Income Inequality and Social Unrest: What’s Their Function?

The current debate on Cato Unbound, particularly today’s contribution from economist Edward E. Leamer, circles around the danger that income inequality poses to political stability.

Leamer argues that computer technology amplifies innate talent differences, and hence will widen existing income disparities. This seems undeniable. He then goes on to imply that this is necessarily a threat to political stability or social harmony. But is it?

Leamer’s unstated assumption is that there is a simple monotonic relationship between income disparities and social unrest. That is certainly a reasonable hypothesis, but it is not the only such hypothesis.

Isn’t it also possible that the relationship is more complex, and multivariate? It seems at least worth investigating the possibility that the relationship between income inequality and political instability is asymptotic – that the richer and richer Bill Gates becomes, the less impact any further increase in his income will have.

More importantly, isn’t it also worth considering the possibility that there are other variables in the equation besides income inequality; for example, the sufficiency of the incomes earned by those in the lowest quartile of the earnings distribution. If the poorest quarter of citizens were destitute, that would seem more socially destabilizing than if they could comfortably feed, clothe, and house themselves and their families – regardless of the incomes of the rich. Someone able to live comfortably might not care if the richest citizens double their incomes tomorrow, whereas someone who is barely scraping by might resent even the most modest increase in the incomes of the rich.

So perhaps the seemingly inevitable increase in income inequality will not pose a threat to social stability, so long as those with the least marketable skills can still earn a comfortable living.

It would be interesting to see a natural experiment conducted to test this theory using historical data.