Branko Milanovic

These are the issues that some dominant segments of public opinion makers have tended to discard, all too easily, I believe, by arguing that all or almost all inequalities are market determined and as such should not be the object of discussion.

The market economy is a social construct, created, or rather discovered, to serve people, and thus raising questions about the way it functions is fully legitimate in every democratic society.

This way of looking at income distribution through the prism of social classes did not change much with the key turning point in the history of economics, the replacement of classical “political economy” by the “marginalist revolution” that started around 1870 and focused on individual optimization rather than on broad economic evolution of social classes, nor did it change later with the synthesis of the two strands (classical and marginalist) under the title of “neoclassical Marshallian economics” (from the Cambridge economist Alfred Marshall) and its establishment in the mainstream position. It was only in the early 1900s that the distribution of income among individuals (not among classes) attracted the attention of Vilfredo Pareto, a Franco-Italian economist who taught at the University of Lausanne in Switzerland. (His contribution is highlighted in Vignette 1.10.)

Economists and social scientists are concerned with inequality in three ways. The first type of question they ask is: What determines inequality among individuals within a single nation? Are there certain regularities that make inequality behave in a particular way as societies develop? Does inequality increase as the economy expands—that is, is it pro- or anticyclical? In these types of questions, inequality is something that ought to be explained. It is a dependent variable. In the second type of question, inequality enters as a variable that explains other economic phenomena. Is high or low inequality good for economic growth, for better governance, for attracting foreign investments, for spreading education among the population, and so on? In these instances, we look at inequality in a purely instrumental sense: We are interested in whether it furthers or hampers some particular desirable economic outcome. The third way inequality enters within the social scientists’ purview is when they address ethical issues linked with it. In these cases, they are concerned with the justice of social arrangements that exhibit different amounts of inequality. Is increasing inequality acceptable only if it raises the absolute incomes of the poor? Should inequality due to one’s better family circumstances be treated differently than inequality due to superior work and effort?

There was, Pareto argued, only a “law of its fixity.”

“augmented” Kuznets’ hypothesis.

were thought apt to spend

John Maynard Keynes,