Equality and the Modern Economy: Are companies the new partners in equality? Smith Institute

179

Wednesday 28th October 1998

In the last of these seminars, John Gray described the social liberal position in equality, which he contrasted with what he called egalitarian distributionism. I want to pick up where Gray left off.

Let me summarise Gray’s position in his own words: “A recognition of the importance of social cohesion is joined with a hostility to class-based social hierarchies. They (social liberals) value equality not because they think it demanded by some theory of justice but because it is one of the central conditions of individual well-being.

For the social liberals, the basic structure of society is an artefact and justice is a social convention. They view property rights and personal freedoms not as free-standing entities whose structure can be determined by consulting some recent theory of justice or rights – but as social conventions, instruments which can and should be recurrently revised.”

This social liberal position contrasts with the rights-based view of equality and justice exemplified in these seminars by Dworkin. Social Liberals believe there are few principles of justice or concepts of equality which are independent of context, time or culture. They tend to speak European languages rather than English with American accents. They are less individualist, and don’t talk very much about rights and rather more about solidarity and sympathy. They are not perfectionists: they don’t believe there is some ideal structure of society and that systems should be judged by how far they have progressed towards them.

Let me illustrate this contrast more specifically. I suspect everyone in this room would agree that it is unfair that what people are paid should vary according to sex or marital status. Yet it is not long since it was thought unfair that a single teacher, living at home with her parents, should receive the same salary as a married man doing the same job who had a wife and children to support. As a result, we had a salary structure that incorporated sex and age discrimination and housing and dependency allowances.

These positions represent two different, and essentially incompatible, views of equality and fairness. For some people, the older view is and was simply wrong. We can understand why people held these views, and respect their sincerity, but we view them as benighted: they are like people who thought that the sun went round the earth, or heat was caused by the release of phlogiston: they were simply ignorant of a truth which we know now.

The social liberal, on the other hand, is much more relaxed. People had one concept of fairness fifty years ago, and a different concept now. The social liberal has a sense of history, and suspects that there are particular reasons why contemporary views of equality attract so much importance to non-discrimination. Reaction against the evils of racialism, and a change in the role of women in society. Probably in fifty years time, when the debate on these issues is further in the past, our concept of fairness and equality will be different still. Dworkin, who regards his contemporary values as universal truths, would find this extremely difficult.

I would describe myself as both a social liberal and a neo-classical economist. This makes more or less unique. I think Joe Stiglitz, whose excellent book Whither Socialism? comes close to this position, might fall into the same category. But the vast majority of market oriented economists, if they are on the centre-left at all, are what I have called redistributive market liberals. Their political philosophy comes from Rawls. Justice, fairness and equality are about a theory of the initial distribution of resources. If we get that right the market will take care of the rest. The equality we seek is of opportunity not outcome.

The reason for the popularity of this position amongst economists is that there seems to be a national affinity between the contractarian individualistic, rights based approach of modern American political philosophy and the individualistic, maximising property rights based approach of modern neo-classical economies. It is a superficially plausible story and for most of my adult life as an economist I believed it. I don’t any more.

One central failure of redistributive market liberalism is that it rests on an impossible dichotomy between our selfish private behaviour and our egalitarian public behaviour. We are beasts at work and saints at the ballot box: but we know that in reality this does not happen. Some of you will know Brecht’s Good Woman of Setzuan, in which a prostitute with a heart of gold goes into business. She finds herself forced to adopt the persona of an evil brother to deal with necessary unpleasantness and soon, as with Jekyll and Hyde, the evil brother appears more and more and the good-natured prostitute less and less. Brecht correctly anticipated the essential nature of the Thatcherite era.

But there is another, more technical, but equally fundamental problem. It is that the distinction between equality of opportunity and equality of outcome is unsustainable.

Dworkin discussed equality in these seminars by reference to a desert island in which chips are exchanged for mangoes and cherries. As he explains, philosophers like this kind of model. So do economists. I used the same kind of model in teaching microeconomics I, except that I substitute applies and bananas for mangoes and cherries. The link between neoclassical economics and contractarian political philosophy is evident here.

The issue, then, is whether the inequality we observe in the distribution of mangoes arises from inequality in the distribution of chips. If we have fixed up the distribution of chips properly, we don’t have to worry: the final distribution of mangoes will meet the requirements of fairness and justice.. There are some complications, but this is the basic premise.

Let me give a simple example of why we cannot separate opportunity and outcome in this way. Take the famous, or notorious, case in which a woman foolishly spilt a cup of coffee over herself in McDonalds and was awarded $3m in compensation. Technically, what happened was that the courts decided that her contract with McDonalds contained an implied warranty about the temperature of the coffee and that the company was in breach of its agreement with her.

We all know what happened in reality was that a sympathetic jury noticed that the complainant had no money and McDonalds had a lot and therefore invented a new set of property rights which transferred $3m from the full pocket to the empty one. In other words, the process worked back from the outcome to the structure of property rights, not forward from the property rights to the outcome.

There are two key points to this example. One is that the nature and distribution of property rights is not something which is or should be determined independently of the outcomes which follow. The other is that the property rights approach to this, and most other, issues gets in the way of the sensible solution. What should have happened, and would have happened in any jurisdiction outside the baleful influence of American legal philosophers, is that fellow customers should have gathered round to help mop up the coffee and McDonalds should have paid for a taxi home. That is the difference between a society organised round abstract principles of justice and one based on shared values and social cohesion.

Now let us turn to the question that Victor Keegan immediately posed to Dworkin: do we think it fair that Bill Gates should be so rich? In the Dworkin framework, we rephrase the question by asking whether Gates is rich because he started with lots of chips, or because he made so much of his supply of chips. Is Gates richer than I am because his father was richer than mine (he was), because he worked harder at school than I did (he didn’t), he took a risk that I didn’t (he did), he was luckier than I am (he was). You probably already have a sense that we are not really on top of the issues. We are not.

The key point is that that distinction between differences in endowment and differences in outcome tells us very little about the nature of inequality in modern economics. Let us ask more precisely why Gates is so rich. Gates is, of course, the largest shareholder in Microsoft, which has exclusive rights in MS-DOS and in Windows, the graphical user interface based on it. These rights are in turn extremely profitable as a result of the interaction between intellectual property legislation and US anti-trust law. If these laws or their construction by the courts were slightly but plausibly different, the rights to MS-DOS might have been held by IBM, or by nobody at all. The rights to graphical user interfaces might have been held by Xerox, who invented them, or by Apple, who developed them commercially.

In other words, Gates’ wealth is explained by the structure and interpretation of complex and sophisticated rules, laws and regulations. In Gray’s language it is explained by “social conventions, instruments which can and should be recurrently revised”, and which do indeed differ across countries and are recurrently revised and which may be in the process of being recurrently revised in the US courts at this very moment. And if you ask what factors should govern decisions about what framework of rules and conventions we should have you would point to

· current concepts of fairness in relation to rewards from innovation and monopoly

· empirical evidence about the effects of different forms of intellectual property legislation on innovation

· evidence about the effectiveness and consequences of different forms of competition policy.

You would not, in short, be able to base your choice to more than a very limited degree on some abstract theory of justice and it is probable that you would make very different choices based on facts about the economy in which you operated and the social values and habits which prevailed within it. Not only the distribution but the nature of property rights are social constructions.

I chose to discuss Gates because this was the ball that was bowled. I want to make the broader point that almost any question you might pose about the nature and changing sources of inequality in modern economies would be answered in a similar way. If we asked instead why Warren Buffett is very rich, or why lone parenthood has become so much more important as a cause of poverty, or why the earnings of doctors are less dispersed than those of lawyers, you will in all cases find the desert island model with its chips, mangoes and cherries completely unhelpful. You will in all cases want to talk about the ways in which our changing values and our varying views of the determinants of social and economic efficiency are enmeshed in social, economic and commercial institutions, and are enmeshed in ways which differ between societies and over time.

And that is why, although a neoclassical economist, I am a social liberal. I no longer think that fairness and equality are mainly issues for the tax and benefit system. I think that fairness must underpin the totality of the design of our social, economic and commercial institutions, and prompt their constant revision

John Kay

26th October 1998

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