The redistribution of income and wealth has come to the forefront of discussions about economics and capitalist systems thanks to Thomas Piketty’s book Capital in the Twenty-First Century. Is rising inequality an inevitable feature of capitalist systems, or is it the result of the particular institutions that shape how capitalism expresses itself? What, if anything, should be done to reverse the trend toward rising inequality?
The answer depends upon whether the calls for redistribution are based upon envy as the political right often asserts, or the desire for the justice the political left believes can only be attained through government intervention.
The idea that envy drives calls for redistribution is based upon the belief that the capitalist system rewards each individual according to their productivity – and the value judgment that each individual has a right to an income that equals his or her contribution to society. Those who are more productive and contribute more have a right to a larger share of our national income. It was hard work, cleverness, entrepreneurship, etc. that allows some individuals to produce goods and services that society desires, and they should be rewarded accordingly.
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In this scenario, calls for redistribution are nothing more than envy by those who do not have what it takes to realize such success. Redistribution would unjustly take away the rewards that drive those at the top to do so much good for society through their innovative ideas. According to the envy perspective, there is no basis for redistribution; in fact it is harmful because it dulls incentives. If those at the bottom want more income, then they should work harder and contribute more to society’s output of goods and services instead of trying to take – through redistribution, social insurance, and the like – what others have contributed.
But what if the accumulation of income and wealth in the hands of a few is driven by market imperfections, legislation, and the formal and informal institutions that shape how capitalism functions? We hear quite a bit about “the undeserving poor,” but what if the income of those at the top of the income distribution is, to a considerable extent, driven by factors unrelated to their productivity and hence undeserved? What about the “undeserving rich”?
If those at the top “reap where they never sowed,” if rising inequality can be traced to monopoly power, legislation, and institutions rather than contributions to society, then redistribution simply returns income to those who were not fully rewarded for their contributions to national output. In this case, a call for redistribution is a call for justice – to allow each individual to reap what he or she sowed instead of having the system divert the income to those at the top.
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Which is it? Are calls for distribution based upon envy or justice? Though framed in different terms, in a recent op-ed in the New York Times Joseph Stiglitz makes a strong case that it is justice. For example:
- “C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.”
- “Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits.”
- In an attempt to revive the financial sector during the Great Recession, we socialized losses among the masses, and privatized gains to those at the top. “bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.”
- At the same time this financial sector welfare was occurring, “corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits.”
- Those at the top have been able to maintain a high rate of return on investments relative to economic growth. “How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.”
- Unions have been gutted, in part due to legislative changes that undermined their ability to stand up for workers.
- Tax havens shield the wealthy from paying their fair share in taxes.
But even if this is wrong and all of the income that flows to the top of the income distribution is mostly due to productivity, the case against redistribution is far from ironclad. For example, is the success of a new product that society values highly due solely to the efforts of a single individual, or does it take a village to raise a business?
Related: Brookings Study Downplays Income Inequality Gap
How much of the success of a new idea depends upon the presence of infrastructure, people educated with the government’s help, legal and social institutions that protect private property, the luck of being in the right place at the right time, and so on rather than the individual’s efforts? If “they didn’t build that” entirely on their own, why is it unjust to redistribute some of the income to those who helped, i.e. to society at large?
In addition, if rising inequality justified by extraordinary productivity of those at the top results in negative incentives for everyone else as this work from the IMF suggests happens, national output could fall. In this case, redistribution raises national output. Conservatives argue that it is the size of the pie rather than its division that matters most when they are defending those at the top against redistribution – they argue that taking income away from those at the top will dull their incentives and reduce national income – but what if it works the other way around?
There is no doubt that many of those at the top are there because they made important contributions to society. Some inequality is justified. But it also seems clear that a large part of the rise in inequality is due to monopoly power, CEO pay that is unconnected to productivity, bailouts, politicians captured by special interests, corporate welfare, and the like. If so, then returning income to those who actually earned it is not envy, it is the “justice for all” that conservatives claim to support.
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