Faculteit Letteren & Wijsbegeerte Mathilde Janfils (01202830) Income Inequality: An Inquiry into Disagreement in the Works of Thomas Piketty and Anthony Atkinson Masterproef voorgelegd tot het behalen van de graad van Master of Arts in de Wijsbegeerte 2015-2016 Promotor: Lezers: Prof. Erik Weber Vakgroep Wijsbegeerte en Moraalwetenschap Dr. Rogier De Langhe Dr. Laura Georgescu
Word Count Word Count 1: 55 329 words Word Count 2: 56 752 words II
Preface The idea behind this dissertation was born during an eye-opening course about Capitalism, Democracy and Equality: The Political Economy of the Advanced Nations that I followed at the London School of Economics during the summer of 2015. I have always considered equality (and therefore inequality) a highly intriguing concept, first of all because of the visceral emotions it appeals to in our daily lives, while we watch the news or read newspapers from the Third World to unemployment, the taxes people pay (or do not pay), the banking crisis and the credit crunch (in)equality is everywhere, especially in our present day society. The second reason why the topic of equality and inequality is important to me is that both concepts are situated at the junction of my two favorite disciplines, philosophy and economics. The idea of scientifically studying inequality, especially from an economic perspective, sounded fascinating to me. As I was studying the topic more in depth, I found myself very puzzled and even a little bit disappointed by this very fact: the accounts of the various economists studying inequality appeared to be very dissimilar and sometimes even contradictory. Inequality was bad and good for growth, inequality would disappear by lowering and increasing taxes, inequality was mainly influenced by the presence of trade unions or it was not moved by it at all How could we even begin to make the world more equal if even the experts are quarrelling about how inequality should be considered, measured, solved, and even defined? Next to this disappointment, it was also hope that motivated me to start this inquiry. Not the hope to find answers, but rather to help the debate focus on the right questions and maybe the hope to contribute to making the world more equal, in even the smallest way, whatever this may mean. To finish, this dissertation would not have been made possible without the help and patience of my supervisor, Professor Erik Weber. I would like to thank him for his advice which allowed me to organize my ideas and mature in my discipline. His intensive coaching helped bring this work to a good end, and I sincerely appreciate his trust in supporting me to find my own way in this hard, yet challenging process. Mathilde Janfils Ghent, 5 th of August 2016 III
Table of contents Word Count... II Preface... III Introduction... 1 0.1 The political and scientific context of this dissertation... 1 0.2 The main disputes... 3 0.3 Piketty s objectivist view on the study of inequality... 6 0.4 Objectives of part 1 of this dissertation... 8 0.5 Part 2 of this dissertation... 8 Part 1... 9 Introduction part 1... 10 Chapter 1: Inequality: the basics... 12 1.1 Introduction... 12 1.2 Definition of inequality... 12 1.2.1 Inequality of opportunity versus outcome... 12 1.2.2 Inequality of income... 13 1.2.3 Poverty... 14 1.3 Justification of inequality... 15 1.3.1 Possible legitimations of inequality... 15 1.3.2 Arguments against inequality... 18 1.4 Conclusion... 22 Chapter 2: Aspects about the struggle against inequality... 23 2.1 Feasibility to solve inequality... 23 2.2 Proposals for action... 26 2.2.1 Atkinson... 26 2.2.1.1 The state, technology and the balance of power... 27 2.2.1.2 Employment, unemployment and pay policies... 27 2.2.1.3 Capital... 28 2.2.1.4 Taxation... 28 2.2.1.5 Welfare state, social protection and global responsibilities... 29 2.2.1.6 Ideas to pursue and some remarks... 30 2.2.2 Piketty... 31 2.2.2.1 Updating the past: the social state and progressive taxation... 32 2.2.2.2 Piketty s new tools... 33 2.2.2.2.1 International financial transparency... 34 IV
2.2.2.2.2 Arguments for a progressive global tax on capital... 34 2.2.2.2.3 Discussion of the possible alternatives... 37 2.2.2.3 Remarks... 38 2.3 Viability and consideration of the proposals... 38 2.3.1 Atkinson... 38 2.3.2 Piketty... 40 2.4 Conclusion... 41 Chapter 3: Disagreement about the causes of inequality... 42 3.1 What made inequality decrease in the past?... 43 3.2 Explanations for the rise of inequality... 45 3.2.1 Textbook story: inequality from labor income... 45 3.2.1.1 Piketty and top earners... 45 3.2.1.2 Atkinson and the textbook story: technology and globalization... 48 3.2.2 Inequality of income from capital... 50 3.2.2.1 Piketty: r>g: accumulation and concentration of wealth... 50 3.2.2.2 Atkinson: capital and imperfect markets... 52 3.2.3 Politics and the social context... 53 3.2.3.1 The role of the state and politics... 53 3.2.3.2 The social context... 55 3.2.4 Conclusion... 56 3.3 Relation between disagreement about causes and policy proposals... 58 Chapter 4: Methodological issues... 61 4.1 Introduction... 61 4.2 Issues of definition... 61 4.2.1 The definition of inequality... 61 4.2.2 Capital and wealth... 61 4.3 Data issues... 63 4.3.1 Inequality of what and among whom... 64 4.3.2 The measurement of inequality... 64 4.3.2.1 Piketty s measurement of inequality... 65 4.3.2.2 Other measurements of inequality: the Gini coefficient and interdecile ratios... 66 4.3.3 Data as a problem... 69 4.3.4 and as a solution... 72 4.3.5 United Kingdom versus France... 73 V
4.4 Conclusion: links with the disagreements... 74 Chapter 5: The nature of the social sciences... 78 5.1 History as a source of evidence... 78 5.2 Piketty s two laws of capitalism... 80 5.3 The status of r>g... 82 5.4 Other trends in history... 83 5.5 What can we claim on the basis of history? Atkinson s version... 84 5.6 The role of the social scientist... 85 5.6.1 Piketty s historicism... 86 5.6.2 Utopian versus piecemeal engineering... 90 5.7 Piketty s account of the social sciences... 94 5.7.1 Nature of the social sciences... 94 5.8 Conclusion... 95 Chapter 6: Political agenda... 97 6.1 Political agenda... 97 6.2 Fine-tuning the contrast... 99 6.2.1 Piketty s belief in democracy... 100 6.2.2 The people in the streets... 102 6.3 Links with chapters 4 and 5... 103 6.3.1 Utopian and piecemeal engineering... 103 6.3.2 Difference in methods... 104 6.4 Conclusion... 104 Conclusion part 1... 105 Part 2... 107 Introduction part 2... 108 Chapter 7: The pluralist stance... 109 7.1 Some key concepts... 109 7.1.1 Plurality versus pluralism... 109 7.1.2 Pluralism and monism: the basics... 110 7.1.3 Different interpretations of both theories... 111 7.1.4 The pluralist stance... 112 7.2 Pluralism concerning the study of inequality... 114 7.2.1 Pluralism concerning the study of inequality and the pluralist stance... 114 7.2.2 Piketty s position... 115 7.2.3 A defense of local pluralism... 116 VI
7.2.4 Implications of endorsing pluralism in the study of inequality and further remark about it... 117 7.3 Conclusion... 120 Chapter 8: The value-free ideal for science... 122 8.1 Douglas judgment of values and the value-free ideal... 122 8.1.1 The value-free ideal and the moral responsibilities of scientists... 122 8.1.2 Types of values and their different roles... 124 8.1.3 Conclusion... 128 8.2 Atkinson and Piketty... 129 8.2.1 Motivation / introduction... 129 8.2.2 Values in Piketty and Atkinson s works... 129 8.2.3 Impact of values on the meaning of disagreement... 132 8.2.4 Implications for policy-making... 133 Conclusion part 2... 136 Bibliography... 139 VII
Introduction 0.1 The political and scientific context of this dissertation Inequality as an economic but also a social matter is back on the agenda. (Atkinson, 2015, 14) Almost every book or article about this topic starts by emphasizing the growing interest it has received in the last decade: from Barack Obama to Pope Francis and even Christine Lagarde, everyone from all sides seems to share the opinion that inequality is the challenge of our times. I was not surprised, therefore, to see that the World Economic Forum s most recent survey puts severe income disparity at the very top of global risks over the next decade. Excessive inequality is corrosive to growth; it is corrosive to society. I believe that the economics profession and the policy community have downplayed inequality for too long. Now all of us including the IMF have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust. The research reaffirms this finding. (Christian Lagarde during her speech in Davos on the 23 th of January 2013) (italics added) And that is a dangerous and growing inequality and lack of upward mobility ( ) I believe this is the defining challenge of our time: Making sure our economy works for every working American. ( ) But this increasing inequality is most pronounced in our country, and it challenges the very essence of who we are as a people. (Barack Obama in his Remarks by the President on Economic Mobility, 4 th of December 2013) (italics added) Inequality is the root of social evil. (Pope Francis on Twitter, 28 th of April 2014) One plausible and recent explanation for this sudden revival of interest appeared to be the shock to the foundations and certainties of economic theory in the aftermath of the financial crisis of 2008. It was at that time that the topic also received a broader audience: on the one hand, it gained more attention from economists, who understood they had neglected distributional questions for too long; on the other, there was also a receptive European and American public who tried to understand what was happening. (Wade, 2014, 6-7) 1
This political preoccupation with inequality is paralleled by a clear scientific interest in it. There are many economists and other social scientists who disapprove of inequality (or at least very high levels of it) and therefore investigate its causes and possible cures. Two important figures among these academics are the French economist Thomas Piketty (in his book Capital in the Twenty-First Century (2014)) and the British economist Anthony Atkinson (in his book Inequality. What can be done? (2015)). The title of Atkinson s book is telling, and there are numerous passages in his book that clearly express his view that we need current inequality levels to be rectified: ( ) I start from the pragmatic concern that current levels of inequality are too high ( ). (Atkinson, 2015, 124) This book has been written in an attempt to answer the question, If we wish to reduce the extent of inequality, how can this be done? (Atkinson, 2015, 301) At the very beginning of Piketty s book, we can also read the following: When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests ( ). The policy recommendations I propose later in this book tend in this direction. (Piketty, 2014, 1-2) At first sight, the situation does not seem very alarming. There are various politicians and other policy-makers who consider inequality an important political challenge. What is more, numerous scientists share this view and conduct the research required to tackle inequality. However, there is also a serious lack of consensus on this topic, which may be a cause for concern. This will briefly be described in Section 0.2. In Section 0.3, I will present Piketty s view on these disagreements. In fact, he is rather optimistic about the situation: he believes that the disagreements will be settled by further research that optimizes the available evidence. This brings me to my own objective with part 1 of this dissertation: I want to develop and argue for a different view, according to which the differences in outcomes are the inevitable result of the methodological and normative choices of the authors. Since scientists have to make these methodological and normative choices (otherwise they cannot proceed with their research) there will, in my opinion, always be divergent results when we conduct scientific research on 2
inequality. In elaborating this view, I will use the books of Piketty and Atkinson mentioned above, because they are key figures and, more importantly, because they defend different views about the causes and cures of inequality. This matter will be further explained in Section 0.4. In Section 0.5, I will elaborate on the goals of part 2 of this dissertation. While part 1 is analytical in nature (I bring to light the mechanisms behind the divergences), part 2 is more reflective. The results of part 1 will be contextualized in recent philosophical debates on value-laden/value-free science and the desirability of a plurality of theories in science in general and in the social sciences in particular. 0.2 The main disputes In part 1 of this dissertation, I will discuss two ways in which Piketty and Atkinson do not see eye to eye: the first way in which they disagree is related to their respective policy proposals and the second one involves the causes of inequality and factors influencing it. I will argue that, as the second kind of disagreement actually explains the first one, we need to investigate what determines the second one. It is in the first place essential that we find out what the first kind of disagreement entails. There are three ways in which Piketty and Atkinson s ideas diverge: first of all, they do not agree on the feasibility of tackling inequality, secondly, they propose different concrete policy actions to do so, and thirdly, they have a different opinion on the viability or practical feasibility of these proposals. All three elements will be discussed below. The first difference of opinion between Piketty and Atkinson involves the possibility (feasibility) of remedying inequality. Atkinson is very obvious about the fact that inequality is the result of political and economic choices and not the product of forces beyond our control, as the following quote in his conclusion shows: Crucially, I do not accept that rising inequality is inevitable: it is not solely the product of forces outside our control. There are steps that can be taken by governments, acting individually or collectively ( ) to reduce the present levels of inequality. (302) (italics added) Atkinson is also very clear about his optimism in this respect: the future is very much in our hands. (1) Piketty, in contrast, does not seem so positive about the possibility of tackling inequality. Although he proposes several possible policy actions in the last part of his book, he also refers to certain trends in history that perpetually increase inequality and which, at first 3
sight, cannot be countered. When reading his story, we most certainly get the impression that the forces at work are beyond our control. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently. (21) Piketty considers the optimistic beliefs about the future of inequality as largely illusory (22) and claims that the forces pushing toward divergence are very likely to take the upper hand. ( ) the process by which wealth is accumulated and distributed contains powerful forces pushing toward divergence, or at any rate toward an extremely high level of inequality. Forces of convergence also exist, and in certain countries at certain times, these may prevail, but the forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century. The likely decrease in the rate of growth of both the population and the economy in coming decades makes this trend all the more worrisome. ( ) In the model I propose, divergence is not perpetual and is only one of several possible future directions for the distribution of wealth. But the possibilities are not heartening. (27) (italics added) Compared to Atkinson, Piketty seems quite pessimistic. He refers to a certain inevitability and inescapability of an incontrovertible historical reality (353) while constantly warning against all too optimistic scenarios. This stark contrast between both authors attitudes is quite surprising at first sight. The second way in which both authors ideas diverge is in the actions they propose to tackle inequality, their actual policy proposals. Atkinson is very pragmatic and suggests that a lot of factors may have an influence on inequality. This is translated into a list of fifteen proposals and five ideas to pursue. The proposals are quite diverse and include among other things a technology policy, the creation of a Social and Economic Council, guaranteed public employment at a minimum wage, the creation of a sovereign wealth fund, a minimum inheritance for all, a participation income, and several proposals about new progressive taxes on property and on inheritance. Atkinson focuses on choices that shape our future and on the balance of power behind them. He is convinced that governments have a very important role to play. He further emphasizes the crucial importance of reducing pre-tax inequality and the inequality in the marketplace, which he feels is the most fundamental inequality that needs to be tackled. (113) Piketty, despite his apparent pessimism and even fatalism, still devotes the last part of his book to possible actions that should be taken in order to regulate capitalism and 4
avoid its endless inegalitarian consequences (515), a goal that is clearly differently formulated than Atkinson s. Piketty s list of proposals is much shorter than Atkinson s, but no less ambitious. He talks about how the inventions of the past century the social state and progressive taxation should be updated to match today s circumstances and inequality, even though there is also an urgent need for new tools. His main solution for today s problems is a clear example of this: he proposes a progressive global tax on capital together with a very high level of international financial transparency. Finally, both authors differ in how they consider the viability or practical feasibility to put their proposals into practice. While Piketty s ideal to tackle inequality is his progressive global tax on capital, he calls his proposal an utopian idea that remains unrealistic in today s context, requiring too much international collaboration. (515) Here, again, Atkinson seems more confident. He devotes the last part of his book to possible objections, providing counterarguments and very concretely showing the feasibility of his proposals with an elaborate budgetary simulation of their possible impact on the UK. The second kind of disagreement between the two authors deals with the factors presumed to influence the level of inequality and its various causes. As we will see later on, this second sort of disagreement offers a plausible explanation for the first one. To begin with, Piketty and Atkinson are convinced that they should base themselves on historical insights about how inequality was reduced in the past in order to find new ways to achieve the same today. Nevertheless, they differ in their opinion about why exactly inequality decreased during the 20 th century until the eighties the period after the Second World War that is often called the Great Compression. Piketty heavily emphasizes the role played by war as well as the political and economic shocks following it. His point is that there is no natural or peaceful trend toward more equality, not even in the 20 th century, the period where the most considerable decrease in inequality was achieved. Atkinson, in contrast, does not fully share Piketty s view and also takes other possible explanations into account, essentially related to the emergence of government transfers and the welfare state as well as a less unequal income distribution following from an increase in popular wealth and the active role of trade unions and labor market regulations. The factors behind this disagreement will be revealed in part 1. The above-mentioned differences in proposals, in convictions about the possibility to fix inequality and the viability of the policy actions, as well as the fact that both authors formulate radically different conclusions about the causes of inequality are all highly surprising and 5
deserve closer attention. Why and how do two seemingly agreeing economists working on the same topic still reach different conclusions and formulate different policy recommendations? Why do they not agree on the causes of inequality, the feasibility of fixing it, and the ways to do so? After all, we would not expect so much disagreement in a field that claims to objectively define inequality as a whole. This is an enigma that I will attempt to solve in the following sections. 0.3 Piketty s objectivist view on the study of inequality Is it possible to say anything objective about inequality? Is it possible to study inequality in a neutral way? Is there any consensus to be reached among economists about it, its causes, its effects? Piketty s answer to these questions is positive, as is clear from the following quotes: If the question of inequality is again to become central, we must begin by gathering as extensive as possible a set of historical data for the purpose of understanding past and present trends. For it is by patiently establishing facts and patterns and then comparing different countries that we can hope to identify the mechanisms at work and gain a clearer idea of the future. (Piketty, 2014, 16) (italics added) To be clear, my purpose here is not to plead the case of workers against owners but rather to gain as clear as possible a view of reality. (Piketty, 2014, 40) (italics added) ( ) it is very difficult to have a rational debate about the great challenges facing the world today ( ) because the global distribution of wealth remains so opaque. ( ) As we saw in Part Three, the truth lies somewhere between these two extremes. ( ) I have also discovered some objectively disturbing trends ( ). (Piketty, 2014, 519) (italics added) Today, with the advantage of greater historical perspective and newly available data, it is clear that the reality was quite a bit more complex. (Piketty, 2014, 41) (italics added) There are plenty of examples of other quotes about how the study of history or looking at the right data will teach us what is the true nature of inequality and what we should do with it. Piketty suggests that different studies of inequality, carried out in a careful and systematic way, will reveal the same facts about the phenomenon and reach the same objective conclusions. So how can an objectivist like Piketty then explain the current disagreements in his field? The answer is very simple: they are currently a phase that can and will be overcome, and in the end, all economists will agree on issues about inequality. 6
One way to elaborate this view is to explain the current dissent by referring to the use of different datasets. Authors are very explicit in emphasizing the fact that many of their conclusions depend on the data they use and are thus vulnerable to imperfections in their datasets. Different sources and different data about distinct countries and periods are likely to give rise to different results. Nevertheless, Piketty, for one, seems convinced that his findings can sometimes be extrapolated to other periods and countries and that in improving their datasets, other economists could come to the same conclusions as his. Disagreement in this view can then be explained by the use of incomplete or incorrect data. If social scientists use the right data, they will all see the same things. Here are some quotes of Piketty that express this viewpoint: Careful examination of various hypotheses and bodies of evidence, and access to better data ( ) US economists often underestimate the increase in top incomes because they rely on inadequate data ( ) The use of better data (in particular, tax data) may therefore ultimately focus attention on the right questions. (Piketty, 2014, 513-514) (italics added) This practice is generally justified on the grounds that the available data are imperfect. This is true, but the difficulties can be overcome by using adequate sources, as the historical data collected (with limited means) in the World Top Income Database (WTID) show. This work has begun, slowly, to change the way things are done. Indeed, the methodological decision to ignore the top end is hardly neutral ( ) they often give an artificially rosy picture of inequality. (Piketty, 2014, 268) (italics added) A second reason invoked by Piketty to rationalize disagreement is that it stems from the very nature of the social sciences themselves. Social sciences will always remain uncertain and tentative, in his opinion, leaving room for interpretation about their conclusions. (Piketty, 2014, 3) As we will see, this second explanation does not tell us anything useful to understand disagreement and remains quite vague and empty when it is examined more closely. We will later on come back to these two reasons given in order to explain or rationalize the different conclusions arising from a priori quite similar approaches of inequality something we would not expect from objective research on such a phenomenon as well as to claims supporting the future resolution of this disagreement. 7
0.4 Objectives of part 1 of this dissertation In the first part of this dissertation, I will argue for a different view than Piketty s, asserting that the lack of consensus cannot be overcome. I am thus convinced that the problems are more fundamental and actually reach further. My hypothesis is that the different results of research on inequality are the outcome of the normative, political and methodological assumptions of the authors in their theories. A first example that immediately comes into mind is obviously the definition of inequality and the reasoning behind its use. We will see further on that authors make many other choices, for example about how they measure inequality or what concepts they use in their analysis, which could all influence the outcome. In other words, all these often implicit decisions have consequences for the kind of research that is undertaken and the kind of results that are obtained. In my opinion, this is a much better explanation why economists have failed to reach a consensus and why such divergent conclusions have been formulated. My goal is therefore to discern implicit assumptions and choices in the works of Piketty and Atkinson that could impact on their theories and conclusions about inequality. I will also examine how they attempt to make those presumptions explicit and motivate them, and what the implications are for the kind of research they have conducted. 0.5 Part 2 of this dissertation In the second part of my dissertation I will reflect upon the conclusion of the first part. I will use research on inequality as a case study to apply insights on pluralism in science and the presence of values in scientific inquiry. I will show how putting my topic within the larger context of those debates in the philosophy of science (i.e. the debate on pluralism/monism and value-free/value-laden ideal for science) confirms my hypotheses and helps to elaborate them further. How should we consider and deal with disagreement? What are the implications of my findings for policy-making? Can knowledge still be objective in a discipline where dissent is reigning? In an attempt to answer all these questions, ultimately, my goal is to arrive at a general assessment of the works of Piketty and Atkinson and of the kind of claims they convey with them. 8
Part 1
Introduction part 1 In this first part of my thesis, I will examine the fact that authors with quite similar views of inequality can arrive at different conclusions about whether or not it can be solved and how. My aim is to test my hypothesis and to look for implicit assumptions that could influence their analysis. In doing so, I will refute the view that disagreement is only temporary and will be overcome in the future. As I pointed out in the introduction, I will focus on the works of Anthony Atkinson and of Thomas Piketty because they start from the same basic premise that inequality is something that should be tackled. They seem to be essentially on the same page, which makes it even more unexpected and interesting that their conclusions could differ so much. The way I will proceed in this first part is by starting from the two kinds of disagreement present in the conclusions of the two authors and look for their causes. In doing so, we will encounter several types of assumptions possibly influencing their conclusions. Do the authors mention this explicitly or do we have to deduce it ourselves? What kind of arguments do they give? What influence do those normative choices have on the further course of the analysis and, in the end, on their research as a whole? In chapter 1, I will be setting the stage with a general chapter introducing the concept of inequality and its study. What does inequality entail? What do we mean when we refer to it? I will start with the most obvious basis for any research: a definition of the topic at hand. Then, I will explore the possible justifications that could legitimize inequality in some cases and the arguments given for the claim that inequality is undesirable. Secondly, in chapter 2, I will describe the first kind of disagreement found in Piketty and Atkinson s works: their disagreement relating to their respective policy proposals. I will offer three specific ways in which this disagreement can be observed: Piketty and Atkinson differ in their opinions on the feasibility to fix inequality, their respectively proposed policy actions, and their viability. In chapter 3, I will examine the various explanations given for the spectacular rise in inequality in recent decades. In other words, I will study its causes, which is the topic of the second kind of disagreement present in Piketty and Atkinson s theories. The insights of this chapter are clearly linked with the ones about the proposals to solve inequality. In the remainder of part 1, 10
I intend to find specific assumptions or choices responsible for the presence of these disagreements. Next, in chapter 4, I will investigate methodological issues concerning how inequality should be defined, measured, approached and studied. The implications of the chosen methodology for the conclusions of the authors will also be analyzed. Chapter 5 will outline Piketty and Atkinson s views of the social sciences, their goal and the expectations we should have of them. The role of history in both authors accounts of inequality will also be described. As we will discover, the authors views on the social sciences are clearly linked with their respective methods but also with a specific ambition present in their works, which will be discussed in the last chapter. Finally, in chapter 6, I will analyze the political agenda of both authors. This last chapter is clearly connected to the previous one and will give us key insights on the kind of assumptions influencing our authors conclusions. The reason I have chosen to focus on Piketty and Atkinson, besides the fact that they share many convictions, is that they are considered to be two leading figures in the field. Capital and Inequality. What can be done? are both very recent books that are regarded by their authors as the crowning achievement of a lifetime of research on the subject. These two works are taken as a representation of the most recent views of Piketty and Atkinson on inequality, which will become very obvious when we compare the two. Before we start, I would like to mention that I have used an abundance of citations in the following chapters for a very particular reason. I consider this to be a necessary step in my argumentation to show that the information I use to support my hypothesis is truly based on claims found in the two books just cited. 11
Chapter 1: Inequality: the basics Social distinctions can be based only on common utility. Declaration of the Rights of Man and the Citizen, article 1, 1789 1.1 Introduction ( ) I start from the pragmatic concern that current levels of inequality are too high ( ). (Atkinson, 2015, 124) (italics added) ( ) capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. (Piketty, 2014, 1) (italics added) These two quotes were cited in the introduction, where I claimed that Piketty and Atkinson are against inequality (or at least against very high levels of it). In what follows, I will elaborate on how I have interpreted inequality and what Piketty and Atkinson imply when they claim that inequality is too high and undermines the meritocratic values of democracy. This first chapter will set the stage and describe our domain more precisely in function of our two authors. A basic explanation and definition of inequality will be provided below. 1.2 Definition of inequality In this section, we will return to the two above-mentioned quotes and examine how the concept of inequality is interpreted in them. 1.2.1 Inequality of opportunity versus outcome Atkinson starts his discussion of what inequality is and what it is not with a fundamental distinction behind the concept: the difference between inequality of opportunity and inequality of outcome. Should we be concerned with the unequal results people end up with (ex post) or with the unequal chances people receive at the start (ex ante)? The concept of equality of opportunity distinguishes two sorts of factors that could influence people s achievements: factors that are within their control (i.e. effort, merit) and for which they should be held accountable, and factors beyond their influence (i.e. circumstances), things that should not play any role. (9-10) Atkinson s claim is that even if the concept of equality of opportunity seems to be the right way to translate our intuitions about equality, we should still pay attention to equality of outcome too. 12
He gives three reasons for this: The first reason, then, that outcomes matter is that we cannot ignore those for whom the outcome is hardship even if ex ante equality of opportunity were to exist. ( ) ( ) competitive equality of opportunity means only that we all have an equal chance to take part in a race a swimming competition where there are unequal prizes. ( ) It is the existence of a highly unequal distribution of prizes that leads us to attach so much weight to ensuring that the race is a fair one. And the prize structure is largely socially constructed. ( ) Finally, the third reason for concern about inequality of outcome is that it directly affects equality of opportunity for the next generation. ( ) If we are concerned about equality of opportunity tomorrow, we need to be concerned about inequality of outcome today. (10-11) This last argument in favor of a concern for inequality of outcome as well as inequality of opportunity may be the most powerful one of Atkinson s first chapter. If we reduce inequality of economic outcomes, then this contributes to securing the equality of opportunity that is seen as a key feature of a modern democratic society. (301) Unlike Atkinson, Piketty does not mention the crucial difference between an emphasis on outcomes or on opportunities. However, he does focus on inequality of outcome too. 1.2.2 Inequality of income Even among authors dealing with inequality of outcome, further questions can be asked about the precise dimension that needs to be addressed in this kind of research. In Atkinson s consideration of inequality, two questions are important: inequality of what among whom? (28) Inequality among whom will be discussed later on. As far as the inequality of what is concerned, Atkinson focuses on the household disposable income adjusted for household size and composition. (29) He carefully distinguishes the different elements that are included or excluded in a schematic way and explains why this definition of income is useful for dealing with the data. Atkinson also defends his adoption of income as a relevant dimension to study inequality, rather than consumption as some economists propose. This choice depends on the purpose of the analysis, he says: 13
I continue to focus on income as an indicator of potential control over resources. The use of income is indeed recognition that the use of resources goes beyond consumption. When measuring inequality, we are concerned not just with the consumption of the rich ( ) but also with the power that wealth can convey. ( ) Income is indeed a means to an end, but its reach goes much wider than consumption. (37) Piketty considers inequality slightly differently and defines inequality as follows: The share of income (or wealth) going to the top decile or centile is a useful index for judging how unequal a society is, because it reflects not just the existence of extremely high incomes or extremely large fortunes but also the number of individuals who enjoy such rewards. (253) For him, it is clear that inequality signifies the income or wealth concentration at the top. By definition, in all societies, income inequality is the result of adding up these two components: inequality of income from labor and inequality of income from capital. The more unequally distributed each of these two components is, the greater the total inequality. ( ) The third decisive factor is the relation between these two dimensions of inequality: to what extent do individuals with high income from labor also enjoy high income from capital? Technically speaking, this relation is a statistical correlation, and the greater the correlation, the greater the total inequality, all other things being equal. (242-243) In his book, Piketty refers to two kinds of income inequality: inequality of labor income and inequality of capital ownership (and the income it brings about). He also emphasizes the importance of examining the relation between the two. In other words, it is clear that both Piketty and Atkinson consider income to be a relevant dimension to measure inequality. Nevertheless, Piketty goes further than Atkinson in his crucial distinction between income from labor and income from capital, considering the two as different types of inequality. 1.2.3 Poverty Before I go on to describe possible justifications of inequality, it may be worth noting that there is a crucial distinction between focusing on inequality and being concerned with tackling poverty a concern that is often regarded as more important. Atkinson devotes some attention to this issue. This is a significant point to mention because politicians or intellectuals all too 14
often claim that they are not bothered by inequality and only care about poverty. In doing so, they hide the fact that, in lifting up the lower end, nothing is done to modify the gaps in the distribution, and more importantly no questions are asked about how rich the rich really are. While Atkinson claims that the bottom of the scale should be of primordial concern, he insists that the upper end also matters: What happens at the top of the distribution affects those at the bottom. ( ) Higher poverty tends to go together with larger top shares. (25) 1.3 Justification of inequality Now that we have a better idea about what is meant by inequality (i.e. inequality of outcome, more precisely income), the next section will examine what Piketty and Atkinson mean when they claim that inequality is too high, arbitrary and unsustainable and that it undermines meritocratic values. When is inequality justified, when can it be legitimized and what reasons can motivate us to condemn it? 1.3.1 Possible legitimations of inequality Atkinson starts his paragraph about the legitimation of inequality with the following quote: The title of this section refers to dispersions to underline the obvious but often overlooked fact that not all differences in economic outcome represent unjustified inequality. Some people are paid more than others for perfectly justifiable reasons, ( ). Among the most important justifications for differences in earnings is that some people have invested in training for occupations that require more skill. ( ) why differences do not necessarily imply inequality and why it is not necessarily the case that all of the observed difference can be explained in this way. (25-26) In pointing at the difference between inequality and dispersion of income, Atkinson recognizes that the story is more nuanced than simply rising inequality. (27) However, he does not go further in trying to determine which kind of dispersions can be considered as a sign of inequality and which ones cannot. He sticks to his pragmatic point of view that today s inequality is too high, no matter its justification. An interesting concept that is worth mentioning here and that comes back a few times in Atkinson s story is fairness. For Atkinson, fairness involves a perceptible link between effort and reward (187) and should be one of the tools used to evaluate proposals for redistribution and tackle inequality. 15
( ) the fact that there are losers as well as gainers is not a decisive argument against redistribution. If governments are serious about reducing inequality, then there have to be trade-offs. These are not easy. ( ) At a societal level, it means that we have to ask difficult questions. Rather than simply accepting the outcome of the market process, we have to examine what we mean by a fair distribution. (271-272) Piketty, in turn, does devote a lot of attention to the justifications behind what Atkinson calls income dispersions. We have already seen that Piketty makes a distinction between different dimensions of inequality that he feels are crucial. He insists that there are different moral and normative reasons for justifying inequality in each case and that those different aspects of inequality and their justifications should not be mixed. (243) On multiple occasions, he stresses that it is not really the magnitude of inequality, or inequality as such that matters, but rather its justification. In this book, I focus not only on the level of inequality as such but to an even greater extent on the structure of inequality, that is, on the origins of disparities in income and wealth between social groups and on the various systems of economic, social, moral, and political justification that have been invoked to defend or condemn those disparities. Inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it. (19) In treating some inequalities as more justified than others, Piketty bases himself on what he calls the belief our democratic modernity is founded on : the belief that inequalities based on individual talent and effort are more justified. (241) This democratic and meritocratic belief is summarized in the quote from the Universal Declaration of the Rights of Man that opens his book and that is repeated several times in it. Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible 16
in reality as well. ( Social distinctions can be based only on common utility, according to article I of the 1789 Declaration of the Rights of Man and the Citizen). (422) It is not always clear if this is Piketty s personal opinion or not, but he obviously has a firm belief in democracy. To his mind, the view that inequalities are justified if they promote the general interest is a theoretical consensus. Nevertheless, he recognizes that there are a lot of dissenting opinions about its concrete application. He is convinced that it is democracy s role to find the answers to those practical questions during a debate. ( ) social inequalities are acceptable only if they are in the interest of all and in particular of the most disadvantaged social groups. ( ) At a purely theoretical level, there is in fact a certain (partly artificial) consensus concerning the abstract principles of social justice. The disagreements become clearer when one tries to give a little substance to these social rights and inequalities ( ) what factors are within and beyond the control of individuals (where does luck end and where do effort and merit begin?). Such questions will never be answered by abstract principles or mathematical formulas. The only way to answer them is through democratic deliberation and political confrontation. (480) It would be misguided to think, however, that Piketty naively follows everything in this meritocratic rhetoric. He is not convinced by all contemporary discourses and even refers to them as meritocratic extremism sometimes, to denounce the way modern society justifies the often all too generous rewards of the winners. (334) At the same time, though, he also acknowledges the importance of this line of thought and how the way a society thinks about inequality may actually have an impact on inequality too. His principal tool to investigate a society s view on inequality is to look at how it is represented in fiction (e.g. for the 19 th century he makes multiple references to Honoré de Balzac and Jane Austen, and for our present-day society, he analyzes contemporary series and movies). It is interesting, moreover, to note that the most ardent meritocratic beliefs are often invoked to justify very large wage inequalities, which are said to be more justified than inequalities due to inheritance. ( ) Proponents of such high pay argued that without it, only the heirs of large fortunes would be able to achieve true wealth, which would be unfair. In the end, therefore, the millions or tens of millions of dollars a year paid to supermanagers contribute to greater social justice. This kind of argument could well lay the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with 17
very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither. (Piketty, 2014, 416-417) In contemporary fiction, inequalities between social groups appear almost exclusively in the form of disparities with respect to work, wages, and skills. A society structured by the hierarchy of wealth had been replaced by a society whose structure depends almost entirely on the hierarchy of labor and human capital. ( ) offering a hymn to a just inequality, based on merit, education, and the social utility of elites. ( ) any character who lives on wealth accumulated in the past is normally depicted in a negative light ( ). This huge change in the social representation of inequality is in part justified, yet it rests on a number of misunderstandings. First, it is obvious that education plays a more important role today ( ) However, it does not follow that society has become more meritocratic. In particular, it does not follow that the share of national income going to labor has actually increased ( ) and it certainly does not follow that everyone has access to the same opportunities to acquire skills of every variety. ( ) The chief misunderstanding is, I think, the following. First, inheritance did not come to an end ( ) we have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will. ( ) Second, there is no guarantee that the distribution of inherited capital will not ultimately become as inegalitarian in the twenty-first century as it was in the nineteenth. (419-422) Here, we clearly see why Piketty insists on the distinction between inequality in income from labor and inequality in capital ownership, in contrast to Atkinson, who merely refers to income as a whole. 1.3.2 Arguments against inequality As mentioned above, both Piketty and Atkinson are aware that inequality calls for an explanation or clarification. Too high, arbitrary and unsustainable are clearly normative terms. We saw what is Piketty s opinion about the link between democracy and inequality. What I am going to examine now are the arguments behind the consideration of inequality considered as bad or its levels as too high. Atkinson differentiates between two ways to argue against today s levels of inequality: intrinsic concerns and instrumental reasons. The latter, instrumental reasons, include arguments based on the possibly detrimental consequences of inequality. Atkinson gives several examples, such 18