(I am conscious that, although the sub-heading of this blog quite clearly states 'macroeconomics' as its primary focus, there has been precious little for the reader tuning in for any comment upon such issues! My apologies - this entry is an attempt to rectify that...well, to some degree.)
Inequality, and its perception in the public eye, has seemingly become one of the key policy issues of our time. Indeed only today, the World Bank has renewed its drive against 'rising inequality' in the world, and Theresa May heads to the Conservative Party Conference with the soundbite - "A country that works for everyone". Headline figures, such as those published by Oxfam last year, shocked many and have stoked public opinion in the direction of actions against the global super-rich. The publications of dozens of bestsellers, such as Joseph Stiglitz's The Price of Inequality (2012), Wilson and Pickett's The Spirit Level (2010), Danny Dorling's Inequality and the 1% (2014), and last but certainly not least (and very surprisingly!) Thomas Picketty's Capital in the 21st Century (2014), seem to reflect our current obsession with inequality, and it is reasonable to assume that there is a growing number of people who agree with the likes of Barack Obama (and perhaps even Jeremy Corbyn!) that inequality in the capitalist world is becoming grotesque and intolerable, though it is not clear there is a majority - certainly not one which would prioritise inequality as an issues.
Personally speaking, the issue of inequality was one of those debates which strongly attracted me to study at university, As a younger reader at the time, I was certainly moved by the conclusion of these books - that a society with less inequality would be a better society to live in. My first opportunity to tackle the subject was an undergraduate essay entitled, "Should Equality Be a Political Ideal?", where I argued fervently for a version of equality of opportunity which was in practise an argument for equality of freedom more than anything else. Yet whilst very few would disagree with this as an ideal or social goal, the ultimate disagreements come in how on earth this can be achieved - indeed I argued to that end that equality of opportunity would never be a goal that is fully achievable, but one which society must constantly reassess. To the extent that I believe we must constantly review what 'freedom' means to our society, I don't abandon this position.
Yet an interesting challenge comes from studying Economics. In particular, a well-written research paper articulating the pure economic argument from Ryan Bourne and Christopher Snowdon of the IEA challenges the notion of 'rising inequality' in Britain today as thoroughly misleading, demonstrating that although the top 1% percent have pulled away since the 1990s, the basic level of inequality as measured has remained largely static since the 1980s, and has actually reduced since the Great Recession - though I remain sceptical here that this is reduction in any meaningful sense to those who matter. Ultimately, they articulate well the fact that the fundamental driving forces behind inequality can both be negative and positive: negative if it is a direct result of cronyism and rent-seeking, positive if it is the result of innovation and voluntary exchange. N. Gregory Mankiw further raises many of the same arguments: innovation makes both the buyer and seller in voluntary exchange better off, but the existence of many buyers and a single seller leads to unequal outcomes. Mankiw also has an excellent critique of Picketty's Capital. The cornerstone theory of Picketty's book is that when the rate of return on capital in an economy, r, exceeds the growth rate of that economy, g, then there will be a scenario whereby we have an "endless inegalitarian spiral", where the accumulation of capital leads to rising inequality, which Picketty predicts will eventually undermine democracy and the political process. The r > g identity is labelled "the principal force of divergence". Picketty's policy conclusion - a global tax on wealth.
Whilst I believe Picketty to have picked up on fact that capital represents a power relation within society - something pointed out by Veblen, and something many economists wilfully ignore, leaving it instead to sociologists - it is certainly not the case at the moment that r > g, in a world of low interest rates where dynastic wealth is likely to end up being diluted eventually by taxation and consumption. Moreover, it is perfectly consistent with the basic neoclassical growth model to have an optimal, steady-state level of inequality - indeed, this seems desirable.The key normative question though is whether something should be done about this outcome.
The logic of Economics appears then to lead us to the following: "Would you prefer to live in a world where we are more unequal but more prosperous on average, or one where we are more equal but less prosperous on average?" Therefore, what is revealed here is a fundamental tension between Economics and Morality. The logic of the free-market position is ultimately that morality - like markets themselves of course - is emergent. The market process is effectively amoral, and thus it makes no sense to talk of its outcomes in the language of morality. Indeed this is largely the view of Hayek. I would at this point add that this completely undermines, ironically, a fundamental tenet of liberalism - that each individual is of equal moral worth. Mankiw himself admits that economists are limited in their ability to comment on such moral issues, but must reflect upon the normative framework within which they operate (which is firmly a Utilitarian one, again not without its problems but defensible).
This leads to some pretty difficult moral questions public policy more broadly. For example: Should public policy be influenced by morality? Is morality not merely a social, emergent phenomenon and therefore ultimately relative? If not, when should morality bind policy, if not all the time?
These are on-going debates in moral philosophy. Economics must appreciate the implications of this position, or accept that the normative values it promotes- chiefly efficiency, growth and higher aggregate living standards - will clash with other values and do not necessarily trump them when formulating policy. This would perhaps explain why the advice of economists is often ignored. Furthermore, there have been some attempts to try and reconcile a radical free-market approach with a form of moral realism, though as far as I can tell they would be shot to pieces in most Moral Philosophy seminars I've attended.
Ultimately, Economics shows us that the public debate on inequality has become surrounded in emotion and passion that has blinded rational approach to policy to understand the underlying causes or attention to the facts (another feature of 'post-truth' politics from the traditional Left, perhaps?). Whilst there is much to admire in Picketty's work, what we are presented with is a conclusion which appeals more to morality than to the underlying facts and forces surrounding inequality. Though, of course, any reader of Adam Smith's Theory of Moral Sentiments (1754) may not be entirely surprised by the appeal of this, and indeed it is for another time whether such policies should be followed at any economic cost.
What I hope to have shown is that, because our moral sentiments and intuitions often conflict with other values, the issue of inequality cannot simply be ignored, but nor is it always and everywhere a bad thing. It is largely responsible for delivering huge rises in living standards over centuries. Capitalism necessitates inequality, and there seems to be no sign of a new system of social organisation which can deliver more prosperity, efficiency or freedom for society as a whole and the individuals which constitute it. But it will always and everywhere be the job of public policy to check and balance the 'positive' inequality against the morally unjust, which will ultimately require a pragmatic approach - unless of course we ignore the 'unjust' part. It is up to the reader to judge whether this would be an acceptable state of affairs.
Inequality, and its perception in the public eye, has seemingly become one of the key policy issues of our time. Indeed only today, the World Bank has renewed its drive against 'rising inequality' in the world, and Theresa May heads to the Conservative Party Conference with the soundbite - "A country that works for everyone". Headline figures, such as those published by Oxfam last year, shocked many and have stoked public opinion in the direction of actions against the global super-rich. The publications of dozens of bestsellers, such as Joseph Stiglitz's The Price of Inequality (2012), Wilson and Pickett's The Spirit Level (2010), Danny Dorling's Inequality and the 1% (2014), and last but certainly not least (and very surprisingly!) Thomas Picketty's Capital in the 21st Century (2014), seem to reflect our current obsession with inequality, and it is reasonable to assume that there is a growing number of people who agree with the likes of Barack Obama (and perhaps even Jeremy Corbyn!) that inequality in the capitalist world is becoming grotesque and intolerable, though it is not clear there is a majority - certainly not one which would prioritise inequality as an issues.
Personally speaking, the issue of inequality was one of those debates which strongly attracted me to study at university, As a younger reader at the time, I was certainly moved by the conclusion of these books - that a society with less inequality would be a better society to live in. My first opportunity to tackle the subject was an undergraduate essay entitled, "Should Equality Be a Political Ideal?", where I argued fervently for a version of equality of opportunity which was in practise an argument for equality of freedom more than anything else. Yet whilst very few would disagree with this as an ideal or social goal, the ultimate disagreements come in how on earth this can be achieved - indeed I argued to that end that equality of opportunity would never be a goal that is fully achievable, but one which society must constantly reassess. To the extent that I believe we must constantly review what 'freedom' means to our society, I don't abandon this position.
Yet an interesting challenge comes from studying Economics. In particular, a well-written research paper articulating the pure economic argument from Ryan Bourne and Christopher Snowdon of the IEA challenges the notion of 'rising inequality' in Britain today as thoroughly misleading, demonstrating that although the top 1% percent have pulled away since the 1990s, the basic level of inequality as measured has remained largely static since the 1980s, and has actually reduced since the Great Recession - though I remain sceptical here that this is reduction in any meaningful sense to those who matter. Ultimately, they articulate well the fact that the fundamental driving forces behind inequality can both be negative and positive: negative if it is a direct result of cronyism and rent-seeking, positive if it is the result of innovation and voluntary exchange. N. Gregory Mankiw further raises many of the same arguments: innovation makes both the buyer and seller in voluntary exchange better off, but the existence of many buyers and a single seller leads to unequal outcomes. Mankiw also has an excellent critique of Picketty's Capital. The cornerstone theory of Picketty's book is that when the rate of return on capital in an economy, r, exceeds the growth rate of that economy, g, then there will be a scenario whereby we have an "endless inegalitarian spiral", where the accumulation of capital leads to rising inequality, which Picketty predicts will eventually undermine democracy and the political process. The r > g identity is labelled "the principal force of divergence". Picketty's policy conclusion - a global tax on wealth.
Whilst I believe Picketty to have picked up on fact that capital represents a power relation within society - something pointed out by Veblen, and something many economists wilfully ignore, leaving it instead to sociologists - it is certainly not the case at the moment that r > g, in a world of low interest rates where dynastic wealth is likely to end up being diluted eventually by taxation and consumption. Moreover, it is perfectly consistent with the basic neoclassical growth model to have an optimal, steady-state level of inequality - indeed, this seems desirable.The key normative question though is whether something should be done about this outcome.
The logic of Economics appears then to lead us to the following: "Would you prefer to live in a world where we are more unequal but more prosperous on average, or one where we are more equal but less prosperous on average?" Therefore, what is revealed here is a fundamental tension between Economics and Morality. The logic of the free-market position is ultimately that morality - like markets themselves of course - is emergent. The market process is effectively amoral, and thus it makes no sense to talk of its outcomes in the language of morality. Indeed this is largely the view of Hayek. I would at this point add that this completely undermines, ironically, a fundamental tenet of liberalism - that each individual is of equal moral worth. Mankiw himself admits that economists are limited in their ability to comment on such moral issues, but must reflect upon the normative framework within which they operate (which is firmly a Utilitarian one, again not without its problems but defensible).
This leads to some pretty difficult moral questions public policy more broadly. For example: Should public policy be influenced by morality? Is morality not merely a social, emergent phenomenon and therefore ultimately relative? If not, when should morality bind policy, if not all the time?
These are on-going debates in moral philosophy. Economics must appreciate the implications of this position, or accept that the normative values it promotes- chiefly efficiency, growth and higher aggregate living standards - will clash with other values and do not necessarily trump them when formulating policy. This would perhaps explain why the advice of economists is often ignored. Furthermore, there have been some attempts to try and reconcile a radical free-market approach with a form of moral realism, though as far as I can tell they would be shot to pieces in most Moral Philosophy seminars I've attended.
Ultimately, Economics shows us that the public debate on inequality has become surrounded in emotion and passion that has blinded rational approach to policy to understand the underlying causes or attention to the facts (another feature of 'post-truth' politics from the traditional Left, perhaps?). Whilst there is much to admire in Picketty's work, what we are presented with is a conclusion which appeals more to morality than to the underlying facts and forces surrounding inequality. Though, of course, any reader of Adam Smith's Theory of Moral Sentiments (1754) may not be entirely surprised by the appeal of this, and indeed it is for another time whether such policies should be followed at any economic cost.
What I hope to have shown is that, because our moral sentiments and intuitions often conflict with other values, the issue of inequality cannot simply be ignored, but nor is it always and everywhere a bad thing. It is largely responsible for delivering huge rises in living standards over centuries. Capitalism necessitates inequality, and there seems to be no sign of a new system of social organisation which can deliver more prosperity, efficiency or freedom for society as a whole and the individuals which constitute it. But it will always and everywhere be the job of public policy to check and balance the 'positive' inequality against the morally unjust, which will ultimately require a pragmatic approach - unless of course we ignore the 'unjust' part. It is up to the reader to judge whether this would be an acceptable state of affairs.
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