Tuesday, September 23, 2014

Why focus on horizontal inequality undermines efforts to reduce overall inequality

Goran Therborn in his important new book “The Killing Fields of Inequality” lists, among the three key puzzles of the past 30 years of social and economic developments, this one: Why were rich societies much more successful in reducing “existential” inequality between various  groups (blacks-whites; men-women; heterosexual-homosexual; immigrants-natives etc.) than in reducing overall income and wealth inequality? Actually, the very opposite happened: both income and wealth inequality increased substantially.

            A focus on “existential” or “categorical” inequality is what in the 19th century Europe used to be called a radical position, associated with the post-1789 developments. Once all formal distinctions of class between clergy, aristocracy and people were abolished, there was, it was argued, no need to focus on the existing income differences. This view reached its peak under the French Third Republic when inequality was increasing by leaps and bounds, while formal equality was left untouched.  (The socialist position at the time was that formal equality is just the first step towards real equality which requires also the diminution of economic inequalities.) The same radical position holds fast and true today: once you see the world as primarily composed of various groups, you quickly slip into “identity” politics whose main objective is to equalize formal legal positions of the groups—and basically let everything else the same.

            According to Thorborn, that’s what the world has been remarkably successful in doing in the past 30 years. There are well-known and substantial advances in the equal treatment of different groups (listed above); there was also a strong push for “horizontal” equality, which is the term used in economics to indicate that on average there should  be no wage differences between men and women, blacks and whites etc. (that is, at  least no differences that cannot be explained by better skills or experience). The progress there, although not as substantial as in legal equality, has been real too.

            But the quasi single-minded focus on “existential” inequality was not always helpful, and I think in some cases was outright harmful, to the general reduction of income and wealth inequalities. The success in the latter would—I think it could be argued—also reduce income differences due to racial or gender discrimination. In other words, pushing for reduction of inequality in general would make lots of sense even if our primary objective is to reduce specific gender or racial income inequalities. But this is not how things worked out. Rather, the focus was on “horizontal” inequalities while the overall, general inequality was left to its own devices, namely was allowed to increase.

            The focus on “existential” inequality is wrong, in my opinion, for at least three reasons. 

            First, the emphasis of group differences quickly spills into identity politics, splintering  the groups that do have an interest in fighting for change. The joint front crumbles. The groups end up by caring just about the change in their own positions and become indifferent to the rest. I am unaware for example that gays or immigrants, once their objectives of legal equality achieved, have shown particular interest to fight for economic equality in general, be it in the United State or the world. Splintering has made people focus on their own complaint; once that complaint is solved, they are indifferent to the rest. 

            Second, the focus on “existential” inequality leaves the basic problem unsolved because the way it poses the issue is wrong. I noticed this in a recent discussion regarding legalization of prostitution.  For feminists, prostitution is a reprehensible activity that they would like either to ban, discourage through some ill-defined teach-ins of women, or curb its demand by  punishing clients who are predominantly males. Not only do these approaches just drive the problem underground without solving it, they are futile because the root case of prostitution is not addressed. The root cause today (and perhaps in history) is income and wealth inequality. There are many (mostly) men with huge incomes and there are many (mostly young) women with poor job prospects and no money. This drives prostitution nationally and globally (as in sex tourism). So,  the point is not to address gender inequality only (men vs. women) but its economic cause. Consider what would happen even if horizontal equality between men and women were achieved, a thing which, with higher enrollment and graduation rates among women than men, and rising number of rich women, man soon happen. The problem will simply become that instead of 90% of customers being men we shall have a “fair” and “gender-neutral” distribution of customers with 50% men and 50% women. Will such gender equality solve the problem? Obviously not: prostitution, a reprehensibly activity in the eyes of the gender-focused activists, will merely become gender-balanced.  Is this all they really want to achieve? No. But, of course, it reveals that the real cause of the problem lies elsewhere, in inequality, and that their approach is misdirected.

            Third, the emphasis on “existential” equality is politically easy because it is not serious. It faces no  real opposition from the right-wing politicians and conservatives because it does not affect the underlying structure of economic inequality and political power. Instead of fighting for meaningful general changes (e.g. increased vacation time for all, shorter work-week for all, more favorable working conditions for parents, longer maternity and paternal leave, higher minimum wage for all etc.)—the issues on which the success has been quasi nil, but which would cut into the profits and thus face a strong economic opposition from the businesses, proponents of the “existential” equality care only up to the point where legal equality is established. Strictly speaking, such equality is also in the well-understood interest of capitalists. We know at least since Gary Becker that, economically, discrimination is inefficient for those who practice it.  But general measures that improve the position of the employees will not of course please those who have economic power. So the proponents of “existential” equality stop midway again. Formal equality is surely a necessary condition for overall betterment, but it is not sufficient. A movement toward more generalized equalization of human condition requires not only legal equality but also substantively greater (income and especially wealth) equality.

            Their approach (“formal equality and then nothing”) is what Rawls calls “meritocratic equality”, the lowest level of equality where all participants are legally free to pursue whatever career they choose  but where their starting positions are vastly different. All those who care exclusively about “identities” do only that: they aim to place everybody on the same starting line, but do not care if some come to the starting line  with Ferraris and others with bicycles. Their job is done once everybody is on the same starting line. Case closed: just when the real issues begin.  

Tuesday, September 16, 2014

The economics of Niall Ferguson in “The Pity of War”: Unwittingly back to Marx?

For the  centenary of the World War I, many new books were published. The ones that I have read, especially Margaret McMillan’s “The War that Ended Peace”, were so disappointing and superficial that I remembered the one that I read in parts, some ten years ago: Niall Ferguson’s “The Pity of War.” It was a good idea. It is indeed a book worth reading, especially for an economist because (unlike other books on WW1) it deals extensively with economic issues. 

            But it is also an unusual book. Although well-written and erudite, it shows all the defects of somebody who, perhaps in order to attract attention, is dead-set to be revisionist, nor in one of two areas, but in most.  And when on top of it, it is heavily influenced by an ideology which is a combination of British imperialism (yet very heavily critical of British policies prior to the War), empathy for the German aristocracy except when it comes to post-War economic management (where Germany is shown to have been able to pay reparations—but there the dislike of Keynes seems to dominate all other concerns), and a strong dislike of anything that smacks of Marxism, well, one could say that we are clearly not in the presence of an ordinary book. 

            The subtitle “Explaining World War I” is misleading because the book practically does not deal at all with the Eastern Front.  Russia, Austria-Hungary, Serbia, Turkey appear at most in 2-3% of the text. Ferguson’s knowledge of Russian sources is clearly non-existent, and there is no description of the war on the Eastern front, not even in the cases of such obvious and well-known interdependencies of the two fronts as in the disastrous Russian offensive of August 1914 conducted at the express demand of the Western Allies to relieve German pressure on the French. Thus, the book is to all intents and purposes  a story of the war between UK, France and Germany. But not nearly of the whole First World War.

            The revisionist discussion of most of the points follows a rather interesting approach where the standard point of view is  convincingly presented, then the alternative (rebuttal) is set up, and then gradually, in many cases, the weaknesses of the alternative, even if unacknowledged, become transparent. So, in some strange ways, Ferguson often provides lots of ammunition to the reader to reject Ferguson’s own revisionist position.  

            On the positive side of the ledger, Ferguson is an excellent writer, has read an enormous number of contemporary books, from poetry to philosophy, has a very good knowledge of British and German sources (less so of the French, and practically none of the Russian) and, unusually for a general historian, has a very good command and interest in economics.  Moreover, the book is—because of the unusual approach whereby one’s theses are often undermined in the presentation—much less revisionist than it seems at first, and probably less than Ferguson originally intended it to be. This, perhaps accidental, even-handedness is definitely a plus.

            I would go, point by point, over some of the revisionist issues, focusing more on the ones where Ferguson deals with economics. 

            1)  The war might not have happened at all. But after reading Ferguson’s own discussion of one upon another contemporary bestseller calling for, or discussing the future war, in fiction or in non-fiction, in all future belligerents’ countries; Ferguson’s multiple references to the pervasive militaristic and jingoistic culture of the time; and the data on the rising military budgets during the entire two decades prior to the war, it is hard to see how a war, whether in 1914 or 1919 or 1922, could not have happened. It was just a matter of time: like a Russian roulette it eventually had to fire.

            2) The war could have happened between a very different sets of powers. Here the argument is that England and Germany had no irreconcilable conflict. This is one of the key points of the book, and it is probably right if one could abstract from more than  a century of British policy whose aim was not to allow the emergence of a single dominant power on the Continent.  Germany, Ferguson writes, willed the war because she was afraid of own financial and military weakness. Power of federal states limited the ability to increase central spending on the military; in the Reichstag,  Social-Democrats were against it, and internationally, greater borrowing led to the rising costs reflected in the widening bond yield gap between UK and Germany (p. 135). Time was working against Germany: hence a preemptive war against Russia, and if need be, France (pp. 33, 100). (Thus, on where the main responsibility for the war lies, Ferguson is no revisionist.) 

England, however,  is responsible for making this purely continental war into a World War. Edward Grey, the British foreign minister, is (with Keynes) the main villain of the book. Grey wanted a war, Ferguson writes, due to some nebulous obligation to help France, while a much smarter position would have been for the UK to have stayed out and allowed Germany to create a “European Union” which would not, ultimately, be a competitor to England. Discussion of this counter-factual would take us too far, so I leave it here as presented by Ferguson. 

            3) There was no popular enthusiasm for the war. But the evidence against this dominant view (buttressed by the throngs of millions in Berlin, London, Vienna, St Petersburg and Paris) are just a few meager examples. Most people, even on Ferguson’s own telling, enthusiastically supported the war when it was declared. He acknowledges that parts of German SDs and Russian Bolsheviks, were the lonely voices who voted against war credits. But he disingenuously rebuffs Hitler’s well-known war enthusiasm expressed in his letters (and obviously shared by millions) by quoting a much more level-headed diary entry from an English conscript written in…1915 (p. 175). Well, surely, by 1915 most of the enthusiasm has evaporated. 

            4) German economic mobilization of resources was no less successful than English. This part is, I think, pretty well argued and substantiated. Germany increased government spending and use of material and human resources no less successfully than Britain.  But since (1) it was economically weaker (contrast German wealth with vast British gold reserves and foreign assets), (2) its capital market was more shallow, and (3) it could not borrow abroad (although it did so in New York until the US entered the war) and (4) could not raise taxes due to the political power of its big business,  Germany ultimately had to resort to inflation. This led to price controls, shortages, monetary overhang etc., all of which spread instability and demoralized the “domestic front.” This was the key reason why Germany lost the war in the Fall of 1918. Ferguson’s explanation for the famous “stab in the back” is entirely economic, and moreover, to a large extent driven by domestic socio-economic relations: power of the big business.

   In matters of  efficiency in conducting the war, Central powers did better: they killed more soldiers and civilians than the Allies (Allies include Russians), and spent much less money doing it. They were, in other words, more efficient in the killing per unit of cost. Ferguson’s data there are pretty compelling: Central powers killed 4.9 million people for a total cost of $61b; the allies killed 3.3 million people for a total cost of $147b. Cost per killed: Allies $44,000, central powers $12,000 (pp. 294, 337, passim). The problem was: Central powers were economically weaker than the Allies, and their social structure was more ossified (somebody else than Ferguson would have said “reactionary”). 

            5) The Versailles reparations were not exceedingly punitive and they were not the reason for Germany’s disastrous economic policy. While in the rest of the book, Ferguson credits German economic management, here he comes in with  a withering criticism. The reason economic management was wrong was because Germans decided to pretend that paying the reparations was impossible and used a two-pronged strategy to show it. First, by devaluing the Reichsmark to boost exports in order to create trade surpluses (with which to pay the reparations), they were in reality aiming to undercut English and French exports, and show to the Allies, or at least to their exporters, that it was not in their own interest that Germany should pursue such “beggar-thy-neighbor” policy.  It was a shrewd, albeit perhaps too clever by half, strategy. From today’s vantage point of the Euro crisis, it is delightful to read a German industrialist state in 1921 that  “our good fortune,  in the midst of misfortune, is our poor currency, which enables us to export on a large scale” (p. 412). 

            The second approach was to let inflation (already stimulated by devaluation) degenerate into hyperinflation. The reduction of real value of domestic  debt arranged workers and trade unions as well as big business and creditors in general. In addition, the government objective was to create an “organized havoc” and wave in front of the Allies the specter of an imminent Communist revolution. The threat of Communism  was then  to be used to exact easier terms from the French and the British.

            Ferguson thus makes two key economic points: reparations could have been paid and disastrous economic policy was consciously pursued. Now, for those who know Ferguson’s antipathy for Keynes (“a ‘soi-disant’ conscientious objector”, p  327), Keynes not surprisingly comes in for a very special critique on both counts. Keynes wielded influence with the Germans (the famous Melchior comes to mind, although it is unclear who influenced whom), and convinced them not only that the Versailles terms were too harsh (Germans needed little convincing on that) but that this view of inequity of Versailles, in light of Keynes’ international reputation, will come to be shared by many in the West. Then he “egged” Germans on to follow irresponsible policies until the West yielded. All the while Keynes thought that inflation would be controllable. When he realized that “controlled“ inflation necessary to increase German exports and scare the Allies was sliding into hyperinflation, it was too late.  So Keynes failed to follow his own warning regarding the destructive effects of hyperinflation made in “The Economic Consequences of the Peace.” No one in Ferguson’s view did more damage than Keynes in that respect. Keynes was both wrong and utterly irresponsible.

            And since Ferguson argues (rather fancifully) that German hyperinflation in 1920’s made the 1929-33 depression in Germany particularly severe (“the inflation [in 1921] was responsible for the onset and particular severity of the 1929-33 Slump in Germany”, p. 426), then there is but one step from blaming Keynes to have been responsible from bringing the Nazis to power. Ferguson never says it in so many words,  but the implication is unmistakable.

            The book often presents excellent data on debt, currency circulation, interests rates, output, real wages etc. All of the data are useful, and the reader will be grateful to Ferguson for having combined in one place, and probably “harmonized”, all the essential macro data for UK, France, Germany, Russia and Italy (and a few other countries). But in some parts of the book  (and nowhere more than in a mercifully short section on the counter-factual German economic policy 1919-1923), the text is almost illegible because of too much back-and-forth among the numbers, mixing up, in the same paragraph or even a sentence, the actual outcomes with possible outcomes or with Ferguson’s preferred outcomes. It is also odd for such a well-researched book that on the issue of reparations no mention is made of Keynes’ nemesis, Etienne Mantoux and his detailed “La paix calomniée.” There Ferguson could have found 400 pages of meticulous detail and calculations to support his anti-Keynes’ stance. (Although Mantoux’s point was rather that reparations were not so unreasonable, not what economic policy Germany should have followed.)

            Ferguson’s discussion of the Russian revolution is perfunctory and minimalist. In keeping with his willful ignorance of any other front but the western, the October Revolution hardly exists at all and the Brest-Litovsk peace agreement is mentioned…twice. The discussion is often prejudiced too. While Ferguson usefully compares the number of victims of the Russian Civil War and Russian losses in the First World War proper (the former 1.2 million people vs. 1.8 for in WW1), and in additions mentions perhaps as many as 5 million who died from hunger during the Civil War (pp. 389-90), Western military intervention against the Bolsheviks is non-existent. Neither does he discuss the fact stated in the book that the victims among the Reds were 3 times more numerous than among the Whites (must have had something to do with the executions of POWs and hostages). He presents  Trotsky as an unmitigated monster bent on destroying his own and enemy soldiers, and then acknowledges that the Bolsheviks (“surprisingly”, p. 394) did not execute POWs  but does not draw any conclusions from that; and finally accuses both the Whites and bizarrely the Reds (twice) of having conducted anti-Jewish pogroms. 

            Should you read Ferguson’s “Pity of War”? Yes, I think it is definitely a very good book. It is marred by author’s penchant for “originality” which implies revisionism, in some cases, at any cost. This was  probably also done in order to attract attention, but in some cases, as in his discussion of the reasons underlying post-war German economic policy, his “revisionism” is persuasive.  The book is marred by the ideological blinkers the author wears with delight. But it still provides a lot, perhaps more than any other book on the First World War in the West, and is particularly attractive to economists because it gives economic management center-stage and explains German sudden collapse (a thing difficult to explain in any case) by economic forces. Strangely, at the end, Ferguson goes back to the “unfashionable” (in his own words, p. 140) domestic explanations for both the origin and the outcome of the war, and thus—oh! horror---rejoins the reviled Marxists.