AIMCAT 2020_2

In his book, “Capital”, Piketty had argued that inequality [on the wane from the 1930s until the 1970s], had risen sharply back toward the high levels of the Industrial Revolution. Now Milanovic, in his book “Global Inequality”, reinforces how little is known about economic forces of long duration. Over the past 30 years, the incomes of workers in the middle of the global income distribution have soared, as has pay for the richest 1%. At the same time, incomes of the working class in advanced economies have stagnated. This dynamic helped create a global middle class and caused global economic inequality to plateau and decline, for the first time since industrialisation began.

At the dawn of industrialisation, Milanovic muses, inequality within countries (class-based) was responsible for the largest gaps between rich and poor. After industrialisation, inequality across countries (location-based) became more important. But as gaps between countries narrow in the near future, class-based inequality will become more important.

Milanovic offers “Kuznets waves” as an alternative to two theories. Kuznets argued that inequality is low at low levels of development, rises during industrialisation and falls as countries reach economic maturity. Piketty offered an alternative explanation: that high levels of inequality are the natural state of modern economies. Unusual events such as world wars and the Great Depression disrupt that normal equilibrium by destroying capital and bringing higher taxes in the US and Europe.

Milanovic suggests that both are mistaken: across history, inequality has tended to flow in cycles (Kuznets waves). In the pre-industrial period, these waves were governed by Malthusian dynamics: inequality would rise as countries enjoyed a spell of high incomes, then fall as war or famine dragged average income back to subsistence level.

With industrialisation, the forces creating Kuznets waves changed. In the 19 th century, technological advance, globalization and policy shifts worked together in mutually reinforcing ways to produce economic change. Workers were reallocated from farms to factories, average incomes and inequality soared and the world became interconnected. Malign forces such as war and political upheaval, and benign forces such as increased education squeezed inequality to the lows of the 1970s....

Since then, the rich world has been riding a new Kuznets wave, propelled by another era of economic change. Technological progress and trade work together to squeeze workers: cheap technology made in foreign economies undermines the bargaining power of rich-world workers directly, and makes it easier for firms to replace people with machines.

This diagnosis carries with it a predictive element. Milanovic expects rich-world inequality to keep rising before eventually declining. Importantly, he argues that the downswing in inequality that occurs on the backside of a Kuznets wave is an inevitable result of the preceding rise. Where Piketty sees the inequality-compressing historical events of the early 20 th century as an accident, Milanovic believes them to be the direct result of soaring inequality. The search for foreign investment opportunities engendered imperialism and set the stage for war. There are parallels, if imperfect ones, to the modern economy; rich economies seem to be stagnating as the very rich struggle to find places to earn good returns on their piles of wealth. Emerging economies will probably continue on their path toward rich-world incomes though that is not guaranteed and could be threatened by political crisis in China and other markets....

The conclusion of Milanovic’s book is unsatisfying. A theory in which rising inequality triggers countervailing social dislocations feels intuitively right, but it leaves important questions unanswered. .... Milanovic's contributions – which broadly connate with those of Piketty – offer a clearer picture of great economic puzzles and his bold theorising chips away at tired economic orthodoxies. But the grand theory does as much to reveal the scale of contemporary ignorance as to illuminate the mechanics of the global economy

1. Which of the following is consistent with the information presented in the passage

a) Milanovic's and Piketty's theories together completely explain inequality.
b) Kuznets' theory complements Piketty's theory of inequality but Piketty's theory is unfairly underestimated in explaining inequality.
c) Milanovic's theory of inequality is superior to either Piketty's or Kuznets' theory.
d) Milanovic's contributions in explaining inequality are approximately similar to those made by Piketty.

2. According to Milanovic, which of the following combination of factors was responsible for the
steep decline in inequality in the 1970s

a) Malthusian forces, technological progress, trade, workers' declining economic power
b) Technological prowess, globalization, policy shifts, war and famine, workers' declining economic power
c) Wars, political unrest, increased education
d) Technological advances, openness, policy shifts, social dislocations, war, political uprising, improved education

3. Which of the following is the central idea that the author is trying to highlight in the passage


a) Piketty and Milanovic, in their books, point to the historical events of the 20th century as the causes and consequences of inequality respectively.
b) The economist Milanovic proposes a theory of inequality in his book but does not comprehensively explain the nature of inequality.
c) In the U.S. and Britain, the income of a select few has been rising since the 1970s, reversing a large part of the income levelling achieved earlier in this century.
d) In his book, Milanovic reckons that while global inequality is still very high, we are now living in a period of falling inequality and this is truly a golden age for studying inequality

4. Which of the following correctly states the difference in the views of Kuznets and Piketty as can
be inferred from the passage?

a) The former believed that high inequality is the norm in modern economies, while the latter thought that high inequality is a temporary side-effect of the developmental process.
b) The former believed that inequality is low at low levels of development, while the latter believed that inequality is low at high levels of development.
c) The former believed that Kuznets waves can be governed by Malthusian dynamics, while the latter considered technology, openness and policy to be factors creating Kuznets waves.
d) The former believed that a rise in inequality is a temporary outcome of the developmental process, while the latter thought that high inequality is the norm in modern economies

5. Which of the following is the author least likely to agree

a) In the near future, most of the differences in incomes between the rich and the poor may once again be due to inequality gaps within countries, according to Milanovic.
b) Piketty opines that a reduction in economic inequality after the world wars was a result of imposition of taxes and reduction of capital.
c) A study which throws light on how governments can address inequality crises may add more depth to Milanovic's book.
d) Emerging economies will certainly continue on their path toward rich-world economies