Economics of the Koran other economic systems and thoughts on poverty

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

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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 Whitehall studies found that although all civil servants in England have the same assess to health care, there was a strong correlation between social status and health. The studies found that this relationship remained strong even when controlling for health-affecting factors such as exercise, smoking and drinking .
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.