Economic Justice and Democracy

From Competition to Cooperation

Robin Hahnel

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135331436
• Edition: 1
• Topic: Business
• Subtopic: Business internazionale
• Index: Business

In Economic Justice and Democracy Robin Hahnel argues that progressives need to go back to the drawing board and rethink how they conceive of economic justice and economic democracy. He presents a coherent set of economic institutions and procedures that can deliver economic justice and democracy through a "participatory economy." But this is a long-run goal; he also explores how to promote the economics of equitable cooperation in the here and now by emphasizing ways to broaden the base of existing economic reform movements while deepening their commitment to more far reaching change.

Part I
Economic Justice and Democracy

1
Economic Justice

When economic historians look back on the last fifth of the twentieth century what will stand out above all else will be the dramatic increase in inequality of wealth and income, both within and between countries. During the 1980s and 1990s inequality increased at unprecedented rates within the United States and most other advanced economies, and the gap between rich and poor countries widened sensationally. This spectacular rise in inequality came on the heels of a more measured trend toward greater equality during the previous half century. During the middle part of the twentieth century, social democratic and New Deal reforms in advanced capitalist economies greatly expanded the ranks of their middle classes and thereby reduced wealth and income inequalities inside their economies. At the same time communist governments, for all their faults, reduced internal income and wealth inequalities compared to their capitalist predecessors and made dramatic strides toward closing the gap in GDP per capita between their less developed economies and the more advanced capitalist countries. Finally, after World War II the postcolonial international economy guided by the Bretton Woods system managed to reduce the gap between rich and poor capitalist countries, even if only slightly. Unfortunately, these equalizing trends came screeching to a halt at the beginning of the 1980s, to be replaced by arguably the most dramatic redistribution of wealth and income from poor to rich the world has ever seen, as well as the disappearance of middle classes—scarcely older than a single generation—in large parts of the global economy.

Reverse Robin Hood

In a study published in 1995 by the Twentieth Century Fund, Edward Wolff concluded:

Many people are aware that income inequality has increased over the past twenty years. Upper-income groups have continued to do well while others, particularly those without a college degree and the young have seen their real income decline. The 1994 Economic Report of the President refers to the 1979–1990 fall in real income of men with only four years of high school—a 21% decline—as stunning. But the growing divergence evident in income distribution is even starker in wealth distribution. Equalizing trends of the 1930s–1970s reversed sharply in the 1980s. The gap between haves and have-nots is greater now than at any time since 1929.¹

Chuck Collins and Felice Yeskel report: “In 1976, the wealthiest one percent of the population owned just under 20% of all the private wealth. By 1999, the richest one percent’s share had increased to over 40 percent of all wealth.” And they calculate that in the twenty-one years between 1976 and 1997 while the top 1 percent of wealthholders doubled their share of the wealth pie, the bottom 90 percent saw their share cut almost in half.² Between 1983 and 1989 the average financial wealth of households in the United States grew at an annual rate of 4.3 percent after being adjusted for inflation. But the top 1 percent of wealthholders captured an astounding 66.2 percent of the growth in financial wealth, the next 19 percent of wealthholders captured 36.8 percent, and the bottom 80 percent of wealthholders in the United States lost 3 percent of their financial wealth. As a result the top 1 percent increased their share of total wealth in the United States from 31 to 37 percent in those six years alone, and by 1989 the richest 1 percent of families held 45 percent of all non-residential real estate, 62 percent of all business assets, 49 percent of all publicly held stock, and 78 percent of all bonds.³ Moreover, “most wealth growth arose from the appreciation (or capital gains) of preexisting wealth and not savings out of income. Over the 1962 to 1989 period, roughly three-fourths of new wealth was generated by increasing the value of initial wealth—much of it inherited.”⁴ When we look to see who benefited from the stock market boom between 1989 and 1997 the same pattern emerges. The top 1 percent of wealthholders captured an astonishing 42.5 percent of the stock market gains over those years, the next 9 percent of wealthholders captured an additional 43.3 percent of the gains, the next 10 percent captured 3.1 percent, while the bottom 80 percent of wealth-holders captured only 11 percent of the stock market gains.⁵

While growing wealth inequality was more dramatic, income inequality has been growing as well. Real wages fell in the United States after the mid-1970s to where the average hourly wage adjusted for inflation was lower in 1994 than it had been in 1968. Moreover, this decline in real hourly wages occurred despite continual increases in labor productivity. Between 1973 and 1998 labor productivity grew 33 percent. Collins and Yeskel calculate that if hourly wages had grown at the same rate as labor productivity the average hourly wage in 1998 would have been $18.10 rather than $12.77, a difference of $5.33 an hour, or more than eleven thousand dollars per year for a full-time worker.⁶ Moreover, the failure of real wages to keep up with labor productivity growth was worse for those in lower wage brackets. Between 1973 and 1993 workers earning in the 80th percentile gained 2.7 percent in real wages while workers in the 60th percentile lost 4.9 percent, workers in the 40th percentile lost 9 percent, and workers in the 20th percentile lost 11.7 percent—creating much greater inequality of wage income.⁷

In contrast, U.S. corporate profit rates in 1996 reached their highest level since these data were first collected in 1959. The Bureau of Economic Analysis reported that the before-tax profit rate rose to 11.4 percent and the after-tax rate rose to 7.6 percent in 1996, capping an eight-year period of dramatic, sustained increases in corporate profits the Bureau called “unparalleled in U.S. history.” Moreover, whereas previous periods of high profits accompanied high rates of investment and economic growth, the average rate of economic growth over these eight years was just 1.9 percent Whatever was good for corporate profits was clearly not so good for the rest of us.

While there are a number of different ways to measure inequality, the most widely used by economists is a statistic called the Gini coefficient. A value of 0 corresponds to perfect equality and a value of 1 corresponds to perfect inequality. The Gini coefficient for household income in the United States rose steadily from 0.405 in 1966 to 0.479 in 1993, a remarkable 18.3 percent increase in income inequality among U.S. households over the time period.⁸

Trends in global inequality are even more disturbing. Walter Park and David Brat report in a study of gross domestic product per capita in ninety-one countries that the value of the Gini rose steadily from 0.442 in 1960 to 0.499 in 1988, a 13 percent increase in the economic inequality between countries in less than twenty years.⁹ The Human Development Report 2000 published by the United Nations reported that between 1975 and 1990 GDP per capita in countries with a high human development index grew at a 2.1 percent average annual rate, while GDP per capita in countries with a low human development index fell at a 1 percent average annual rate (p. 205). The report also reveals that between 1990 and 1998 the average annual rate of growth of GDP per capita was more than twice as high in countries with a high human development index (1.7 percent) than in countries with a low human development index (0.8 percent). The gap between rich and poor countries has increased dramatically, and all evidence available so far indicates that this trend toward greater global inequality has continued into the new millennium as neoliberal globalization continues despite growing popular dissent.

The facts are clear: we are experiencing increases in economic inequality inside the United States reminiscent of the robber baron era of U.S. capitalism over a hundred years ago, and the acceleration of global inequality has reached unprecedented levels. But how should we interpret the facts? When are unequal outcomes inequitable and when are they not? Is it necessarily unfair when some consume more, or work less than others? Do those with more productive property deserve to work less or consume more? Do those who are more talented or more educated deserve greater rewards? Do those who contribute more, or those who make greater sacrifices, or those who have greater needs deserve more? There is no denying that economic inequality is increasing dramatically, both inside and between countries, but by what logic are unequal outcomes fair or unfair? A central argument of this book is that increasing confusion—and opportunism—among critics of capitalism about economic injustice contributed substantially to our failure to advance the cause of equitable cooperation in the twentieth century, and will continue to plague our efforts in the twenty-first century if we do not sharpen our understanding of economic justice and commitment to fighting for economic justice in any and all circumstances.

Different Conceptions of Economic Justice

Equity takes a backseat to efficiency for most mainstream economists, while the issue of economic justice has long been a passion of critics of capitalism. From Proudhon’s provocative quip that “property is theft,” to Marx’s three-volume indictment of capitalism as a system based on the “exploitation of labor,” economic justice has been a major theme in political economy. But as much as economic justice is still a passion of radical political economists today, we seem to have a difficult time saying clearly what it is. Instead, many radical economists find themselves in the position in which the late U.S. Supreme Court Justice Potter Stewart found himself when required to make a ruling on pornography. In his immortal words: “I shall not today attempt further to define pornography, but I know it when I see it.” It seems few radical economists can define economic justice, but almost all believe they know economic in justice when they see it. Unfortunately this approach is an invitation to inconsistencies and opportunism that undermine the movement fighting for economic justice in the long run.

What is an equitable distribution of the burdens and benefits of economic activity? What reasons for differential compensation are morally compelling, and what reasons carry no moral weight? Four distributive maxims span the range of possible answers to the question how people should be compensated for their part in economic cooperation.

Maxim 1: To Each According to the Value of the Contribution of Her Physical and Human Capital

The rationale behind maxim 1 is that people should get out of an economy what they and their productive possessions contribute to the economy. If we think of economic goods and services as a giant pot of stew, the idea is that individuals contribute to how plentiful and rich the stew will be by their labor and by the nonhuman productive assets they bring to the economy kitchen. If my labor and productive assets make the stew bigger or richer than your labor and assets, then according to maxim 1 it is only fair that I eat more stew, or richer morsels, than you do.

While this rationale has obvious appeal, it has a major problem I call the Rockefeller grandson problem. According to maxim 1, the grandson of a Rockefeller with a large inheritance of productive property should eat a thousand times as much stew as a highly trained, highly productive, hardworking son of a pauper—even if Rockefeller’s grandson doesn’t work a day in his life and the pauper’s son works for fifty years producing goods or providing services of great benefit to others. This will inevitably occur if we count the contribution of productive property people own, and if people own different amounts of machinery and land, or what is the same thing, different amounts of stocks in corporations that own the machinery and land, since bringing a stirring spoon, cooking pot, or stove to the economy kitchen increases the size and quality of the stew we can make just as surely as peeling potatoes and stirring the pot does. So it seems that anyone who considers it unfair when the idle grandson of a Rockefeller consumes more than a hardworking, productive son of a pauper cannot accept maxim 1 as their definition of economic justice.

A second line of defense for maxim 1, which can be thought of as the conservative conception of economic justice, is based on a vision of “free and independent” people, each with her own property, who, it is argued, would refuse to voluntarily enter a social contract on any other terms. This view is commonly associated with the writings of John Locke. But while it is clear why those with a great deal of productive property in Locke’s “state of nature” would have reason to hold out for a social contract along the lines of maxim 1, why would not those who wander the state of nature with little or no productive property in their backpacks hold out for a very different arrangement? If those with considerable wherewithal can do quite well for themselves in the state of nature, whereas those without cannot, it is not difficult to see how requiring unanimity would drive the bargain in the direction of maxim 1. But then maxim 1 is the result of an unfair bargaining situation in which the rich are better able to tolerate failure to reach an agreement over a fair way to assign the burdens and benefits of economic cooperation than the poor, giving the rich the upper hand in negotiations over the terms of the social contract. In this case the social contract rationale for maxim 1 loses moral force because it results from an unfair bargain.

In A Theory of Justice (1971), John Rawls corrected this weakness in social contract theories of justice through the ingenious device of an “original position.” Rawls explicitly acknowledged that no negotiation over a social contract had actually ever taken place at any point in history, and we were therefore talking about a hypothetical negotiation. More importantly, his idea of an original position also focused attention explicitly on the crucial issue of what constitutes a fair negotiating situation. Not surprisingly Rawls’s argues that in his “original position”—where none know how much productive property they will have in their backpacks, and all must fear they will have little or none—rational people would not agree to maxim 1. We will consider below Rawls’s own conclusion that what rational people in his original position would agree to is what he calls the difference, or maximin principle. However, for now we can draw a minimal conclusion: Unless those with more productive property acquired it through some greater merit on their part, the income they accrue from this property is unjustifiable and therefore unfair, in which case maxim 1 must be rejected as an acceptable definition of economic justice if we find that those who own more productive property did not come by it through greater merit.

One way people acquire productive property is through inheritance. But it is difficult to see how those who inherit wealth are more deserving than those who don’t. It is possible the person making a bequest worked harder or consumed less than others in her generation, and in one of these ways sacrificed more than others. Or it is possible the person making the bequest was more productive than others. And we might decide that greater sacrifice or greater contribution merits greater reward. But in these scenarios it is not the heir who made the greater sacrifice or contribution, it is the person who made the bequest, so the heir would not deserve greater wealth on those grounds. So if we decide rewards are earned by sacrifice or personal contribution, income from inherited wealth violates both norms since inheriting wealth is neither a sacrifice nor a personal contribution.

A more compelling argument for inheritance is that banning inheritance is unfair to those wishing to make bequests than that it is unfair to those who would receive them.¹⁰ To frame the dilemma in its starkest form, suppose those who wish to make bequests came by the productive property in a manner consistent with our conception of economic justice—whatever that might be—and rather than eat prodigious portions of caviar in the twilight of their lives, they prefer to pass on productive assets to their children or grandchildren. To deny them the right to do so would seem to be an unwarranted violation of their legitimate right to dispose of their economic wherewithal as they wish. One could argue (as Robert Nozick does) that if wealth is justly acquired it is unfair to prevent anyone from disposing of it as they wish, including bequeathing it to their descendants.

But what of the right of members of the younger generation to equal economic opportunities? If we permit inheritance of productive assets some will start out with significant advantages and others will be unfairly handicapped. I do not believe there is any way around this dilemma, which can be stated as follows: Do members of an older generation, when exercising their right to use their wealth as they wish, have the right to create unequal economic opportunities for a younger generation?

My answer is no. If we pose the issue in terms of rights, this is a case of conflicting rights, and I would argue that the right to an equal economic opportunity in life outweighs the right to bequeath significant wealth to one’s offspring. In other words, while some freedom of consumption for the older generation is sacrificed by outlawing inheritance, this minor restriction of a right is necessary to protect a more fundamental right of the younger generation to equal economic opportunities.

However, I argue in the next chapter that to conceptualize economic democracy in terms of property rights is a problematic approach precisely because conflicting rights, or freedoms, are commonplace, and settling these conflicts by awarding a right to one party or the other is ultimately arbitrary. I suggest that instead of attempting to maximize economic freedom—a logically impossible task when people’s economic freedoms conflict with one another and we consider the freedoms of different people incommensurable—the goal should be to award everyone decision-making power in proportion to the degree they are affected by the outcome. What if we consider conflicting interests over bequests in these terms? Since the younger generation is much more seriously affected by unequal economic opportunities than the older generation would be affected by limiting their freedom of consumption in this one respect, it would be justifiable to limit inheritance to bequests that do not generate significant differences in economic opportunities.

While the conflict between the ...