Wednesday, April 16, 2014

Ants at the Piketty Picnic: What's Wrong with "Inequality"?

"For entirely innocent reasons, the preferences and talents of people will not always produce equality of results. The egalitarian tendency is then to coerce equality of result by law." -- Robert Bork 
Captain Renault: "I'm shocked, shocked to find that gambling is going on in here!"
Croupier: "Your winnings, sir."
Captain Renault:"Oh, thank you very much."
So what's wrong with inequality, anyway? According to conservatives like Bork, inequality is the innocent outcome of innate differences in "preferences and talents." Doing away with inequality would not only be inefficient but would require the exercise of coercion.

Liberals, meanwhile are shocked, shocked to find so much inequality going on in this day and age. Obviously there is a need for a bi-partisan effort to tone down the inequality a bit without too much coercion. Oh, thank you very much.

So what's wrong with inequality? For anybody paying attention, Judge Bork let the cat out of the bag. Inequality is coercive (but don't tell anyone!). That's why conservatives attack equality as coercive.

The move incorporates several tactics associated with Karl Rove: take the offensive, attack your opponents' strengths and steal their thunder by accusing them first of what they might effectively use against you. Libertarians and conservatives have made it their business to "own" the coercion claim and thus deflect its sting. Liberals aid and abet them by conceding a whimsical "efficiency/equity trade-off" and by running interference against normative encroachments on allegedly positive economic methodology.

Why do people want to get rich? Sure, they want nice stuff, but more fundamentally they want to be freed from the coercive everyday insecurity of being poor. How do the wealthy stay rich and get even richer? They use the political power that their wealth accords to keep the game rigged in their favor.

These are not state secrets. Nor are they facts disclosed in data reported by the BLS or the IRS. Just common knowledge -- common sense that doesn't count for beans in the marginal productivity analysis. Inequality is a positive fact; coercion is a normative claim. So let's all talk about inequality as if it has nothing to do with coercion. Let's not talk about the elephant in the room. What elephant?

So what's wrong with "inequality"? Framing the debate to be about "inequality" misses the point that the real problem is coercion. If the inequality conversation leaves the coercion question up for grabs, you can be damn sure the right will seize it and run with it. Loser liberals then will have yet another opportunity to be shocked, shocked that so much inequality is going on.
"Wealth, as Mr. Hobbes says, is power…. The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market."  -- Adam Smith, Wealth of Nations
"The distribution of income, to repeat, depends on the relative power of coercion which the different members of the community can exert against one another. Income is the price paid for not using one's coercive weapons. One of these weapons consists of the power to withhold one's labor. Another is the power to consume all that can be bought with one's lawful income instead of investing part of it. Another is the power to call on the government to lock up certain pieces of land or productive equipment. Still another is the power to decline to undertake an enterprise which may be attended with risk. By threatening to use these various weapons, one gets (with or without sacrifice) an income in the form of wages, interest, rent or profits. The resulting distribution is very far from being equal, and the in- equalities are very far from corresponding to needs or to sacrifice." -- Robert L. Hale, "Coercion and Distribution in a Supposedly Non-Coercive State,"  Political Science Quarterly, Vol. 38, No. 3 (Sep., 1923), pp. 470-494

2 comments: said...

But, but, but, SCOTUS just told us that money is speech and must be free to be used to....

allis said...

Thank you for the reference to Professor Hale's article and for your thought provoking commentary. On the one hand, it's encouraging to know that even ninety years ago thinkers were well aware of the problem of coercion in the economy. On the other hand, it's depressing to realize that mainstream economists are still trying to distract us from studying it.

Yes, the real problem is not inequality, but coercion. For a long time I've been trying to figure out ways to demonstrate how economists use "economics" to conceal the importance of "power" (coercion) in the economy.

Thresholds and Spaces (Part I)

Economic history is notoriously a scene of conflicting interests, which is just what the neoclassical economists didn't want to discuss. (Joan Robinson, Economic Heresies, 1971)

Let's discuss "conflicting interests." We can imagine an ordinary event: a man thinks about selling his house and a woman thinks about buying a house. In this market it's assumed there is only one potential seller and one potential buyer. Minor assumptions include: neither seller nor buyer will be under any sort of compulsion to sell or buy, and no middlemen will be involved in the sale. Also, this is a onetime sale, so we are not concerned with production or future sales.

Next, we assume that John will not sell his house for less that 130K dollars; he would prefer to keep it rather than accept a lower price. Mary will not spend more than 160K dollars to buy a house. John's 130K price is his seller's threshold price; Mary's 160K price is her buyer's threshold price. The seller's threshold price is a minimum price and the buyer's threshold price is a maximum price. In our example, these threshold prices are given. How they are arrived at is not our immediate concern. Our problem is, given the assumptions and the threshold prices, how can we figure out what price the house will sell for.

As it happens, with no more information than what's given in the assumptions, we just don't know what the price will be. We can, however, eliminate some possibilities: If a market price is below the seller's threshold price, he will leave (or not enter) the market. If the market price is higher than the sellers' threshold price, she will leave (or not enter) the market. (This is the definition of threshold prices.) Potential prices are limited to those which are equal to or within the thresholds. These potential prices occupy what can be called a surplus space. In our example, the thresholds of 130K and 160K create a surplus space of 30K.

Surplus space represents the maximum gain that can accrue to the trading parties. It says nothing about how this gain will be distributed, although all prices in the surplus space will be "Pareto efficient." Neither trader will be worse off by trading at any of those prices. But, unless sellers and buyers are both "price takers," they will fight each other for the gains in the surplus-space. As if on a football field, they play a push-em-back game to force the actual selling price nearer the opponent's threshold. Every market is a contested space with goals of economic profits or increased satisfactions.

If seller John has all the bargaining power, the actual selling price will be Mary's threshold price, 160K. If buyer Mary has all the bargaining power, the actual selling price will be John's threshold price, 130K. And if they both have bargaining power, the actual price will be somewhere between their threshold prices. Exactly where will be a measure of their relative bargaining power.