Economics of the Koran other economic systems and
thoughts on poverty
Purpose of Life
The economic
system suggested by the Koran is a sub set of the social .Islam recognizes the
family as the basic human social unit. The Islamic social system’s primary
thesis is that man was given consciousness but humans have to acquire spiritual
aspects through effort and knowledge
,there are inbuilt talents in humans that need to be nourished and
nurtured and that is the primary purpose of human life .This awareness and
discovery of ones self and the inherent talent has to be made whilst living
within society ,simplistically speaking the nourishment of the self and the
spiritual progress is the direct result of the amount of effort an individuals
makes towards the assistance of others and society .In other words the individuals
self develops in direct ratio of the individuals contribution towards the
development of the self of others .In an society where all are striving to
assist others there can be no strife or conflict . The individual exists in society.
Islam requires that individuals attain betterment whilst living in society In fact
Islam requires that individuals participate vigorously and forcefully in every
day life .Action is an active prerequisite of being a Muslim. .Attainment of
personal betterment by shunning society and company of other human beings is not
the Islamic way of life.
Economics of the Koran
Islam also
presents the evolution of man from more humble existence and this evolution has
occurred by struggle and effort and survival. Every facet of life and being is
recognized to go through such a struggle and the purpose of this struggle is to
develop better and abler species and environment. Adoption to change is a
persistent theme in the Koran .Innovation and technological progress are the
recommended path which will eventually result in the unification of mankind
into one brotherhood,.
Frequently
it is suggested that the Koran does not present an economic system it is
further asserted that any system (other than say Communism-and that only as
communism is said to deny God)) would be Islamic. This is not correct; the
Koran does suggest and lays down the basis of an economic framework or system
and some that is a part of the capitalistic economic theory, inclusive of its basis,
would not find sanction within the economic system suggested by the Koran.
Generally
the Koranic system is divided into two parts by most experts i.e. the spiritual
and worldly part .It is asserted that the injunctions of the Koran on poor tax
and equality in consumption aim at the hereafter .This also is not entirely
correct .The economic system suggested by the Koran promises ‘real’ (worldly or
benefits in this life ) benefits in this world i.e. the system promises a vibrant
, living and stable society , which would be indestructible as long as the
basics are followed .The system advocated by the Koran eliminates the fear of :
the unknown ; failure ; and bankruptcy . The system allows the individual to pursue her or his dream.
The system allows the individual to peruse the higher purposes of life which is
the direct result of the elimination of the risk, economic and social.
The Koran’s
economic system recognizes that each human is unique and is gifted by nature by talents which vary from person
to person. In the economic sense each individual is to receive the fruits of
her or his labours. There is therefore no equality in income and individuals
compete and receive rewards in accordance to their abilities and attitudes .The
system suggested by the Koran includes the concept of private property and also
succession. The system is to be a free market economy, where business is
conducted on a voluntary basis with no coercion, the market has to be
competitive where the best receive the most and there is an incentive to
innovate and grow .The market has to be competitive as is life.
Competition
, however, in an Islamic economic system is different from the classical
western concept ,the value system in an Islamic society places emphasis upon competition
, but the criteria by which the elite is identified is neither wealth nor
status nor inheritance but is the amount of effort to enrich society that an
individual has displayed . The better are those who enrich society primarily by
their actions and also by their thought. The other aspect of an Islamic society
is to shun conspicuous consumption, one is free to enjoy ones wealth and too
use ones wealth to enrich and improve ones life but as soon as wealth is
displayed to express status or superiority it becomes forbidden. Wealth cannot
be displayed to portray success and superiority.
The Korans
economic system clearly forbids poverty. In an Islamic society, the government,
State or society itself has the responsibility of removing poverty. Individuals
are required to pay poor tax .The poor tax is so designed that it is payable on
‘idle’ assets .Payment of poor tax is compulsory and can be enforced by governments.
The system
described above is more or less in line with the classical (more correctly the
social democratic model of North Europe) followed by the world and the developed economies.
The major deviation being that removal of poverty is a primary objective and
the redistribution of income to seek convergence in consumption is voluntary
and not coerced or enforced by society or State. .It is in consumption,
however, that the Islamic system deviates from the Western model.
Difference
in abilities of people translate in difference in earnings .The more able or
gifted or talented or educated earn more .There is, therefore, no equality in
earnings .The Islamic system does not suggest that earnings be equalized or
converged. The Koran suggest that those who are gifted and are ‘assisted’ by
nature to be able to earn more than others and these fortunate people should be
able to consume whatever they earn, this consumption, however , should aim at
nourishment of the individual towards betterment and in exploring talents and
latent capabilities ,Consumption should, however, not be based upon the desire
to flaunt ones good fortune to others .Wealth should not be used as a symbol or
measure of success. Success is gauged by the use of the status or position or
assets that an individual attains .The good fortune if used to better society
is laudable. Savings are to be invested in production to generate employment or
given away to converge consumption. The haves need to fund education, heath,
housing etc.
The Islamic
society has to ensure that all children are provided equal opportunity , talent
has to be nourished and inheritance or family ties is not to be the basis of
advancement .The process of assigning
ones ‘surplus’ income to the have-nots is to be voluntary , it cannot and
should not be enforced by State or government ,or by law . This is important
since the system only works if it is voluntary and sustainable. Risk of failure
or bankruptcy is only eliminated if all member participate willingly and with
the firm understanding that when the social order is rearranged today have-nots
will be treated similarly as tomorrow’s have-nots.
The economic
system propagated suggests the removal; of poverty and convergence of consumption,
so as to allow all members of the society to be freed from the fear of the vagrancies
of life. The system has to be competitive so as to ensure that the better have
the control or manage the society inclusive of the economy
The Koran
also forbids riba , there is now some dispute as to what is meant by this , a
small group contends that ribe means punitive interest rates and that is what
is forbidden, a larger group deems all interest rates to be forbidden , The former
group deems that interest rates as applicable today include a portion to cover
inflation . This is argued as fair exchange, as X Rupees borrowed a year
earlier if returned today would have been devalued due to inflation. There is
in any case an impressive work done on interest free banking, this work has
been translated into practical as a number of Banks in Pakistan and elsewhere
offer interest free banking.
Capitalistic System
Capitalism
is defined as a social , economic and political system ,where means of production e.g. industries , banks, natural resources ,
are owned by individuals or private corporations .Where the political system operates in the
interest of such powers .and where the distribution of national income is determined by them . It is closely
associated with the free enterprise system, which may be defined as one where businessmen,
the owners of the means of production are free to maximize their profits. The
real driving force behind capitalism – the acquisitive spirit or the profit
motive, was nether sanctioned by the State nor Church .Since the Church had
submitted to the King, the responsibility of restraining the merchants from
unbridled pursuit of self interest fell to the Crown .The power of the State
gave way to those exalting individualism and ultimately the acquisitive instinct.
The purpose
of economics is to provide the goods and render the services that people want. The
best economic system is one that supplies the most of what people want more.
Smiths’s
argument was that human beings are moved primarily by selfish and egoistic motives,
that all human activity is rooted in self preservation and hence self interest
and ambition are not vices but virtues leading to hard work and prosperity. By,
implication, then the State should keep its intervention in economic activities
to a minimum so that individual and social welfare is at the maximum.
Smith
presented a system based upon keen competition as the mitigate to unbridled personal desire , Smith argued that
, left to themselves , producers and workers are guided by the self interest to
put their capital and labour to use where they are the most productive . The
mechanism that ensures this is the ‘invisible hand’ of a free market ,where businessmen compete for consumers
money in an egocentric search for profits
,and where consumers seek to obtain the best-quality products at the
cheapest price .. The quest for profit maximization producers are impelled only
to produce those goods for which there is demand and to use the most efficient
techniques so that unit costs are minimized.In a free-market economy , therefore every one is happy, the producers
earn maximum returns , and consumers are satisfied by high-quality products
available at the lowest price ensured by maximum productive efficiency .All of
this is the miracle performed by the ‘invisible hand’ in spite of , or rather
because of , human greed and acquisitive
behaviour .
Smith was a
proponent of free enterprise or laisser-faire . With this economic ideology
went a political creed that considered the State as an necessary evil – evil
because of its encroachment upon individual liberty, but necessary as a bulk
ward against anarchy.
Economics as a discipline took from when business
enterprises were small and simple and agriculture engaged most of the
productive energy of people .Firms responded to changing roles of production
and to changing market process. They were sub ordinate to the instructions of
the market The theory presented by Smith and others reflected this fact .In
time theory was amended to embrace monopoly – or more precisely oligopoly – but
it remained a captive of its origins. The competitive firm was still the centerpiece.
And Oligopolist also responded to market movements and was impelled to do so,
for he sought single–mindedly to maximize profits .Thus the market and hence
the consumer remained sovereign. Consumer choice continued to control all.
Smiths
contribution was added to and significantly refined by following economists and
thinkers, who further elaborated the theory, but they differed little with the
basic promise presented by Smith. The refinements offered by subsequent
thinkers do not affect or even touch the central substance of the discipline
.That, however, subjectively is deemed to be the final form.
The essence
of the neo-classical system is that individuals using income derived in the main,
from their own productive activities express their desire by the way they
distribute the income for , the various goods and services available to them in
markets .Their tendency is to distribute their income that the satisfaction
derived from the last unit of expenditure for any particular purpose is equal
to that from the expenditure for any other purpose .At this point satisfaction is maximized .
This
expression of the individuals will is passed on by the market to the producers
along with similar expression of others. When the desire is strong, so will be
the willingness to spend money. And so will be the price in the market .Where
the desire is weak, so will be the price. The producer will be motivated by the
purposes of profit. Thus, over unspecified periods of time, he seeks to maximize
.Price changes signal to this motive. Included among the recipients of this information
so transmitted are producers who can expand or contract their production,
others who can enter or depart the business .They respond, in such response they
ensure the production is ultimately in the command of the individual.
Information
also passes from the producer to the market and to the consumer .This, however,
involves no similar command; rather it is intelligence on the basis of which
the individual or consumers alter his instructions to the producer.
The
economic system places the individual- the consumer – in the ultimate command
of itself. The individual being in charge, cannot be in conflict with the
economic (or political) system .The consumer cannot be in conflict with what
the consumer commands.
The control
of the economic system by the individual varies from individual to individuals
primarily in ratio of the wealth or disposable income a person possesses,
however, in the neo-classical model this difference and others are said to be
mitigated by free market competition.
Emergence
of Corporations
The
emergence of the corporations disturbed the sovereign consumer concept. Some
industries attracted large corporations, the model was modified to encompass
this development. The concept of the firm remained unchanged to be the
individual owner who is a profit maximize, the owner, however, got power to set
prices. The price set by one form affects those of the other firm thus prices
that are set acceptable to all. The change in price triggers the consumer’s
response and thus the consumer is still in charge. The higher profits of
corporations can be managed by taxation. The ultimate social, political and
moral sanction of the system driving from its ultimate subordination to the
will of the individual remains unimpaired .The firm in the neo classical model
remains fully subordinate to the State .The economic management of the State is
responsive to the needs of the public as a whole and not to the business firm.
Identified
with the neoclassical model is the neoclassical State .The economic system
functions in response to the instructions of the market and ultimately to the consumer.
Where the response to this instruction of the market is inadequate or imperfect
the government may be required to amend the instruction or supplement the
response so that it accords better with the public interest .The model assumes
that most economic tasks will be accomplished in response to the instructions
of the market .The State is supplementary and regulatory in its role. Neo-classical
economic has a strong adverse attitude towards
: tariffs ; price controls ; suppression of technological innovation ; any thing that suggest
government assistance to or
acquiesce in , monopoly . These, all
involving the rigging of the market in favour of the firm, are classical
devices for winning public support for private purposes .The model, however,
still considered the firm to be small and unable to influence free market forces.
The
neo-classical model regarded the government to be self regulatory or self righting.
Temporary malfunction were self correcting. Its basic tendency was to employ
all willing and available workers for some thing close to maximum output. This
was because production provided the income which purchased that production and,
in the end, provided enough to purchase it all.
The income
that was provided could be saved but saved income would also be invested. If
savings were large interest rates would fall and this would encourage investment.
Or, demand being momentarily deficient, prices would fall, and a smaller of
purchasing power would suffice to clear the market .So there could be no
permanent shortage of purchasing power.
The
neo-classical equilibrium between production and purchasing power that acquired
the resulting production was established at a level where all willing and
useful workers were employed. If workers were unemployed, wages would fall in
consequence of competition for jobs. It would be profitable to hire more workers:
perhaps in consequence of the lower wages, demand and prices would fall, But
wages directly affected by the unemployment would fall more..Thus the fall in
real wages would be a decisive factor in expanding employment. The expansion
would continue until all were employed
Keynesian
Revolution and the Planning System
The Great
Crash of 1929 made a serious dent in the classical and neo classical economic thought:
Keynes reshaped economic theory to reconcile microeconomics with macroeconomics
.Keynes after the Great Depression stated that there could be shortage (or
surplus) of purchasing power in the economy and that neither wages nor interest
rates reacted usefully to correct it .A reduction in wages might merely reduce
purchasing power – aggregate demand, yet more, and make things worst. In the
absence of sufficient demand even the lowest interest rates, would not
encourage the needed investment and thus enhance demand .Stagnation would continue.
The only answer, was for the State to intervene. The State would spend in
excess of its tax revenues and so add demand when this was required.
The
government would also manipulate the supply of funds available for ending, and,
therewith, the interest rate at which such funds were available. Alone, low
interest rates may not accomplish much .As part of a general strategy of
stabilisation monetary policy would be effective.
Savings
deposited with banks or other lending or financial institutions are available
for relending .The amount that is available can be extended by allowing banks
to borrow from the central bank. This can be encouraged by a favourable lending
(or-discount) rate by buying government securities from the bank, thus leaving
them with money, the supply of funds which they have for lending can be further
enhanced by the central bank. If the need is to restrict demand the process is
reversed .The interest, or discount rate is fixed by the central bank.
Keynes observed that businesses function as
producers as well as providers of income to households in the shape of wages, rents,
interest and profits .The households in return spends money to buy goods from businesses.
This cyclic flow runs the economy .Income flows from producers to consumers and
then back from consumers to producers. As long as businesses are able to sell
their products at reasonable prices the process goes on.
The
individuals income is partly saved and deposited with financial institutions,
partly taken away by governments as taxes, and some part on imports. These
leakages from total expenditure tend to keep aggregate demand for goods short
of aggregate supply. These leakage are mitigated by: business borrowings for investment;
government spending; and exports. If leakages are matched with injections,
total spending matches the total quantity of goods produced, and economy can be
said to be in equilibrium. If leakages, however, exceed injections aggregate
demand falls short of aggregate supply ,
and some goods remain unsold so that producers are forced to scale back
production and hence unemployment tends to rise .To cut unemployment
governments must increase spending by means of fiscal and monetary policies .
Fiscal
policy involves the weighing of governments expenditure versus tax receipts. During
a depression, fiscal policy calls for a budget deficit i.e. for government
expenditure to exceed tax receipts, but with inflation the solution lies in
budget surplus. Monetary policy affects the economy through its impact upon
business investment whilst a contraction discourages it. Hence during a
depression the monetary policy has to be expansionary, but during inflation thre
needs to be a contraction.
Friedman
Keynesian
economics assigns a watch-dog role to government in contrast to neo classical
economics which views the State as a necessary evil .The Keynesian revolution
was attacked by Friedman, who brought back microeconomics and free market
policies back to the forefront. His argument those cycles occurs due to the
monetary factor and not supply demand imbalances. Monetary supply determines
prices and employment rates. To him government’s role has to be shrunk to core activities.
It is basic
to neo-classical and neo-Keynesian models that a combination of fiscal and
monetary policy will produce stable prices at close to full employment .If
there is unemployment this can be off set by public action to increase demand .
As unemployment disappears inflation becomes the danger .This can be arrested
by curbing demand .Thus stabilisation is obtained.
Both models,
however, converge on the fact that market remains the regulator .If total
market demand is expanded, firms will respond and increase production and
employment and if demand is contracted the firm will respond by reducing prices.
Both models depend on the same view of the power of the market.
Criticism
of Economic Models
Main stream
economic though is far from clear but both main economic systems adhere to the
basic premise that self interest is the best guardian of collective economic health.
The
American economy is beset with two evils: the rising concentration of wealth;
and the rising budget deficit, the structure of the economy has much to do with
both these evils. Large corporations interfere with both the supply side and
even to, a extend manipulate, the demand side. The economy has therefore
inherited the evils of both systems. It is neither a free market economy nor is
it a finely tuned fully regulated system, Concentration of wealth interferes in
the state of competition .The rich are able to buy small firms and thus create
virtual monopolies. He modern household does not allow the expression of
individual personality and preference .It requires extensive subordination of
preferences of one member or another .The notion that economic society requires
something approaching half of its adult members to accept subordinate status is
not easily defendable .And it is not easily reconciled with a system of social
thought which not only esteems the individual but acclaims his or her power .Neo-classical
economics resolves this problem by burying the subordination of the individual
within the household , the inner relationship of which it ignores . Then it
recreates the household as the individual consumer .The economist does not
invade the privacy of the home.
The
structure of the economy from the time of Adam Smith underwent a radical change
as large corporations started to emerge. The classical model was modified to
accommodate the emergence of large corporations. This, however, resulted in a
major shift or deviation from the model .Corporations can into being and exist
because technological progress and advancement need organization to nurture and
harness the consequences of such advancement . To manage technical advancement
firms need to control process and manage demand and this infringe upon the model.
The large firm ownership passes over to the managers of the firm and not by its
share holders who have nominal power.
Organization
does not apply to all sectors of the economy and thus results in a two tier
economy one comprised of large organisation largely above the market and the
other characterized by small firms who are subject to market forces .The former
do not confirm to the neo-classical model . The management of large firms have
powers to seek government intervention to manage prices .Innovation needs large
organizations to harness the benefits of the innovation and these organizations
need to have long time horizons and technology takes time to reach a point
where it becomes commercially feasible. Organizations thus need to assure that
prices will remain stable so that the risk of a long gestations period is mitigated.
The large
corporation seeks to control prices and also to, manage demand .Corporations
attempt to control and organize the supply of materials and components,.
Corporations also attempt to mobilise its own capital and savings. Corporations
develop a strategy to control unions and influence the opinion of the community
and the State .The corporation therefore seriously circumvents the model, which
does not approve the control of process and management of demand.
The large
corporation has power to protect its interests by shielding it from the market forces.
Corporations need to ensure sufficient return on capital to justify the large
capital outlay needed to harness the technological innovation. The return on
capital is then maximized without incurring much risk .Corporations attempt to
minimize interference in its decision making by means of a weak oversight
process, weak board of directors and ineffective shareholders. Reasonable
returns keep outside interference to minimum levels and also insulate the
corporations from borrowings or investments that erode the corporation’s autonomy.
Reasonable profits are thus crucial to the corporation and therefore prices
have to be managed, costs have to be controlled and consumer preferences have
to be manipulated..
All large
firms in different sectors of the economy may not have the same goal. The model
assigns only one goal i.e. profit maximization .In the neo-economic system
prices are the primary signals. Prices signal changes in wants of consumers to
producers and also inform the consumer of changes in production costs requiring
a reordering of the commodities demanded .The consumers maximize the
satisfaction achieved from a set of income based on process of different
commodities or services.. Customer satisfaction orders the layout of labour,
capital new materials and management ability that is needed.
The market
system is in itself stable .Fluctuations in demand and prices and supply are
self correcting. The planning system has no such ability and is prone to
instability in face of recession or inflation and this instability passes on to
the mixed system where the market portion is also affected by the instability
of the planned system.
Downwards
instability means insufficient demand , more goods are available ,or could be
made available with existing plants and capital employed in assets , then can
be sold .The planned system is unable to
react to such an happening as. decrease in production means that income needed
to buy the goods and services produced – each sale returns to some one the proceeds
which , if spent, would provide the wherewithal for making the equivalent
purchase .With that part of the proceed which is in fact , spent – which is
turned to the consumption or further production requirements of the recipients
– there is no problem .It is with savings that the danger of the discrepancy
arises .These must be invested and must
be thus spent or else there will be a
deficiency in purchasing power .If there is such a shortfall goods will remain
on shelves , orders will fall , production will decrease
. Unemployment will increase, thus a recession.
In the
market system, the length of such a deficiency in demand is limited. Firms in
the market system numerous and small and income is widely distributed in
comparatively small amounts. The propensity to spend from this income is high,
it is strongly exposed to urgent consumption and production needs of the
recipient .If there are savings these will be deposited and made available for lending.
And if they are sufficiently abundant, there is at least a chance that this
will be at interest rates and terms that will encourage the other and already
needy firms of the market system to use them.
The market
system allows prices to fall resulting in loss of profits to the firm. The
reduction in income immediately results in the reduction of the ability of the
firm to save – and thus ensure that more of what the firms receives is spent..
And the lower prices for products and services attracts the customer and
increases the purchase of those who are living on fixed incomes or who are
spending from past accumulations .So an equilibrium in which demand covers
supply is likely to be re-established at lower prices .Output does not decline
, there is no increase in unemployment .
In the real
world prices and wages are more rigid, output might fall, unemployment might rise,
But in the market system, savings do accrue widely in small amounts and are
likely to be used. The small firm does reduce his income but remains employed ,
the small firms savings do fall when this happens .Thus the market system tends
to be stable of has tendency towards stability through self correcting
mechanisms and responses of the consumer and the producer .
Planned
System
In the
planned system savings may not be invested. The planned system does prefer
investment of savings in capital expenditures in contrast to consumption expenditures.
Small number of people makes the investment decision. Savings can exceed
investment and there is a drop in level of demand which reduces production. The
planned system works on synthetic demand which is less reliable than the
spontaneous urgent demand of the market system. The stabilization mechanism is
very weak, in the planned system, as prices are controlled and as a consequence
fall on demand does not trigger a fall in prices .Wages also do not vary and
thus do not attract new employment. The entire impact of the reduction in
demand is on output and employment. The planned system therefore lacks the self
correcting ability of the market system; this in a mixed system exposes the
market system also to woes resulting from the inflexibility of the planned
system
The
Keynesian revolution recognized this inherent inability of the mixed system
.The government intervention required to correct instability soon became a part
of the planned system .The fact that the Keynesian revolution was necessitated
by the need to aid the planned system was not made transparent. The post
Keynesian model does not recognize the increase in instability to the increase
in the power of the corporations.
In the
market system inflation can be controlled rather easily .The individual in the
market system takes instructions from the prices, these the individual does not
control .Strong demand will pull prices up , such demand can be created by
lending by banks or government over and above that what is saved .This is controlled by tightening credit or tax increases or reduce governmental
spending . Prices will stabilize.
In the
planned system the firm has power, over prices .Prices are frequently raised to
maintain profits .Price increase raise wages which lead to a spiralling price.
The system is severely compromised as corporations along with governments get
power to fix wages and prices, it is no longer a self stabilized system.
Inflation
is controlled by: reducing public expenditure; reducing private expenditure;
and raising taxes .Reduced expenditures are borne by private citizens and
market firms not large corporations who have fixed demand in sectors of the economy
say defence.
Increase in
interest rate is another method of curbing demand .Corporations minimize use of borrowed
funds ,instead it utilizes capital
generated from its own earnings .The
market system relies heavily on borrowed funds .Interest rate hikes do not have
the same impact on the planned system as it does on the market system , these
hikes therefore curb market firm’s demand
Even use of taxes as a measure to control demand is circumvented by the
planned system , which has ability to raise prices to pass the burden to the
customers .
The modern
economy is irrational, some products are available in abundance whilst some, of
more fundamental importance, are scarce The performance of the economy in
relation to need is unequal. That is because the planning system usurps the
right to fix prices and allocate resources .The planned system wins supports to
further enhance the irrationality by redirecting demand. Government expenditure
is also lopsided .Weapons, research, highways etc., have access to public funds
whereas education, police, courts, sanitation and other urban services are
under funded.
The model
is completely silent on this, the distribution of public expenditures remains
in response to citizens will .Either the citizen is committed to his own
discomfort and perhaps even his eventual extinction. Or there is, for the
moment some flaw in the government which is producing the wrong use of public funds.
Where the power to influence decisions is great there is abundance, where power
is lacking the public services are starved.
Wages
difference between the market and the planned system will persists and the
equalizing claims of neo-classical economics must be rejected and the economy
will move to one comparatively affluent, one comparatively improvised working force.
The model insists upon the equalization of wages and thus in reality the model
does not seem to be relevant.
Suggestions
to Modify the Model
The disruption in the economic sector, in the
American economy, can only be minimized or eliminated by reducing the
concentration of wealth, linking minimum wages to maximum wage, breaking up raw
material monopolies, proper representation of share holders on boards ,
reducing size of firms reducing or limiting size of inheritance , balanced
budgets . Money growth to be in sync with economic growth, government
interference is to be minimal. Both main system, however, focus upon the
symptoms and not on the root cause of instability and consequently economic and
social uncertainty.
John
Kenneth Galbraith in his book ‘Economics and the Public Purpose ‘ suggests that
action be taken to remove the ills of the economic models or system ,and
measure suggested are : support measure to reduce inequality , which is the
direct result of the increasing power of
the planned system in comparison to the reducing share of the market system
; the stabilization of prices and
incomes to strengthen the bargaining position of the market sector ; small
firms and workers associated with the market segment of rather economy need to
be provided security in prices and income ; small firms to take steps to avoid
fluctuations in income ; minimum wages should not be bench market to ensure
bare survival , be enacted to reduce inequality ; and differential of wages
between the market and planned system should be eliminated or narrowed
;government should ensure support to vulnerable groups to ensure that a minimum
standard of living is maintained .
Poverty
Economic
inequality refers to disparities in the distribution of economic assets and
income .Inequality within society is due to : Labour markets ; innate ability ;
education ; race ; gender ; culture ; wealth concentration ; development
patterns ; and personal preferences for work , leisure and risk .
A major
cause of economic inequality is caused by differences in supply and demand for
different kind of work A job where there are many willing workers competing for
the few jobs will result in low pay and visa versa .
Individuals
have different abilities such as intelligence, strength or charisma and there
are also differences in individual’s wealth. Talented people tend to be in high
demand and are better paid than less fortunate people .The most successful
people , however , are those who are around average capabilities , very
talented or poorly endowed people seem to be left out for various reasons .Education
is one important factor in deciding the income of a person , better educated
people are better paid ,
Kuznets
argues that the level of inequality is the result of the stage of development a
country or society is. Countries with low level of development have relatively
equal distribution of wealth .As a country develops , it acquires more capital
, which leads to the owners of capital having more wealth and income ,
introducing inequality .Eventually through several possible redistribution
mechanisms , such as social welfare programs
, more developed countries move back to lower levels of inequality . The
thesis tested with present data seems to be very weak. Newly created wealth
concentrates in the possession of the already wealthy individuals .High
inflation also is said to cause poverty as high inflation is coercive and
favours those who possess wealth, thus aggravating inequality
.
The
children of poor remain under achievers in later life and thus remain poor. This
is because working memories of children who have been raised in poverty have
smaller capacities than those of, say, middle class children. Working memory is
the ability to hold back bits of information in the brain for current use .It is crucial for comprehending
languages , for reading and for solving
problems ,Entry into the working memory is also the perquisite for something to
be learnt permanently as part of declarative memory – the stuff a person knows
explicitly . It has been demonstrated
that the reduced capacity of the memories of the poor is almost certainly the
result of stress affecting the way that childish brains develop. Stress changes
the activities of the neurotransmitters, the chemicals that carry signals from
one nerve cell to another in the brain .Stress also suppresses the generation
of new nerve cells in the brain. Most significantly of all it shrinks the
volume of the prefrontal cortex and the hippocampus. These are parts of the
brain most closely associated with working. Memory. Children with stressed
lives , then , find it harder to learn
.They do less well at school and end up poor
as adults and pass on the same circumstances upon their children .Poor
life stressful lives due to uncertainty about the future and due to being at
the bottom of the social heap as well as financially deprived . People at the bottom of the social heap
experience much more stress in their daily lives than those at the top and as a
consequence are less healthy. Even young children are sensitive and are aware
of such things.
It has been demonstrated in
Britain that the number of children a man fathers is related to his income .Status though is always relative , it is linked to money because it drives the
desire to make more of the stuff in order to outdo the competition .This is the
ultimate engine of economic growth. Since status is a moving target there is no
such thing as enough money. Richard Easterlin observed that while the rich are happier than the poor within a country, average happiness does not increase as that country gets richer. If this can be established without doubt then the ‘free-market’ argument that because economic growth makes everybody better off, it does not matter that some better than others. The argument does not stand up at least if ‘better-off; measured in terms of happiness .Darwinism suggests that a free society better allows people to rise through the hierarchy by their own efforts. People wish to be relatively better off than their peers even if it means that they are worst off in absolute terms .Darwinism believes that poverty is relative . It has been established that once a country grown to be lifted out of penury, its inhabitants are likely to live longer, healthier lives if there are not huge differences between their incomes. It means that low income countries with low income variation can out score richer countries with wider variations in incomes.. It has been established that that those at the heap have the worst health than those at the top. It is believed that it is the Darwinian failure of being at the bottom of the heap that is truly stressful and bad for the health.
Losing has a real cost not just the absence of gain – early death for the failures and genetic continuity for the successors – it is hardly surprising that those at the bottom of the heap sometimes seek status , or at least ‘respect’ in other ways .
Poor children are more likely to fail at school, poor adults to commit crimes die young, and so on .Policy makers try to compensate by spending to end ‘child poverty ‘and by targeting health and education initiatives on the neediest yet such attempts are doomed because they conceive of each social ill in isolation, rather then treating their shared root causes .The cause, however, is not poverty , but inequality .
Within the developed world where destitution is rare, countries where incomes are more evenly distributed have longer-lived citizens and lower rates of obesity, delinquency, depression and teenage pregnancy than richer countries where wealth is more concentrated .Studies of British Civil Servants find the senior ones enjoying better health than their immediate subordinates, who in turn do better than those further down the ladder .
Research has shown a link between inequality and social cohesion. In more equal societies people are more likely to trust each other. Egalitarian societies exhibit greater community involvement and lower homicide rates.
There is a robust relationship between socioeconomic status and health. It shows that it is not only the poor who tend to be sick when everyone else is healthy, but that there is a continual gradient, from the top to the bottom of the socio-economic ladder, relating status to health. The
Economic inequality is thought to reduce distributive efficiency within society .Inequality reduces the sum total of personal utility because of the decreasing marginal utility of wealth. The marginal utility of wealth is lowest amongst the richest. In other words, an additional dollar spent by a poor person will go to things providing a great deal of utility to that person, such as basic necessities like food, water and health care; meanwhile an additional dollar spent by a much richer person will most likely go to things providing relatively less utility to that person, such as luxury items.. From the standpoint, for any given amount of wealth in society, society with more equality will have higher aggregate utility.
Pigon says :
‘Nevertheless, it is evident that any transference of income from a relatively rich man to a relatively poor man, must increase the aggregate sum of satisfaction .The old “Law of diminishing utility” thus leads securely to proposition : Any cause will increase the absolute share of real income in hands of the poor , provided that it does not lead to a contraction in the size of the national dividend from any point of view ,in general increase economic welfare ‘
Pigou also says that income generally benefits the rich by making them wealthier than other people. Whereas the poor benefit in absolute terms. He says :
‘ Now the part played by comparative ,as distinguished from absolute , income is likely to be small for incomes only suffice to provide the necessaries and primary comforts of life , but to be large with large incomes . In other words, a larger proportion of the satisfaction yielded by the income of the rich people comes from their relative, rather than from their absolute amount .This part of it will not be destroyed if the income of all rich people is diminished together. The loss of economics suffered by the rich when command over resources is transferred from them to the poor will , therefore be substantially relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests ‘
Robert Putnam says :
‘Community and equality are mutually reinforcing. Social and economic inequality moved in tandem through most of the 20 th.. Centaury. In terms of distribution of wealth and income, America in the 1950s and 1960s was more egalitarian than it had been in more than a centaury. These same decades were also the high point of social connectedness and civic engagement .Record highs in equality and social capital coincided .Conversely , the last third of the twentieth century , was a time of growing inequality and eroding social capital The timing of the two trends is striking : somewhere around 1965-70 America reversed course and started becoming both less just economically and less well connected socially and politically’
Inequality is mitigated by :public education to increase supply of skilled labor and reduce inequality ; progressive taxation ; , where rich are taxed more than the poor ; minimum wages legislation to raise the income of the poorest working groups (although this is debated as it might cut the least skilled out of the employment market entirely ) .
Why More
societies almost always Do Better . By Richard Wilkinson and Kate Pickett .
Poor
children are more likely to fail at school. Poor adults are likely to commit
crime and die young. The underlying cause in not poverty but inequality. Countries
where incomes are more evenly distributed have longer lived citizens and lower
rates of obesity, delinquency, depression and teen age pregnancy than richer
countries where wealth is more concentrated.
Difference
in status causes these ‘gradients’. Low caste Indian children do worst on cognitive
tests if they must state their ideanties beforehand
The remedy
lies in taxing the rich or lower inequality in income in the first places, Japan and Sweden are examples .
Giovanni
Cornia and Julius Court ( World Institute for Economic Research )
concludes that to much equality (below
Gini coefficient of 0.25 ) negatively impacts growth due to incentive traps
,free–riding , labour shrinking and high supervision costs .. They also claim
that high levels of inequality ( above a Gini coefficient of 0.4) negatively
impacts growth , due to - incentive traps , erosion of social cohesion , social
conflicts and uncertain property rights .They advocate policies which put
equality at the lower end of this” efficient” range .
Meritocracy
favours an eventual society where an individual’s success is a direct function
of his merit , or contribution .Therefore economic inequality is beneficial as
much as it reflects individual skills and effort , and detrimental inasmuch as
it represents inherited or unjustified wealth or opportunities .
Not every
one agrees that income inequality is a problem to be solved. America
and England
are reckoned to have among the greatest inequalities among rich countries as
measured by the Gini coefficient. Such inequality could, however, be the cause
of low levels of child well being. These two countries perhaps value social
mobility and greater opportunities to prosper higher than reduction in inequality.
Nordic countries which are more equal regularly do well in happiness surveys.
What if the
price of greater equality is lower growth? The received wisdom is that rich
rewards are necessary to stimulate the innovation on which growth depends .No
loss the author says: ‘we have got close to the end of what economic growth can
do for us ‘.But that is a claim that needs to be supported .If our ancestors
had declared themselves satisfied, we would be without many things we value – and,
they would have values to .could they have imagined them .Should we be ready to
dismiss joys we have never known?
Many people
accept inequality as given, and argue that prospects of greater material wealth
provide incentives from competition and innovation within an economy.
Modern
economic theory has suggested that a functioning economy entails a certain
level of unemployment. These theories argue that unemployment benefits must be
below the wage level to provide the incentive to work, thereby mandating
inequality and that additionally it is impossible to lower unemployment to zero.
Many
economists including Adam Smith believe that one of the main reasons that
inequality might induce economic incentive is because material well being and
conspicuous consumption are related to status .In this view high inequality
creates high amount of stratification, leading to greater competition for status.
https://www.dawn.com/news/1439043?fbclid=IwAR1Fttd_MPS7mswBDy2pT3Mml-uJqlr2xPRJ7mt9F1enzp22WdWSeLSnrW4
ReplyDelete