Introduction

• Published date: 01 March 2015
• DOI: http://doi.org/10.1111/1467-8462.12100
• Date: 01 March 2015
• Author: Ian M. McDonald

Policy Forum: On the Economics and Politics of Inequality

Introduction

Ian M. McDonald*

According to Piketty (2014, p. 440), Lilian

Bettencourt, the L’Oreal heiress with a fortune

in 2010 estimated at $25 billion, ‘never worked

a day in her life’. This may seem unfair but

should it matter? Would you feel more

aggrieved if it was revealed that the $25 billion

was an underestimate and that her true fortune

was nearer to $50 billion? Also, is your

aggrievement merely showing your envy, one

of the seven deadly sins?

Empathy is a more respectable basis for

concern about inequality. It is those who do

badly that should receive more help. For

Australia, using life satisfaction data from

the Household, Income and Labour Dynamics

in Australia Survey as a measure of well-being,

Figure 1 from McDonald (2012) gives some

guidance on who is doing badly. Figure 1

shows the life satisfaction scores for various

groups by income decile. (The groups overlap

to varying extent.) Of the groups considered,

the mentally ill and those on disability benef‌it

are doing the worst, with average levels of life

satisfaction1.38 and 0.71 points, respectively,

below that of the average respondent to the

survey. Their poor performance suggests a case

for more support by the rest of society, as urged

by Layard (2005).

The next of the groups doing badly are those

in long-term unemployment, averaging about

0.38 points, respectively, below the average

respondent. The numbers in long-term unem-

ployment are strongly inf‌luenced by the state of

the macroeconomy (see McDonald 1993) and

so their relatively low life satisfaction suggests

that better macroeconomic management can

have an important effect in reducing the

inequality of well-being.

It is also apparent from Figure 1 that income

inequality per se has a relatively small effect on

life satisfaction. This is not surprising. The

enjoyment from your football team winning,

from social interactions or from savouring

Mahler is hardly affected by your income.

In this Policy Forum, Paul Frijters and Gigi

Foster present some interesting evidence,

which suggests that political inf‌luence is a

major cause of wealth inequality in Australia.

They consider the 200 richest Australians in

2009. Of these 200, only 10 appear to be clear

cases of innovators or superstars—the other

190 are in industries where political inf‌luence

may play an important role in generating

private wealth, such as property and natural

resources. Frijters and Foster argue that their

evidence, which they admit is the result of a

‘cursory examination’, favours the political

inf‌luence explanation over the marginal pro-

ductivity explanation of wealth inequality.

But, does the political power that leads to

and comes from wealth matter for human well-

being? Mark Triff‌itt argues that a high level

of corporate inf‌luence in political decision-

making, which appears to be both a cause and a

result of wealth inequality, undermines the

legitimacy of government. This has an adverse

effect on the quality of public policy. It is

harder to get public support for well based

reform if the public is sceptical about the

degree to which certain private interests are

driving the thrust and detail of the reform.

Focusing on the socioeconomic, Peter

Whiteford describes in some detail the trends

in income inequality in Australia since the

* Department of Economics, The University of Melbourne,

Victoria 3010 Australia; email <i.mcdonald@unimelb.

edu.au>.

The Australian Economic Review, vol. 48, no. 1, pp. 65–6

°

C2015 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by Wiley Publishing Asia Pty Ltd