Digressions&Impressions

Financial Crises, Lisa Herzog on Iris Marion Young on Systemic Harm/Structural Injustice

Can one ascribe individuals a responsibility to address systemic harms? I draw on arguments developed by Young (2011) in order to show that this is indeed possible. Young develops her notion of forward-looking responsibility in the context of a broader account of ‘‘structural injustice.’’ One can understand the imposition of systemic harms as a form of structural injustice: it puts some people into positions of privilege, e.g. because they benefit from risky investment strategies, while others are put into situations of disadvantage, as they are exposed to increased risks and volatility. It is, however, unlikely that individuals can overcome the problems of systemic harms by themselves. Nor can they be held individually responsible in the sense of backward-looking responsibility. In order to understand the responsibility to prevent such injustices or harms, Young argues that we should understand responsibility not only according to the ‘‘liability model’’ of accountability for harm done by specific individuals, but also as a ‘‘forward-looking’’ notion (2011, p. 92). We have a responsibility to care about the institutions within which we live and act, ‘‘watching [them and] monitoring their effects to make sure that they are not grossly harmful’’ (2011, 88). This notion of responsibility is ‘‘essentially shared’’ and ‘‘can be discharged only through collective action’’ (2011, p. 105). In Young’s words: one has an ‘‘obligation to join with others who share that responsibility in order to transform the structural processes to make their outcomes less unjust’’ (ibid.).
Thus, it suggests itself to turn to existing collectives that could carry these responsibilities. These should be the groups of those who can jointly take steps to prevent systemic harms. Young argues that factors that help determine who should be ascribed responsibility include the power to address the problem, the fact that agent benefits from existing injustices (or harms)—and are hence under a special obligation to do something about them—, and the fact that there are already organized entities that can take action (2011, 144ff.). These factors all point to bankers as addressees of such responsibility. Even if they are not personally guilty of misbehavior, they have a responsibility, as members of the profession, to take steps to prevent systemic harms, or at least to minimize the risks of their occurrence.--Lisa Herzog ([2017] 2019) "Professional Ethics in Banking and the Logic of ‘‘Integrated Situations’’: Aligning Responsibilities, Recognition, and Incentives" J Bus Ethics, 536

Lisa Herzog is one of the leaders of a developing field in the ethics and political theory of finance.* And I often find it very useful to think my way to my own views by grappling with hers. The paper partially quoted above argues, by using what Talcott Parsons' called ‘‘integrated situations,’’ for a significant role for professional associations of folk working in finance to help confront the ethical failures of bankers and to help create the right mix of regulation, incentives, recognition, and norms to tackle a whole bunch of systemic harms that follow from financial crises in particular. While I like the spirit of Herzog's proposal -- which echoes ideas about the significance of intermediary societies I tend to ascribe to Michael Polanyi --, I am a bit skeptical about the possibility of turning finance workers/traders/bankers (etc.) into professionals of the relevant sort (which is why I proposed, once, recall (here; here and here;  for background here) regular drilling and simulation-games by regulators and traders/managers, etc.). But about that some other time more. Here I want to focus, more narrowly, on the backbone of Herzog's normative argument which relies on increasingly important work by Iris Marion Young Young on structural injustice.**

Let's stipulate, for the sake of argument, that Young's argument for forward-looking responsibility is sound and convincing.+ The question, challenge, I wish to pose today whether it is right to think of the systemic harms of the sort generated by financial crises as species of structural injustice? (And my answer is, no.) To be sure, and not unimportantly, I fully grant that the policy responses to financial crises, often, in recent times, exhibit patterns of outcome that are well interpreted as structural injustice in many instances shockingly so. That is, the moral hazard involved in privatizing gains and socializing losses from the financial industry is indeed an instance of structural injustice due to rent-seeking and a kind of political blackmail. (I return to that below.) And so what follows is, perhaps, more of academic than of political interest. 

It is natural to assume that members of the financial community are relative wealthy. But even the UK, which has a permissive bonus culture and a large financial sector (and, by European standards, higher political tolerance for inequality), average pay for a banker is £39,412. Since averages can hide huge distributional variance, it is likely this means means that the vast majority of bankers really should not be thought of as wealthy (by advanced economy standards). Folk working in brokerage securities as a trader make, on average, £60,000, but they do average 30K in bonuses. Obviously that's compatible with some making a lot more than this.++ And this puts traders above average, but net yet among the structurally privileged (for an economy like the UK).

In addition, bankers and traders can lose their jobs when their firms go bankrupt as happened with Lehman--in the UK alone this led to 4000 people losing their jobs. Less high profile, in the collapse of Northern Rock, an once important British mortgage bank, about 2,500 jobs were lost. So, absent political decisions, bankers and traders do have real skin in the game when their firms go bankrupt. There are also more complex issues pertaining to pension coverage. 

The previous two paragraphs suggest that it is by no means obvious that we should think of the average member of the financial industry as especially privileged or immunized from the fall out in a financial crisis. That does not rule out that Herzog's argument would apply to some of the better paid members of the industry.

As an aside, I do not mean to deny that various forms of, say, deposit insurance, also involve de facto a hidden subsidy to bankers in times of crisis. But since these forms of insurance prevent systemic harms I leave them aside.

In addition, and more important, the systemic harms that accompany a major financial crisis -- characterized by liquidity crisis, bank-runs, bank-collapses, inability to complete trades at any price, the regular, automatic (etc.) imposition of circuit breakers, etc. -- are not intrinsically re-distributive from poor to privileged. As Piketty shows, en passant, in Capital, left to its devices, a financial crash, and its aftermath, tends to be a great leveller (because financial assets deflate across asset classes).1 It's only recent central bank policy -- which we can describe as the so-called Greenspan put -- and the way bailouts are now acted and priced in that has changed this historical correlation. 

Now a skeptical reader may think that here I am playing the government failure card a bit easily in suggesting that the imposition of systemic harms as a form of structural injustice are a consequence of government policy and not financial crises as such. I do recognize an exception to my claim, and that is, in fact, cases where a government cannot repay its debts in the context of a financial crisis. It's quite clear that restructuring, budget cuts, and devaluations that accompany such government debt crises can frequently involve cases of structural injustice even when, in executing austerity or a devaluation the government avoids (as it often does not) targeting the poor, vulnerable, and pensioned. (In practice, we have seen shockingly large forms of structural injustice in the Greek debt restructuring where Northern European banks were bailed out at the expense of the Greek poor.)*** For, in general citizens have very ineffective control over Government debts, while the investment banks, debt market makers/specialists, and treasury officials do. 

To sum up, in practice it is good to have an eye toward structural injustice given how policy de facto, alas, works. In my view this can only be solved if we end the effective blackmail of the financial industry of  policymakers since Lehman and the practice of using quantitative easing as our major, almost only, policy response to financial collapses--these do have enormous redistributive effects from the underprivileged to privileged in practice. (So, we need to develop alternative policy responses.) But I also suspect that the initial harms that follow from financial collapses, while systemic in character, are not forms of structural injustice. And so these require a different kind of normative argument than the one offered by Herzog.

Workers are neither Investors nor Citizens of Firms

Working humans are so much more than “resources”. This is one of the central lessons of the current crisis. Caring for the sick; delivering food, medication and other essentials; clearing away our waste; stocking the shelves and running the registers in our grocery stores – the people who have kept life going through the Covid-19 pandemic are living proof that work cannot be reduced to a mere commodity. Human health and the care of the most vulnerable cannot be governed by market forces alone. If we leave these things solely to the market, we run the risk of exacerbating inequalities to the point of forfeiting the very lives of the least advantaged.

How to avoid this unacceptable situation? By involving employees in decisions relating to their lives and futures in the workplace – by democratising firms. By decommodifying work – by collectively guaranteeing useful employment to all. As we face the monstrous risk of pandemic and environmental collapse, making these strategic changes would allow us to ensure the dignity of all citizens while marshalling the collective strength and effort we need to preserve our life together on this planet.

Every morning, men and women, especially members of racialised communities, migrants and informal economy workers, rise to serve those among us who are able to remain under quarantine. They keep watch through the night. The dignity of their jobs needs no other explanation than that eloquently simple term “essential worker”. That term also reveals a key fact that capitalism has always sought to render invisible with another term, “human resource”. Human beings are not one resource among many. Without labor investors, there would be no production, no services, no businesses at all.

Every morning, men and women, especially members of racialised communities, migrants and informal economy workers, rise to serve those among us who are able to remain under quarantine. They keep watch through the night. The dignity of their jobs needs no other explanation than that eloquently simple term “essential worker”. That term also reveals a key fact that capitalism has always sought to render invisible with another term, “human resource”. Human beings are not one resource among many. Without labor investors, there would be no production, no services, no businesses at all.

To the question of how firms and how society as a whole might recognise the contributions of their employees in times of crisis, democracy is the answer. Certainly, we must close the yawning chasm of income inequality and raise the income floor – but that alone is not enough. After the two world wars, women’s undeniable contribution to society helped win them the right to vote. By the same token, it is time to enfranchise workers.

Representation of labour investors in the workplace has existed in Europe since the close of the second world war, through institutions known as works councils. Yet these representative bodies have a weak voice at best in the government of firms, and are subordinate to the choices of the executive management teams appointed by shareholders. They have been unable to stop or even slow the relentless momentum of self-serving capital accumulation, ever more powerful in its destruction of our environment. These bodies should now be granted similar rights to those exercised by boards. To do so, firm governments (that is, top management) could be required to obtain double majority approval, from chambers representing workers as well as shareholders

In Germany, the Netherlands and Scandinavia, different forms of codetermination (Mitbestimmung) put in place progressively after the second world war were a crucial step toward giving a voice to workers – but they are still insufficient to create actual citizenship in firms...  https://democratizingwork.org/ "Coronavirus shows why we must democratise work.   @The Guardian, May 15, 2020

A few weeks ago I was asked repeatedly to co-sign the widely translated and circulated petition partially quoted above. Since some influential thinkers were already signed up, and I am (here and here) a friend of virtue signaling (for a nice argument see here), so the temptation to join in a noble cause was great. But I also knew that the text -- undoubtedly a messy compromise among the early drafters -- could not be changed anymore. And while I shared in the eloquently expressed concerns, in particular that badly designed and hasty bail-outs will just reinforce a flawed status quo, I could not in good good conscience co-sign. I have a number of conceptual and empirical reservations, and as I reflected on these I realized that I find the whole underlying vision of this document misguided.

 

Workers and employees are not "citizens" of firms and their "top management" is not a "government," and they should not be. Just as we should resist the corporate newspeak which turns every customer or client into a 'friend,' 'family-member' or 'patron,' we should resist (the corporatist-democratic-speak) turning our employee status into one one of citizenship. As a metaphor it's misleading as an aspiration fearsome.

 

If a worker is treated as a citizen of a company then you open the door for a company or bureaucratic organization to view itself as a sovereign over these 'citizens'. This is undesirable if only because plenty of states that insist on continuing a whole series of claims on and obligations to emigrants (that is, former citizens) and exiles who want nothing to do with these states. If companies start viewing themselves as sovereigns there is little conceptual space to prevent the increasing encroachment of their power over the lives of employees. 

 

You may think that citizenship is the answer to the very real existing problem of corporate tyranny and arbitrary powers over workers. But this is an instance where the solution is worse than the problem. Once one has sovereignty and, say, a subsidiary principle (common in federative polities) then rather than treating the state as a countervailing power to corporations and non-profits and non-profits and corporations as a countervailing powers to the state, these will become delegated powers. In states that are politically weak and poor, this will merely accelerate the power of corporations against the government. In states that are rich this will only increase the legal space for corporate control over employees' lives outside work hours. Sovereign power is, in principle, unlimited.

 

As an aside, it is notable that the petition wishes to 'decommodify' work by rejecting the conceptualization of workers as “human resource,” and conceptualize these "stakeholders" as "labor investors." Evidently human capital theory has -- despite talk of "dignity" -- a firm grip on the imagination of the drafters of the petition. But to treat workers as labor investors is a disastrous move because it encourages firms to shift their risks even more onto the backs of workers. This has already happened with many workers' pensions and is correctly treated as an instance of neoliberalism gone amok.

 

Strikingly the petition does not address the problem by calling for rights of individual employees against their new sovereigns. (Oddly, the petition only recognizes  "collective rights;" I return to this below.) Rather it calls for  more 'democracy' within firms. What's fascinating to me is that the very institution that has failed to provide the relevant protections at the national level (democracy), which is responsible for the existing status quo in most rich countries, is now called upon to rectify the problem at the individual firm/organization level. But why think that genuine democracy would work better within firms?  We are never told. I close with two observations on this.

 

First, the petition kind of pretends as if the status quo, or at least "human health and the care of the most vulnerable" is "governed by market forces alone." At one point it says "that market mechanisms alone cannot be left in charge of the choices that affect our communities most deeply" and implies this is the case "in the health sector." This may have been true in the nineteenth century, but we are very far removed from this situation today. Democratic legislation governs most of the pre-conditions of and constraints on economic life directly through licensing, zoning, health and safety regulations, subsidies, etc. and indirectly through taxes and trade regulation. The health sector, in particular, is among the most regulated of all industries at all levels even in the United States. (In many other places, the provision of care is either in government hands or under substantial government control.) That is to say the current situation is itself the outcome of the multi-faceted and open-ended play of political and market forces.  To pretend otherwise does not help solve the problem. What's really needed is education and, in particular, mass political mobilization at the national and international level (including, I agree, strengthening of union rights).

 

Second, I agree with the petition that the rich have been winning too many of the political battles in government. But why think they won't do so more in corporations? In particular, why think democracy will do a great job protecting the most vulnerable workers? Odds are that left to their own democratic devices within corporations, management and the educated and wealthier workers will combine against the most vulnerable. That's what democracies tend to, after all. (Even unions, alas, do not have a stellar record on this score.) Similarly, judging by our existing democratic politics, there is also no reason to expect that democratic firms will be green in virtue of being democratic. And once legitimated by and understood as sovereign power, the space to resist, to exit, or to experiment with alternatives has been narrowed which is welcome to the corporate class, but nobody else.

 

 

 

 

The PSR, Due Diligence, Plutarch, and Debt (HT Graeber)

§ 1  Plato in his Laws permits not any one to go and draw water from his neighbor's well, who has not first digged and sunk a pit in his own ground till he is come to a vein of clay, and has by his sounding experimented that the place will not yield a spring. For the clay or potter's earth, being of its own nature fatty, solid, and strong, retains the moisture it receives, and will not let it soak or pierce through. But it must be lawful for them to take water from another's ground, when there is no way or means for them to find any in their own; for the law ought to provide for men's necessity, but not favor their laziness. Should there not be the like ordinance also concerning money; that none should be allowed to borrow upon usury, nor to go and dive into other men's purses, — as it were into their wells and fountains, — before they have first searched at home and sounded every means for the obtaining it; having collected (as it were) and gathered together all the gutters and springs, to try if they can draw from them what may suffice to supply their most necessary occasions? But on the contrary, many there are who, to defray their idle expenses and to satisfy their extravagant and superfluous delights, make not use of their own, but have recourse to others, running themselves deeply into debt without any necessity. Now this may easily be judged, if one does but consider that usurers do not ordinarily lend to those which are in distress, but only to such as desire to obtain somewhat that is superfluous and of which they stand not in need. So that the credit given by the lender is a testimony sufficiently proving that the borrower has of his own; whereas on the contrary, since he has of his own, he ought to keep himself from borrowing...

[§2] ...Thus we ought in our affairs, as in a besieged town, never to admit or receive the hostile garrison of a usurer, nor to endure before our eyes the delivering up of our goods into perpetual servitude; but rather to cut off from our table what is neither necessary nor profitable, and in like manner from our beds, our couches, and our ordinary expenses, and so to keep ourselves free and at liberty, in hopes to restore again what we shall have retrenched, if Fortune shall hereafter smile upon us...

§ 3 ....The Goddess Artemis in the city of Ephesus gives to such debtors as can fly into her temple freedom and protection against their creditors; but the sanctuary of parsimony and moderation in expenses, into which no usurer can enter to pluck thence and carry away any debtor prisoner, is always open for the prudent, and affords them a long and large space of joyful and honorable repose. For as the prophetess which gave oracles in the temple of the Pythian Apollo, about the time of the Persian wars, answered the Athenians, that God had for their safety given them a wall of wood, upon which, forsaking their lands, their city, their houses, and all their goods, they had recourse to their ships for the preservation of their liberty; so God gives us a table of wood, vessels of earth, and garments of coarse cloth, if we desire to live and continue in freedom. Aim not at gilded coaches, steeds of price, And harness, richly wrought with quaint device; for how swiftly soever they may run, yet will usuries overtake them and outrun them....

§ 4 ... And as King Darius sent to the city of Athens his lieutenants Datis and Artaphernes with chains and cords, to bind the prisoners they should take; so these usurers, bringing into Greece boxes full of schedules, bills, and obligatory contracts, as so many irons and fetters for the shackling of poor criminals, go through the cities, sowing in them, as they pass, not good and profitable seed, — as did heretofore Triptolemus, when he went through all places teaching the people to sow corn, — but roots and grains of debts, that produce infinite labors and intolerable usuries, of which the end can never be found, and which, eating their way and spreading their sprouts round about, do in fine make cities bend under the burden, till they come to be suffocated. They say that hares at the same time suckle one young leveret, are ready to kindle and bring forth another, and conceive a third; but the usuries of these barbarous and wicked usurers bring forth before they conceive. For at the very delivery of their money, they immediately ask it back, taking it up at the same moment they lay it down; and they let out that again to interest which they take for the use of what they have before lent.

§ 5  It is a saying among the Messenians, Pylos before Pylos, and Pylos still you'll find; but it may much better be said against the usurers, Use before use, and use still more you'll find. So that they laugh at those natural philosophers who hold that nothing can be made of nothing and of that which has no existence; but with them usury is made and engendered of that which neither is nor ever was.--Plutarch, Moralia (translated by  William Watson Goodwin) "Against Running In Debt, or Taking Up Money Upon Usury." [ES: I have not checked the Greek, but hopefully this does not undermine the points I wish to make today.]

In Debt: the First 5000 Years (pp 231-2), David Graeber calls attention to the passage quoted from Plutarch. His excerpt is briefer than my version and he uses the passage to quote Plutarch's likening the role of debt to "a foreign invasion."* Here I have different (ahh) interest in the passage. Before I get to that it's only fair to note Plutarch's main argument, which is that debt is the off-spring of the desire for luxury.  Luxury is something one does not need, and so superfluous.+ And so Plutarch's main argument is a prudential plea for moderation.

This commitment helps explain, in part, what would sound strange to us: "that usurers do not ordinarily lend to those which are in distress, but only to such as desire to obtain somewhat that is superfluous and of which they stand not in need." (Hereafter, the maxim of ordinary usury; or, simply, the maxim.) I suspect Plutarch knew (even lacking Graeber's rich account) that there existed plenty of usury (to the distressed) which was 'non-ordinary' in his sense.++ Even  so the passage provides nice evidence for the thought that due diligence into the ability to repay ("the borrower has of his own"), and perhaps character, was part of the "ordinary" practice of usury among the Greek aristocrats (who could be taken or be seen to afford the superfluous) that Plutarch would have known.

Of course, Plutarch's larger argument is a proposal to regulate debts ("that none should be allowed to borrow upon usury, nor to go and dive into other men's purses, — as it were into their wells and fountains, before they have first searched at home and sounded every means for the obtaining it.") This puts a requirement on any would-be-debtor, and any would-be-creditor, to fund any expenses that would (ahh) ordinarily be funded by credit out of assets (or savings). Once such due diligence has been done, there is de facto no proper need for credit/debt. This suggests, however, a more far-reaching implication. If the due diligence shows that the would-be-borrower is short of collateral or funds, then from Plutarch's perspective there is no grounds for a debt. So, the point of the regulation alongside the Maxim is clearly to prevent the creation of credit to the distressed that become debts that cannot be repaid. The underlying (political) rationale is clear enough because a debtor is, for Plutarch, somebody un-free, that is, halfway down the path to slavery.*

So much for the political angle. Plutarch also notes that the very existence of interest makes a mockery of one of the versions of the Principle of Sufficient Reason, nothing can be made of nothing and of that which has no existence. We tend to associate the principle with Parmenides; writing much later, Plutarch treats it as a common principle among the natural philosophers. Interest violates a principle of equality built into the nature of debt (recall this one); because what is returned is more -- sometimes dis-proportionally more -- than the principal.** 

Of course, there are a whole battery of claims and arguments that interest does represent something (cost of borrowing, opportunity costs, inflation expectation, underlying rate of return in a society, etc.) So, the charging of interest can be made intelligible. And, perhaps, that's sufficient to undermine the idea that interest is somehow un-caused. I like that in the version of the PSR quoted by Plutarch, the PSR is committed to the claim that no thing can be produced by nothing in the sense of not existing. (For, of course, it cuts off a natural temptation to say, in response, that social fictions cause interest!) 

Now, Graeber (recall) has quite interesting things to say about the genealogy of philosophy. He argues that philosophy's origins are grounded in paradoxes of coinage, and that philosophy is the complicit offspring of violent eradication of forms of life. In reflecting on this (and recall this post on the PSR), I had the following free association.

As Graeber emphasizes, the Greek word for "interest" literally means "offspring." And, from the perspective of the PSR, one may say that interest is, thus, either un-caused offspring or the product of unusually fertile principal. The latter route is (recall) the Piketty-ian world of disproportionate capital growth, perhaps, characteristic of financial capitalism; the former is a miracle of the sort that founds Christianity.   

 

 

 

 

 

 

A Macro trend that worries me a bit

10 Year Treasury Rate - 54 Year Historical Chart; source: Macrotrends.

Let me start with two claims I will not pursue in this post: (i) I am very confident that the price of Bitcoin is a bubble (some other time about that). I honestly don't know (ii) if last week's market correction was the start of a downward trend in stock prices or just a minor hiccup in a long-run bull market. This post is not intended to make anybody money or to predict the future (say, in the manner of Donald MacKenzie who wrote about the Volatility Index just before it rose again).

Since 1980 headline interest rates have been in full decline. (The inflation adjusted curve has the same shape, but is slightly less striking. The early 70s had historically low real interest rates before the great run-up.) In what follows I treat this, for simplicity's sake as a free-standing cause (and abstract away from the political and economics reasons for this decline).* During this long decline, governments could borrow relatively easily, bond-investors grew rich without much effort, bankers could make easy money in virtue of their license to print money, and it was easy to make money in financial and real estate assets (which made retirement planning for upper-middle class families easy). That, together with stagnating wages, has had huge effects on income distribution (see Piketty).

Thirty-seven years is a long time.+ That's longer than the Berlin Wall stood; longer than (ahh) the thirty-years war. That is, expectations have been trained up on falling interest rates; business models and risk models across the economy rely on cheap credit and falling interest rates as an ordinary fact of life. For example, "most deposit models [of big European banks]  are based solely on a period of decreasing interest rates and hence might entail high model risk."  I suspect nobody really knows what the effects on the financial sector and real economy will be once interest rates have really bottomed.

Of course, even if interest rates have bottomed it does not follow they will go up. But I would think that inflation expectations will rise following the combination of tax-cuts, government deficits, discouragement of immigration, and persistent low unemployment.

Few active traders remember what it's like to be in a market in which interest rates go up regularly and systematically. The present financial sector is almost certainly not very robust in such an environment; Just recently the President of the Minnesota FED was adamant that "The biggest banks need more capital, and that’s the best way to protect taxpayers," {HT. Eric Winsberg} Almost certainly European big banks are in worse shape.++ Governments are surely not well prepared to borrow at substantially higher costs. Whatever the economic effects of (hypothetical) rising interest rates will be, they require very tough and politically unpalatable choices by regulators and governments unless we're really are on a higher economic growth trend. (But that's not obvious given aging populations. [Again, if immigration is really curtailed that will worsen matters.])

Now, since the last great recession, neo-Fascist parties and sentiments have been growing in popularity all over the world. Leaving aside, say, Greece (which has suffered greatly economically), this has happened during peacetime, relatively low inflation, and -- despite all the challenges -- relatively prosperous times.** So my worry is, if interest rates rise, and there will be another severe bout of economic dislocation and hardship, will neo-fascism get its lucky break? For my suspicion is that it's precisely when reliable expectations are thwarted that people are willing to be receptive to radical alternatives.

On Spooner and Basic Capital.

The inevitable result of these principles would be that the class of employers, who now stand between the capitalist and laborer, and, by means of usury laws, sponge money from the former, and labor from the latter, and put the plunder into their own pockets, would be forced aside; and the capitalist and laborer would come together, face to face, and make such bargains with each other, as that the whole proceeds of their joint capital and labor would be divided between themselves, instead of being bestowed, in part, as now, as a gratuity, upon an intermediate intruder. The capitalist would not only get all he now gets as interest, and the laborer all he now gets as wages, but they would also divide between themselves that sum which now goes into the pockets of the employer. What portion of this latter sum would go to the laborer, and what to the capitalist, would depend upon the circumstances and bargains in each particular case. The probability is that for the first few [36] years after these principles went into operation, capitalists would ask and obtain a pretty high rate of interest. The competition among laborers, in their bids for capital, would produce this effect. But as the general safety of the system should be tested, and as laborers should gradually make accumulations, which would serve as some security for loans, and as the business of banking should be increased, the rate of interest would gradually decline, until—probably within ten or twenty years—capital would go begging for borrowers, and the current rate of interest would probably not exceed three or four per cent. And all the proceeds of labor and capital, over and above this interest, would go into the pockets of the laborer.--Lysander Spooner (1846) Poverty: Its Illegal Causes and Legal Cure, 

In Poverty, Spooner attacks usury laws, promotes free banking, and (as I discussed earlier) insists on complete debt forgiveness after a debt is due and been repaid to one's capacity. Thereby, Spooner hopes to promote a more equal economic regime -- he explicitly has in mind the conditions prevalent in early nineteenth century New England -- in which banks and capitalist employers are reduced in significance and a lot of us are independent economic agents with our own capital. He is a fierce critic of conditions that generate poverty and extreme wealth inequality. He argues that his scheme will generate not just higher average income, but also more equality. He thinks the rich will be less productive than  autonomous, middle class economic agents. He expects independent workers to more productive than wage-earning workers. He seems to think most firms will be limited in size.* Let's call this a Spooner economy.** This is relatively lightly regulated and with firm property rights and few sources of rent-seeking behavior.

Somewhat surprisingly he does not advocate for an estate tax, and this undermines part of the grounds of his egalitarian optimism. That is, Spooner thinks high returns to capital are primarily due to the structure of the banking sector, the bad regulation of credit, and capitalist modes of production. But he seems to miss the possibility that the wealth of the wealthy may grow at a faster rate than the growth in wages of the rest of us due to the growth of the economy (Piketty's famous formula, r > g). It is an open empirical question, if in a Spooner economy, Piketty's formula holds.

Before I return to Piketty, let me note that Spooner is a critic of financial intermediaries which both (a) profit from other people's labor and (b) because of lack of access to capital among the poor, make (i) wage-labor necessary, and thereby (ii) produce an economic hierarchy that sustains a small class of capitalists and a large working class. (As should be clear he is also a critic of forms of credit that create permanent indebtedness among the working poor.) In addition, and this is clear from the quoted passage above, his moral criticism of financial intermediaries is that the relationship between creditor and debtor becomes an impersonal one; it's not 'face to face.'  To adopt Steve Darwall's framework, in a Spooner economy, economic agents relate to each other in the second person. For Spooner production is a joint enterprise among independent and mutually interdependent economic agents with each getting its fair share.+ It is a remarkable vision, especially because it is articulated just as the industrial revolution and the large corporation are taking off full steam.

A natural extension of Spooner's position, while taking unequal initial conditions, or unfair historical legacies, and higher returns to capital seriously, absent significant estate taxes, is a basic capital scheme (as distinct from a basic income scheme). There are many variants on this. Ordinarily basic capital is understood as a  'one-off lump sum of financial capital paid to the individual on maturity' by the state (White 2011). If one  recognizes (i) that the largest investors are better positioned to profit from the cost of discovery (Brown et. al.: 2008) and (ii) that better endowed institutions tend to have higher risk-adjusted returns on their investments (Piketty 2014: 570-1), then ordinary basic capital scheme is not sufficient. One should find a way for the non-rich to grow along with the wealthy.*** In reflecting on a Piketty (without fully endorsing all of Piketty's claims), the influential mathematical economist, Debraj Ray, suggested (recall here) that "all [the world's] inhabitants must ultimately own shares of physical capital." (2014) By 'physical capital' Ray means land and financial assets. That is to say, if we want to make the growth of capital a joint enterprise each of us should (have a) share in its growth.

 

 

De Grouchy's Egalitarian Philosophy of Law

In order for the fear of a sentence to be effective and beneficial the sentence must not outrage. Its justice must be perceptible to average reason, and it must especially awaken the conscience, at the same time as it punishes its silence and slumber. But this will not be so (a) if sentences are too strong and instead of inspiring horror against crime, appear barbarous and unjust themselves; (b) if they do not punish the injustices committed by the rich against the poor; (b*) if, when these injustices are not subject to sentences, the laws do not prevent them in other ways; (c) if a judge can arbitrarily harden or soften a sentence; (d) if there are privileges, hereditary, personal or local which offer a legal loophole, direct or indirect. Then the people are tempted to see criminal laws as made against them and in favor of the rich, as the result of an association designed to oppress them. Then they hate more they fear these laws that no longer inform their conscience because they outrage their reason, and this hatred is enough to overcome fear in strong souls and in all those made bitter by the joint feeling of injustice and need.--Sophie de Grouchy, Letters on Sympathy, translated by Sandrine Berges, Letter 8.

ln the quoted passage Sophie de Grouchy, whose Letters on Sympathy (hereafter Letters) is attached to her translation of Adam Smith's Theory of Moral Sentiments (hereafter TMS) echoes the strategy I attributed to Cesare Becciara's Crimes and Punishment recently. She relies here on a barbarous vs civilized distinction not so much to justify imperialism or cultural superiority, but in order to claim that the Europeans are (often) barbarians. While she agrees with Beccaria that bad law too often fails to deter and (unintentionally perhaps) ends up encouraging law-breaking, she thinks the the main point of law is not so much deterrence (as Beccaria thinks), but rather to help cultivate virtue: "to awaken... conscience." This it does not by imposing morality by, say, the punishment of sin; but rather by leaving people mostly alone and by paying attention to incentives (recall this post): “The incentive to behave unjustly, when it is based on need, is therefore extremely rare in the absence of bad laws,” (Letter 7 [and recall this post for more].) In addition, she favors making the law fairer (about which below), more impartial (by removing discretion (c)), and (again following Beccaria) making punishment more proportionate to harms done--for laws that too harsh fail to deter (see a).

Underlying De Grouchy's vision is the idea that law must be intelligible to those governed by it. (This is not quite in Beccaria, but the idea goes back to Plato's Laws.) Then it can perform its proper function of moral education (awaken...conscience), while simultaneously for its authority rely on the good opinion of those it rules (justice must be perceptible to average reason). She puts this in striking language: "by preserving their natural rights, the social order would put men in the best position to bring about mutual respect." (Letter 8.) If the law offends against ordinary moral sense it will undermine its proper function and creates outrage (“for the fear of a sentence to be effective and beneficial the sentence must not outrage.). If the legal system generates anger the law undermines itself by reducing compliance and undermining virtue, both are needed for social order.*

So far I have emphasized De Grouchy's debts to Beccaria (and Voltaire's commentary on it). But De Grouchy's interest in the way law can facilitate moral equality is distinctive. In fact, in the quoted passage at the top of this post (see b&d), she recognizes that wealth inequality can undermine the rule of law: laws must be fair and not favor the wealth by exempting from the law -- a common feature of feudal society -- or by being biased toward wealth (a common feature of most legal systems in practice.) To be sure Beccaria is not indifferent to wealth inequality; he promotes luxury consumption in order to combat what we may call the Piketty effect: "The pleasures of luxury are not the principal sources of this happiness; though, by preventing the too great accumulation of wealth in few hands, they become a necessary remedy against the too great inequality of individuals, which always increases with the progress of society." (Ch. 32, p. 123; this echoes Hume and Smith.) He is clearly sensitive to the idea that concentrated wealth is bad politically.

Thus, De Grouchy claims that one way to promote a proper rule of law is, then, to reduce inequality directly: “Let us only remove the extreme inequality that puts the poor too far from the rich to be known by them, and the rich too far from the poor to see them, and to let the voice of humanity reach their heart; and then unexpected misfortunes will become rarer and will certainly be mended.” (Letter 8) The comment is made in the context of her discussion of the nature of law, but here, too, she is (and this echoes Adam Smith's TMS) clearly focused on the moral effects of inequality and advocates political and legal action to combat it directly.

 

On Wanting To Be A Public Philosopher

• Do you actually want to? 

  • ...nobody should have to be a public philosopher. Although it can be valuable, it can also be risky, and it isn't suitable for every kind of philosopher or for every kind of philosophical work.
  • If you are only here in response to external pressure in this direction, and this is not something you're motivated to do for your own reasons, or for its own sake, IMO you're within your rights to resist that pressure citing the risks and/or the inappropriateness of this kind of work for your situation.

• Be aware of the risks.

  • Online hate and abuse are disproportionately directed at women, POC, LGBTQ people and other groups who experience discrimination, but anyone can be targeted. There are psychological, emotional, legal, financial, and other risks involved in public-facing work. They are often unpredictable.
  • Hate and abuse do not only occur online, even if they begin there. If you become a public figure your personal safety may be put at risk through e.g. doxxing, stalking, and dangerous physical mail. Academics are typically easy to target as our work addresses and phone numbers are posted freely online by our universities and our physical office spaces are often accessible to anyone.
  • If you belong to a university or other institution, find out what support and protections they provide. If nothing (or too little) is available, you might want to suggest/request/demand that they do better. Especially if your institution, department, or funding agency is actively encouraging you to engage in the risky business of public scholarship, they should support and help you when you do.
  • Some colleagues, in philosophy and elsewhere in the academy, do not respect public-facing scholarship. Some will even view it as evidence that you've lost interest in—or failed at—"real" philosophy. This can be an issue in securing employment as well as for promotion, tenure, and other forms of assessment.
  • Even positive experiences in the public arena can be exhausting and unpredictable. For example, media interest tends to come in viral waves, the timing of which can depend on all kinds of factors beyond your control and won't respect your teaching schedule.

• Have something to say.

  • It should be something you care enough about, and that enough people will want to hear, to make your efforts worthwhile. If you are going to make a serious investment of time, emotional energy, research funding, and other things into public work, you need to believe in your project and your message.
  • I started to do public-facing work in earnest when I started to research the philosophy of love. My work on the epistemology of arithmetic is no less important to me, but it isn't suitable for the same kind of public audience, and that's OK (see above).

• Consider who you want to be in the public arena.

  • If you develop a public profile, you will almost certainly be judged both positively and negatively for pretty much anything you do. Under these circumstances, integrity is challenging but essential. I recommend thinking carefully in advance about your intended public image, persona, personal brand, or whatever you like to call it.
  • I created a list of features I would aim to embody in my public-facing self. You don't need to be that explicit about it, but it helps to have a sense of direction and personal ethics to maintain consistency as you build a platform and audience.
  • Think ahead about your preferences with respect to privacy, as well as those of people around you (such as family members, collaborators, and colleagues). Keep these conversations current—people and situations change.

• Know that you will need different skill sets.

  • Philosophers trained in a typical contemporary philosophy PhD program are not trained to be public philosophers. Don't expect it to be easy to transfer what you already know into the public sphere. Although often ignored, trivialized, or disparaged, everything listed in Part 2 below is an achievement.

  • I've found learning to write and speak for public audiences very challenging. I experienced a steep learning curve. I'm still learning rapidly...--Carrie Jenkins " So You Want To Be A Public Philosopher?" [HT DailyNous; all emphases in original]

I warmly recommend Carrie Jenkins's post to would-be-public philosophers, their would-be-peers and evaluators, and people that love public philosophers (for whatever reason). The piece is full of important insights and suggestions (there is a lot more than I quoted above), and I would echo her focus on integrity (recall). In particular, I really like how she calls attention to the significance of advance planning. Importantly, Jenkins calls attention to the responsibilities of institutions, not the least universities and grant agencies, that encourage public philosophy, but often provide shamefully few resources to support colleagues that are being threatened or abused/harassed from various angles or become targets of political campaigns. (The previous sentence draws on my experiences of my departmental colleagues and myself.) In addition, Jenkins is right to call attention to the reputational risks of doing public philosophy. We do have a lot of colleagues who fail to respect public-facing scholarship, but use it, as she suggests, as a proxy for lack of philosophical ability.

I like how Jenkins speaks of "public-facing" work/scholarship. It is clear that she tries to make it symmetrical with, let's call it, peer-facing scholarship. She is right to emphasize that they draw on different skill sets, and that our professional training does not really prepare us for public-facing work. (Having said that, European universities and grant agencies are increasingly offering seminars to address some of the required skill set as part of graduate training.) Her underlying (tacit) model, however, is that of publicizing insights she developed through her peer-facing expertise.  That is, for Jenkins some peer-facing expertise is suitable for development to a public audience (and some not). That is, this is really a matter of (to use European technocratic-speek) disseminating peer-evaluated research findings to a wide audience.

To be sure, Jenkins's model is compatible with skipping publication in peer-facing outlets (journals) and hybrid versions (publishing some material for fellow experts and other material only in public venues, but with expert-quality documentation available--Piketty did a version of this and, perhaps, also Jenkins in her work on love). But my point is that public philosophy so conceived has an implied directionally from peer-facing expertise to public-facing exposure. There is nothing wrong with this conception. But it is not the only possible conception of the genre (for more of my views on public philosophy, recall here, here on Dotson's service philosophy, and here on some blogging as public philosophy).

Before I get to to that, it is worth noting that even in Jenkins's model of public philosophy, the person, who is a philosopher, and who faces the public, may well change. Jenkins hints at this by calling attention to the many skills and new dispositions one acquires by doing public philosophy. Even leaving aside (due to opportunity costs) that one may not be able to participate with the same dedication and attention to peer-facing philosophy, one may become a different kind of philosopher entirely. Here the metaphor of face is not innocent; by professionally facing others, one also becomes -- go read your Levinas - part of their community. A public-facing orientation generates duties, loyalties, and obligations and these when taken serious, in turn, transform the person. I don't mean the previous sentence to be my last word on it (it's not the first), but as the Hypatia debacle revealed (recall), research ethics are not fully developed within professional philosophy yet.

And this gets me to another possible conception of the genre. It is quite possible for public-facing philosophy to influence or displace peer-facing philosophy. (To give a standard example: Socrates undoubtedly talked quite a bit to Plato, one hopes, but quite possibly spent a lot more time talking to non-philosophers.) By this I mean that public-philosophy entails a receptivity toward the risk that one's peer-facing philosophy is not just influenced by one's engagements with public others, but, more importantly, shaped by one's public-facing activities. For example, and it's not my area of expertise, but it is my sense from reading Judith Butler that gender theory was shaped by (no doubt, theory-mediated) encounters with lived experience that in certain respects ran well in advance of gender theory. (Some such analogous transformative experience occurred to me through my engagements with professional economists--I didn't go native [despite being employed in a social science department], but I look very differently at my own profession and its history now. I am confident plenty of philosophers of mind, say, were changed by their immersion in some of the cognitive sciences.)

The way such public-facing work can shape peer-faced work is unpredictable. Some will start muttering about lowered standards and lack of seriousness--and, indeed, there are genuine risks. But the would-be-shaping of peer-faced scholarship is, in fact, a central argument in favor of public-facing work. As I have noted before, analytical philosophy has low barriers to entry and little in the way of doctrinal or even (much) methodological expertise. At its best, it has a sponge-like capacity to constantly rejuvenate itself -- some would say be disciplined -- by way of outward engagement with mathematics, the other sciences, history, and even the arts, etc. There is no reason to end rejuvenation by way of facing-other-expert-areas. But, in addition, if we are being encouraged to face and transform the public, we should not be afraid to be transformed by it.

A note on Modal Economics and Interest; or a thought on Thanksgiving

The most common forms of debt are loans, including mortgages and auto loans, and credit card debt. Under the terms of a loan, the borrower is required to repay the balance of the loan by a certain date, typically several years in the future. The terms of the loan also stipulate the amount of interest that the borrower is required to pay annually, expressed as a percentage of the loan amount. Interest is used as a way to ensure that the lender is compensated for taking on the risk of the loan while also encouraging the borrower to repay the loan quickly in order to limit his total interest expense. Debt Definition@Investopedia

 

Interest is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves.Interest Rate Definition @Investopedia 

Common debt connects the present to the future. From the creditor's perspective, interest represents, among other things, the reward for deferring present consumption or other use (not to mention hiding the money under a mattress), including a reward for risk of default and some protection against expected inflation (etc.). That is to say, expectations about possible outcomes into the future enter into the rate of interest she will charge. (I return to this below.)

From the debtor's perspective debt allows one to shape the future. So, with a mortgage one can, say, turn a logically and physically possible house, into a real house. With a loan, an ecological entrepreneur can turn a dream of a wind-farm that generates clean energy into reality. That is to say, particular loans connect the present to possible worlds that are actualized in virtue of, at least in part, these loans.* It's possible, of course, that there are other means to the roughly same possible future without these loans (the house was build with a bequest not a mortgage, etc). So, I am not suggesting that the existence of this loan can help provide identity conditions or precisification of a possible world.

During a guest lecture on the Greek debt crisis by a high ranking civil servant of the Dutch Treasury, Michel Heijdra (a trained and rather gifted philosopher) remarked (something to the effect) that interest on debt also represent an optimistic view of the future. For, its rate tends to exceed risk-free income as well as other uses (present pleasure in consumption, etc.) that represent a status quo bias. This made realize that within the class of possible worlds from any given production possibility frontier that may be actualized in virtue of contracted debt (recall also this post on Piketty's idea of a technological frontier), interest-bearing debt actualizes a particular sub-set of these. In fact, the sub-set of these are biased toward the generation of income that can cover and repay the principal and interest on it. In a larger equilibrium framework, these are optimal, Leibnizian worlds. I mention Leibniz not just because the optimization techniques he (and his followers, Bernoulli, Euler, etc.) pioneered are still central to how economics thinks of such matters, but also because these remarks are very much in the spirit of his remarks on possible worlds and the role of God as optimizer and economizer in it (see, e.g., Rescher).**

Obviously, not all debt will be repaid. Interest on common debt also represents a reward of risk and this entails some probability of default. So, in practice debt, makes us aim for Leibnizian possible worlds while allowing for the genuine possibility that locally we land on sub-optimal worlds, including worlds that are worse than the present one in which the debt is not repaid and the borrower scrambles for other funds. (The preceding sentence is not an attack on Leibniz (who can easily accommodate the insight.)) So, we may say, then, that common debt connects us to possible worlds that our close to optimal*** given present endowments and possible worlds that are rather annoying from the present perspective. The former ought to predominate, but the latter cannot be ruled out.

 

 

Hannah Arendt (and Chomsky) Predicted How Our Epistemocracy (almost) leads to Donald Trump

Daniel Bell is cautiously hopeful because he is aware that scientific and technical work depend on "theoretical knowledge [that] is sought, tested, and codified in a disinterested way" (op. cit). Perhaps this optimism can be justified so long as the scientists and technologists remain uninterested in power and are concerned with no more than social prestige, that is, so long as they neither rule nor govern. Noam Chomsky's pessimism, "neither history nor psychology nor sociology gives us any particular reason to look forward with hope to the rule of the new mandarins," may be excessive; there are as yet no historical precedents, and the scientists and intellectuals who, with such deplorable regularity, have been found willing to serve every government that happened to be in power, have been no "meritocrats" but, rather, social climbers. But Chomsky is entirely right in raising the question: "Quite generally, what grounds are there for supposing that those whose claim to power is based on knowledge and technique will be more benign in their exercise of power than those whose claim is based on wealth or aristocratic origin?" (Op. cit., p. 27.) And there is every reason to raise the complementary question: What grounds are there for supposing that the resentment against a meritocracy, whose rule is exclusively based on "natural" gifts, that is, on brain power, will be no more dangerous, no more violent than the resentment of earlier oppressed groups who at least had the consolation that their condition was caused by no "fault" of their own? Is it not plausible to assume that this resentment will harbor all the murderous traits of a racial antagonism, as distinguished from mere class conflicts, inasmuch as it too will concern natural data which cannot be changed, hence a condition from which one could liberate oneself only by extermination of those who happen to have a higher I.Q.? And since in such a constellation the numerical power of the disadvantaged will be overwhelming and social mobility almost nil, is it not likely that the danger of demagogues, of popular leaders, will be so great that the meritocracy will be forced into tyrannies and despotism?--Hannah Arendt (1972) "On Violence,"note XVI, in Crises of the Republic, pp. 196-7

The note quoted above is attached to a paragraph that treats Bell's analysis of a then-new phenomenon in history: the rise in importance of a credentialed technocratic class (of scientists and engineers, but also bureaucrats) that is indispensable in securing the open ended economic growth of modern (liberal) political economies. While Bell treats technocrats as a new species of disinterested agents, Chomsky and Arendt know better: as the social rewards of technocracy grow, the special ethos that governs an intellectual credit economy gives way among technocrats to mores more apt to political rule (and, in turn, this infects the academy).*

Since Bell, Chomsky, and Arendt discussed these issues, this credentialed class has increasingly secured the economic gains from its own contributions and is steadily supplying the political and economic elite (perhaps also the military elite). Along the way this class also rigged the system in its own favor, by permitting a rent-seeking financial elite to secure private gains at the expense of social costs since the great financial crisis  (in 2008), and by making patents and copy-rights ever more protected.** Thus what was only a speculative thought in the 1960 has become reality: we live in an epistemocracy, or (if you think our modern credentials are spurious) we live in a credentialed elite that purports to be meritocratic.*** Obviously, it is not a perfect epistemocracy (the elites’ self-selection mechanisms are imperfect), but we are heading there.

In an earlier piece on meritocracy, I noted it is very annoying to be told that one deserves to lose. It is worse, I think, if one is told repeatedly and frequently by a whole society's morality and shared commitments that the systematic pattern of outcomes in which one always end up on the losing side is morally just and due to your cognitive, physical, psychological, aesthetic (etc.) flaws, especially, perhaps, if it all seems true. [Note that the true can be ideological if it presupposes a status quo bias [recall]; it can also be a form of supportive propaganda in Stanley's sense [recall]] I would now add that the worst feature of a meritocracy is that the ruling elites treat their own values as constituting rationality.

It is very hard to combine an epistemocracy with democracy because as Arendt notes", in the counterfactial limit the numerical power of the disadvantaged will be overwhelming and social mobility almost nil. Even if the meritocracy is run in accord with Rawls' difference principle and the rising tide of prosperity benefits the least advantaged materially, there is no reason to expect that the majority will accept being second-class forever (even if its accorded all the procedural trappings of democratic participation). Obviously, Arendt smuggles in an assumption of considerable heritability of intelligence, and we may well think (with a nod to plasticity) that ceteris paribus there will be open-ended progress in improving intelligence via social/cultural/educational factors and, thereby, with clever social engineering constant renewal of the elites. But other things are not equal: those will money and influence will nudge the system in their offspring’s favor.

Because rationality and facts are, by (social) definition, on the side of the credentialed elites, the disadvantaged are susceptible to demagogues. And, in fact, if one thinks that power is a genuine end, as it must be in politics, then it is quite rational by the majority to turn to demagogues. While Arendt correctly notes the murderous traits of a racial antagonism that accompanies this turn to demagoguery she mistakenly assumes that its primary target is the credentialed elite rather than members of low status groups that are advancing in relative status due to economic success (I call this the enduring ‘Jewish problem’).

And so we can distinguish between two kinds of demagogues: (i) the ones [Donald Trump, Boris Johnson, etc.] that on the whole leave the credentialed elites pretty much alone and re-direct the majority's energies at scapegoats (immigrants, refugees, dark-skinned citizens, etc.), and (ii) those demagogues that channel the anger at the credentialed elites. It turns out that (i) is can be a serious nuisance to epistemocracy (as the disruption caused by Brexit shows) and harm some of its members (especially if they beling to targeted scapegoat communities), while only (ii) is lethal to credentialed elites as such. Credentialed elites are able to accommodate themselves to (i); from their vantage point Donald Trump is ultimately mere entertainment. We see this calculation at work, first, in the favorable media coverage Trump garnered and, second, because Trump is not being treated as an existential threat to the status quo by those that have most to lose from it.

Once a demagogue along the lines of (ii) arises democracy is finished because the credentialed elites will not defend it. For, they have no attachment to democracy as such: already 'ignorant voters' are treated as a self-evident fact by many of the most ardent epistemocrats; there is increasing fondness to use arguments from complexity to favor either markets or experts. Rather, as Arendt suggests the credentialed will desert the democratic cause, and defend their power against the more egalitarian impulse in the name of a moral cause: merit. 

Obviously these outcomes are not inevitable. It is possible liberal democracies muddle on. It is notable that there is a huge atmosphere of crisis that permeates Arendt's writinsg from the late 1960s and early  70s. There was a genuine crisis that was arguably worse than what's being faced now, but for all of our many imperfections liberal democracies have not imploded since. In particular, it is more likely that external threats (fill in your favorite: climate change, violent Jihad, China, etc.) will allow the construction of some kind of unity that will involve some compromise between the principle of merit and the principle of equality.

 

 

The Significance of Piketty (and the estate tax)

Even so, this critique misses out on what’s interesting – and potentially very depressing – about Piketty’s theoretical account. Standard economic arguments start from an implicit set of assumptions about the absence of power relations. Perfect competition, by definition, is a state of the economy in which no one actor is more powerful than another – all actors are price takers, not price makers. This leads to a highly fruitful set of arguments about how real life markets – let alone polities – just aren’t like that. Markets aren’t perfect. Inequalities are rife. And as people like Jack Knight, Doug North when he was wearing his former-Marxist hat and (obviously, far more modestly) me have argued, this provides the foundations for a reasonably excoriating critique of standard economic claims. To the extent that the happy assumptions of perfect competition are not justified, so that power relations matter, we have no theoretical warrant whatsoever to believe that powerful and self-interested actors will influence institutions towards socially optimal outcomes. Specifically, these theories draw attention to the distributional consequences of institutions – i.e. who gets what. Unequal power leads to unequal influence over the institutions that distribute the benefits of cooperation, which in turn means that the benefits are likely to be distributed in unequal and inefficient ways. Here, there’s a hidden theoretical connection between standard economic critiques e.g. of monopoly and left-rationalist critiques of how actually-existing capitalism works. The latter, in a sense, draw the full conclusions of the arguments of the former. Both suggest moreover that in a world where there weren’t any power disparities, so that actors were fully equal participants in markets and politics, the problems of skewed institutions and unequal distribution of gains would disappear. Bringing conditions closer to the true equality of perfectly competitive markets would largely solve the problem.

Piketty’s claim is potentially much more corrosive. For him, the fundamental problem isn’t one of flawed markets and unequal power. It’s one of markets working as they are supposed to. In Piketty’s description (p.27), ‘the more perfect the capital market (in the economist’s sense, the more likely r is to be greater than g.’ Even more bluntly, the r>g inequality (p.424) ‘has nothing to do with market imperfections and will not disappear as markets become freer and more competitive. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.’ If Piketty is right, institutional reforms aimed at removing market imperfections will do nothing to address the fundamental problem of economic inequality, and may, indeed, exacerbate it. The problem isn’t in the institutions but in market capitalism itself, so that efforts to reform corrupt institutions will not fix the core problem--Henry Farrell, CrookedTimer. [Emphasis added.]

I have been following the Thomas Piketty seminar at Crookedtimer with interest (as somebody who has done some blogging on Piketty). Farrell really nails what matters about Piketty's Capital (in a way I had not managed, although I think several other contributors at Crookedtimber could have benefitted from reading my posts; I can also recommend this review by Blume and Durlauf, which is fair and critical). Farrell understates the point. Because one further way in which markets are not perfect is due to rent-seeking behavior by political insiders; which is why excessive profits (let's stipulate relative to risks) always generate questions about politically imposed imperfections (patents, trade-protection, standards, barriers to entry, etc.) in the market. So, a humanitarian reformist can always choose between improving market competition or finding direct ways to compensate the rest of society (through taxes, subsidies, etc.). That is to say, there is an implicit theodicy in modern thought about markets: for all the evils (big and small) accompanying markets (not to mention luck), pure and perfect markets generate the best of all possible worlds (for many areas of social life) and, thereby, deliver progress. Piketty can be taken to undermine the theodicy because -- if he is right -- in the long run we'll just be vastly more unequal. 

Even so, it is notable that Farrell does not mention an obvious market imperfection: the right to inheritance. Inheritance between generations is not secured by the market, but by governments' excessive willingness to protect and promote the wishes of the deceased. Piketty discusses the significance of significant estate taxes in the history of progressive taxation (see, especially, 502-9). Oddly, he does not advocate it in his conclusion (he focuses on a global capital tax, in large part, to promote transparency and further research as discussed by Kevin Vallier and myself, and earlier here). I say "oddly" because he notes how effective it had been. While he rightly worries about the effects of a heavy tax on capital (it would prevent "entrepreneurs" from turning "into rentiers, since there would be no more entrepreneurs," (572) a tax on inheritance does not prevent entrepreneurship (especially if it is combined with relatively low taxes on earned income).*

Given that Piketty does not advance the estate tax as one of his official solutions, it should not be such a surprise that the estate tax is ignored by the official commentators at Crooked Timber (even though some of the contributed comments by readers do mention it). Anderson explicitly leaves the "tax code" aside. Anne Cudd basically defends the justness of inheritance if the income is acquired justly and the effects of inheritance do not create unjustness (when, for example "inherited wealth creates a privileged group like other forms of oppression.") But why society should protect the wishes of the dead in this way is by no means obvious.  No positive argument is given, and I am unfamiliar with any one that is compelling (even Nozick recognizes there is something fishy about gift-giving through generations).

One need not be a luck egalitarian to find it odd that the government should be instrumental in ensuring that some get more through no effort whatsoever of their own. The estate tax may, in fact, be the most just tax there is; collecting it requires the fewest violations of liberty (last wills are part of the public record, etc.)--go read Adam Smith. If the estate tax is set high enough, then  r>g does not occur. It does not follow that the outcome patterns that would then occur in pure and perfect markets are always desirable, but that's a different issue (recall).