This Monday PJ in Limbo visited the University in Prague called Cerge-EI. A private University which specialises in applied economics courses. Cerge-EI is the home of IDEA – one of the leading and most influential think tanks in the republic which has some modest influence of the economic conversation within the Czech Republic, and a university which has such people as Joseph Stiglitz (the 2001 nobel prize winner for economics) on its Executive and Supervisory committee.
The project director of IDEA and the chairman of the Cerge-EI Executive and Supervisory committee is a man named Jan Švejnar. A man with a CV so long and intriguing I am still kicking myself for not asking certain questions whilst I’m writing now: with a Ph.D in Economics from Princeton University in 1979, as an economics advisor to the first president of the Czech Republic Vaclav Havel between 1992 and 1999, and the winner of the 2015 IZA Prize in Labour Economics.
As you can see from the main picture at the top, Prof. Švejnar had a lecture at Cerge-EI titled ‘Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty’. I had the pleasure of attending and meeting Jan myself.
This was a lecture essentially in which Jan explained one of his previous research papers where he measured wealth inequality against GDP growth, and then with certain criteria measured this effect against nations with wealth acquired through political-connections (as he called them – cronies) and non-political connections.
During the lecture, Jan admitted some difficulties in doing this. A lot of the data is difficult to obtain – the main reason why income inequality is scrutinised more than wealth inequality, because income is measured easily whereas assets aren’t.
Jan showed that he used the Forbes rich list as a measure of wealth, and also used the global number of billionaires since the 1920’s as another demonstration of inequality. He measured this inequality against GDP by simply calculating the total wealth of these billionaires in any given country and dividing it by the GDP of that country over the same period of time. This was then measured against the criteria of wealth accumulated from political connections and wealth accumulated without. Jan also explained the controversy involved in categorising individuals into groups of whether they acquired their wealth through their political connections or not.
One of the conclusions that he came to was that (surprise surprise) there was a negative correlation between income inequality based on the wealth accumulation of individuals with political connections and a country’s GDP. The biggest surprise to Jan however, was that there was no positive correlation between the wealth accumulation of individuals with no political connections and a country’s GDP either.
As I talked to Jan after the lecture was over, I asked him if he had any thoughts on if there were any other alternative drivers that run alongside wealth inequality which have a negative effect on GDP growth.
Jan explained to me that honestly, he thought that this dilemma is connected with his surprising conclusion. He explained that increasing competition and the breaking down of monopoly power is crucial to GDP growth and the pre-conceived ‘benefits’ of an unequal distribution of wealth in society. A Bill Gates according to Jan is worthless if he is not followed by a whole dozen entrepreneurs that he has to compete with. This situation caused by the obstructionist and regulatory powers of large businesses when they collude with governments, according to Jan is what was holding back the growth that you would otherwise expect in our global predicament of increasing wealth inequality.
During the lecture, there was section where Jan showed how the level of taxation within the USA was almost 90%, which coincided with much less wealth inequality. There was a question which brought up the revelations of the Panama papers and the hyper mobility of capital. With another question, I alluded to these revelations and whether the problem could be a case of low aggregate demand linked to these trends which are currently in reverse to these policies of the past – alongside with the fact that the richest’s marginal propensity to save is higher and the poorest’s marginal propensity to consume is greater.
Jan concluded that my concept was the idea of the ‘good capitalism’, but still asserted his classic libertarian argument. His argument which was the next logical step that followed his findings: that wealth inequality within a country accumulated by political connectivity is bad for its gross domestic product, and so if the opposite is false – then in that instance something must be at play.
And there we have the first episode of ‘Interviews & Ideas’. Comment below if you would like to add or scrutinise anything that was mentioned. How do you see the problem of increasing wealth inequality of today? What are the main drivers of its correlation with GDP growth?
Prepare for many more interviews and content like this in the future.