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05 September 2018

The Economy of Inequality

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Taking into account the main results of the studies conducted by Amartya Sen in the field of economic development, as well as his empirical contributions and the search for alternatives and solutions to resource allocation problems, especially when these are scarce, the need to review economic policies to more fairly address the difficulties, shortcomings and basic needs of the population becomes more evident.

In response to the proposal and axiomatization of the poverty index of A. Sen, and considering the idea of poverty as deprivation of capabilities, it seems possible:

  • To determine the magnitude of poverty and inequality.
  • To evaluate the impact of economic and social policies on the population, particularly on the poor.
  • To measure the increase and decrease in inequality and poverty.
  • To permanently adjust economic and social policies.
  • To focus attention not only on efficiency, but also on equality.

Poverty index

Much of the theoretical contributions of Amartya Sen have been devoted to studying income distribution, and social choice theory, while also being concerned about its applications. His contributions to economic development theory and social choice theory are based on the explanation of its central result: Arrow’s impossibility theorem.

In Sen’s work we find a general interest in issues related to distribution, and a particular concern for the most disadvantaged members of society. In this regard, he argues that attention to poverty as a problem arises as soon as it is considered that “poor” individuals create difficulties for those who are not, because it is thought that living in poverty is unfortunate, but the real problem arises when it leads to “disutility” for the rest of society. Hence the importance of introducing the P index, which makes it possible to combine three aspects of poverty:

  • the percentage of poor people for a chosen poverty line or H index;
  • the magnitude of poverty or I index;
  • the distribution of income among the poor, or G index;

This composite index, or Sen index (Ps), whose axiomatic derivation is usually formulated P = H [1+ (1- I) G], overcomes insensitivity problems, makes it possible to quantify the poor population and detect when there are income transfers that favor the poorest. Poverty measures used before Sen’s proposal were inefficient, since the first requirement to conceptualize poverty is to have a criterion that makes it possible to define who must be the focus of our interest. Specifying “consumption norms” or a “poverty line” can open part of the task: the poor are those whose consumption levels fall below these norms, or whose income are below that line. But this leads to another key question: should the concept of poverty be related to the interests: 1) only of the poor; 2) only of those who are not poor, or 3) as much of some as of others?

Photograph of Sha Po street Xiamen slum dwellers / Image: CC0 Public Domain / maxpixel

A concept of poverty must involve, at least, two fairly defined exercises:

  • a method to include a group of people in the poor category: “identification”.  It can be based on a level of minimum needs.
  • a method to integrate the characteristics of the poor in a global picture of poverty: “aggregation”. It requires a method that combines the deprivations of different people in a global indicator.

Active subjects and expansion of freedoms

Now it is important to never forget the inclusion in this perspective of an approach that assumes the idea of poverty as deprivation of capabilities, and that conceives individuals as active agents of change and not as mere passive recipients of benefits. Thus, the conception of economic development will not focus solely on the growth of the gross national product, increased income or a greater technological advance, but also on the process of expanding the real freedoms enjoyed by individuals, which are intimately linked with these other aspects, since the growth of any of them directly influences the growth and expansion of those freedoms.

Despite the opulence that certain parts of the world may be enjoying, today’s society still denies basic freedoms to a large number of people. And economic development requires the elimination of the main sources of deprivation of liberty, such as poverty, lack of opportunities, dictatorships or the abandonment in which public services and assistance can be found. What citizens can achieve depends on economic opportunities, political freedoms, social forces and the possibilities provided by health, education and the promotion of initiatives.

Women and children are the most vulnerable groups and those who see their rights and freedoms constrained the most frequently / Image: CC0 Public Domain / maxpixel

Economic development highlights the empirical connections between different types of freedoms::

  • Political freedoms (freedom of expression and free choice): promote and encourage economic security
  • Social opportunities (educational and health services): facilitate economic participation.
  • Economic services (opportunities to participate in trade and production): generate general personal wealth, as well as public resources to fund social services

Thus, with sufficient social opportunities, individuals may be able to configure their reality, and not become mere passive recipients of benefits granted by the various institutions. As a result:

  • Poverty can be reasonably identified with deprivation of capabilities. Attention is focused on deprivations that are intrinsically important (income would be instrumentally important).
  • There are other factors that influence the deprivation of capacities, and real poverty, in addition to lack of income (income is not considered the only instrument that generates capabilities).
  • The instrumental relationship between lack of income and lack of skills varies from one community to another, from one family nucleus to another and from one individual to another (involving contingency and conditionality).

An analysis of this kind will allow a better understanding of the nature and causes of deprivation and poverty, shifting media attention (such as income, although income is undoubtedly an important means to enjoy capacities), for the purposes individuals pursue and, therefore, the freedoms necessary to achieve those ends. Which shows that it is possible:

  • To address the concern for distributive problems.
  • To consider the role of the most vulnerable and disadvantaged members of society.
  • To contemplate the adjustment of economic and social policies.
  • To better understand the nature and causes of deprivation and poverty.

And it is feasible to address these aspects by focusing not only on efficiency, but also on equality.

Ana González Menéndez

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