Is business a reason for economic inequality, or does business reduce economic inequality? I believe the answer is “Yes.”
Private business both increases and decreases inequality, in conjunction with changes in the structure of the economy, technology, social attitudes and public policy. Private business does not definitively determine the distribution of income, but it influences it.
I will preface my remarks with a caution about being too focused on inequality. I care much more about poverty. For example, income distribution is far less equal in my own country of the United States than in a country such as Cambodia. Yet the poor in America have much higher incomes than the average Cambodian.
Business practices affect inequality in three different ways, through corruption, scalability, and the search for undervalued resources. I close with a story about a for-profit business helping people who have lost their jobs.
Corruption
Let’s begin with a sad case in which business increases inequality and shrinks total economic activity. This is corruption.
I first studied income distribution when I was in my early twenties. As you can see from my hair color, that was a few years ago. Professor Martin Bronfenbrenner, an expert on the subject, told us that Haiti had the most unequal income distribution. This was during rule by the Duvaliers, Papa Doc and his son Baby Doc. The inequality arose from government favors to key business leaders, such as granting monopolies and government contracts. The rich got richer, and the poor people got less for the money they spent and had fewer opportunities to earn money. The problem was not business, but the collusion between corrupt government officials and dishonest business people.
This pattern plays out over and over again. The extreme examples include the Philippines under Marcos, Indonesia under Sukarno, and today Cameroon under Biya. And other cases are abundant.
Business will be corrupt where government officials are corrupt. But where government is generally honest, business will be generally honest. Business leaders will reflect the morals of the government and the society under which they operate.
Reducing corruption produces two good results: it increases total economic activity, while also increasing the welfare of poor and middle-class citizens.
The sad part of this issue is that I cannot tell you how to get from here to there. Take Sicily. The island has a history of corruption dating back hundreds of years. How can Sicily become more like Sweden? I don’t know, but I am certain that Sicilians would be much better off with less corruption.
