Fair Distribution of Economic Welfare: Science against Myth | Daily News

Fair Distribution of Economic Welfare: Science against Myth

Part I:
Central Bank of Sri Lanka
Central Bank of Sri Lanka

The impact of Corona Pandemic so far during the past year has provoked a new round of concerns over the extent of fair distribution of economic wealth and means across the people of each country because of the brutally disproportionate effects of the pandemic on living standards of the people across various segments/social strata. The disruption of global supply chains due to lockdowns and social distancing policies adopted by the governments as the immediate response to curb the spread of the pandemic has been the major cause.

While millions of people in the world have been pushed to a new circle of poverty without much helping hand of the rich, the erosion of living standards has been disproportionate across races, age, sex, area, industry, sector, etc. Meanwhile, further accumulation of wealth to few owners/investors of information technology-based businesses due to zoom-economic structures created by markets to protect supply chains in response to pandemic is highlighted as the first-round beneficiary of the pandemic while new beneficiaries of wealth are to come in years to come in the process of the response to new waves of the pandemic and recovery. The US Fed Chairman recently stated that ultra-ease policies being flowed would make unequal recovery.

Distributional Response from Market Economies

The Presidential Election in the US in last November and subsequent events including the assault on the Parliament complex were largely driven by thoughts of the need for distribution of fair share of income and wealth and state welfare that were never heard in large market economies like the US in the recent past. US$ 1.9 trillion relief package (including $ 15 hourly federal minimum wage law, additional $ 1 trillion direct payments to families, $ 440 bn for small business, etc.) on the top of the already implemented $ 3.6 trillion stimulus in last 10 months was the first initiative for fair distribution declared by the US President-Elect Biden. At the inauguration speech of the new US President on January 21, 2021, he stressed the growing inequality among several national challenges that should be addressed together and issued 15 new Executive Orders mostly to improve distribution to the US economy through global transactions.

While political leaders favour exorbitant taxes on billionaires to provide welfare for the general public, some raise concerns over the present market mechanism in line with thoughts of socialism. Pandemic hit worst the market economies of the West and government response through health, fiscal and monetary stimulus policies taken to address distributional disparities are similar in all economies.

Global Policy Trend on Economic Recovery from Corona

Therefore, in almost all countries, the state or the bureaucracy has received a new lease of life in the name of fair distribution of economic welfare among the public under the cover of the pandemic risks where the bureaucracy believes that it can control pandemic-related all risks and improve the distribution of welfare. Policy tools available are numerous although their effects intended on fair distributions are not on record. Control of imports and foreign currency outflow, price controls inclusive of tariff revisions in favour of domestic production/import substitution, types of divestiture/distribution of state property/businesses to investors in favour of foreign exchange and international business knowhow, intervention in internal trade flows to reduce trader-margins, relaxation of bureaucratic barriers and conflicts to allow more private production/business activities, offer of state employment to low income segments, historically low interest rates and fiscal stimulus through debt are some examples for such tools.

Communists/Socialists against Capitalism

Rising adversity of wealth distribution seems to help recover proponents of socialist governance systems which have been pushed to corners of the world since 1980s with the larger market reforms taken place in Russia, China and East European countries in place of pro-communist-socialist policies. These proponents generally follow the views of Karl Marx (writings during 1840s to 1870s – major Das Kapital published in 1867) on the large wealth disparity between the capital owners and labour class due to exploitation of labour (Skills and Time) in the production by the capital-owned entrepreneurs by paying the labour with unfair or low share of production value (Labour Theory of Value) as the wage and the surplus or profit accumulating to capital or capitalist in the environment of the UK/Europe under industrial revolution and colonization. However, profit is the margin between the cost of production and price which is determined by market factors, mostly outside the control of the entrepreneur (even causing losses and capital bankruptcies), which is not factored in Marx’s philosophy.

Their core solution to ensure a greater wealth/income parity is for the government to own production means and the relevant bureaucracy to determine production lines, trade, prices and remuneration to stakeholders under various central plans (Socialism/Communism). They heavily criticize the free market economic systems as capitalism that shows no mercy on distributional effects. However, Karl Marx only presented his economic philosophy and did not recognize the state intervention to correct situation. Although Karl Marx got involved in political journalism and democratic revolution in France against the monarchy to support the working-class movement in 1940s, he fled to England as a refugee and lived in great poverty while writing his philosophy on unfair capitalism without involving in any political or labour movement.

In contrast, market or capitalist economic systems are driven by private property, competition and profit motive. The father of Economics or free market hypothesis or capitalism, Adam Smith, believed (writings during the period 1750s to 1770s – major The Wealth of Nations published in 1776) that the market mechanism works on the foundation of the self-interest which accrues benefits to all stakeholders through competition, because all in markets (labourers, land owners and capital owners) are traders where markets have own regulations leading to natural prices based on competition.

Therefore, he proposed that the government allow markets to operate freely (Laissez Faire), other than maintaining general law and order funded through taxes to provide for orderly environment for functioning of markets. Therefore, Adam Smith seems to recognize the state as the element that disturbs the market mechanism and fair distribution. He was a philosophical writer and lecturer in political economy in his carrier and Commissioner of Customs in Scotland in 1778. Most developed countries have resorted to the capitalist model/market economies and advocate for improvement of living standards through competition, productivity and opportunities.

However, leaders of the countries have been governing them at preferred points on the path between the socialism and capitalism whereas no one can measure the degree of the blend rather than slogans on fair distribution or fare share. The hypothesis of social or socialist market economies is the new variant of market economies that believes policy intervention in market economies to ensure fair distribution of economic benefits. This is a political slogan attempting to survival of socialism after it failed in 1980s. Therefore, pro-socialists by looking at distributional outcome of pandemic-hit market economies have renewed the voice on the need for greater state intervention in markets to ensure fair distribution.

Facets of Distributional Disparities – Wealth, Income and Public Services

The conventionally discussed disparity is the wealth and income disparity blamed for capitalist economic activities. Although there are certain economic indicators to measure the overall increase in living standards, measurements of distribution disparities are rare. Mostly available distributional data are on disparities of household/personal income, employment, household living conditions, consumption of consumer durables and technology, education, etc., by various social groups (age, sex, race, area, etc.) gathered from sample surveys conducted in long lags. Although the disparity of distribution of wealth/property/capital is the core topic, no one has suitable data to quantify it. However, in countries with the transparency in financial markets, the distribution of financial wealth/capital is ranked by way of a list of wealthy individuals based on market prices of securities.

The economic growth and prosperity that are not distributed fairly among the people are not considered healthy and democratic. Therefore, governments take numerous policies on political grounds at various points between the communism and capitalism to improve the distribution through various public services. Fiscal and monetary policy measures, market regulations and law enforcement are broad facets of public policies. All are intended to promote living standards of the people through both increase in production, income, employment, skills and opportunities and improvement in their distribution across the people.

(The writer is a former Deputy Governor of the Central Bank of Sri Lanka) To be continued