What’s Wrong with Extreme Inequality?

What’s Wrong with Extreme Inequality?

What’s Wrong with Extreme Inequality?

June 3, 2014

by Michael Edesess

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Klarman: Baupost’s Core Principles Have Helped The Fund Outperform

Seth KlarmanWhen Baupost, the $30 billion Boston-based hedge fund now managed by Seth Klarman, was founded in 1982, it was launched with a core set of aims. Q4 2021 hedge fund letters, conferences and more Established by Harvard professor William Poorvu and a group of four other founding families, including Klarman, the group aimed to compound Read More

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It is common practice to use a single figure – gross domestic product (GDP) – as the definitive measure of progress. Relative standings of countries are assessed by comparing their GDP growth rates or their GDPs per capita. Times of crisis are compared to non-crisis periods by citing relative levels of global GDP growth. GDP per capita is routinely – and often unquestioningly – referred to as the “standard of living.”

But does it really measure progress or wellbeing? In a recent book, The Great Escape: Health, Wealth, and the Origins of Inequality, Princeton economist Angus Deaton measures wellbeing on a multidimensional scale. “The story of human wellbeing, of what makes life worth living,” writes Deaton, “is not well served by looking at only a part of what is important.”

In his book, Deaton turns a sharp focus on health, wealth and inequality in the distribution of those amenities. Some wealth inequality is inevitable and helps growth, he contends, but at extreme levels – which the U.S. may be approaching – it becomes counterproductive. He ends with an important chapter about international aid to less-developed countries, about which he has very strong opinions.

Wealth and satisfaction

Deaton also attempts to relate GDP to other measures of wellbeing, such as happiness. Different measures of “happiness,” however, produce markedly different results.

Deaton concentrates chiefly on a measure he calls “average life evaluation.” This measure results from a survey that is regularly administered in various countries by the Gallup Organization. In this survey, people are asked to “rate their lives by imagining a ‘ladder of life’ with 11 steps; the bottom step, 0, is ‘the worst possible life for you’ while 10 is ‘the best possible life for you.’”

Figure 1 below, from page 21 of Deaton’s book, shows each country’s average life evaluation – a number between 0 and 10 – plotted against national GDP per capita. The size of each circle is relative to the country’s population.

Figure 1: Life evaluation and GDP per capita on a log scale

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