventions - such as the minimum wage - that harm wealth creation. The backlash against wealth-creating processes such as globalization, offshoring and private equity in the UK and US are founded in the view that they create inequality. If we had better redistribution mechanisms (say, a basic income) such backlashed would be reduced, and the wealth creation process enhanced.
3. Equality can encourage investment in infrastructure, such as transport or secure property rights, that helps growth - because such infrastructure is seen to benefit all, not just the rich.
There's something else I'd add. One reason why wealth creation is a good thing is that it fosters increased respect for liberty and autonomy - perhaps through Maslow's hierarchy of needs. But this also implies that a group of people who feel poor won't respect freedom so much. So perhaps more egalitarian societies are more likely to respect freedom. Are civil and social liberties really less secure in egalitarian northern Europe than in the more inegalitarian US?

Comments

[Mr. Econotarian]

Corrupt governments which do not properly enforce property rights can lead to a politically-connected group of landowners owning much of the land.

Currently in many areas of China, poor people are having their land taken away by developers with the full backing of the government.

Whether this is a cause of lack of growth, or simply a symptom of lack of property rights enforcement and therefore general lack of economic freedom remains to be seen.

Those who support redistribution should point to any benefits of the redistributionist process, not the benefits of equality in general, because one is a direct result of redistribution and the other could come from a range of causes.

History is full of examples of horrific economics results from land redistribution (such as in Zimbabwe).

[dearieme]

The answer to your final question, Mr D, depends on whether you think the main threats to liberty come from
(1) Mexican irredentism
(2) Mad mullahs
(3) Social Democrats, New Labour, Old Labour, Liberal Democrats, Neoconservatives, Compassionate Conservatives and suchlike indigenous menaces.

[Mark Wadsworth]

Causality, my friend, causality.

Let's imagine a kleptocracy/absolute monarchy/malevolent dictatorship, where rulers screw the peasants/slaves for every penny, doesn't pay for transport, education, health and so on. Of course such countries have lower growth rates, but the low rate is the RESULT of the inequality.

Conversely, imagine a free-market idealised Western economy. As it grows, those at the top will benefit more (in % terms) than those at the bottom, but those at the bottom will still benefit. So in this case, the high rate is the CAUSE of the inequality.

But I am not one who is too fussed about relative poverty/inequality, I am only worried about helping those at the bottom, those at the top can look after themselves.

[dearieme]

So if it proved possible to make England as egalitarian as Scotland, it could become as prosperous?

[emmanuelgoldstein]

[History is full of examples of horrific economics results from land redistribution (such as in Zimbabwe)]

An autocrat is transferring land (and other resources) from one group of his supporting oligarchs to another isn't redistribution in the sense relvant to Chris' argument.

[dearieme]

Ah but, emmanuel, it is actual, existing redistribution.

[John F.]

What is "growth?" What are its components? If the value of the economy as measured by some currency increases because there are more infirmeries, medicines, water treatment plants, prisons, and security infrastructure, is the society "growing?" Or, is it just getting sicker, more polluted, crime-ridden, and fearful?

[Nigel Sedgwick]

For what reason have you drawn (or favoured repeating) a linear fit to some data points that (at least to my eye) struggle to justify that assumption?

Best regards

[emmanuelgoldstein]

[Ah but, emmanuel, it is actual, existing redistribution.]

Only if the Russia economy c.1991-98 counts as actual, existing, free-market capitalism

[dearieme]

All that the Russian economy of c.1991-98 proves is that Socialism prepares one for criminality not for capitalism.

[emmanuelgoldstein]

[All that the Russian economy of c.1991-98 proves is that Socialism prepares one for criminality not for capitalism.]

(1) All that Zimbawe c. 2001-07 proves is that the actions of psychotic Marxists != redistribution.

(2) Get off the tu quoque roundabout.

[tom s.]

"Corrupt governments which do not properly enforce property rights can lead to a politically-connected group of landowners owning much of the land."

True, but a politically-connected group of landowners owning much of the land can lead to corrupt governments which nevertheless properly enforce property rights, because they have all the property.

[Kevin Carson]

Econotarian,

What tom s. said. "Politically-connected landowners" sounds like a pretty good description of Latin American latifundistas and other landed oligarchies throughout the Third World. And a chief aim of U.S. foreign policy over the past century has been to protect the "property rights" of these quasi-feudal landed elites from redistribution.

Libertarianism doesn't mean the defense of anything that's called property--including the property of the thief. Libertarianism means defending justly acquired property. Murray Rothbard had it right: in most cases in the Third World, the rightful owners are the peasants working the land. The people who hold state title are just another form of tax collector, exacting tribute based on their ancestors having conquered the land on horseback.