In defense of equality (without welfare economics)

When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini:

“The methods of Italian writers…are not…comparable to his [Dalton’s] own, inasmuch as their purpose is to estimate, not the inequality of economic welfare, but the inequality of incomes and wealth, independently of all hypotheses as to the functional relations between these quantities and economic welfare or as to the additive character of the economic welfare of individuals”. (Corrado Gini, 

Measurement of Inequality of Incomes, Economic Journal, March 1921.)

I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want  to estimate is welfare (or even happiness) and how it is distributed. Income provides only an empirically feasible short-cut to it.

I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. We all agree that the marginal utility must be diminishing in income because it is the foundation of economic micro theory.  (If marginal utility of income were not decreasing, we would not be able to explain why demand curves are sloping downward.) But we have no idea whether, whole both your and my marginal utility functions are decreasing, my level of utility may, at any point, be orders of magnitude greater than yours or the reverse.

The only way for the “welfaristas” to solve this conundrum is to assume that all individuals  have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it except as here where it is considered as a lesser evil that allows “welfaristas” to cling to their Utilitarianism, to define measures like the Atkinson index and to continue believing that the real thing we want and (they clam) do measure is inequality in individual welfares.

Now, the welfarst approach continues to be associated with pro-equality policies. 

Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. If from that equilibrium you take some income from A and give it to B, loss of utility of A will outweigh the utility gain of B (because marginal utility is decreasing) and thus obviously total utility will be less in any situation where income is not fully equally distributed.

My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)

My answer was that I justify concern with income inequality on three grounds.

The first ground is instrumental: the effect on economic growth. After the period of the 1990s where, due to lack of data, we ended up with inconclusive results on the link between inequality and economic growth, we are  having more and more evidence that high levels of inequality slow down the increase in total income. We are able to show that now because we have access to micro data and a much more sophisticated view of both inequality and growth. Here, as examples, are the papers by Sarah Voitchovsky and by Roy van der Weide and myself. But, it has to be acknowledged: if empirical literature were to come to a different conclusion, namely that inequality helps growth we should have to drop that instrumental argument against high inequality.

The second is political effect. In societies where economic and political  spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. Instead of one-person one-vote democracy we get one-dollar one-vote plutocracy. This outcome appears inevitable, especially in modern societies where running political campaigns is extremely expensive. But it was not very different in ancient Greece or Rome. if we hold that democracy, a more or less equal influence of everyone on public affairs, is a good thing, we have to be in favor of severe limits on income and wealth inequality. It seems to me that the negative impact of inequality on democracy, not only obvious only in theory, is now being confirmed empirically as well (see Martin Giddens’ “Affluence and Influence”).

Let me note parenthetically that even if we failed to detect such explicit influence of the rich on policy making, the a priori case that it must exist (but is difficult to measure) would still be extremely strong. Because for the opposite case to hold, i.e., rich people give money to politicians but do not get anything in return, we have to assume an entirely irrational behavior of the rich: they throw money away for no reason. That goes so much against the fundamentals of economics that if we assume it here we should also assume it that when people (say) go to restaurants; they throw money randomly: “Your glass of wine costs $10. Well, I will give you $15 and you do not need to give me the wine”. If that behavior seems reasonable to you, then I would agree that the rich may not influence politicians to whom they give money.

The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans.  This is I think pretty evident on an a priori basis, but we have also an increasing number of papers that show the positive correlation between inequality of income and inequality of opportunity (see Marrero and Rodriguez, Miles Corak). Families with greater income ensure that their children have much better opportunities (which negates the fundamental equality of which we spoke) and in turn make sure they this new inequality of opportunity is converted  into yet higher income for themselves and their own children. So, a positive feedback works very strongly to maintain unequal access to opportunities.

I have to say here that in addition inequality of opportunity affects negatively economic growth (so we now have a negative effect going from my third ground back to the first) which makes inequality of opportunity abhorrent on two grounds: (1) it negates fundamental human equality, and (2) it lowers the pace of material improvements for society.

My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?

The three middle classes and populism

In November this year American voters will choose between populism and plutocracy. The choice was clearly highlighted in my Global Inequality (Chapter 4) written more than a year ago although at that time I could not anticipate the extraordinary rise of Donald Trump.

That rise, combined with the populist reaction against globalization, immigration and foreigners, has become the staple of newspaper and magazine articles to the extent that some, like in the recent New York Review of Books, claim (of course with the hindsight) that populism was both inevitable and predictable. It is, not only in the United States, but also in the UK, France, Denmark, Sweden and elsewhere fueled (as is commonly argued), by the very slow or nil real income growth of the middle-income groups in rich countries. The graph below (based on Luxembourg Income Study data) shows this clearly: the shares of the middle four deciles have declined over the past 30 years by between 1 and 4 GDP points in key developed countries. The phenomenon therefore is not only American: it is common to all rich countries. 

But while the origins of populism in the West seem well understood and “reasonable” in the sense that populism is driven by the economic slowdown,  a similar process of rising populism in China seems difficult to explain because it is accompanied not by a declining but by a rising middle class.  The modernization theory leads us to believe that the rising share of the middle class should propel democratization. In effect, this is what we have observed over the past 40 years, from the Carnation Revolution to Portugal  to the fall of Communism or the spread of democracy in South Korea and Taiwan and in all of Latin America.

Could China be an exception to this “regularity”? It is the same question probably that the Communist party leaders ask themselves. If they answer it in the affirmative, they would be throwing in the towel in a fight to maintain their rule. Since they seem unwilling to do so, and are becoming  aware that the ideology of “GDPism”, founded on an infinite growth of real incomes by close to double-digit numbers, cannot be maintained,  they have tried to move the public opinion in the direction of populism, whether of mild Maoist or of soft nationalist kind. Neither of these two tendencies is yet strong enough or sufficiently poisonous, but the potential to crank it up if needed is there. Thus, in the Chinese case, the rising tide of populism is not caused by an economic failure but on the contrary by economic success which is making the maintenance of the old political system more difficult, or is incompatible with it. This is a contradiction between the development of the forces of production and inadequacy of the superstructure that every Marxist would easily recognize.

The third populist reaction is taking place in Russia. It is fueled by yet a different force. Certainly not  by too much economic success, nor so much by economic failure, but by unjust privatizations and by resentment and revanchism, the two feelings that go back to the end of the Cold War that was (mistakenly) interpreted in the West as the victory over Russia. It is this narrative that Putin and the Russian middle classes find abhorrent and which is at the root of their malign populism and nationalism. It is wrong to see it as manufactured by the top; it is more that the top has given it the right to express itself, in a way that the rise of Trump in the United States did not by itself produce populism, but made its expression more acceptable. While in the past people felt some inhibition to air strong xenophobic or racist views, that inhibition is gone when the political leaders freely express such views and moreover get political support for doing so.

Those who therefore personalize the problem and look at Trump, Xi or Putin as somehow guilty of “creating” populism and inflating xenophobia are only partially right. Trump, Xi and Putin allowed populist feelings to express themselves  but did not invent them.  Populism existed before and was based on real and understandable reasons. The diagnosis that sees the cause of our problems primarily in several politicians leads us then to prescribe a wrong remedy. A very imperfect remedy consists in trying to stop such politicians from coming to power or overthrowing them. Such a remedy does not contribute at all to the solution of the underlying problem which either brought them to power, or close to taking power.

A real remedy has to start with the correct diagnosis. And the correct diagnosis is that in the US, populism is rooted in the failure of globalization to deliver palpable benefits to its working class, in Russia, it is rooted in its crony capitalism and inability (or unwillingness) of the West to include Russia as an equal partner, and in China, it is rooted in an inadequate political system. Once we see the correct cause of the problem, we can begin to try to solve it. Otherwise, the sickness of populism, which for all problems blames globalization and foreigners, in the three major powers that control 98% of all nuclear weapons in the world, is indeed a cause for major concern.