The Reason for Inequality- Debunking Flawed Economic Theories – ESSAY BLOG

Inequality exists, but not because of these reasons…

There are numerous economic theories as to why certain countries are richer than others. At the forefront, there exists three predominant ideas. The “Geographical” Hypothesis, the “Cultural” Theory, and the “Ignorance” idea. To me, none of these seemed to provide the complete answer to why one country can have a greater economy than its neighbour. This short essay blog will describe each theory, and then systematically attempt to debunk each of them.

The “Geographical” hypothesis of the cause of inequality is the idea that one country is richer than another, because it may have a certain geographic advantage over another country. For instance, it may have more fertile soil for agriculture, and a climate more suited to encourage productive work. Economists such as Jeffrey Sachs argue that richer countries tend to have more “temperate latitudes” (such as Japan and USA), whereas poorer countries tend to be focused around the Tropics and Equator. Logistically, he argued that tropical climates tend to have greater susceptibility to labour-productivity curtailing diseases, such as malaria, as well as the fact that tropical soils are less adapted to productive agriculture, due to the daily nutrient rainfalls that wash away necessary nutrients. However, there is clear evidence to suggest the flaws in the Geographical Theory. For instance, the huge difference in wealth between North-Korea and South-Korea cannot be explained merely by rainfall. Rather, the two country have entirely different economic systems. Indeed, the productivity of a country may be enhanced if its population was able to grow without the threat of drought or disease, but this factor alone cannot explain how Australia faces similar geographical variables to Botswana, yet the GDP per capita is $7,000 vs $54,000. Therefore, the myth that a country is poor purely down to its geographic situation cannot be regarded as the true reason for the growing levels of international wealth inequality.

The “Cultural” theory, suggests that certain countries are wealthier than others due to their cultural strong work ethic, or certain religious ethos that encourages hard work. German Sociologist Max Weber argued that the 16th Century Protestant Reformation throughout Western European society contributed greatly to the encouraging of industrial evolution (productivity enhancing measures) to push for higher levels of economic growth in Europe. However, the culture hypothesis fails to account for large fluctuations in economic growth, despite the maintenance of a cultural identity. For instance, Chinese culture and individual identity did not change drastically from 1990-2010. However, before the reformation of China’s economy by Deng Xiaoping, Mao’s absolutist, non-incentivising policies had lead to crippling widespread poverty and famine. However, as China has transformed its political institutions to be more inclusive and capitalist, it has seen vast economic growth, averaging 12% per year from 1993-2008. This economic growth has not been the result of a shift in culture, but rather a shift in institutional power, from extractive to inclusive.

Finally, we must debunk the “Ignorance” theory. Favoured by many economists, this hypothesis states that certain economies are currently poorer than others, because the leaders of the poor countries are not skilled or able enough to lift their economies out of stagnation. However, in my opinion, it is too simple to state that a country is poor only because their leader is foolish, but rather their leader may be incentivised to make decisions that benefit them self or a close circle of political elite, rather than make decisions that benefit the welfare of their people. In other words, in modern democracies, seldomly is an economic policy passed which has not faced tough opposition and compromises from different political opinions, such that in theory, social welfare and consumer utility is maximised. Of course, there exists government failure through unintended consequences, but to ensure re-election, politicians will often draft policies that garner the most support and therefore maximise utility, so to encourage economic growth and prosperity. However, in autocratic societies, extractive policies can be passed unopposed, hence although the leader may seem “ignorant” through not promoting economic growth, in actual fact they may be working to promote their own best interests, even if it means preventing economic growth. Hence, political leaders may not be “ignorant”, but rather driven by self-interest to create extractive political and economic institutions that prevent their power being diluted into the public sphere, at the cost of curtailing economic growth.

Hence, in my opinion, the “Geographical”, “Cultural”, and “Ignorance” theories are not able to fully explain the reason for international inequality. There exists too many individual examples of countries that defy the hypotheses, as well as additional reasons why each theory may not be the sole reason for economic inequality. Daron Acemoglu and James A.Robinson’s book “Why Nations Fail,” is a compelling read that I would highly recommend to anyone interested in the root of historical economic inequality. The book argues that it is the design of a country’s economic and political institutions that determines productivity and incentive, and it is these factors that predominantly determine that country’s prosperity. In my next “essay-blog”, I will be outlining their argument, and discussing why I believe that this is the strongest theory for explaining why certain countries are richer than others.

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