Gs Paper I
News Excerpt:
Researchers from the Paris School of Economics have shown inequality in modern India to be greater than colonial times.
More about News:
- Several argue that inequality harms democratic processes. Some inequality, others argue, is actually beneficial, since it acts as an incentive to entrepreneurs to start businesses, thereby increasing employment and welfare for others.
- This view is mistaken, as inequality can also have harmful economic effects.
- For instance, the concentration of monopoly power among capital relative to labor can negatively impact consumption, welfare, and growth.
- Properly implemented, wealth taxes and redistribution can yield positive outcomes.
Monopoly power and consumption
- Billionaires and large business groups draw their wealth from monopoly power, which allows them to set prices higher than what would be determined in a competitive market.
- The extent of mark-ups above the cost of production is determined by their monopoly power, which means that for any given level of money wages, real wages are lower in economies with strong monopolies.
- Monopoly effects are currently being experienced as the cost-of-living crises affecting the developed economies.
- The phenomenon of "greedflation," where companies raise prices to increase profit margins in the wake of demand-and-supply shocks, has been cited as contributing to high rates of inflation in the west.
- Textbook economics suggests that the profit-maximizing level of output under a monopoly is less than under a competitive economy, implying a welfare loss.
- The presence of monopolies can lead to lower real wages and lower levels of output and investment, which can contribute to inequality and hinder economic growth.
Inequality and growth
- The "multiplier" effect refers to the process where an initial investment leads to an increase in income for workers and goods-sellers, which is then spent on purchasing other goods, resulting in a total increase in income that is greater than the initial investment.
- When companies exercise market power and have monopolies, they can set higher mark-ups and prices, which results in lower real wages for workers, reducing their purchasing power and consumption.
- Despite selling fewer goods due to reduced consumer demand, companies with monopoly power can still enjoy the same amount of profits because of their higher margins.
- The increase in income from a given amount of investment will be lesser under monopoly conditions because of the reduced consumption power of workers with lower real wages.
- While the rich may have higher absolute levels of consumption, they tend to consume a smaller proportion of their incomes compared to those with lower incomes.
- The multiplier process depends on the proportion of income that is consumed. In an unequal economy, a larger share of income is concentrated in the hands of those with a lower propensity to consume, leading to a weaker expansion of the economy.
Redistribution and growth
- Distinction between wealth and profits: Redistribution through taxing wealth would not affect investment, as investment occurs under the influence of future profit expectations, while wealth is accumulated past profits.
- Taxing the wealth of individuals like “TATA Group” will not affect investment in sectors like airports, as expected profits depend on factors like demand for air travel, which are independent of personal wealth.
- Taxes on wealth would not affect investment since it leaves expectations of future profits unchanged.
- For example, taxing “TATA Group” wealth will not affect investment since expected profits from airports depend on the demand for air-travel which is independent of the value of his wealth.
- In an economy with high expectations of profit, businesses would still invest even if wealth is taxed, as the goal is to earn future profits.
- Redistributing wealth and increasing income can strengthen the multiplier process, leading to higher purchasing power and greater demand, encouraging businesses to invest.
- If monopolies are curtailed and prices are lower, real wages would be higher, leading to greater demand and a healthier economy.
- Proposals like Economist taxing billionaire wealth and providing basic income can create a new class of entrepreneurs who can start businesses without relying on wage labor.
- Redistribution is not a silver bullet, and too high a rate of taxation can become a net drain on an economy.
- Used in conjunction with other policy measures, curtailing inequality can lead to a healthier economy.
