ESSAY / María Granados
Most scholars and newspapers (1) claim that the inequality gap is widening across the globe, but few provide an explanation as to why this apparently growing concern occurs, nor do they look into the past to compare the main ideologies regarding potential solutions to such problems (i.e.: the Austrian School of Thought and Keynesianism). The following paper attempts to do so by contrasting interventionist and libertarian approaches, to ultimately give an answer to the question.
Alvin Toffler predicted and described what he called ‘The Third Wave’, a phenomenon consisting of the death of industrialism and the rise of a new civilisation. He focuses on the interconnection of events and trends, (2) which has often been ignored by politicians and social scientists alike. Notwithstanding, J.K. Galbraith points out that the economy is shaped by historical context, and attempts to provide an overview of the main ideas that have given birth to current economic policies; (3) while Landes's focus on the past suggests inequality is not a new phenomenon. (4) Hence, its evolution cannot be overlooked: On the one hand, it led Marx to proclaim that private capital flows invariably lead to property concentration in consistently fewer hands; on the other hand, it led Kuznets to believe that modern economic growth would make developed countries to reach out geographically, spreading process to developing countries thanks to major changes in transport and communication. (5) First and foremost, we shall delve into the why question, sustained by the premise that there is, in fact, inequality, which sets up the foundation for economic studies. (6) Piketty asserts that ‘arbitrary and unsustainable inequalities’ are generated ‘when the rate of return on capital exceeds the rate of growth of output and income’. An advocator for open markets and the general interest, he rejects protectionism and nationalism, (7) but is it possible to establish justice through capitalism?, and, more importantly, is capitalism the most suitable system to do so?
Famous liberal philosopher Adam Smith wrote on the matter of state intervention that public policy should only be used insofar as it stimulates economic growth. (8) Freedom of trade made economies specialise through the division of labour, and so it resulted on low prices and an abundant supply of marketable products. The critique on corporations, state-chartered companies, and monopolies, made him conclude that the State should control (9) common defence, the administration of justice, and the provision of necessary public works. Contrary to popular belief, he was also in favour of a proportionate income tax. (10) David Ricardo added that a tax on land rents was necessary to prevent landowners from an increase share of output and income. In the nineteenth century, Marx pursued the destruction of the inevitably accumulated private capital. In the same period, realist theories (11) were embraced by Müller and List, among others, who viewed the state as a protector for the citizens, the equality provider. What all of the aforementioned theories have in common is that the State does play a role to a certain extent on the prevention of ‘unfairness’. (12) Although thinkers may well be a product of their times, John Maynard Keynes and Friedrich August Von Hayek have heavily influenced current policies regarding inequality. Arguably, their thoughts stem from the above-mentioned ideas: the input of Marx’s Capital in the Keynesian welfare state is contrasted with Smith's liberal approach (‘let the invisible hand be’) Hayek embraced. During the Great Depression, the preference for liquidity made Keynes focus on the shortage of the demand, to suggest that the corrective action of the government, borrowing and spending funds, was the best way out of the crisis. Several concepts were born or renewed, such as public work, or the social security system, and, more importantly the ‘deliberate deficit’. His theory regarded the deliberate unbalance of public budget so that more money would flow into the economy, sustaining demand and employment. (13)
Libertarians would argue that Ricardo failed to foresee that technological progress was going to diminish the dependence on agriculture, therefore decreasing and stabilising land price. Marx also rejected the likelihood of a long-lasting technological development. The latter challenged his ideas, since an increase in productivity and efficiency led to higher salaries and better living conditions, providing more opportunities for the workers. Indeed, with industrialisation came an improvement in the essentials of life. Mitchell, Schumpeter and Robbins, who studied the business cycle, theorised that the economy was a tendency whose problems had no prevention or cure. Thus, inequality had to be allowed to run its course, since it would eventually decrease. In the Post-Keynesian Revolution, the interaction of the wage-price spiral caused inflation. Hayek rhetorically asked the interventionists: ‘in our endeavour consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?’ (14) The OPEC crisis in 1973 made governments apply the Austrian School to WIN, (15) removing any obvious impediments to market competition (i.e.: government regulation). Milton Friedman, in favour of the classical competitive market system, followed Hayek’s liberalism. He did write about the negative income tax, consisting of securing a minimum income for all by controlling money supply; nonetheless, he agreed with what Hayek stated in 1945: The more the state organises, plans and intervenes, the more difficult it is for the individual to choose freely, to plan for itself. For Hayek, private property was ‘the most important guarantee of freedom’. The division of the means of production amongst independent citizens was his concept of fairness. (16) Professor of Economics Walter E. Williams introduces The Road to Serfdom explaining Hayek’s underlying three premises: If using one individual to serve the purpose of another is morally wrong (slavery), taking money from one individual to serve the purpose of another is just as wrong; collectivists or interventionists cannot ignore that free markets produce wealth; and men cannot know or do everything, thus, when the government plans, it assumes to know all the variables. (17)
In 1945, when Hayek challenged the Keynesian perspective, multilateralism arose, giving birth to institutions at the global and regional levels. (18) Currently, whilst there is a tendency to focus on ‘global’ problems and solutions, Piketty (19) asserts that globalised capitalism can only be regulated through regional measures, stating that ‘unequal wealth within nations is more worrisome than unequal wealth between nations.’ Specifically, he proves that salaries and output do not catch up with past wealth accumulation. He believes that taxing capital income heavily could potentially kill entrepreneurial activity, and decides that the best policy would be a progressive annual tax on capital. Despite Hayek’s premise being the unknown, thereof disgraceful consequences of interventionism; Stiglitz disbelieves that trickle-down economics will address poverty, considering that it is precisely the lack of information what makes the ‘invisible hand’ fail. Neoliberal assumptions are heavily critisised by Stiglitz, who evaluates the role of the IMF and other international economic institutions’ performance, concluding that their programs have often left developing countries with more debt and a more corrupt, richer, ruling government. Moreover, good management ultimately depends on embracing the particular and unique characteristics of each country’s economy. (20) At this point, one could ask itself, is justice a biased concept of the west? Landes claims the rich (in IPE, developed countries) will solve the problem of pollution, for instance, because it is them who have more to lose. (21) This could result in a natural redistribution of wealth. By contrast, he demonstrates that the driving force of progress was seen as ‘Western’ on the realms of education, thinking and technique; until the uneven dissemination made people reject it. (22) The egalitarian society is seemingly in between both of the main economic branches previously discussed: It includes the free will of the rich to tackle current problems the so-called globalization poses; (23) the free-will of developing states to apply national solutions to national problems, and the impulse of international cooperation and regional political integration.
To conclude, history evidences most economists, thinkers and scholars resort to the state to try to distribute wealth evenly. The way they portray the same problem makes them disagree on the way to solve it, but there is an overall agreement on the need to intervene to a certain extent to prevent the inequality gap from broadening. In Galbraith’s words: ‘Economics is not, as often believed, concerned with perfecting a final and unchanging system. It is in a constant and often reluctant accommodation to change.’ (24) On this quest for justice, it may be worth realising that the concept of unfairness cannot be taken for granted.
1. E.g.: Lucas Chancel in The Guardian in Jan. 2018, Piketty (2014), Ravenhill (2014), David Landes (1999).
2. Toffler, Alvin (1980). The Third Wave. New York: Bantam Books.
3. Galbraith, John Kenneth. (1987). Economics in Perspective. Boston: Houghton-Mifflin Trade and Reference.
4. Landes, David. (1999). The Wealth and Poverty of Nations. London: Abacus.
5. Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992.
6. The aim of the subject being the allocation of scarce resources (according to e.g.: L. Robbins).
7. Piketty, Thomas. (2014). Capital in the Twenty-First Century. Cambridge, US: Harvard University Press. p. 7
8. Galbraith, John Kenneth. l.c. f.f. 8
9. E.g.: through the imposition of tariffs or taxes following the canon of certainty, convenience, and economical to assess and raise.
10. Read Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. 1998 edition. Milano: Cofide. Book V: On the Revenue of the Sovereign or Commonwealth; Chapter II: On the Sources of the General or Public Revenue of the Society; Part II: On Taxes. I.
11. For more on the theories that shaped economic thought, read Paul, Darel, and Amawi, Alba, (Eds.). 2013. The Theoretical Evolution of International Political Economy: A Reader. Oxford: Oxford University Press. See p. 16-19 and p. 153 for Realism, p. 95 and 102 for Friedrich List.
12. Note: Even in socialism, prior to the State’s dissolution, workers had to become the ruling government to ensure the process ensued.
13. Keynes, John Maynard. (1936). The General Theory of Employment Interest and Money. Cambridge: Palgrave MacMillan.
14. Hayek, Friedrich A. (1945). The Road to Serfdom. Reader’s Digest. Combined edition, 2015: The Institute of Economic Affairs. p. 40
15. Whip Inflation Now
16. Ibid. p. 41
17. Ibid. Introduction
18. Read Ravenhill, John. (2014). Global Political Economy. Oxford: Oxford University Press.
19. Pikkety, Thomas. l.c., pp. 303-304, 339 f.f.
20. Stiglitz, Joseph. (2003). Globalization and its Discontents. London: Penguin.
21. Landes, David. l.c. P. 516
22. Ibid. p. 513
23. Hirst develops the following points: In the 1870-1914 period there was as much economic integration as now; most transnational corporations are not truly ‘global’; the Third World is becoming marginalised with regards to the movement of capital, employment and investment; and supranational regionalisation is a more relevant trend than that of Globalization. Hirst, Paul, et al. (2009). Globalization in Question. Oxford: Polity.
24. Galbraith, J.K. l.c. Chapter 22, p. 326.
Chancel, Lucas (coordinator). World Inequality Report. Wid.world: Executive report. World Inequality Lab, 2018, pp. 4–16.
Galbraith, John Kenneth. (1987). Economics in Perspective. Boston: Houghton-Mifflin Trade and Reference.
Hayek, Friedrich August (1945). The Road to Serfdom. Reader’s Digest. Combined edition, 2015: The Institute of Economic Affairs.
Hirst, Paul, et al. (2009). Globalization in Question. Oxford: Polity.
Keynes, John Maynard. (1936). The General Theory of Employment Interest and Money. Cambridge: Palgrave MacMillan.
Landes, David. (1999). The Wealth and Poverty of Nations. London: Abacus.
Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992.
Paul, Darel, and Amawi, Alba, (Eds.). 2013. The Theoretical Evolution of International Political Economy: A Reader. Oxford: Oxford University Press.
Piketty, Thomas. (2014). Capital in the Twenty-First Century. Cambridge, US: Harvard University Press.
Ravenhill, John. (2014). Global Political Economy. Oxford: Oxford University Press.
Smith, A. (1998). An inquiry into the nature and causes of the wealth of nations. Scotland.
Stiglitz, Joseph. (2003). Globalization and its Discontents. London: Penguin.
Toffler, Alvin (1980). The Third Wave. New York: Bantam Books.