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Mar282010

Insights into Economic Inequality and Job Creation from Samuel Bowles

Editor’s note: This is a post written by Mamading Ceesay.

Introducing Samuel Bowles

Samuel Bowles is probably the most important economist you've never heard of and it wouldn't surprise me if he won the Nobel Prize at some point. Given that he's a key influence on last year's winner Elinor Ostrom and that his intellectual antithesis the market fundamentalist Chicago School of Economics "is on the ropes" as he puts it, that's not beyond the realm of possibility.

Bowles has spent four decades studying economic inequality ever since Dr Martin Luther King asked Bowles and his then colleague at Harvard, Herbert Gintis to write background papers for the 1968 Poor People's March. His studies have given him unique insights into inequality, job creation and social cohesion, so it is of great interest to London Creative Labs.

Bowles' work is cited a number of times in Eric D. Beinhocker's 2006 book The Origin of Wealth. In the Santa Fe Reporter article Born Poor?, Bowles is interviewed and some of his work regarding inequality is discussed.

Bowles on Economic Inequality and Guard Labor

One key claim of Bowles is that the higher the level of inequality present in an economy, the more inefficient it is and the less income it produces. There are a number of reasons that this is the case. One reason is that in highly unequal societies, the highest ranking members of society have to expend more time, energy and resources making sure those below them behave by amongst other things the employment of what Bowles and his colleague Arjun Jayadev call guard labor. Think supervisors, traffic wardens, police officers and prison guards, which by the way aren't the best paying jobs around anyway.

Those employed in guard labor aren't creating economic value since they aren't producing goods and services or running businesses that produce goods and services. This is a significant opportunity cost in the economy of an unequal society. That opportunity cost is multiplied by the fact that an excess of guard labor also sustains illegitimate inequalities. This means those who are on the wrong ends of those inequalities never get the chance to fully participate in the economy and contribute to society to the degree they are potentially capable of. Bowles has found that there is a direct positive correlation between the amount of inequality in a society and the amount of guard labor it requires.

Bowles and his colleagues have found the single most important determinant of economic success in America is "one's choice of parents"[1]. IQ and education are much less important in determining one's economic success despite all the rhetoric saying otherwise. The implications of this for economic policy, social mobility and social justice are stark. One of the most disturbing being poverty persisting through generations of a family despite individual members' efforts to improve themselves.

How to Create Jobs the Samuel Bowles way

According to Bowles, most state-sponsored initiatives for jobs creation perform poorly precisely because they are designed as tax incentives for corporations to employ workers. Instead, he proposes giving everyone no matter who they are a very substantial one-off grant which they could then spend as they see fit, to further their education or start a business, or anything else that makes sense to them.

Community Action New Mexico has run a program for years that approximates Bowles' proposal to some degree. It has helped 800 New Mexicans set up Individual Development Accounts (IDAs). After completing a course on money management, the IDA holders have their savings matched by a multiple of 4 to 1, enabling them to buy a home, pay higher education fees or start a business. The IDAs have led to 93 new businesses, 67 home purchases and 110 people in higher education. New Mexico state's contribution is $2,500 per IDA. Given the number of jobs created by homegrown, IDA-supported businesses', this approach is about $10,000 cheaper per job than New Mexico's corporate subsidies.

IDAs fall short of Bowles' vision, because for example not everyone qualifies; it's not an outright grant, but a matched fund. What if someone starts a business that fails, buys a house that loses much of its value or studies what turns out to be a vanishing trade? This is where a radically reformed social security safety net can come in, as a form of social insurance that kicks in when one suffers misfortune through no fault of one's own.

What Bowles is essentially saying is that sharing the wealth causes an increase in the amount of wealth in the economy, due to more economic activity and job creation. This creates a larger and more robust tax base and reduces the benefits bill. Surely policymakers should be not just investigating but piloting projects based on Bowles' ideas.

Letting the Gini out of the Income Inequality bottle

The Gini coefficient is a measure of statistical dispersion often used by economists as a measure of inequality of income or wealth. The most recent US Gini income index is 46.4 which puts it on a par with the Philippines a country where every other person lives on less than $2 a day and Rwanda an even poorer country still recovering from the genocide 16 years ago. 46.4 is a great increase over the US Gini income index of 38.8 in 1968 and is quite frankly shameful for one of the wealthiest and most powerful societies in the world. The US has become even more of a "Winner takes all" society since Martin Luther King's day not less.

New Mexico has a Gini income index of 45.7 which is bad enough, compare that to the District of Columbia which has a truly appalling Gini income index of 53.7 that a third world nation would be ashamed of. Utah in contrast has a 41.3 Gini income index.

According to the Institute for Fiscal Studies report on Poverty and inequality in the UK: 2009, the UK's most recent Gini income index is 36, the highest level of inequality since the comparable time series began in 1961. In comparison, Sweden has a UN Gini index of 25, Germany 28.3 and in France the figure is 32.7. Not only is this a poor performance in comparison with its European peers, countries like Indonesia, Vietnam, Laos, Algeria and Tanzania perform better than the UK on Gini income indices. Furthermore, 36 is clearly a massive increase in income inequality since the pre-Thatcher Gini income index of 25. This long-run increase in income inequality almost inevitably indicates a long-run increase in poverty in the UK.

The GLA Economics Unit published a report in 2008 on Patterns of low pay in London where it presents Gini income indices for all employees in London and Outside London covering the years 2002-2005. London in 2005 had a Gini index of 32.4 and Outside London had a Gini index of 31. Given the most recent UK Gini index of 36, those figures would clearly be worse now. It's worth noting that the given figures by definition exclude those whose sole form of income is benefits and those who are neither in receipt of salary or benefits. In other words, the most poorly off aren't included.

The Gini income index is far from being the end-all and be-all of income inequality metrics. Its value lies partly in being frequently used and easy to present to laypeople, it is used for instance by the UN in its' Human Development Reports. For those of a more statistical bent, Entropy, Redundancy and Inequality Measures looks like an interesting resource. It features a Python library that contains formulas from Amartya Sen's book On Economic Inequality.

Other resources on Economic Inequality

It looks like the EQUALSOC academic network is doing potentially relevant and useful work in the area of economic inequality, the Oxford Handbook of Economic Inequality is a recent publication based on their work.

[1] Bowles, S., Gintis, H., and Osborne Groves, M., eds. 2005. Unequal Chances: Family Background and Economic Success. Princeton, NJ: Princeton University Press

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Reader Comments (3)

This is a brilliant post Mamading, more like this please :)
July 25, 2010 | Unregistered CommenterJosef Davies-Coates
Thanks Mamading for sharing Samuel Bowles' insight and economic expertise. I would have loved to know how those in guard labor (as he puts it) can free themselves and leave to the full potential they were wired to reach. Nevertheless, there are lot of valuable lessons to be picked up from this post.
It was great reading Samuel Bowles work, thanks for posting.
February 15, 2011 | Unregistered CommenterJob Description Templates

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