Friday, August 28, 2015

All our needs are social

In a recent article published here (which is a prequel to his book), Professor  Harry G. Frankfurt takes a philosophic position against our concern with inequality. According  to him, our intuition does tell us that we should be worried about inequality, but that intuition is misleading for an effective moral theory where we should be only concerned about our own well-being and “good life”, not in relationship to the others. He allows however that we should be concerned with incomes of those whose “resources are too little.”

I have already encountered similar opinions, among economists, and written about that (here), so it is with some reluctance that I have to cover the same ground again. But I must admit that this kind of argument is somewhat of a red flag to me so here I go again. For simplicity, I divide my argument into three parts.

We are social beings. It was stated by Adam Smith very nicely that our needs vary in function of what we consider to be socially acceptable. In a much quoted passage, Smith contrasts a man living in a relatively poor society who is content with a roughly-hewn shirt and another one, living in a richer society, who  would be ashamed to be seen in public without a linen shirt. Smith was drawing on his own experience, having observed how what is socially acceptable, i.e., what are our “needs”, has changed in his own lifetime as England and Scotland had become richer.

Here is the quote:

“[Under necessities] I understand not only the commodities that are indispensable for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.” (Book 5, Chapter 2)

Smith’s observation has far-reaching consequences. If our needs depend on what is socially acceptable, then they will clearly vary as between different societies. They will depend on the wealth of such societies or wealth of our peer groups. Consequently, our needs are (1) even in theory endless (because development has no material limit), and (2) they are thoroughly relative. We cannot distinguish between that part of the needs which is presumably due to ourselves, our “real” needs that, according to Professor Frankfurt, determine whether “[we] have good lives, and not how [our]  lives compare with the lives of others” and the  other part which is presumably due to the environment.  

It is futile to try to distinguish between the two. We do not know what are our needs until we live in a society and observe the needs of others. So, pace Professor Frankfurt, we cannot just imagine that others do not exist as he enjoins us to do. All our needs are social.

But my friend Carla Yumatle, in a discussion on Twitter, has made a point against this interpretation (I paraphrase her): yes, all our needs may be social, but it does not mean that a moral theory, whose objective is to provide us with some moral guidance, needs to take this into account. Actually, it may deplore that we have such needs. Carla draws the distinction  between Rousseau’s amour propre (which is basically vanity, or what used to be called “pride” or self-love in relationship to others) and amour de soi (which is concern with ourselves as such). The latter would be, if I understand her well, acceptable, according to Frankfurt, but the former (which obviously relies on our comparisons with others) would not.

Authenticity. But that too depends  on a false dichotomy between amour de soi and amour propre. The two are indistinguishable. To show that they are different we have to prove somehow that only amour de soi is authentic, while amour propre is not. Or as Professor Frankfurt claims: “It [concern with inequality] leads a person away from understanding what he himself truly [sic!] requires in order to pursue his own most authentic needs, interests, and ambitions.”

But similarly to the previous argument, here too we cannot tell what are  authentic and unauthentic needs. I really have no idea what are my authentic needs as compared to the needs that I develop from living in New York. If I lived in Belgrade (as I did) or Chennai (as I did not), I would have had entirely different needs. Does anyone doubt that? So what are my “authentic” needs?

Do I have an “authentic” need for an iPhone? No, I did not have an “authentic” need so long as iPhones did not exist. But now I do have an “authentic” need for an iPhone.  However much we might like the fact that somebody decides not to own an iPhone when everybody else has it, we cannot claim that she is more authentic or somehow unconcerned with her relative position.  She might decide not to have an iPhone because she does not like to talk on the phone or because she likes to be contrarian but there is nothing more authentic in rejecting to follow the crowd than in deciding to go with it. We might like those who reject crowd-behavior or even admire them, but they are not by any means more “authentic” than the rest.

Welfare function. Finally, an  economic argument is that once we allow for our concern with the poor to enter our utility function, as Professor Frankfurt tells us to do, there is nothing to stop us from introducing in that same utility function  our concern with incomes of those who are richer than ourselves.

Moreover, if Professor Frankfurt keeps on insisting that despite all we should be concerned only with incomes of the poor, neither Professor Frankfurt nor anybody else can tell us what is that income at which we should begin to worry about other human beings whose “resources are too little”. He cannot tell us what this “too little” is. Does he want us to be concerned only with incomes of those who live below 1 international dollar per day, or those below $5, or those below $15? If it is only those below the absolute poverty threshold ($1 per day per capita), then we should not be concerned with poverty in the US at all because nobody lives below that level. Is this okay with Professor Frankfurt?

But if Professor Frankfurt wants us to be concerned with poverty in the US, then he is introducing precisely the relative poverty measure, that is the poverty which  varies with income level of a society where we live, a concept which he has banished before under the guise of not being “authentic”.

So, his reasoning brings him back to the beginning where he is unable to define needs as separate from the context where they are expressed. He is  unable to do so because he is unable to distinguish between the so-called “authentic” needs and those that we develop simply by living in a society from the very moment when we are born. We cannot define what the "good life" is independently of the others.

So, his whole edifice crumbles.

Saturday, August 22, 2015

Did socialism keep capitalism equal?

This is an interesting idea and I think that it will gradually become more popular. The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing  all.

Now, this idea comes from the fact that rich capitalist countries experienced an extraordinary period of decreasing inequality from around 1920s to 1980s, and then since the 1980s, contradicting what a simple Kuznets curve would imply, inequality went up.  It so happens that the turning  point in the 1980s coincides with (1) acceleration of skill-biased technological progress, (2) increased globalization and entry of Chinese workers into the global labor market, (3) pro-rich policy changes (lower taxes), (4) decline of the trade unions, and (5) end of Communism as an ideology. So each of these five factors can be used to explain the increase in inequality in rich capitalist countries.

The socialist story recently received a boost from two papers. Both argue that the demonstration effect of the Soviet Union internationally (or differently, the threat of Communist revolution nationally) produced low inequality in the West. K S Jomo and Vladimir Popov write “an alternative view is…that the reversal of growing inequality followed [happened because of] the 1917 Bolshevik revolution in Russia, the emergence of the USSR and other socialist countries..”. AndrĂ© Albuquerque Sant’Anna does more: an empirical analysis where the top 1% income share of 18 OECD countries over the period 1960-2010 is explained by the usual variables (financial openness, union density, top marginal tax rate) plus the variable created by Sant’Anna, relative military power. It is equal to military expenditures of a county as a share of USSR/Russian military spending (all annual data) interacted with the distance from Moscow. If, say, your spending is 1/10th of Soviet spending and you are close by (say, in Finland) then the threat of Soviet Union (aka Communism) will be greater, and presumably you would depress the top income share of your capitalists more than if  you have the same relative spending but are Portugal.  Here is the pooled cross-section and time-series graph from Albuquerque Sant’Anna: relative power of the USSR on the horizontal, top income shares on the vertical axis.
To put some additional order into that story let us consider three channels through which socialism could have “disciplined” income inequality under capitalism. The first was strictly ideological or political and is reflected in the electoral importance of Communist and some socialist parties (Italy and France come to mind). The second is through trade unions (which many people have indeed included in their work). The trade unions themselves were often affiliated with Communist parties (like CGT in France) or were close to Labor parties like in Sweden and the Nordic countries in general. And then, you had the “policing” device of the Soviet military power.

I think that one should keep these three channels separate. Ideally, one should treat them also empirically as different, although we should note that Albuquerque Sant’Anna does adjust for trade union density. Since the relative power variable still comes out as robustly negative (the greater the relative power of the Soviet Union, the lower the top income share) he is right to conclude that the Soviet Union’s influence is separate from the influence of trade unions. Also, one should keep in mind that the period after 1991, that is after the dissolution of the Soviet Union, is fundamentally different. Not only there was a decrease of Russian military spending compared to what it was under the Soviet Union but that spending no longer had the “Communist” connotation which is, according to the argument in the paper, what kept capitalist countries “on the straight and narrow” path of equality. Perhaps using a dummy variable would help.  

Going back to the three possible channels of influence, I do mention them in my forthcoming book (“Global inequality”, Harvard University Press), but unlike Albuquerque Sant’Anna, I do not do an empirical analysis. I also see them as one of the contributory factors to the Great Levelling. I do not think that they were the only factor (no more than I see the accelerated technological progress, or globalization, as the sole factors behind the inequality reversal since the 1980s). Actually, I argue (but I am not going to give away the whole story here in a blog) that the Great Levelling was driven by the political forces emphasized by Piketty (war destruction, high taxation, hyperinflation) as well as by the “benign” economic and demographic forces emphasized by Kuznets (increase in the education level combined with a reduction in the education premium, aging of the population and thus greater demand for redistribution, end of the transfer of labor from rural to urban areas). There is a way that they can be “reconciled” but to see that you will have to buy the book next year.

Here I want however to bring to the fore the work which looks at the whole issue somewhat differently, and does this in a sense from a very global perspective. Indeed Communism, was a global movement. It does not require much reading of the literature from the 1920s to realize how scared capitalists and those who defended the free market were of socialism. After all, that’s why capitalist countries militarily intervened in the Russian Civil War, and then imposed the trade embargo and the cordon sanitaire on the USSR.  Not a sort of policies you would do if you were not ideologically afraid (because militarily the Soviet Union was then very weak). The threat intensified again after the World War II when the Communist influence through all three channels was at its peak. And then it steadily declined so much that by mid-1970s, it was definitely small. The Communist parties reached their maximum influence in the early 1970s but Eurocomunism had already expunged from its program any ideas of nationalization of property. It was rapidly transforming itself into social democracy. The trade unions declined. And both the demonstration effect and the fear of the Soviet Union receded. So capitalism could go back to what it would be doing anyway, that is to the levels of inequality it achieved at the end of the 19th century. “El periodo especial” of capitalism was over.

I am not sure that this particular story can alone explain the decline in inequality in the West, and certainly it is a story that one hears less often in the US than in Europe, as the United States  believed itself to be sufficiently protected from the Communist virus (although when you look at the repression in the 1920s and McCarthyism in the 1950s, one is not so sure). But even Solow’s recent mention of the changing power relations between capitalists and workers (the end of the Detroit treaty) as ushering in the period of rising inequality is not inconsistent with this view. In a recent conversation, and totally unaware of the literature, an Italian high-level diplomat explained to me why inequality in Italy increased recently: “in the 1970s, capitalists were afraid of the Italian Communist Party”. So there is, I think, something in the Albuquerque Sant’Anna, and K. S. Jomo and Popov stories.

The implication is of course rather unpleasant: left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa. That’s where I think differently: I think there are, in the longer-term, forces that would lead toward reduction in inequality (and that would not be the return of Communism).

P.S. I think the fundamental question that these and similar papers ask is the following: does capitalism contain “automatic stabilizers” that would curb  the rise of inequality before it goes over the top; or do “stabilizers” always have to be revolutions, wars and economic crises? I do not think that we have an empirical answer to it.