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Deliberate Inequality and Populism

According to neoclassical theory, the market economy promotes equality in income distribution because when profits in an industry increase (for example, due to changes in technology or consumer tastes), two dynamics occur. On the one hand, new suppliers enter and competition reduces profits to the minimum required for survival, preventing the accumulation of extraordinary rents. On the other hand, as investment in that industry increases, labor demand and wages rise —through competition— throughout the economy, so that income distribution is not affected.

The theory assumes mobility and perfect substitutability between the factors of production, and that in equilibrium their marginal productivity is equal to their remuneration. At some point, if the marginal productivity of capital were greater than that of labor, capital would be substituted for labor, which reduces the marginal productivity of capital and raises that of labor until equality is again achieved. Thus, the economy in equilibrium equals the remuneration of capital and labor, since the market equals the marginal productivity of both, which is equal to that remuneration.

This theoretical approach has not been reflected in reality. Capitalism and the market economy are characterized by substantial inequalities. Some assumptions of neoclassical economics, necessary to materialize its predictions on income distribution, are totally out of touch with reality.  The existence, among others, of economies of scale, high entry costs for new suppliers, imperfect markets (monopolies and oligopolies), inflexibilities in the capital-labor relationship (scarce substitutability) and asymmetries in access to information generate differentiated degrees of accumulation and prevent competition from determining profits and prices in the markets for technology, capital, goods, raw materials and labor.

In addition, collective ownership of the means of production (communism) was not only a failure in terms of wealth creation and welfare but also resulted in a substantial concentration of income in bureaucratic, military and partisan cadres. In the periods in which relatively satisfactory indexes of equity were achieved, it was at the cost of very low incomes, due to the productive inefficiencies that characterized the system.

So the best tool for achieving high incomes, reducing and eliminating poverty and mitigating inequalities remains an economy that combines capitalist stimuli (profit motive) and market energies with interventionist public policies that offset income-concentrating tendencies. This is easier said than done, given that economic power, both in democracies and dictatorships, tends to have a disproportionate influence on decision-making.

This unequal weight has been so present, regardless of whether they are rich or poor countries, that on numerous occasions public policies, far from compensating for the tendencies of capitalism to concentrate income, actually reinforce them.

Many of the discontents that populists have engendered with their gigantic irresponsibility have arisen as a result of such policies. Until a few decades ago it was feasible for governments to benefit with their decisions those who have the most without causing resentment, but today, with the wide access to information allowed by technology, it is not possible to keep the population in ignorance, and it is not possible, then, to avoid their anger.   

Examples of decisions that protect and strengthen the economic situation of those who have the most abound. Many countries compete to see which one grants more subsidies, tax exemptions and other advantages to multinational corporations and large local companies focused on exports or tourism. All, by the way, under the cover of a contradictory and lying discourse, only put into practice for small local entrepreneurs, about how inconvenient subsidies and tax exemptions for sectors not chosen by the market but by politicians or bureaucrats are for the economy.

In developed Western countries, the same thing has happened: a heartless competition to grant tax advantages to the largest companies on the planet. There too, the shortest route to receive special benefits financed by the rest of society has been to be a giant company.

In this way, the natural propensity of the market economy to concentrate wealth and income has been invigorated by public policies that deliberately perfect this tendency. Neoliberals claim that this paternalism towards big capital allows the materialization of positive externalities derived from its investments. All this shows the enormous weakness -and the contradictory opportunism— of the arguments of this school of thought on the virtues of the invisible hand.

There is already a great deal of awareness of this situation on a global scale. This has led, for example, to the special tax on multinational corporations promoted by the OECD (Organization for Economic Cooperation and Development) and the recent call by 250 billionaires for wealth taxation.

The magnetism of populists is based on a profound delusion since they build support from the poorest sectors when their leaders are extreme neoliberals and have not the slightest interest in these sectors. The best way to defeat them is to empty their demagogy of its content, making the State more efficient while providing it with tools so that, instead of carrying resentments, the lower-income sectors see feasible routes to move up the social ladder and become protagonists and beneficiaries of the growth of wealth.

*Translated by Micaela Machado Rodrigues from the original in Spanish.


Político y economista. Profesor de la IE University (España). Master en Economía de la Universidad de Manchester (Inglaterra). Fue diputado y ministro de Planificación y Política Económica, de Costa Rica.


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