Posts Tagged ‘social Darwinism’

 

The manners and morals of the plutocracy are once again provoking negative reactions within the United States and around the world.

Back in 1977, in the midst of an earlier economic crisis, John Kenneth Galbraith examined the claims of and on behalf of the super-rich during the age of “high capitalism.”

Chrystia Freeland [ht: sm] is doing something similar today—studying contemporary plutocrats and how they justify their exalted status.

Those at the very top, Freeland says, have told her that American workers are the most overpaid in the world, and that they need to be more productive if they want to have better lives.

“It is a sense of, you know, ‘I deserve this,’ ” she says. “I do think that there is both a very powerful sense of entitlement and a kind of bubble of wealth which makes it hard for the people at the very top to understand the travails of the middle class.”

One standout moment Freeland recalls is a conversation with a billionaire who spoke with great sympathy about some friends who’d come to him for investment advice. “And he said to me, ‘You know what? They only had $10 million saved. How are they going to live on that?’ I kid you not, he was really worried about them.” . . .

So how are the super-rich that Freeland interviewed different from the super-rich of the past — say, 1955? Well, there are many more of them, and they’re a lot richer than they used to be.

“One of the things which is really astonishing is how much bigger the gap is than it was before,” she says. “In the 1950s, America was relatively egalitarian, much more so than compared to now.” CEOs earn exponentially more now, compared with their workers, than they did 60 years ago.

“The other difference is that now the super-rich are global. And that’s not sort of a cultural choice of theirs, that is something which is imposed on them by the nature of the world economy,” says Freeland. “Increasingly, I think you are actually seeing what, ironically, was the dream of Marxists, right? You are seeing the emergence of an international class.”

While Marx almost certainly wasn’t dreaming of global billionaires, Freeland says he might have recognized what’s going on right now. “This notion that borders wouldn’t matter, that we would have commonality of interests around the world. Well, guess who got there first? The plutocrats.”

Special mention

Special mention

In the world of Greg Mankiw (and of most neoclassical economists), the inequalities of capitalism can be described as “just deserts.”

The basic idea is that a free-market system allocates incomes according to (a) the marginal productivity of the factors of production (such as labor and capital) and (b) how much of those factors individuals choose to sell to enterprises (in the form of labor hours and savings). So, wages represent the return to not being lazy (and therefore working to earn an income), and profits the return to not being piggy (and therefore setting aside savings from income for future consumption).

Therefore, in the world of neoclassical economics, individuals get what they deserve.*

A reader reminded me of a classic essay by Amartya Sen, in which he challenges the theory of just deserts as expounded by P. T. Bauer. (Unfortunately, the essay is behind a paywall. But I was able to use my university library to retrieve the full text.)

Bauer has long been known as a critic of egalitarianism and of any and all schemes (especially in the context of Third World development) to use government policies to move toward more equal economic arrangements. Sen identifies four arguments Bauer uses to challenge egalitarianism: the economic differences that exist in society are

  1. deserved (in the sense that they are the result of people’s capacities and motivations)
  2. procedurally justified (because they are the product of voluntary arrangements)
  3. instrumentally useful (since they lead to higher living standards for all)
  4. better than the alternative (which is coercive measures on the part of governments)

 

Sen then proceeds to dismantle Bauer’s arguments, one by one. For the purposes of this post, let me focus on just one of them.

both the argument about who is deserving and the procedural argument ultimately turn on Bauer’s description of the process of production: that is, a rich person produces correspondingly more than a poor person. This description plays a crucial part in Bauer’s economic analysis—both of inequality within a country and of inequality across national boundaries, including the claims of the so-called third world. I shall call Bauer’s position here the “personal production view.”

Sen’s argument is that the personal production view is difficult to sustain in cases of “interdependent production.”

Production is based on the joint use of different resources, possibly provided by different people, and it is not in general possible to separate out who—or even which resource—produced how much of the total output. There is no obvious way of deciding that “this much” of the output is owing to labor, “that much” to raw materials, “that much” to machinery, and so on. In economic theory, a common method of attribution is according to “marginal product,” i.e., the extra output that one incremental unit of one resource will produce given the amounts of other resources. This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions.

But even when all these assumptions have been made—quite a tall order—it is still arbitrary to assert that each resource’s earnings reflect the overall contribution made by that resource to the total output. There is nothing in the marginalist logic that establishes such an identification. Marginal product accounting, when consistent, is useful for deciding how to use additional resources so as to maximize profit, but it does not “show” which resource has “produced” how much of the total output. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others.

Furthermore, when incomes generated by the production of different goods are compared, relative incomes depend on relative prices of the products, and this introduces an additional element of arbitrariness in the personal production view. You and I may continue to produce the same two goods in unchanged amounts in exactly the same way, but a change in the relative prices of our respective products (caused, say, by changing demand conditions having to do with the functioning of the rest of the economy) can make our relative incomes change without any change of anything that you and I are, in fact, doing or producing.

Finally, there is the need to distinguish between what a person produces and what is produced by resources that he happens to own. The moral appeal of giving more—in Bauer’s words—to “those who are more productive and contribute more to output” does not readily translate into giving more to “those who own more productive resources which contribute more to output.”

Note that this is a critique of the “personal production” theory of the distribution of income—a view shared by both Bauer and Mankiw, and with many other neoclassical economists—by a Nobel Prize-winning neoclassical economist. Sen’s conclusion is that

The personal production view thus confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources.” These ambiguities are crucial to its moral appeal. The personal production view, it must be concluded, is richer in powerful rhetoric than in substance.

Sen’s critique is a classic case of the neoclassical theory of income distribution, which underlies its social Darwinism, receiving its just deserts.

* Aside from market imperfections and externalities, the extent of which serves as the basis of argument between conservative and liberal neoclassical economists. The existence of public goods is how, within such a neoclassical world, Mankiw argues for progressive taxation and transfer payments to the poor—provided, that is, the rich actually value such public goods, i.e., they benefit more from them than others in society.

Clearly, Greg Mankiw is discomfited by the claim that his approach to economics smacks of social Darwinism.

Jonathan Chait is the one who first made the claim, which he later defended. According to Chait, the “the main guiding principle” of social Darwinism is

a defense of the free market as a moral arbiter, rather than merely a tool for creating wealth. Just as natural selection allows better-adapted species to thrive and poorly adapted ones to die out, the free market rewards talent and hard work and punishes laziness or lack of talent, in a perfect or near-perfect way.

And that’s exactly what Mankiw argues in the paper [pdf] Chait cites, and which Mankiw suggests Chait and others read in full.

So, I did. First, Mankiw argues that “people should get what they deserve,” that is, “A person who contributes more to society deserves a higher income that reflects those greater contributions.” And, Mankiw argues, capitalism does exactly that.

Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources. But we economists often say that there is nothing particularly equitable about that equilibrium. Perhaps we are too hasty in reaching that judgment. After all, it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.

Mankiw, however, also recognizes that the “real world differs from a classical competitive economy free of market imperfections.” Therefore, there is room for progressive taxation within his Just Deserts world. But, and here’s the kicker, progressive taxation (and, long with it, the financing of government programs) only make sense if the value of government services increases along with income. In other words, the rich should only be forced to pay higher taxes to the extent they benefit from the “public good.”

What about transfer payments to the poor? These can be justified along similar lines. As long as people care about others to some degree, antipoverty programs are a type of public good. . .That is, under this view, the government provides for the poor not simply because their marginal utility is high but because we have interdependent utility functions. Put differently, we would all like to alleviate poverty. But because we would prefer to have someone else pick up the tab, private charity can’t do the job. Government-run antipoverty programs solve the free-rider problem among the altruistic well-to-do.

What this means is that, if the rich believe that alleviating poverty is a public good from which they benefit, they should be willing to pay higher taxes to support transfer payments to the poor.

Either way, it’s survival of the fittest.