Wednesday, January 9, 2019

What is the just pay? Capitalists, John Roemer and the Cultural Revolution


In the 1990s and in his 1999 book “Equality of opportunity”, John Roemer set the stage for what has since been a flourishing area of inequality studies—inequality of opportunity. Roemer’s key insight was to divide the factors that influence one’s income into three parts: circumstances or factors that are exogenous to the individual, that is over which he has no control (gender, race, parental income and education etc.), those that are the product of his effort, and finally those that are the result of what Roemer called “episodic luck” (I got a good  job because I just happened to be available at the time when the job was advertised).

Roemer’s approach has led him also to propose a very radical way to reward (pay) people. Consider two groups of individuals, defined by an exogeneous marker like gender. One group (men) tends to be physically stronger and produces on average 10 widgets per day. Another group, women, is physically weaker and produces only 5. Should everybody be paid according to the number of widgets he/she produces (which a simple-minded “meritocratic” approach would suggest)? No, Roemer says, the reward should be proportional to our contribution compared to the average of our group. So, if I produce 12 widgets, why is 20% above men’s average, I should be paid the same as the woman who produces 6 widgets, which is also 20% above the average of her group. The reason is that we are both paid according to our (differential) effort—and the attempt is made to control (abstract from) our innate characteristics which may privilege or  punish some of us.

Consider the radicalness of this proposal as applied in another context. Students’ grades should also follow the same rule. If say rich parents’ kids do better than poor parents’ kids on average, then a rich kid who has scored 12 points on a test should get the same grade as the poorer kid who has scored only 6 points. And so on.

But recently as I was rereading Phelps  Brown’s book “The Inequality of Pay”, published in 1977, I ran across a different scheme of rewards applied in Beijing in the 1960s, around the time of the Cultural Revolution. All men were paid according to the average number of widgets produced by men, and all women were paid according to the average  number of widgets produced by women. Here is the quote from Phelps Brown:

This story brings out what to Western observers may seem a contradiction in Chinese pay structure: if it is right and proper to pay a man more than a woman because the man being stronger produces more, why should not a man who exerts himself and produces more than another man likewise be paid more? To the Chinese the answer is simply that the latter differential appeals to self-interest whereas the former cannot. Strangely but intelligibly, the Chinese treat payment in proportion to the amount of work done as a self-evident principle of natural justice while differences  in that amount are not within the worker’s own control, but as mischievous when they are. (p. 53; emphasis mine)


The reader, probably having thought how radical and left-wing is Roemer’s proposal, is now suddenly thrown into this most radical left-wing experiment ever where—the very opposite principles rule! It seems that there is no continuity: a more left-wing approach is not just slightly more to the left than the less leftist approach—it is the very opposite of it!

To see that, recall that in Roemer’s case we do not want to pay somebody for his or her circumstances, but only for his or her effort. In the Chinese case, it is the reverse: we pay somebody only for his or her circumstances, but not for his or her effort. Why is that? The philosophy is entirely different. Circumstances are viewed  as “natural” and one should be paid according to them. But payment according to effort is viewed as corrosive of moral norms since it means that people respond to economic incentives. People should work either because they want to contribute to the community (without expecting anything in return) or because they like to work. “Incentivizing” --appealing to self-interest--in such a setting is considered as bad, as in a different setting paying somebody for an exogenous advantage that he or she does not deserve.

The ultimate outcome of the Chinese system is an equal pay for everybody, both men and women, and regardless of individual productivity. It would be at the polar extreme of the “meritocratic” pay where everybody is paid simply according to the number of widgets he or she produces.

What is the best way? Meritocratic pay responds to out feeling of justice that everybody should be paid according to their contribution. Presumably it would lead to the highest output. Roemer redefines justice so as to extract only differential effort according to which people should be paid. They will be paid the same amount  for different number of widgets produced. Empirically, it will be always very difficult to determine what are the factors that should fall under the heading of circumstances and hence should not affect the reward. The Chinese system has a moralistic element in it: it is bad to be incentivized by pay. The downside is that it is likely to lead to very low effort of most participants.

When we design systems of rewards, we are obviously always led by some principles of justice or ethics. The problem is that these principles do not all come up with the same solution. In many cases, as we have seen here, depending on what our guiding principle is, the reward structure will be very different. On top of that we need, in principle, to take into account the effects on the overall output—unless of course our philosophical principle Is such that the quantity of that output is immaterial.


Note:

John Roemer who kindly commented on the text asked me to make clear that he never advocated  direct application of the principles explained here (nor thought that this would be possible to do in a market economy), but argued that policies like affirmative action should be designed with the objective of reducing or eliminating the impact of circumstances on one's income.

 

Friday, December 28, 2018

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.


Wednesday, December 5, 2018

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.