A Non-Controversial (and Good) Reason for Reducing Economic Inequalities
The Political Economy of the Two Welfare Theorems
Many of us give great importance to the value of equality. But saying that equality matters is not enlightening. To start with, following Nobel Prize Amartya Sen, we are entitled to ask: equality of what? There are many things that we can want to equalize (welfare, resources, capabilities, opportunities…) but we cannot equalize all of them at the same time. Moreover, this doesn’t give any hint at all about this value should be traded off against other values like freedom, autonomy, or responsibility. Again, you cannot have everything at the same time. Actions that promote equality may infringe on some persons’ freedom or contribute to making individuals less responsible for their choice. Finally, not everyone considers that equality really matters. One does not need to be a cold-heart libertarian to agree at least partially with Harry Frankfurt’s famous criticism of economic egalitarianism.[1]
That is not to mean that equality is irrelevant and that there is no reason to promote equality. In his book Why Does Inequality Matter?, Thomas Scanlon identifies six reasons to promote more specifically economic equality:[2]
1. Economic inequalities induce differences of status that can be humiliating.
2. Economic inequalities contribute to conferring unjustified economic and political power to the wealthiest.
3. Economic inequalities endanger the equality of opportunities.
4. Economic inequalities are a risk to the fairness of political institutions.
5. Economic inequalities can be due to a lack of equal consideration of the members of the population.
6. Economic inequalities can result from unfair economic institutions.
This list mixes different types of reasons. According to reasons 1 to 4, economic inequalities are problematic because of their consequences, while according to reasons 5 to 6 because of the more fundamental unfairness they reveal in our society. However, these reasons point out that economic inequalities are problematic because they are related to other inequalities (reasons 1, 3, and 5) or to unfairness (reasons 2, 4, and 6). Therefore, someone who is definitely skeptical that equality and the related value of fairness really matter will not necessarily be impressed by Scanlon’s list.
I think however that there is a simple and straightforward reason to reduce economic inequalities which is that a too-high level of economic inequalities makes the use of the price system to coordinate agents’ choices and plans less politically acceptable. For a French person like me, the importance of this reason for promoting more economic equality is immediately obvious when thinking of the infamous gilets jaunes episode. The original idea – implementing a carbon tax – was impeccable as far as economic logic is concerned. Once the policymaker identifies a problem of externality, it is perfectly sound economic reasoning to act on the price system through a tax to change economic behavior at the margin. In terms of political economy, however, the policy underestimated the fact that, given the degree of economic inequalities, the tax would disproportionately burden the poorest members of the population.
The point does not only apply to policies in case of market failures, however. More generally, reducing economic inequalities would make the functioning and the outcomes of markets less contentious for many people. Richard Hanania, who cannot be suspected of egalitarian fever, develops a similar idea:
“When people worry about the relationship between employers and employees, they worry about asymmetric bargaining power. But asymmetric power is a product of disparities in wealth — workers that have more resources demand better conditions. This is why firms can treat employees in the third world worse than Americans, and explains why working conditions get better as society gets wealthier. If this is a concern, the solution is again to just redistribute wealth, which would make poor people better off, meaning they can enter the labor market on whatever terms the economy will allow, taking into account their own needs and preferences, along with those of the rest of society. They can choose either a job that pays $15 an hour with the stipulation they will never pee in a bottle, or get $18 and take the risk of having to do so every now and then. Human progress in the field of logistics isn’t held hostage to the smallest bladder. The same goes for things like overtime pay requirements, the length and frequency of breaks, and other things. Perhaps in the area of worker safety there may be asymmetric information, and potential workers can’t make informed decisions about what’s likely to give them cancer twenty years down the line. In such cases I’d be open to targeted regulations that pass a cost-benefit test. But most things that fall into the category of “workers’ rights” are nothing like this, and collective bargaining over them, or government setting the relevant terms of employment contracts, therefore cannot be justified.”
Hanania’s article pushes for a libertarian argument against workers’ rights but we do not need to go in this direction. The price system results in an allocation of resources that is essentially determined by bargaining power and willingness to pay. Both are directly related to the agents’ wealth level, i.e., their disagreement and endowment points. Basically, the better the exit option of an agent in an economic bargain, the better the outcome will be for her if she chooses to enter into the relationship. In general, in a market economy, resources go primarily to those who are willing to pay the most for them. In both cases, the more you already have, the more you’re able to obtain from the value created by economic cooperation, everything else equals.
In terms of economic analysis, there is nothing original here. The so-called “two theorems of welfare economics” teach us that while the price system will allocate resources efficiently (except for market failures), the final distribution will depend on the initial distribution of resources. The philosopher David Gauthier puts it aptly:[3]
“The operation of a market cannot in itself raise any evaluative issues. Market outcomes are fair if, but of course only if, they result from fair initial distributions. (…) morality has no application to market interaction under the conditions of perfect competition.”
The claim that “morality has no application to market interaction” may seem counterintuitive but makes perfect economic sense. Considering that the political acceptability of economic institutions largely depends on the perceived fairness of the outcomes they lead to, and considering that the price system is the best way to coordinate plans and expectations and to promote welfare, there is a strong reason to organize the economy in such a way that the outcomes of the price system are perceived as fairer. There are many competing conceptions of fairness, but it is relatively uncontroversial that most of them would push for a reduction of economic inequalities compared to their current levels. People will be more ready to accept the outcomes of the market economy if their economic situation puts them in a non-too-disadvantageous bargaining position. For this, we should redistribute economic wealth more, without introducing too many distortions of economic incentives. A universal and unconditional basic income might be part of the toolkit to achieve such an objective.
[1] Harry Frankfurt, “Equality as a Moral Ideal,” Ethics 98, no. 1 (1987): 21–43.
[2] T. M. Scanlon, Why Does Inequality Matter? (New York, NY: Oxford University Press, 2018).
[3] David Gauthier, Morals by Agreement (Oxford University Press, 1987), p. 93.