Marx for me (and hopefully for others too)

Yesterday I had a conversation about my work, about how and why I started studying inequality more than 30 years ago, what was my motivation, how it was  to work on income inequality in an officially classless (and non-democratic) society, did the World Bank care about inequality etc. The interviewer and I thus came to some methodological issues and to the inescapable influence of Marx on my work. I want to present it more systematically in this post.

The most important of Marx’s influences on people working in social sciences is, I think, his economic interpretation of history. This has become so much part of the mainstream that we do no  longer associate it with Marx very much. And surely, he was not the only one or even the first to have defined it. But he applied it most consistently and most creatively.

Even when we believe that such an interpretation of history is common-place today, this still is not entirely so. Take the current dispute about the reasons that brought Trump to power. Some (mostly those who believe that everything that went on previously was fine) blame a sudden outburst of xenophobia, hatred, and misogyny. Others (like myself) see that outburst as having been caused by long economic stagnation of middle class incomes, and rising insecurity (of jobs, health care expenses, inability to pay for children’s education). So the latter group tends to place economic factors first and to explain how they led to racism and the rest. There is a big difference between the two approaches—not only in their diagnosis of the causes but more importantly in their view of what needs to be done.

The second Marx’s insight which I think is absolutely indispensable in the work on income and wealth inequality is to see that economic forces that influence historical developments do so through “large groups of people who differ in their position in the process of production”, namely through social classes. The classes can be defined by the difference in the access to the means of production as Marx insisted but not only by that. Going back to my work in socialist economies, there was a very influential left-wing critique of socialist systems  which held that social classes in that system were formed on the basis of differential access to state power. Bureaucracy can indeed be seen as a social class. And not only under socialism, but also in pre-capitalist formations where the role of the state as an “extractor of the surplus value” was important, from the ancient Egypt to the medieval Russia. Many African countries today can be usefully analyzed using that particular lens. In my forthcoming “Capitalism, Alone” I use the same approach with respect to the countries of political capitalism, notably China.

But to underline: class analysis is absolutely crucial for all students of inequality precisely because inequality before it becomes an individual phenomenon (“my income is low”) is a social phenomenon that affects large swathes of people (“my income is low because women are discriminated”, or because African Americans are discriminated, or poor people cannot access good education etc.). To give a couple of examples of what I have in mind here: Piketty’s work especially in “Top incomes in France” and Rodriguez Weber’s book on Chilean income distribution  over the long-term (“Desarrollo y desigualdad en Chile (1850–2009): historia de su economía política”). On the other hand, I think that Tony Atkinson’s work on British and various other income and wealth distributions failed to sufficiently integrate political and class analysis.

This is also where the work on inequality parts ways with one of the scourges of modern micro- and macro-economics, the representative agent. The role of the representative agent was to obliterate all meaningful distinctions between large groups  of people whose social positions differ, by focusing on the observation that everybody is an “agent” who tries to maximize income under a set of constraints. This is indeed trivially true. And by being trivially true it disregards the multitude of features that make these “agents” truly different: their wealth, background, power, ability to save, gender, race, ownership of capital or the need to sell labor, access to the state etc. I would thus say that any serious work on inequality must reject the use of representative agent as a way to approach reality. I am very optimistic that this will happen because the representative agent itself was the product of two developments, both currently on the wane: an ideological desire, especially strong in the United States because of the  McCarthy-like pressures to deny the existence of social classes, and the lack of heterogeneous data. For example, median income or income by decile was hard to calculate but GDP per capita was easy to get hold of.

The third extremely important Marx’s methodological contribution is the realization that economic categories are dependent on social formations. What are mere means of production (tools) in an economy composed of small-commodity producers becomes capital in a capitalist economy. But it goes further. The equilibrium (normal) price in a feudal economy, or in a guild system where capital is not allowed to move between the branches will be different from equilibrium prices in a capitalist economy with the free movement of capital. To many economists this is still not obvious. They use today’s capitalist categories for the Roman Empire where wage labor was (to quote Moses Finley) “spasmodic, casual and marginal”.  

But even if they do not realize it fully, they de facto acknowledge the importance of institutional set up of a society in determining prices not only of goods but also of the factors of production. Again, we see it daily. Suppose that the world produces exactly the same set of commodities and the demand for them is exactly the same, but it does so within national economies that do not permit movement of capital and labor, and then does it in an entirely globalized economy where borders do not exist. Clearly, the prices of capital and labor (profit and wage) will be different in the latter, the distribution between capital owners and workers will be different, prices will change as profits and wages change, incomes will change too and so will consumption patterns, and ultimately even the structure of production will be altered. Indeed this is what today’s globalization is doing.  

The fact that property relations determine prices and structure of production and consumption is an extremely important insight. The historical character of any institutional arrangement is thereby highlighted.

The last among Marx’s contribution that I would like to single out—perhaps the most important and grandiose—is that the succession of socio-economic formations (or more restrictively, of the modes of production) is itself “regulated” by economic forces, including the struggle for the distribution of the economic surplus.  The task of economics is nothing less than global historical: to explain the rise and fall not solely of countries but of different ways of organizing production: why were nomads superseded by the sedentary populations, why did Western Roman Empire break into a few large feudal-like demesnes and serfs, while the Eastern Roman Empire remained populated by small landholders, and the like. Whoever studies Marx can never forget the grandiosity of the questions that are being asked. For such a student then using supply and demand curves to determine the cost of pizza in his town will indeed be acceptable, but surely will never be seen as the prime or the most important role of economics as a social science.

First reflections on the French ““événements de décembre”

Because I am suffering from insomnia (due to the jetlag) I decided to write down, in the middle of the night, my two quick impressions regarding the recent events in France—events that watched from outside France seemed less dramatic than within.

I think they raise two important issues: one new, another “old”.

It is indeed an accident that the straw that broke the camel’s back was a tax on fuel that affected especially hard rural and periurban areas, and people with relatively modest incomes. It did so (I understand) not as much by the amount of the increase but by reinforcing the feeling among many that after already paying the costs of globalization, neoliberal policies, offshoring, competition with cheaper foreign labor, and deterioration of social services, now, in addition, they are to pay also what is, in their view and perhaps not entirely wrongly, seen as an elitist tax on climate change.  

This raises a more general issue which I discussed in my polemic with Jason Hickel and Kate Raworth. Proponents of degrowth and those who argue that we need to do something dramatic regarding climate change are singularly coy and shy when it comes to pointing out who is going to bear the costs of these changes. As I mentioned in this discussion with Jason and Kate, if they were serious they should go out and tell Western audiences that their real incomes should be cut in half and also explain them how that should be accomplished.  Degrowers obviously know that such a plan is a political suicide, so they prefer to keep things vague and to cover up the issues under a “false communitarian” discourse that we are all affected and  that somehow the economy will thrive if we all just took full conscience of the problem--without ever telling us what specific taxes they would like to raise or how they plan to reduce people’s incomes.

Now the French revolt brings this issue into the open. Many western middle classes, buffeted already by the winds of globalization, seem unwilling to pay a climate change tax. The degrowers should, I hope, now come up with concrete plans.

The second issue is “old”. It is the issue of the cleavage between the political elites and a significant part of the population. Macron rose on an essentially anti-mainstream platform, his heterogenous party having been created barely before the elections. But his policies have from the beginning been pro-rich, a sort of the latter-say Thatcherism. In addition, they were very elitist, often disdainful of the public opinion. It is somewhat bizarre that such “Jupiterian” presidency, by his own admission, would be lionized by the liberal English-language press when his domestic policies were strongly pro-rich and thus not dissimilar from Trump’s. But because Macron’s international rhetoric (mostly rhetoric) was anti-Trumpist, he got a pass on his domestic policies.

Somewhat foolishly he deepened the cleavage between himself and ordinary people by both his patrician predilections and the love of lecturing others which at times veered into the absurd (as when he took several minutes to teach a 12-year old kid about the proper way to address the President). At the time when more than ever Western “couches populaires” wanted to have politicians that at least showed a modicum of empathy, Macron chose the very opposite tack of  berating people for their lack of success or failure to find jobs (for which they apparently just needed to cross the road).  He thus committed the same error that Hillary Clinton commuted with her “deplorables” comment. It is no surprise that his approval ratings have taken a dive, and, from what I understand, even they do not fully capture the extent of the disdain into which he is held by many.

It is under such conditions that “les evenements” took place.  The danger however is that their further radicalization, and especially violence, undermines their original objectives. One remembers that May 1968, after driving de Gaulle to run for cover to Baden-Baden, just a few months later handed him one of the largest electoral victories—because of demonstrators’ violence and mishandling  of that great  political opportunity.

Why inequality matters?

This is the question that I am often asked and will be asked in two days. So I decided to write my answers down.

The argument why inequality should not matter is almost always couched in the following way: if everybody is getting better-off, why should we care if somebody is becoming extremely rich? Perhaps he deserves to be rich—or whatever the case, even if he does not deserve, we need not worry about his wealth. If we do that implies envy and other moral  flaws. I have dealt with the misplaced issue of envy here (in response to points made by Martin Feldstein) and here (in response to Harry Frankfurt), and do not want to repeat it. So, let’s leave envy out and focus on the reasons why we should be concerned about high inequality.

The reasons can be formally broken down into three groups: instrumental reasons having to do with economic growth, reasons of fairness, and reasons of politics.

The relationship between inequality and economic growth is one of the oldest relationships studied by economists. A very strong presumption was that without high profits there will be no growth, and high profits imply substantial inequality. We find this argument already in Ricardo where profit is the engine of economic growth. We find it also in Keynes and Schumpeter, and then in standard models of economic growth. We find it even in the Soviet industrialization debates. To invest you have to have profits (that is, surplus above subsistence); in a privately-owned economy it means that some people have to be wealthy enough to save and invest, and in a state-directed economy, it means that the state should take all the surplus.  

But notice that throughout the argument is not one in favor of inequality as such. If it were, we would not be concerned about the use of the surplus. The argument is about a seemingly paradoxical behavior of the wealthy: they should be sufficiently rich but should not use that money to live well and consume but to invest. This point is quite nicely, and famously, made by Keynes in the opening paragraphs of his “The Economic Consequence of the Peace”. For us, it is sufficient to note that this is an argument in favor of inequality provided wealth is not used for private pleasure.

The empirical work conducted in the past twenty years has failed to uncover a positive relationship between inequality and growth. The data were not sufficiently good, especially regarding inequality where the typical measure used was the Gini coefficient which is too aggregate and inert to capture changes in the distribution; also the relationship itself may vary in function of other variables, or the level of development. This has led economists to a cul-de-sac and discouragement so much so that since the late 1990s and early 2000s such empirical literature has almost ceased to be produced. It is reviewed in more detail in the Section 2 of this paper.

More recently, with much better data on income distribution, the argument that inequality and growth are negatively correlated has gained ground. In a joint paper Roy van der Weide and I show this using forty years of US micro data. With better data and somewhat more sophisticated thinking about inequality, the argument becomes much more nuanced:  inequality may be good for future incomes of the rich (that is, they become even richer) but it may be bad for future incomes of the poor (that is, they fall further behind). In this dynamic framework, growth rate itself is no longer something homogeneous as indeed it is not in the real life. When we say that the American economy is growing at 3% per year, it simply means that the overall income increased at that rate, it tells us nothing about how much better off, or worse off, individuals at different points of income distribution are getting.

Why would inequality have a bad effect on the growth of the lower deciles of the distribution as Roy and I find? Because it leads to low educational (and even health) achievements among the poor who become excluded from meaningful jobs and from meaningful contributions they could make to their own and society’s  improvement. Excluding a certain group of people from good education, be it because of their insufficient income or gender or race, can never be good for the economy, or at least it can never be preferable to their inclusion.

High inequality which effectively debars some people from full participation translates into an issue of fairness or justice. It does so because it affects inter-generational mobility. People who are relatively poor (which is what high inequality means) are not able, even if they are not poor in an absolute sense, to provide for their children a fraction of benefits, from education and inheritance to social capital, that the rich provide to their offspring. This implies that inequality tends to persist across generations which in turns means that opportunities are vastly different for those at the top of the pyramid and those on the bottom. We have the two factors joining forces here: on the one hand, the negative effect of exclusion on growth that carries over generations (which is our instrumental reason for not liking high inequality), and on the other, lack of equality of opportunity (which is an issue of justice).

High inequality has also political effects. The rich have more political power and they use that political power to promote own interests and to entrench their relative position in the society. This means that all the negative effects due to exclusion and lack of equality of opportunity are reinforced and made permanent (at least, until a big social earthquake destroys them). In order to fight off the advent of such an earthquake, the rich must make themselves safe and unassailable from “conquest”. This leads to adversarial politics and destroys social cohesion. Ironically, social instability which then results discourages investments of the rich, that is it undermines the very action that was at the beginning  adduced as the key reason why high wealth and inequality may be  socially desirable.

We therefore reach the end point where the unfolding of actions that were at the first supposed to produce beneficent outcome destroys by its own logic the original rationale. We have to go back to the beginning and instead of seeing high inequality as promoting investments and growth, we begin to see it, over time, as producing exactly the opposite effects: reducing investments and growth.