Inequality against freedom

In making a libertarian case for Bernie Sanders, Will Wilkinson draws attention to an awkward point for right-libertarians – that inequality is the enemy of freedom.

He points out that Denmark –the sort of country Sanders wants the US to be more like – has greater economic freedom than the US. This, he says, “illustrates just how unworried libertarians ought to be about the possibility of a Denmark-admiring, single-payer-wanting, democratic socialist president.” 

Will is not taking freak cases here. My chart plots a measure of income inequality (taken from the World Bank) against the Heritage Foundation’s index of business freedom – their measure of how government regulates firms – for 26 developedish nations. There is a slight negative correlation between them, of 0.16. If anything, I’m biasing the chart against the point I want to make: if I were to exclude Malaysia, which is free and unequal, or include Chile (which is unfree and unequal) the negative correlation would be much greater.

Inequality doesn’t just reduce freedom for workers. It reduces freedom for business owners too.

Will says this is because countries that want to tax and redistribute must have a healthy economy, which requires business freedom. I suspect that there are two other mechanisms at work.

One is that many of the rich have no interest in economic freedom. They want to protect extractive institutions and the monopoly power of incumbents from competition. They thus favour red tape, which tends to bear heavier upon small firms than big ones. This, I suspect, explains why inequality and unfreedom go together in Latin America, for example.

Secondly, people have a strong urge for fairness. If they cannot achieve this through market forces, they’ll demand it via the ballot box in the form of state regulation. As Philippe Aghion and colleagues point out, there is a negative correlation between union density and minimum wages: minimum wage laws are more likely to be found where unions are weak. Regulations, in this sense, are a substitute for strong unions – and, I suspect, a bad substitute because they are more inflexible.

Through these mechanisms, inequality is the enemy of freedom even in the narrowest right-libertarian sense of the word.

That said, it doesn’t follow that people who want greater income equality will necessarily promote economic freedom: Megan McArdle might be right to say that Sanders can’t or won’t much enhance it. We should, though, ask: what sort of egalitarian institutions and policies might increase freedom?

For me, the answer is clear: those which increase workers’ bargaining power. This means fuller employment and a jobs guarantee; stronger trades unions; and a citizens’ basic income. The point here is that if workers have the power to bargain for better wages and conditions, and the real freedom to reject exploitative demands from bosses, then we’ll not need so much business regulation. In this sense, greater equality and cutting red tape go together.

What don’t go together – in the real world – are inequality and freedom. So-called right-libertarians therefore have a choice: you can be shills for the rich, or genuine supporters of freedom – but you can’t be both.

Comments

[Luis Enrique]

"if workers have the power to bargain for better wages and conditions ... then we’ll not need so much business regulation"

that's an attractive argument. But where is the political party offering it? You have previously asked what the centre-left is for: could it offer that combination?

(I am assuming here that Corbyn is not offering to lower business regulation in combination with raising worker power)

[Matt Moore]

The causal mechanism is exactly the other way around.

Freedom leads to equality.

Restrictions on business are always an opportunity to create rent, and therefore inequality.

[Peter K.]

"For me, the answer is clear: those which increase workers’ bargaining power. This means fuller employment and a jobs guarantee; stronger trades unions; and a citizens’ basic income."

One should also emphasize strong macro policy to make labor markets tight. Central Banks have failed to do this for decades. Austerity makes Central Banks' jobs harder.

Macro policy is monetary policy plus fiscal policy plus trade/currency policy.

Imagine if Denmark had sane monetary and fiscal policies?

Greece is being choked on the macro front.

[Jonathan]

This recent Mukand and Rodrik paper has an interesting take on the rise |(and relative rarity) of liberal democracies:

http://drodrik.scholar.harvard.edu/files/dani-rodrik/files/the_political_economy_of_liberal_democracy_jan_2016.pdf?m=1452283595

[Bob]

"Imagine if Denmark had sane monetary and fiscal policies?"

Here's how to fix the problem.

Denmark is in a currency peg. Get rid of the peg and then ban bank lending for currency settlement on pain of it being a gift of shareholder's funds.

You don't 'prop up the krone' on this side. That is very silly because it puts a patsy in the market on the offer side which of course everybody then takes advantage of.

But without a patsy on the offer side, who is going to take your shorts and who is going to cover them at 10pm when you have to settle your bets?

Nobody. So you are forced to bid up.

[Keith]

This sort of debate illustrates the problem with Political language. Words like Socialism, communism, libertarian etc have no clear meaning unless or until you define them in terms of policy detail. The different concepts in the lexicon of political and economic theory have varying connotations in different conditions of the real world and overlap. So there is a strong tendency for debates in this area to be confused and expressions of emotion. Sanders actual policies as candidate seem social democratic; they are compatible with a wide range of structures in the private business sector. Social Democracy is a compromise set of methods which were developed to straddle unregulated capitalism and pure state socialism. Avoiding both. The methods were created in highly democratic countries to be compatible with appealing to the middle ground. Freedom and equality are what they were intended to produce!

[Opirmusic]

The divide between negative/freedom-from and positive liberty/freedom-to has always been drawn on this line. The right-libertarians, as Paul Treanor describes (http://web.inter.nl.net/users/Paul.Treanor/libertarian.html), have always put the idea of process ("process legitimizes outcome") and fairness (though it takes the form of what passes for "equality of opportunity", even those we have nothing even close to it, as Hayes shows in Twilight of the Elites, since EoOpp requires more equality of outcome in the first place) over concerns about actual, *lived* liberty.

"Libertarians emphasise this principle primarily in their rejection of (government-enforced) distributive justice. To libertarians, there is no such thing as distributive justice in the usual sense, what Nozick calls a 'patterned distribution'. To them, the outcome of a fair and free market is just. In fact, most libertarians believe that it derives this quality of justice, from its being the outcome of a special process (the free market, or a comparable process)."

A GBI, as you note, could remedy this (and it does have support from some right intellectuals, so that's something.) Barring that, Nordic-style social democracy would work great; it has done a fantastic job at promoting individual liberty in its respective countries (not to mention the high social mobility, entrepreneurialism through Peltzmann effect reinforcement, innovation due to letting people actually go to school without becoming indentured servants, etc.)

[Bob]

So-called "libertarians" are authoritarians. They expect people to do as they are told, operate entirely as individuals not as groups and want to have the guns to back it up.

The basis of their nonsense - that people don't attack each other or gang up - is the same facile nonsense as the weed smoking left anarchist movement. And just as sensible - since it denies all ape culture that has evolved over about 5 million years.