‘Inequality is shaking up capitalism and politics.’ This ominous statement appeared on the cover of Bloomberg Businessweek, one of the most widely read magazines on Wall Street, which featured an investigative report on wealth gaps in the US and throughout the world. Indeed, the headline foregrounds one of the key issues in the international political and economic debate, a topic that is coming up more and more often in reports by the International Monetary Fund, the OECD and even the famously elitist World Economic Forum. The theme is inequality. Between different areas of the world, between the countries boosted by globalisation (the new key players in the world economy) and those that have seen their incomes and expectations change (with negative repercussions on the stability of the middle classes). Between generations, with young people experiencing increasing angst and uncertainty. Between those riding the wave of the new digital economy, with its innovative productive processes, and those who’ve been pushed aside by these phenomena, to the point of losing their jobs. Between north and south, as is the case in Italy. Four of the five European regions with the highest unemployment are in southern Italy (Sicily, Calabria, Campania and Apulia). Inequalities are wreaking havoc in well-established social and political structures, fuelling resentment and animosity (often exploited by skilled fearmongers in exchange for political approval). They are creating new cultural fractures and thwarting sustainable development strategies. It is therefore crucial for those who still possess a sense of responsibility and a forward-looking vision – be it in politics, business, or in areas where public opinion is shaped – to tackle these matters with great care.

If we are to avoid the dangers of populism and nationalism, we require ‘a more equal capitalism.’ It’s one of the arguments put forth by Raghuram Rajan in The Third Pillar: How Markets and the State Leave the Community Behind, recently published in Italy by Università Bocconi Editore. Rajan is one of the leading economists of our day. He’s been an executive at the International Monetary Fund and has served as governor of the Reserve Bank of India, the country’s central bank. He now teaches at the University of Chicago, and is thought to be in the running for a Nobel Prize. In 2003, with Luigi Zingales, he also wrote Saving Capitalism from the Capitalists (whose title was echoed by Colin Crouch’s 2018 book Can Neoliberalism Be Saved From Itself?). Rajan is currently arguing that the state, with its sovereignist tendencies, and the markets, dominated by large financial groups and digital multinationals, have become excessively powerful, creating severe new social unbalance and inequality.

There is ‘greater polarisation’ between social classes: ‘The communities most vulnerable to price competition from foreign goods have lost middle-income jobs, held by people with medium to low levels of education, and have experienced progressive decline, while individuals from the upper middle class now have the possibility to compete – on the basis of merit and skills – for dream jobs in superstar companies.’ Such a polarisation ends up crushing hopes, unleashing fears and accentuating conflict. It must therefore be avoided if we wish to preserve a market economy, in its most positive sense, and the very institutions of liberal democracy. Rajan believes that ‘true capitalism flourishes in democratic environments’ and that ‘capitalism and democracy are symbiotic and combining them leads to prosperity.’ We must therefore break the hegemony of the state and the market and restore the power of society, the ‘third pillar’ in question. This means nurturing an ‘inclusive localism’ that values open and welcoming communities, and giving these communities the means to address the needs of their citizens and encourage their participation, making good use of the mechanisms of subsidiarity. In other words, a new economic and democratic balance and a more equal economy.

To understand more, it’s worth reading Inequality: A Short History by Michele Alacevich and Anna Soci, two economists from the University of Bologna who previously taught at Columbia University in New York. The authors explain how economic theory has mostly failed to address this topic, allowing so-called ‘spontaneous market dynamics’ to take hold. But in recent years, the effects of globalisation and the emergence of a digital economy have disrupted social and productive balances as well as traditional welfare policies, casting a shadow on the core values of liberal democracy itself. A serious critical analysis is therefore required. The authors cite the relevant existing literature (including works by Joseph Stiglitz, Jean-Paul Fitoussi, Dani Rodrik, Thomas Piketty and others) and insist on the need for social reforms and active policies, for example in the EU. In their conclusions, they write that ‘how we solve the issue of inequality will determine whether we are able to give globalisation a human face, preserving the credibility of democracy as a viable political system.’

One of the main forms of inequality affects younger generations. Niccolò Zancan details the problem in his book Uno su quattro. Storie di ragazzi senza studio né lavoro (One in Four: Young People Not in Education or Work, Laterza). In Italy today, there are 1.2 million NEETs (not in employment, education or training). They’ve tried everything, from temporary positions found through employment agencies to underpaid internships, and from under-the-table odd jobs to useless education courses, before finally waving the white flag. But their surrender reflects a tragic social waste. It is a scathing indictment of a society that is becoming less and less inclusive. What to do? Invest in education, research, innovation (including social innovation) and new welfare models. In Italy and in Europe.  

One thing, however, must always be clear: there’s no such thing as a free lunch, as Lorenzo Forni, an economist at the University of Padua, states in the title of his recent book, Nessun pasto è gratis, published by Il Mulino. The subtitle reads Perché politici ed economisti non vanno d’accordo (Why Politicians and Economists Can’t Agree) The answer? the former are obsessed with short-term approval ratings, the latter are too bound to doctrines. The crux of the matter is the budget. You can circumvent it for a while, but sooner or later you have to pay the bill. And it’s the weak who have to pay. Forni mentions the cases of Argentina, Belarus and Spain. He also highlights the limits of protectionism and fiscal expansion in the US under Trump. And he warns that ‘public deficit spending, which can only be paid back through growth,’ is ‘a modern attempt to reproduce the miracle of the five loaves and two fish.’ He reminds us that growth can only be achieved through changes that make the economy more digital and competitive, not with loose spending hikes, tax cuts and printing money. In summary, yes to investments in research, education and environmental sustainability, but no to welfarism founded on debt.

Once again, this leads us back to the ideas of John Maynard Keynes, which we discussed in a blog post last week. It isn’t a matter of burdening the state with debt or overindulging in welfare policies (as some superficial and politically motivated readings have suggested in recent years), but rather of balancing budgets and stimulating investments that increase demand and employment. A contemporary adaptation of Keynes’ lesson: reducing waste, consumption, transfers and tax evasion, and investing more in innovation, productivity and competitiveness. Reforms, infrastructure, high-quality training, welfare. This is the path to sustainable growth, to fighting gaps and inequalities.