Why inequality matters

Will Wilkinson says "the level of inequality, taken in isolation, [is] completely useless as a barometer of social or economic justice." The Economist says economists "cannot advance positive reasons for what the right level of inequality is." I agree.  

Instead, we lefties care about inequality not because we have some idea of what the Gini coefficient or share of the top 1% should be, but because we fear that three things that would make inequalities tolerable are - to some extent - missing.

Firstly, inequalities don't all arise from fair processes.

One condition here - set out in Rawls' difference principle - is that inequality should be associated with "fair equality of opportunity". But this condition is obviously lacking when top jobs go disproportionately to people from the most expensive schools.

Also, many inequalities arise not from free market processes but from what Acemoglu and Robinson call extractive institutions - the ability of the rich to use political power to extract wealth for themselves*. The state, through crony policies such as bank bailouts, generous procurement schemes, corporate welfare policies and intellectual property laws is complicit in this. As David Grusky has pointed out, a lot of inequality is a form of market failure.

Many egalitarians aren't worried about the rising share of the 1% in itself. Instead, we worry about it, when it is combined with falling median incomes - as this is a sign that inequality has become mere predation, rather than a byproduct of a healthy economy. It's the wealth of Emma Harrison that troubles us, not so much that of Wayne Rooney.

Secondly, we fear that inequality has adverse effects. I'm not thinking so much here of its impacts on economic growth, social cohesion (pdf) and other aspects of well-being; the evidence here is convincing if you're prepared to be convinced, and not if you're not. Instead, the danger is that inequality is, as Sean McElwee says, an "affront to democracy." The obvious way in which this happens is that the rich simply buy power. But there are less obvious mechanisms too. One is that the rich's control of business gives them leverage over government policy because - as Michal Kalecki said - they can claim that anything that reduces "confidence" will hurt jobs. Also, as Adam Smith said, we have "a disposition to admire, and almost to worship, the rich." This not only undermines the equality of respect that's part of the democratic spirit, but it leads us to pay too much heed to the interests of the rich and not enough to those of the poor.

Thirdly, we've no great beef with inequality if it is combined with some form of risk-pooling. Even if our first two conditions were met, we'd favour some redistribution to mitigate the effects of bad luck - be it the bad luck of a bad draw in the genetic lottery or of being hurt by a recession. Of course, lefties define luck more widely that righties, but most of the latter should support some redistribution; Hayek, for example, favoured a basic income.

I say all this to make two points.

First, to the right. Contrary to what David Henderson says libertarians should worry about income inequality as it is often the product of statism.

Second, to the left. Getting the rich to pay more tax is nowhere near enough to reduce the inequalities we should tackle.

* Marxists claim that capitalism (and, I'd add, managerialism) are also extractive institutions. We don't need to go that far in this context.  

Comments

[Guido Fawkes]

As a libertarian who isn't that worried about inequality, particularly if it is a result of merit, I accept that taxpayer funded education is key to social mobility.

So I want taxpayer funded schools to be the best they can be and all the left-wing crap since the 60s that cripples the chances of kids to be thrown out.

Hayek was vague about his support for a basic income - he didn't think it through and nor have I. We sort of have versions of it in the welfare states of the Western democracies.

I don't like crony capitalism either (who does?) when the state is small the opportunities for it are that much less.

[TickyW]

The problem with merit, of course, is that it is often used as a cover word for luck.

A learning disabled person will perform badly in a "meritocracy" (ie have a low income) but may work extremely hard to keep themselves in their poorly paid job. A meritocracy fails to reward that individual for their virtue, which is their effort and hard work.

A gifted and talented individual born with talent may, in contrast, not need to exert themselves much to earn a comfortable living. Such an individual is being rewarded for their luck (their genetic inheritance) and not for any moral virtue they possess. The additional income such an individual is able to command due to their luck is really just economic rent. It is entirely fair to tax economic rent (as distinct from labour income) and so should be taxed and used to enhance the income of the less fortunate but more virtuous individual.

Nozick's entitlement principles fall short to the extent that they hold inheritance (money or talent) is just (fair) acquisition.

[Socialism In One Bedroom]

It worth bringing up the OXFAM report again, which shows 85 billionaires have more wealth than half the people in the world. No meritocracy delivers that outcome! This is proof that a meritocracy does not exist. What exists is a kleptocracy. Any true libertarian would instantly see this and alarm bells would be going off in their brains. But libertarianism is the last refuge of the apologist.

No individual is so talented, has the ability, to justify owning more than entire nations.

One of the billionaires could live 10,000 life's even at his current extravagant lifestyle. It would take other people countless lifetimes to acquire what these people own. Again no sensible measure of merit could result in this outcome.

And if anyone thinks the only problem with this vast inequality is the impact on democracy (which is true) then I wonder what planet they are living on!

[David Friedman]

I think the point about luck vs merit confuses two different defenses of outcomes which Nozick distinguishes--desert and entitlement. For the simplest example, imagine we have a perfectly just distribution of income, whatever that may be, and two people bet a dollar on the flip of a coin. The winner does not deserve to win—the outcome is due to pure luck. Yet it seems to most of us that he is entitled to the dollar, since he has gotten it by a legitimate process.

Similarly, if you are willing to start with the libertarian assumption that each individual belongs to himself and that voluntary exchanges are morally legitimate, the talented individual who ends up with a high income may not deserve it, but he is entitled to it.

[leslie48]

I must seriously take issue with Guido Fawkes ridiculous comment "all the left-wing crap since the 60s that cripples the chances of kids" The social mobility data and massive expansion for many children make a mockery of his statement
Comprehensives rid us of the ' socially apartheid' 11+ system , GCSE & National Curriculum with maths and Sciences for all ( under Thatcher I know) gave many more kids ( including girls ) far more chances, Tony's A Levels and AS units got more kids into more universities by the later 2000s so that by the end of New Labour we had reached similar levels to our competitors. Pre-schooling opportunities provided to the less advantaged have continued. Sixth form and uni's is no longer a privilege of a tiny elite of upper middle class toffs who of course feel their job market position threatened by bright state kids from the Russell group.

[Andrew]

I continue to be amused by the mindset common in political discussion that analyses things in terms of the effect of systems "statism/democracy/kleptocracy" upon outcomes and outcomes "inequality" upon systems.

What utter nonsense to consider the corrosive effect of inequality upon democracy. The current inequality is the RESULT of democracy (at this point of economic and social evolution).

The abstract category of political system really has no real use beyond a convenient tag for that collection of outcomes. To consider alternatives "under" system X or Y is of no more merit than considering biological life "under" a system other than natural selection. It is so far counter-factual that you are left with very little idea of "what" there could be under this other system and how it got there.

In considering alternatives to capitalism, you can't just impose a separate set of rules as if people will actually play by them if you tell them to! You have to explain how that set of rules will come to describe the behaviour of a future society and how that behaviour has evolved from the present state.

And given the difficulty in predicting complex systems to do that with any large set of changes is impossible.

I suggest giving up.

[Blissex]

«willing to start with the libertarian assumption that each individual belongs to himself and that voluntary exchanges are morally legitimate,»

Note that this includes *any* form of state legislations and regulation, including 100% tax rates, as long as each individual has the right to leave that state, because then membership of that state is a voluntary exchange.

«the talented individual who ends up with a high income may not deserve it, but he is entitled to it.»

The addition of "talented" above seems to me pure reactionary, elitist propaganda, because the argument applies to people who are lucky, or a heir to a fortune, or skilled at getting away with it, or whatever other type of incumbency they enjoy.

[Andrew]

I also love the idea of the rich buying power.

Richness IS power by definition.

If you reduce that power, you are also by definition reducing the wealth, since it will lead to less resource control.

So you might as well say you want to reduce inequality because you don't like it. Not a bad reason.

[David Friedman]

Blissex: In order to justify state legislation you need the additional assumption, which I did not propose, that the territory of the state belongs to the government of the state, hence that "you can stay here if you agree" is a voluntary transaction. Absent that assumption, "you must leave if you do not agree" is no more the proposal of a voluntary transaction than "your money or your life." Isn't that obvious?

The argument can apply to lots of people, but the example of the person who is talented--which, one could argue, itself a matter of luck--was sufficient for the point I was making, which was about the distinction between desert and entitlement.

[Frederic Mari]

Interesting article, echoeing some of my thoughts on the subject:

http://theredbanker.blogspot.com/2014/02/taxes-charitythe-rich-and-us.html

[Dave Timoney]

@leslie48, Paul Staines (aka Guido Fawkes) is the troll's troll. He is simply winding you up. That "left wing crap ... cripples the chances of kids" is just bog-standard rightist ideology, intended to denigrate public education to the benefit of the private sector (inequality rools).

BTW, Hayek was not "vague" on the issue of a basic income (by which I take PS/GF to mean that he didn't work out a detailed model of how this would work in practice) because he didn't approach it from the managerialist perspective of whether it was cost-justifiable or Pareto optimal, but rather from the perspective that a guaranteed minimum income was both a necessary bootstrap for equality of opportunity and a protection from state coercion.

[erik]

Personally, I never understood this "fair process", " equal opportunity" stuff.

You are born, with certain genes/abilities, into a socio-economic context - and the way your life goes from that point onward depend on your preferences and the incentives you face (that economic textbooks use the word choice is simply bizarre). In the best of possible worlds, society create incentives compatible with the best possible outcome. Maybe this also will be compatible with "equal opportunity", but I do not see why it is an intrinsic good.

[Blissex]

«the territory of the state belongs to the government of the state,»

I don't understand that statement, it makes no sense to me. The state *defines* the very concept of "belongs to".

Unless you are trying to make an obscure point about "fee simple" and "allodial" ownership.

«"you must leave if you do not agree" is no more the proposal of a voluntary transaction than "your money or your life."»

That applies equally well to employment, or for that matter to watching movies at the theater.

[theOnlySanePersonOnPlanetEarth]

erik said - "Personally, I never understood this "fair process", " equal opportunity" stuff."

In the 1970's some racist employers would not employ black people. Legislation is brought in to counter such attitudes. Attitudes slowly change and opportunities become more equal. Some establishments would not have blacks staying in them, e.g. hotels. Legislation worked it's magic again. The same applies to many class barriers today.

I guess if you don't understand this it means you have no experience of it. But we shouldn't let your pitiful ignorance stop us. I guess you are a prime example of the need to keep history alive. But your ignorance is nevertheless depressing.

[Sardo Numpsa]

I believe the idea of UBI is catching on in right libertarian circles, I am doing my best to spread the word.