Ottmar Hörl's sculptures of Karl Marx, Trier, Germany, 2013
Book Details
John Plender
CAPITALISM
Money, morals and markets
334pp. Biteback. £20.
978 1 84954 868 7
Thomas Piketty
THE ECONOMICS OF INEQUALITY
Translated by Arthur Goldhammer
160pp. Belknap. £16.95 (US $22.95).
978 0 674 50480 6
Anthony B. Atkinson
INEQUALITY
What can be done?
400pp. Harvard University Press. £19.95 (US $29.95).
978 0 674 50476 9
Paul Mason
POSTCAPITALISM
A guide to our future
340pp. Allen Lane. £16.99 (US $27).
978 1 84614 738 8
A clearer alternative to Thomas Piketty: and the problem when capitalists make nothing but money
PAUL COLLIER
There are many people who find capitalism morally offensive. Perhaps the overriding reason is an unease at Adam Smith's proposition that the consequence of an economic act cannot be inferred from its motivation. Are our true benefactors the entrepreneurs who, driven by greed, unintentionally enrich us? Then there is capitalism's reliance on the market model, which belittles co-operation: communities, it is argued, would be happier if self-sufficient. A variety of other objections follow: capitalism contaminates our sense of value. Its inequalities of wealth create imbalances of power: between workers and capitalists, or between special interests and the common good. Capitalists are exploitative, hijacking the fruits of labour. From Aristotle to present-day Islam, some have regarded a reward for waiting as undeserved. The rise of consciousness about sustainability has opened a new critique: capitalism is environmentally unsustainable because it plunders the planet, and socially unsustainable because the accumulation of capital leads to ever-widening inequality. Finally, since 2008, the post-1929 critique has been revived: capitalism is condemned on its own metric as inefficient.
In thinking coherently about capitalism, a helpful starting place is to ask yourself this question: why are poor people poor? Discussion of poverty circles around three answers. Firstly, some people have become rich at the expense of others; secondly, people are poor because they have been unlucky; or, thirdly, because they have made poor choices. The first would require restitution, which would in turn imply striving for equality: the poorest people must have been robbed of most, and the richest must have stolen the most. The second, ill-luck, would require social insurance. As proposed by John Rawls's principle of Maxi Min, the priority would be to raise the floor. The third explanation, poor choices, poses the options of indifference or compassion. These three rival analyses lurk beneath all discussion of inequality. The passion of the Left is driven not by belief that social insurance would be valuable, but by anger at perceived wrongs. The contempt of the Right is driven not by concerns about the disincentive effects of social insurance, but by anger at the prospect of rewarding the foolish at the expense of the prudent.
Determining which of these rival positions best accounts for poverty is an empirical matter. In the Britain of the nineteenth century, the first was reasonably persuasive, but it is no longer so in the twenty-first. The appropriate agenda is now a social insurance floor and compassion. As to poverty at the global level, none of these three accounts has much traction. Overwhelmingly, the answer to why poor societies are poor is that they lack the organizations of modern capitalism. Capitalism has created organizations that harness the productivity potential of scale and specialization without triggering the alienation predicted by Marx. Marx thought that large-scale production inevitably separated enjoyment from labour, and that specialization "chained [man] down to a little fragment of the whole". Ironically, the consequences of alienation were most devastatingly revealed by industrial socialism. Modern firms maintain motivation by a judicious combination of incentives and a sense of purpose: workers internalize the objectives of the firm. From the entrepreneur to the car park attendant, people get job satisfaction from what they do, not just from what they earn. Being subject to the discipline of the market, firms that fail to create such work environments go bankrupt.
The Achilles heel of modern capitalism is the financial sector. In recent years, this sector has radically skewed its model of motivation towards reliance on incentives. Perhaps this was because performance appeared to be so readily measurable, but it is very difficult to design incentives to reward what is really desired. Asset managers are well rewarded for short-term performance, as a result of which they judge the firms in which they invest on the same criteria. Gradually, this has come to infect the way in which the CEOs of non-financial companies are rewarded. Over the past two decades, the ratio of CEO pay to the average pay of their workforce has widened in the USA from 20:1 to 231:1 (with banks themselves leading the way with a ratio of 500:1). In turn, this infects the way that firms are run. Directly, the widening of differentials has made it harder for firms to maintain the commitment of their workforce. Indirectly, it has tempted CEOs into dysfunctional balance sheet tricks: profits are at a peak, while investment is at a trough.
The resort to exclusive reliance on incentives may also have been because the intrinsic incentives have become threadbare. The mission statement of Lehman Brothers, "we make nothing but money", hardly invited devotion to the greater good. The approach perhaps inevitably backfired: the culture of an organization that thought this a fit statement of purpose ultimately licensed its workforce to work for their individual interest. But the problem of misalignment of private and social incentives is more fundamental. Smith's proposition that the market does a good job of aligning them, while true for many markets, is often seriously wrong in financial markets. A gain made by one asset trader is matched by the loss borne by another. Such trade is not socially useless, but its social value bears little relation to the private returns. The main social value of trading in financial assets is that it makes the underlying investment in the real asset more liquid, and so more attractive than if it were held forever. This is an important value, but the private returns to trading, typically driven by tiny informational advantages, generate far more trades than are needed for liquidity. At the margin, the social value of trading approaches zero. A similar process is at work in a legal dispute. The rule of law is a huge public good, but no commercial lawyers are working to achieve "justice": they work to win a case in a zero-sum tournament. The last hour of legal effort purchased by a party to a legal dispute yields its return not by generating more justice, but by increasing the chances of winning the tournament. There are simply too many people spending their time on these zero-marginal-social-product activities. Worse, many of them are highly talented. In Britain, some of the brightest brains are diverted to the City from activities such as innovation, where the marginal social returns are far higher than the private returns, because innovations can be imitated. In their hearts, many of these people recognize that while enriching themselves they are not enriching society: they quit and do something more satisfying.
The four books under review all reflect the current disquiet over capitalism but in radically different ways. John Plender is a financial journalist of long standing. The journalistic practice of close observation has been the key missing skill among academic economists, and it partly accounts for why we failed to foresee the global financial crisis: we did not realize the extent to which the banks had geared up on their asset base. Plender's account of the modern City is at the core of Capitalism: he suggests that, to date, insufficient measures have been taken to prevent a repeat of the crisis. But his account is considerably enhanced by being placed in the much wider historical context of moralizing about markets: in Capitalism, Aristotle and Marx rub shoulders with the recent bank CEOs. Plender also provides a nice account of the evolution of entrepreneurship: and, yes, many of these people are our true benefactors. His book is balanced, well written and not self-aggrandizing. I recommend it.
Thomas Piketty's recent analysis of wealth and growth, Capital in the Twenty-First Century (reviewed in the TLS, June 27, 2014), is an important thesis that, barring catastrophes, wealth takes an ever-rising share of income. A book by Piketty on inequality sounds like an important event. Unfortunately, although just published in English, The Economics of Inequality is actually a prequel written in 1997, presumably now translated opportunistically. Piketty's ostensible thesis here is that disputes about inequality are largely based on a lack of understanding of economics. But his underlying critique of capitalism is that it is socially and morally intolerable because the rising ratio of wealth to income generates ever-rising inequality. This depends on both technical and moral assumptions. Technically, he assumes that the return on capital remains indefinitely at around 4.5 per cent, and accrues to wealth owners. Yet the return on capital is currently much lower, and the deficiencies of modern corporate governance have enabled managements to transfer much of the return from wealth-owning shareholders to CEOs and asset managers. This is one reason why pension funds are in such trouble. Morally, he assumes that the inter-generational transfer of wealth is a "lottery of birth" to be corrected by taxation. But characterizing inheritance as a lottery is an abuse of metaphor. The inter-generational attachment within families is a bond more powerful than any other form of social attachment. Framing humanity as merely two entities – mortal individuals and infinitely lived society – may be the stuff of economics textbooks, but for many people inter-generational family trumps both. This is not to vindicate, but certainly to complicate, the morality of inheritance.
Piketty also discusses whether redistribution can be "efficient". That is, would the redistribution of £1 from the rich to the poor cost more or less than £1? "Pure" redistribution would cost £1, while "efficient" redistribution would cost less than £1: for example, initial assistance in a job search might enable a person to get a more productive job. So much of economics is about efficiency that to economists this appears to be a central distinction: a move to efficiency is potentially "Paretoimproving" – in principle, everybody could be made better off. We are trained from economic infancy to think of Pareto outcomes to be potentially superior. But it is hard to think of why the efficiency issue might actually matter: in either of the cases sketched above, one person gains £1, and whether the other loses 90p, £1, or £1.10 is unlikely to be decisive. While, at the time it was written, Piketty's book on inequality was valuable, if you are sufficiently interested to think of reading it, I recommend that instead you read Anthony B. Atkinson's Inequality: What can be done? Unless I have missed something, Atkinson's book incorporates everything that Piketty has and a lot more. I suspect that Piketty, who has worked extensively with Atkinson, might agree.
Within its own terms, Atkinson's book is magisterial. It is the definitive analysis of inequality in Britain and how to reduce it, as viewed through the standard professional economics prism of Utilitarianism. While grounded in sophisticated theory and state-of-the-art quantitative evidence, the book carries through to specific policy recommendations on standard matters such as tax rates, benefits and tax reliefs. More ambitiously, it proposes guaranteed employment for job seekers by unrestricted recruitment into the public social sector, and that fiscal incentives should be used to skew technology away from labour-saving innovations such as robotics. I do have qualms both about these ambitious proposals and about the Utilitarianism on which the entire analysis is implicitly premissed. A guarantee of employment in the public social sector is neither necessary, given current levels of unemployment, nor desirable. Inadvertently, by turning social work into the sump sector, it would undermine it as the chosen profession of many dedicated people. More than most jobs, the quality of social work depends on personal commitment. As to skewing technological change, while conceptually neat, it is scarcely the domain of practical policy. The pace of robotics innovation is a global phenomenon set not by the British Treasury, but by companies in the USA, Japan and China.
My deeper concern is that the Utilitarian calculus of inequality used in economics is indifferent to desert. A transfer from anyone on a higher income to anyone on a lower income is welfare-improving regardless of how their respective incomes came about. As a result, the key to tackling inequality appears to be to redistribute huge amounts of money in the middle of the income distribution, because this is where the numbers of people are largest. We return to the Britain of 1977 – the most equal recent year – through higher taxes on doctors and headmasters, and lower taxes on postmen and bus drivers. Yet I suspect that when people say they are "concerned about inequality", this is not what they have in mind. Rather, people feel angry about those high incomes that they perceive to be undeserved. While the old distinction between the deserving and the undeserving poor is barren, since even those poor people who are entirely responsible for their condition have to be helped, that between the deserving and the undeserving rich really matters. Applying the same marginal tax rate to a doctor on £160,000 and a CEO on £5 million will increasingly be questioned, even though it is of no consequence for inequality as measured by economists.
Paul Mason is entertaining, but predominantly in ways that are unintended. His title, PostCapitalism, says it all. Mason is a Marxist of the school that in the 1980s was writing about "late capitalism". If Atkinson has written the book that Ed Miliband would have wanted, Mason is for Jeremy Corbyn. The Marxists have never quite got over the fact that the 1980s actually turned out to be the period of late socialism. "Post-capitalism" is one stage more messianic than "late capitalism": yes, capitalism as we know it is being crushed by the weight of its own contradictions as the zero marginal cost economy of the internet drives it to oblivion. The sharing economy of Wikipedia is the future, and Mason hyperventilates about it. That industries with marginal costs below average costs have been around since the 1840s (railways) is not mentioned. That internet applications such as Uber and Airbnb seem to be bringing masses of people into the market goes unremarked. Wikipedia is exciting, as are many other non-market aspects of the sharing economy such as common housing schemes and craft collectives. But they are outcrops of the prosperity generated by markets, not alternatives to them. No matter; Marx is Mason's great guide, and a once missing fragment of his work brilliantly presages the new economy of the internet. There is a sad discourse on why the working class let Marx down. But dismay can be tempered by the new and more reliable army of liberation: techno-nerds. We are given a whole chapter devoted to the labour theory of value. And the great tide of history is with us: Gaza, Greece and the SNP are all part of the same new political movement: you will be reassured to learn that the SNP "was not a nationalist surge". Whatever underpins such thought processes, it is not intellectual. More plausibly, it is a psychological craving for an oppositional identity. Mason is now the economics editor for Channel 4 News. That he got this job despite never having studied the subject may suggest how its management prioritizes infotainment.
Aspects of capitalism undoubtedly need to be addressed. But the undeserving rich may consist less of capitalists than of powerful managers: corporate governance needs to be rebalanced, perhaps on the German model in which societal interests are represented on supervisory boards. Similarly, the useless rich may consist less of the idle descendants of capitalists than of smart people wasting their lives in those sectors where at the margin activity is socially rather unproductive. These sectors need to be downsized: we were right to do it with coalmines; we should do it with the City. In Britain the nostalgic narrative that the poor have been wronged should be put to rest. We need an effective floor of social insurance and compassionate policies that are effective in lifting people out of poverty traps. As to global poverty, whatever the problems of poor societies, overdosing on capitalism is not one of them.
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