Pareto’s principle applied too narrowly?
In his sobering Chapter 5 on the United States, however, Professor Deaton asserts that economists routinely apply Pareto’s principle too narrowly, overlooking that the wealthy in societies with highly unequal distributions of income and wealth may capture the country’s systems of governance. They may then use this power to rig market processes in their favor or to exploit taxpayers through what economists call “rent seeking” – that is, profit made on government contracts that is not matched by commensurate value delivered to society. That linkage can easily make the rest of society worse off.
Democracy turned into plutocracy?
“There is a danger that the rapid growth in top incomes can become self-reinforcing through the political process that money can bring,” Professor Deaton warns — a process that can turn democracy into plutocracy.
From the link to “a series of papers” in the above article at the NYT:
Why Hasn’t Democracy Slowed Rising Inequality?
In this paper, we explore five possible reasons why the US political system has during the last few decades failed to counterbalance rising inequality.
First, both Republicans and many Democrats have experienced an ideological shift toward acceptance of a form of free market capitalism which, among other characteristics, offers less support for government provision of transfers, lower marginal tax rates for those with high incomes, and deregulation of a number of industries. Financial deregulation, in particular, has been a source of income inequality (Philippon and Reshef 2008). The mass public may well embrace such an ideological shift if rising inequality nonetheless “trickles down” to rising incomes and home ownership for all. In recent years, there has been a serious financial crisis, declining median incomes, and declining home ownership rates. This raises important questions as to why these ideological trends persist and remain politically powerful.
From the conclusion:
Overall, the kinds of government policies that could have ameliorated the sharp rise in inequality have been immobilized by a combination of greater polarization, lack of voter participation, feedback from high-income campaign contributors, and political institutions that must overcome a series of key pivots before making significant changes.