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Inclusive growth essay

I wrote this essay for the St. Gallen Symposium’s essay competition whose topic in 2016 was “Alternatives to Economic Growth”. I’m sharing it here after slight editing. I thank several people who commented on drafts.

Some years ago, a leading professor in economic growth said in a class I was in:

“You see here how GDP per capita has grown over the last couple of centuries. People have become much richer over time, but there have been large differences across countries.”

This was not really new to me, but what he said next I have remembered well:

“Here’s a thought experiment. Say it’s 1700 and I give you two options: You can either choose to be a rich person who lives in a poor country or you can be someone who lives in a country that’s rich, but who’s poor.”

He argued that one would likely have been better off as a rich person in a poor country. The reason is that in this pre-industrial age, differences between countries were much less pronounced than differences within countries.1

He then said:

“Now ask yourself this question today: Would you rather be a rich person in a poor country or a poor person in a rich country? I bet you would choose to be in a rich country over being a rich person.”

It impressed me, because I had never thought about these developments from this angle. So what happened in the last centuries that led to this change?

For most of human history, there was little or no growth. Since the beginning of organized agriculture and the rise of cities, a large part of society lived off a meager diet of carbohydrates like gruels while a small urban elite dined on richer foods like meat.2 The productivity of people was so similar across countries that the economic power of an entity was thought to derive directly from the number of its subjects and states should aim to increase the number of people living within their borders.3 Innovation was not seen as an important source of progress. And there were even cases of technological regress, such as the Aborigines loosing the knowledge of using bow and arrow.4

But since the late 18th century there has been real sustained growth. In the course of this revolution, factories were build, the face of the earth was altered and trade networks spanned the globe, e.g. for cotton.5 Economies’ productive capacities per person increased in real terms between 1800 and 2010 by a factor of 11 in the United Kingdom, 21 for Germany, 9 in the Netherlands and 24 in the United States.6 Consider what that means: Could you imagine your living standard to be a tenth or twentieth of what it currently is?

We call economic growth an increase in the amount and quality of goods and services that society produces and consumes. This concept is frequently invoked by politicians or economists as the target that we should aim to maximize by directing our institutions – such as laws and cultural norms – towards it. But economic growth happened very unequally across the world. Europe and its overseas offshoots participated early and grew strongly, such that by the middle of the 20th century, disparities within countries were small relative to differences between countries. This was the state of the world that the professor had alluded to. And when I looked at the data, it was true that – in 1970 – I would have been almost three times better off as a Swiss person earning an average income than as a person in India in the top one percent of the income distribution.7

But again, something happened. The market-based reforms and the globalization starting in the 1970s and 1980s allowed capital and labor to flow more freely and led to large increases in living standards in developing countries. Especially in China and India, millions of people form a new middle class. This reduced global inequality which as measured by the Gini coefficient fell from 0.70 in 1990 to 0.62 in 2010.8

This made me think that maybe the professor’s verdict did not hold anymore. The gap might have closed and a rich person in a poor country might be equally well off – or maybe even better off – than a person with an average income in a rich country. Taking the previous example, in 1999, the top percent in India earned 30 percent more than the average earner in Switzerland.9

But while we should applaud the fact that differences between countries have decreased globally, inequality within countries has been rising. Thomas Piketty, in his best-selling 2014 book, warns of rising levels of income inequality and wealth inequality which in the Anglo-Saxon countries approaches levels not seen since the First World War.10 This point is made similarly by Angus Deaton, the winner of the 2015 Nobel Memorial Prize in Economic Sciences, who analyzes global trends in health and poverty and makes a case for optimism about the state of the world. However, he cautions that in some cases of “Great Escapes’’ from poverty, the new elites have held down the people rising after them.11 He evokes the picture of a ladder being pulled up. So maybe we are seeing a return to the previous state before modern economic growth with large differences within countries and less strong differences between countries. And while the impact of globalization on inequality is almost mechanic, an old fear is emerging again: automation.

Meet Baxter (panel 1 in Figure 1): He is a friendly general-purpose robot who can be taught simple manual tasks by moving around his mechanical arm. He is safe to have around and reliable. This makes him great for jobs such as lifting objects or sorting things. Other robots bake pancakes (panel 2), teach the prayer (panel 3), carry heavy loads across dangerous terrain (panel 4), pick grapes (panel 5) or shoot rockets (panel 6).

Figure 1: Robots12


Foxconn, the main manufacturer of Apple’s iPhone, already employs 50,000 robots in its Chinese factories and is planning to automate large parts of its production. Google is testing self-driving cars and they might become a reality on our streets. And who needs a taxi driver then?

200 years ago, the Luddites in England worried about automation in the form of mechanical looms. Since then, people have warned periodically of the rate of progress outpacing people’s ability to adapt to technological change. Some even quipped that humans will be made as redundant as horses in the advent of the automobile. However, these warnings were usually exaggerated as previous waves of technological progress replaced old jobs with new ones, leaving most people better off in the long-run. The most common recommendation of how to deal with these disruptions is to encourage more education for people to adapt faster and to gain skills that are complements, not substitutes, to machines.

But maybe that is not enough, because this time might be different in an important aspect: Technology is also advancing in fields that have previously been thought of as safe from automation. Research on artificial intelligence and machine learning is making fast progress. IBM’s algorithm Deep Blue beat the world’s best chess player, Garry Kasparov, in 1997 and Google’s AlphaGo beat the best human player at the ancient game of Go, which was considered to be much more difficult for computers to excel at, in 2016. Other algorithms have been developed to recognize songs, judge people’s attractiveness and compose music. These fears of automation are also expressed by Erik Brynjolfsson and Andrew McAfee in a recent book in which they warn of a “Second Machine Age”.

And what should worry us most is the increasing concentration of capital – be it robots or factories – in the hands of few which could lead to rising within-country inequality. Researchers have shown that across the world, the share of income going to labor has been in decline since the 1980s.13 Part of this decline can be explained through a rise in automation and computer technology. When automation advances, capital owners benefit more than workers. In the limit case, few capital owners could own all robots, while the rest of humanity would depend on their charity.

These distributional pressures raise several concerns. The first problem with inequality of wealth and income is that it is in several ways self-perpetuating. Wealthy people likely achieve higher returns on their wealth through better investment advice and opportunities. And some rich people might also use illegal opportunities for higher returns by evading taxes. Gabriel Zucman documents how France missed taxes in 2011 of about one percent of its GDP due to tax evasion.14 Changing marriage patterns work similarly. When once a doctor might have married his assistant and a CEO his secretary, couples are now more alike in their education and incomes.

Inequality has real costs for the economy as a whole. Daron Acemoğlu and James Robinson argue that in the long run countries with inclusive institutions prosper and countries with extractive institutions suffer. A concern is that the middle class in countries like the United States might not feel included anymore or – to cite Charles Murray – society is “coming apart”. This point is also supported through research by Anne Coase and Angus Deaton, who show a worsening in the mortality of middle aged white men in the United States.

And inequality is not just a problem for society as a whole, but it impacts individual people. Researchers have shown that people are not only interested in their own well-being, but have an inherent wish for a fair distribution.15 Our bodies react with unhealthy heart rates to perceived unfair distributions and even monkeys were shown to react badly to unequal rewards.16 17 What we learn is that questions of efficiency cannot be analyzed separately from questions of fairness and distribution.18 So instead, let us counteract these forces and work towards a society where people participate more broadly. I propose to rearrange our priorities from generating aggregate economic growth, to encouraging inclusive growth.

Does that mean that we should not value economic growth anymore and need a complete alternative to it? No. If everybody is poor, then there is no inequality. But it is important to acknowledge that the two are not independent of each other. And we do not have to choose one of these modes for the exclusion of the other, because making sure all parts of society are included also allows for more material wellbeing for everybody.

So how do we get there? A number of solutions have been proposed. And while there is no perfect and exact solution, some argue for higher minimum wages and some for unconditional basic incomes. Brynjolfsson and McAfee push for negative income taxes, which seems promising because it subsidizes human labor and recognizes that work gives people purpose.

We should also broaden our notion of what it means to work. To rephrase from John Adams, the second president of the United States, maybe our parents studied engineering for us to have the liberty to study computer science such that our children have the liberty to study music and art.19

In 1932, Bertrand Russell reflected on how to deal with changes in how we live and work:20

“Modern methods of production have given us the possibility of ease and security for all; we have chosen, instead, to have overwork for some and starvation for others. Hitherto we have continued to be as energetic as we were before there were machines; in this we have been foolish, but there is no reason to go on being foolish forever.”

But the actual first step is to acknowledge that there is a problem. We can make our world a more inclusive place and we can start building this society now. Let’s not wait.

  1. The point that class used to be a more important determinant of inequality than location is also made by: Milanovic, Branko (2013). “Global Income Inequality in Numbers: in History and Now.” Global Policy, 4(2): 198-208. 

  2. Laudan, Rachel (2015). Cuisine and Empire: Cooking in World History, California Studies in Food and Culture. 

  3. Porter, Theodore M. (1986). The Rise of Statistical Thinking, 1820-1900, Princeton University Press, chapter 2. 

  4. Diamond, Jared (1999). Guns, Germs, and Steel: The Fates of Human Societies, W. W. Norton & Company, chapter 15. 

  5. Beckert, Sven (2014). Empire of Cotton: A Global History, Knopf. 

  6. As measured by the real gross national product per capita in a year, corrected for price changes. From: Bolt and Van Zanden (2014). “The Maddison Project: Collaborative Research on Historical National Accounts.” The Economic History Review, 67(3): 627-651. 

  7. The top 1% in India earned an average of 133,250 rupees per year in 1970 which amounts to 12,300 in 2005 purchasing power corrected US dollars. The average tax unit in Switzerland in 1970 earned the purchasing power equivalent of 34,800 US dollars in 2005 values. Sources: Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez and Gabriel Zucman, The World Wealth and Income Database,, 12.01.2016. and Penn World Table 8.1

  8. Bourgouignon, François (2015). The Globalization of Inequality, Princeton University Press, p.42. 

  9. Using the same sources as before, the top 1% in India earned an average of 229,679 rupees per year in 1999. And adjusted for purchasing power differences this is equivalent to 42,731 US dollars in 2005 values. The average income per tax unit in Switzerland in real 2010 CHF in 1999 was 66,100, corrected for purchasing power differences that would be 32820 US Dollars in 2005 values. 

  10. Piketty, Thomas (2014). Capital in the Twenty-First Century, Harvard University Press. 

  11. Deaton, Angus (2013). Great Escape: Health, Wealth, and the Origins of Inequality, Princeton University Press. 

  12. 1: Baxter, 2: Motoman SDA10, 3: Bilal praying robot, 4: Alphadog, 5: Wall-Ye grape harvesting robot, 6: predator drone 

  13. Karabarbounis, Loukas and Brent Neiman (2014). “The Global Decline of the Labor Share.” Quarterly Journal of Economics, 129(1): 61-103. 

  14. Zucman, Gabriel (2011). The Hidden Wealth of Nations: The Scourge of Tax Havens, University of Chicago Press, p.62. 

  15. Fehr, Ernst and Klaus M. Schmidt (1999). “A Theory of Fairness, Competition, and Cooperation.” The Quarterly Journal of Economics, 114(3): 817-868. 

  16. Falk, Armin, Ingo Menrath, Pablo E. Verde and Johannes Siegrist (2011). “Cardiovascular Consequences of Unfair Pay.” IZA Discussion Paper Series No. 5720. 

  17. Brosnan, Sarah F. and Frans B. M. De Waal (2003). “Monkeys Reject Unequal Pay.” Nature, 425(6955): 297-299. 

  18. See the talk (in German) by Armin Falk: “Fairness- und Gerechtigskeitsfragen lassen sich von Effizienzfragen nicht trennen.” (“Questions of fairness and justice cannot be separated from questions of efficiency.”) [34m55s] 

  19. Original quote from McCullough, David (2001). John Adams, chapter 5:

    I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

  20. Bertrand Russell (1932). “In Praise of Idleness”.