Thomas: Rawls Piketty and the New Inequality (2016)

7/25/2019 Thomas: Rawls Piketty and the New Inequality (2016)

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the author 2016

Rawls, Piketty and the New Inequality

Alan Thomas1

Tilburg University

Abstract

The forty year period 1970-2010 saw two developments in the USA: first, at the level of theory,intense academic interest in the egalitarianism of John Rawls. Second, at the level of practice,fundamental changes in the institutions, policies and norms of US society that have led Gilens andPage [2014] to conclude that it has become an oligarchy de facto if not de jure. A central componentin that practical development is the tolerance of extensive inequality and the emergence of notmerely the 1 percent, but the elevation of an upper decile of wealthy individuals into a positionof economic and political dominance. In spite of pioneering work by Krouse, MacPherson andArneson, little academic attention has been paid to whether a political economy with roots inRawlss work might be the most effective response to these practical and institutional changes. Thatsituation may be about to change given the popular, as well as academic, response to Thomas

Pikettys Capital in the Twenty-First Century. In this paper I will consider whether a form ofeconomic system described by Cambridge economist James Meade a common source for bothRawls and Piketty offers a feasible egalitarian ideal. It will be argued that the USA represents a"test case" for other advanced democracies faced with the challenge of a new form of patrimonialcapitalism. It is further argued that only a structural change to societys fundamental wage settinginstitutions, along the lines recommended by Meade and Rawls and implicit in Piketty, will bringabout the necessary structural change to implement a political economy for a just society.

This paper takes as its starting point the conjunction of two striking facts: the first is that

the last forty years has seen intense academic discussion of the work of John Rawls, but

comparatively little discussion of what he called the choice of a social system. [Rawls,

1971, p. 242] The second fact is that the last forty years has also seen marked changes in

the economies of several Western democracies, but those changes are the most marked in

the United States. I will elaborate on both points in turn.

First, Rawlss work on domestic justice culminated in the arguments ofJustice as

Fairnessin which the question of our choice of a social system plays a significant role in

his discussion. Notably, he argued that liberal market socialism or a property-owning

democracy were the only systems that could adequately specify his conception of justice

as reciprocity. [Rawls, 2001] In particular, he dismissed welfare state capitalism the


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predominant form of successful egalitarian societies in our own world on the grounds

that it neglects the principle of reciprocity and is, therefore, structurally unjust. There has

been some discussion of these claims in the voluminous secondary literature on Rawls,

notably by Dick Krouse and Michael McPherson.2[Krouse & McPherson, 1986] But the

comparative scale of this discussion, compared to such topics as Rawlss approach to

public reason or religious accommodation, has been puzzlingly slight.3

I turn now to the second starting point of my discussion, namely, the major

economic changes in social democracies across the Western world. These changes are the

most marked in the USA which is why European social theorists such as PierreRosanvallon and Thomas Piketty are drawn to study them. [Rosanvallon, 2013; Piketty,

2014a] They are well illustrated in this table that I reproduce from Pikettys book Capital

in the Twenty-First Century:

Figure 8.5 Income inequality in the United States 19102010.


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My selective interest in this tabulated data is what it tells us about income inequality in

the USA for the period 19702010. It shows us the extent to which the wealthiest 1 per

cent and top 10 per cent of American citizens have pulled away from their fellow citizens

over the last forty years. I will be concerned in this paper with some other phenomena

associated with this development: the hollowing out of Americas middle class and

stagnant incomes for those at the lower end of the income distribution. Relativeinequality

has significantly widened caused by a hyperconcentration of gains at the top.4[Hacker

& Pierson, 2010, p. 3]

Further components of what Richard B. Freeman called the New Inequality

5

arethe distinctively American problem of the toleration of very high levels of executive

remuneration; the emergence of very high rewards in the financial sector; the breakdown

of Americas distinctive public-private partnerships when it comes to social insurance

provision and, therefore, the exposure of many American on lower incomes to very high

levels of risk. At the level of what one might call the background conditions to this

inequality there has been a structural change in the US economy from manufacturing to

services and the further weakening of organized labour as a countervailing force to all of

the foregoing changes.6Some commentators, such as Jacob S. Hacker, Paul Pierson, and

Sheldon Wolin take another key to these changes to be that which Wolin calls the

political coming of age of corporate power in America. [Wolin, 2008, p. x]

I am not an economist and am in no position to assess macro-economic

arguments, but I note, for the sake of completeness, the claims of Joseph Stiglitz and

James Galbraith that such levels of inequality in income and wealth are economically

damaging. [Stiglitz, 2012; Galbraith, 2014] They contribute to an economy with


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suppressed consumer demand and, in the absence of fiscal measures to reduce the

comparative advantage of the wealthy, macro-economic policy can only stimulate growth

in ways that exacerbate the tendency of a lightly regulated capitalism to inherent

instability. [Stiglitz, 2012; Galbraith, 2014] We can reasonably predict an unstable series

of boom and bust cycles that reproduce the pattern of events that lead up to the global

financial crisis of 2008. These cycles are in no-ones interest, and the better off stand to

lose just as the worst off do, but societys wealthiest people are the best placed to spread,

and hence manage, their risks while the worse off are not.7 That places them in a

comparatively better position to take advantage of deflated asset prices at the outset of arecovery: they lose less, they recover faster and, indeed, in doing so they consolidate their

comparative advantage.8

The post-2008 phenomenon of an economic recovery for the rich is therefore

explicable as part of this self-reinforcing cycle and one we can expect to see repeated.9If

those who hold capital assets have a significant influence on policy, then they will self-

seekingly favour policies that set the goal of low inflation as a priority over other

economic goals. They will, therefore, favour so-called austerity policies even in an

economic downturn. The overall macro-economic effect is a set of policies that both

increases the frequency of boom-bust cycles and causes the recessionary phase to last

longer than they ought to do so in such cycles. All of this plays into what Robert D.

Solow calls the rich get richer dynamic. [Solow, 2014]

Returning from the economics to the politics of inequality, if concentrations of

wealth and monopolistic control of capital have the political consequences that Rawls

fears when he described his laws and tendencies of the social world, then that explains


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why his two favoured forms of social system pre-emptively disperse capital holdings.

Alternative political systems, such as the one currently dominant in the USA, may stand

in a mutually reinforcing relation to high levels of inequality of income and wealth and

produce a drift to oligarchy (to use Thomas Pikettys helpful phrase).10The central

thesis of Jacob S. Hacker and Paul Piersons Winner-Take-All Politicsis that Americas

wealthiest citizens have proved highly politically effective beyond their comparatively

small numbers in a democracy and have, indeed, successfully won an ideological and

political battle over the last forty years to cement their control of political and economic

policy.To use Rawlss metaphor, the space of contested power is a limited space and

inherently competitive. The very wealthy in American society collectively constitute an

unusual powerful political actor that works to roll back the state, extend the scope of

market provision, lower direct and indirect taxation and transfers, and conceptualise

social programs as an inefficient form of insurance from which employers and wealthy

individuals ought to withdraw. All of this is as a result of, and with the aim of

consolidating, their monopolistic control of capital.11Political office need not be literally

bought and sold if, in the inherently competitive space of politics, the wealthy are the

most powerful political actor vis--vis other actors and able to exercise undue influence

over democratic governance.12[Page and Winters, 2009; Gilens and Page, 2014]

Indeed, Martin Gilens and Jeffrey I. Page made international headlines last year

when they argued that the USA has become an oligarchy. They concluded that

multivariate analysis indicates that economic elites and organized groups representing

business interests have substantial independent impacts on U.S. government policy, while


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average citizens and mass-based interest groups have little or no independent

influence.13 The form and structure of democracy de jure co-exists with oligarchy de

factoin the sense that the view of the majority of voters is epiphenomenal to the process

of formulating and implementing policy.

For radical critics the contribution of John Rawls to these economic and political

changes was to play the fiddle while Rome burned; my aim in this paper is to convince

you otherwise.14My goal is to show that Rawlss conception of justice as fairness, when

fully specified as one kind of social system, is not only the most normatively desirable,

but also the most realistically utopian, response to these changes changes that areobviously notbeyond the control of democratic politics.

1 Rawls Fundamental Choice of Social System

It is an open question how much my normative orientation differs from that of Rawlss

own; my fundamental commitment is to a society free from domination and working out

the consequences of that commitment has implications for the topic of material

inequality.15My goal, shared with others such as James Bohman, is a society in which the

material basis of domination is made structurally impossible. Bohman argues that

republicanism assigns to citizens, jointly and severally, an achieved political status that

makes it impossible to fall under the control of another.16 [Bohman, 2010, p. 436,

emphasis added; see also Schuppert, 2013] The aim is so to re-structure material

incentives that the capacity to dominate is taken away from any economic actor; we are

not simply in the business of making domination costly to agents, some of whom might

think that paying such metaphorical traffic tickets was worth it.


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This goal is realized by so pre-distributing capital that the context of market

transactions is transformed. It is transformed so as to make their results fair in the only

feasible way in which that can be achieved, namely, by patterning outcomes from the

market. [Thomas, 2011, 2012] The proposal is to permit material incentives while

constraining the inequalities that they generate to operation within a permissible range.

[Rawls, 1999a, p. 74; Thomas, 2015] Both aims can be secured, I will argue, by attention

to the issue of who holds capital. Addressing this question allows us both to focus on the

structural basis of domination and to pre-distribute capital assets so as to harness the

advantages of the market while patterning its outcomes as just.That aim is shared with Rawlss theory of justice as fairness; I take it the content

of his principles of justice are familiar. Less familiar is his later claim that the underlying

principle of reciprocity can only take a fully specified form in a property-owning

democracy or a liberal market socialist system. Both involve a guarantee of the basic

liberties, freedom of occupation, freedom to hold private property and a free market. Yet

that which primarily distinguishes them, together, from other social systems is their

sensitivity to who controls capital.

I will not, in this paper, discuss the prospects for liberal market socialism and will

focus here on property-owning democracy.17By the time he wrote Justice as Fairness,

Rawls described a property-owning democracy as realiz[-ing] all the main political

values expressed by the two principles of justice. [Rawls, 2001, p. 135] He explicitly

states that it forms the institutional background to the realisation of the complete

conception of justice as fairness from one generation to the next even if his discussion

of it must remain, in his words, illustrative and highly tentative. [Rawls, 2001, p. 136]


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Rawls focuses on the pre-emptive dispersal of the ownership of wealth and capital

in a property-owning democracy, but for a specific political end:

[T]o prevent a small part of society from controlling the economy and indirectly,political life as well . Property owning democracy avoids this, not be theredistribution of income to those with less at the end of each period . but ratherby ensuring the widespread ownership of productive assets and human capital (thatis, education and trained skills) at the beginning of each period, all of this against abackground of fair equality of opportunity. [Rawls, 2001, p. 139]

This relatively compressed later discussion of a property-owning democracy focuses on

the way it realises justice as fairness. In this respect, it contrasts with Rawlss earliestdiscussion of the idea in the first edition of A Theory of Justicein which there is a great

deal more macro-economic detail. Rawls there states that:

The aim of the branches of government is to establish a democratic regime in whichland and capital are widely though not presumably equally held. Society is not sodivided that one small sector controls the preponderance of productive resources.[Rawls 1971, p 280]

If this economic system does indeed work well, then Rawlss ideal property-owning

democracy envisages markets operating in a context structured pervasively so as to make

their patterned effects fair. The state intervenes not only to supply public goods and to

counter negative externalities, but also to impose adjusted procedural justice. In the first

edition ofA Theory of Justice, Rawls states that steeply progressive taxes may very well

be justified given the injustice of existing institutions. [Rawls, 1971, p. 279] But in his

realistically utopian theory when justice has been more fully implemented, then the role

of progressive taxation is significantly reduced. That reflects a general commitment to

pre-distributive, as opposed to re-distributive egalitarianism. That choice of egalitarian


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strategy, in turn, reflects a primary normative focus on underlying holdings of, and access

to, capital. If we focus on the initial distribution of all forms of capital, human and

physical, we have a reduced reliance on ex post income re-distribution.

In order to explain why progressive taxation plays such a reduced role in the

ideally just society, compared to our own, we need a better grasp on how a property-

owning democracy is justified by Rawlss principles working as an interlocking group.

Paul Smith noted that:

The idea that the equalization of property ownership would transform the labourmarket, by equalizing bargaining power and eliminating the economic coercion to

accept drudge jobs at low pay and thus forcing employers to make all jobsattractive, all things considered, is crucial to Rawlss idea that, in a competitivelabour market located in a just basic structure, income inequalities would tend justto compensate the costs of different jobs, that is, tend to equality, all thingsconsidered. [Smith, 1998, p.225]

Smith believes that this explains some of the distinctive features of Rawlss egalitarian

strategy (the strategy that we would now call predistributive a word that Smith does

not use):

Economic equalization is more likely and reliably to be effected, as Rawls thinks,by institutions and policies that equalize bargaining power than by an egalitarianethos restraining the exercise of unequal bargaining power (and egalitarianinstitutions and their distributional results are what, if anything, could produce anegalitarian ethos. [Smith, 1998, p. 227]

This is the central idea of the New Keynesianism that Rawls inherits from Cambridge

economist James Meade: we so structure the labour market that what looks like the

introduction of special incentives under the difference principle works under a set of

macro-economic arrangements that make such incentives tend to be merely

compensatory.18 So the difference principle leads to inequalities that fall only within a


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permissible range. Rawls argues that the scale and complexity of a modern economy

forces the conclusion that the only way to implement principles of justice is by

structuring the context in which market transactions occur. [Thomas, 2012]

2 Rawls, Piketty and the Drift to Oligarchy

We know that Rawls was aware of the work of economists contemporaneous to him, but

we do not know how he came across the work of post-War British egalitarian James

Meade. The context in which Meade formulated his ideas was as an adviser to the

revisionists in the post-War British socialist (Labour) party. Meade believed that thestandard Labour Party procedure of strengthening the power of Britains labour unions

when the socialists were in power, only to be met by a matching strengthening of the

power of employers when they were not, generated a destructive and wasteful cycle of

inflationary pressure and economic instability. His solution was a macro-level

restructuring of the context in which labour and capital confronted each other: this re-

structuring gave every citizen access to capital in order to reduce their dependence on

income from labour with a transformatory effect on the economy as a whole.

This work is the common source for Rawlss ideal of a property-owning

democracy and a tradition within economics of politically engaged work on income and

wealth that runs from Meade, via economist Anthony Atkinson, to Thomas Piketty.

Pikettys contribution to the argument I am developing here is two-fold: first, he provides

us with as comprehensive a data set as is feasible given that some information is

unavailable and that information of this kind is politically contested (and often

deliberately concealed). This is as complete a narrative as we are likely to assemble,


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provisionally, for two and a half centuries of capitalism and the results are not

encouraging for reasons that I will go into in more detail.

Secondly, Pikettys more important contribution is to expose, and to critique, both

a general and a special argument in defense of inequality that represents it as the result of

the working out of an autonomous logic of capitalism. The belief that there is such a

thing as an autonomous logic of capitalism is the first, general, argument; the more

specific claim that the current inequality in the USA is the product of the opening of the

US economy to global forces is a special instance of this more general claim.

The aim, in both cases, is to imply that we face a choice between the prosperitythat results from the untrammelled operation of a free market that respects this

autonomous logic, with unjust inequality as a regrettable side effect, or democratic

interference with this logic that obstructs this prosperity. This line of argument hopes to

show that the broadening and deepening of markets always makes them more efficient

and is highly likely to improve wellbeing overall; capitalism is a win-win proposition

for everyone, at least potentially, and the morally privileged institution of the market is in

everyones interests. We will have to abandon the goal of regulating the top end of any

distribution, but in Feldsteins memorable phrase only the spiteful egalitarian would

reject Pareto improvements that benefit others on the basis of what Rawls calls a

reasonable envy. [Feldstein, 2005]

The globalization argument is a special instance of the more general argument:

the autonomous logic of capitalism has always to be respected, and the New Inequality is

produced by the exposure of the US economy to the forces of globalization. The

hollowing out of the American middle class may be regrettable, but it is the downside


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of economic changes that are more broadly to be welcomed.19This explanation fits easily

with another: that the direct effect of globalization on the US economy is to place a

premium on skills, particularly those connected to new technology: that explains why so

many American citizens have lost out.20

Piketty challenges both of these arguments. His more fundamental claims is that,

with his historical narrative before us, we can see that they are both instances of Sartrean

bad faith: as representing as beyond our democratic control that which is, in fact, the

product of deliberate political choices. This instance of bad faith is, itself, in good faith at

a deeper level for those who propose it: it represents the concern of those who benefitfrom these changes to represent them as both inevitable and irreversible and not subject

to democratic choice.

I think Piketty helps us to see why we need, now, to undertake a radical, structural

reform of our central market institutions the kind of expanded economic basic

structure represented by a property-owning democracy. This is for two reasons: the first

is that the situation that we are facing is, if Piketty is right, historically unprecedented.

The period between 1970 and 2010 has seen the return of capital, but Piketty knows

that the nature of this society differs from the most radically unequal societies of the past.

The composition of the top decile has changed. There is a greater amount of wealth in the

top decile (the residual 9 percent) that is made up of income from labour, even if the

top one percent still holds a disproportionate amount of equity. This is not, then, the

society of the late nineteenth century rentier that was wiped out by the shocks to capital

and periods of high inflation in the twentieth century. But the point is: that could be


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about to happen particularly in the United States where inequality currently take an

extreme form.21Piketty contrasts two forms of highly unequal society (in income terms):

[T]here are two different ways for a society to achieve a very high inequality of top

income . The first . is through a hyperpatrimonial society (or society ofrentiers): a society in which inherited wealth is very important and where theconcentration of wealth attains extreme levels . This is the pattern we see inAncien Rgime France and in Europe during the Belle poque. [Piketty, 2014a, p.264]

That is an episode in the past of capitalism; however, the second form of unequal society

is far more recent:

The second way . is relatively new. It was largely created by the United Statesover the past few decades. Here we see that a very high level of total incomeinequality can be the result of a hypermeritocratic society (or at any rate a societythat the people at the top like to describe as hypermeritocratic) . The peak of theincome hierarchy is dominated by very high incomes from labor rather thaninherited wealth.22[Piketty, 2014a, pp. 264-5]

But this over-simplifies the real issue:

The stark contrast I have drawn here between two types of hyperinegalitariansociety a society of rentiers and a society of supermanagers is nave andoverdrawn. The two types of inequality can coexist: there is no reason why a personcant be both a supermanager and a rentier and the fact that the concentration ofwealth is currently much higher in the United States than in Europe suggests thatthat may well be the case in the United States today. And of course there is nothingto prevent the children of supermanagers from becoming rentiers. [Piketty, 2014a,p. 265]

That, I take it, is the central issue that Piketty raises in the case of the USA, with the

threat that it can generalise more widely across the jurisdictions that he studies: the two

logics . may complement each other in the century ahead and combine their effects .

The future could hold in store a new world of inequality more extreme than any that

preceded it.23[Piketty, 2014a, p. 265]


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Piketty is describing empirical tendencies and isolating them so that we may,

collectively, take political action to redress them. In spite of his (perhaps unfortunate)

name-checking of Marx in the title of his book, Pikettys thesis is not a prediction of

some apocalyptic end for capitalism. Returns on capital will, indeed, diminish just as neo-

classical theory predicts, but the key issue is imbalanced growth.24The New Inequality

will provide the background conditions for an imbalanced development of capitalism if it

is left unchecked by political action.

In so far as Pikettys arguments are empirically grounded, then, new data or better

explanations may undermine them. My point is that the truth of Pikettys key equation r

> g is not imposed by some autonomous logic of capitalism, but by our political

choices (as he emphasizes).25 This equation expresses the relation between returns on

capital assets (r) and the rate of growth (g). Growth is slowing in our societies

because they are already affluent, but if it is true that returns on capital will average 5 6

percent a year while growth (determined by both population growth and technological

innovation) will not keep pace, then we are facing the consequences of what could be a

momentous social change. In particular, the role of inherited wealth will become

disproportionately strong: to cite the phrase from the book most likely to stay in the

minds of its readers the past tends to devour the future.26[Piketty, 2014a, p. 378]

The benign post-war growth patterns captured by Simon Kuznets famous

Kuznets Curve were taken to represent a normal phase in the development of capital,

but Piketty argues that this phase was, in fact, historically anomalous. [Kuznets, 1953]

Patterns of growth in capitalist societies are always shaped by political choices and if, in

Pikettys narrative, the only countervailing forces to excessive inequality are the capital


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shocks represented by World War, then we need to do better. We need to reconstruct, in

so far as we can, the special political conditions that produced, economically, the trente

glorieuses and, politically, the work of James Meade who was theorising these new

conditions of capitalist society in medias res.27

This leads on to the second reason why I think this data mandates that we adopt

the radical strategies of Rawls and Meade. Pikettys data covers (primarily) the last two

centuries including the emergence of welfare state capitalism in all its manifestations.

Pikettys point is that social democratic politics has failed to prevent a return to extensive

levels of capital based inequalities approaching their late nineteenth century precedentover the long run. Those capital based inequalities are dangerous for democracy given

that those who benefit from the process of concentrated capital accumulation exert undue

political influence to ensure that the rich get richer dynamic continues unimpeded.

[Solow, 2014] The real challenge of Pikettys argument is that we have not yet imagined

or implemented a political option that will solve the problem of preventing capital

accumulation threatening the values of liberal democracy.28The relatively low rates of

growth that feature in the problematic equation r > galso feature in Pikettys pessimistic

account of the prospects for a social democratic politics founded wholly on an expanded

role for progressive taxation and welfare state capitalism: we have tried this option, and it

has not worked over the long run.

Low growth rates in income mean that current electorates will not welcome a

substantially higher tax burden; the latter has stabilized across the main jurisdictions that

Piketty examines and for a good reason. [Piketty, 2014, p. 382] There is a jurisdiction

relative cultural consensus on the role of the state and how extensive its provision of


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services should be. There is going to be no expansion of the affirmative welfare state of

the kind witnessed between 1930-1950 (from 10 percent to between 30 50 percent of

national income) because that has already happened. No one realistically expects the

process to develop until 70 or 80 percent of GDP is appropriated by the State.29We need

new options in our egalitarian thinking for one very good reason: advanced democratic

welfare state capitalism was already in place, but the return to our new Gilded Age in the

period 1970 2010 was not prevented not even in the Nordic social democracies that

do very well by redistributive measures, but less well by pre-distributive, capital based,

measures. My interpretation of Pikettys data is that it demonstrates that egalitarians neednew, more radical, ideas; fortunately, Meade and Rawls are well placed to provide them.

3 Two Kinds of Pre-distributionism versus Social Democracy

The crux of my case for taking a property-owning democracy uniquely to be our best

option as egalitarians is that its pre-distributive contextualization of the market patterns

its outcomes as fair. This is not quite, however, what is meant by pre-distribution in the

current debate over egalitarianism and that is why I would like to pursue a compare and

contrast exercise with the views of Jacob S. Hacker, the leading pre-distributionist in

this recent debate, and the views of Lane Kenworthy. As the title of Kenworthys book

Social Democratic America makes clear his preferred option is a return to the social

democratic traditions of the USA.30[Kenworthy, 2013a] While he has not considered the

more radical views of Meade, Rawls and Piketty to date, we do have the benefit of

Kenworthys thoughtful response to Hackers proposals. [Kenworthy, 2013b] I propose,

as the litmus test for all three sets of proposals, examining how well they fare in


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addressing the problem of the squeezed middle. The problem of the squeezed middle is

that changes in the US economy over the last forty years have seen little change to the

lives of the worst off they continue to do very badly. However, it has seen significant

changes to the lives of the next category up the socio-economic ladder, namely, the

working lower middle class. It is the income of this group that has stagnated.

Pikettys historical research puts the fate of this class in an historical perspective:

the growth of a true patrimonial (or propertied) middle class was the principal

structural transformation of the distribution of wealth in the developed countries in the

twentieth century. [Piketty, 2014, p. 260] He continues:[I]t is tempting to insist on the fact that wealth is still extremely concentrated today:the upper decile owns 60 percent of Europes wealth and more than 70 percent inthe United States. And the poorer half of the population are just as poor today asthey were in the past, with barely 5 percent of total wealth in 2010, just as in 1910.Basically, all the middle class managed to get its hands on was a few crumbs:scarcely more than a third of Europes wealth and barely a quarter in the UnitedStates . Nevertheless, the crumbs that the middle class have collected areimportant. [Piketty, 2014, pp. 261-2]

This general pattern across the jurisdictions in Pikettys dataset is actually behind the

curve when one examines the major structural changes in the US economy that has

produced the phenomenon of the squeezed middle.

The American middle class has fractured: those who have benefitted from these

social and economic changes have been elevated into the lower 9 percent of the top 10

percent. However, the lower middle class has seen its life prospects deteriorate

consequent on the polarisation of the US workforce. [Stiglitz, 2012, p. 56] They have

typically reacted by sending a secondary earner to work and working longer (often by

combining separate jobs). They also face the consequences of a politically motivated shift


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of personal risk on to themselves and their families even when their income has

stagnated. (Hackers documentation of the great risk shift focuses on exposure to risk

as the inverseof inadequate capital holding.) [Hacker, 2012] Americas squeezed middle

class faces increased pressure to save to cover their individual risks while their income

has not kept pace with these demands: it has remained, in real terms, virtually stagnant

over a forty year period between 1970 and 2010.31

This group is not in any Rawlsian blind spot: justice as fairness, as realised in

an economic system, ties together the interests of all social groups.32If it is true that the

worst off in our own society are the durably worst off in receipt of welfare payments,then Rawls took their claims to be the most morally urgent. But it would be very myopic

to aim to lift the currently worst off into the position of the currently squeezed middle.

Those who can fully participate in society via meaningful work would, nevertheless, find

themselves exposed to risk and with stagnant income. If the choice is welfare dependency

or the long and stressful hours of a typical family in the squeezed middle, then that is not

an appealing structure of incentives. The contribution of the Meade-Rawls tradition in

thinking about inequality is to direct our attention away from income inequality per se to

the deeper inequalities in capital holding, control or access that serve to ground it.

I suggest, then, that we draw on Meade and Rawls and the economic data

supplied by Piketty to explain how we ought to realize the ambitious target of making

unjust exploitation impossible. The way that this aim is realized is by adopting a system

in which the relationship between income from capital and income from the marketing of

labour is restructured at the macro-level of an expanded economic basic structure. This

ambition is reflected in a wide range of policies: a free and high quality public education


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system, wealth tax as well as progressive income tax, high levels of estate tax, the taxing

of capital gains and capital gifts, and incentives for small savers.33More specific policies

for the universal dispersal of capital include a society-wide unit trust made up of a

portfolio of equity held for all citizens by the state, a sovereign wealth fund (where

applicable) or some kind of demogrant scheme to encourage the individual, as well as the

collective, holding of equity. If parts of this approach ought, in my view, to be

constitutionally secured then there is one major issue that has to be the subject of

democratic deliberation, namely, the relation between private and public debt. As Piketty

points out, not only does the state in modern Western democracies typically not tax therich sufficiently, it actually borrows from them.34

I think a return to this capital focused and pre-distributive tradition leads to

significant differences of focus when we turn to policy choice. For example, I think their

particular focus leads to some divergence from the policies of Jacob Hacker to whose

pioneering work I am indebted. This point is worth developing as Hacker is usually

interpreted as offering the distinctively pre-distributionist contribution in policy

debates as to how to address the New Inequality. I think, in fact, that his policies are

nowhere near radical enough they certainly do not compare to that which Meade and

Rawls envisaged.

Hacker pragmatically takes the preferred institutions of the social democratic Left

to be working well and basically only in need of protection and expansion. [Hacker,

2013] That is why, from the point of view of European social democrats already

committed to welfare state capitalist institutions, Hackers message is keep what you

have and avoid the Right-wing assault on pooled capital schemes. He aims to return


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America to the goal of being an equality and opportunity society. This certainly

corresponds to Rawlss goals as articulated in his first two principles that guarantee the

equal basic liberties and fair equality of opportunity. However, nothing in this aspiration

reflects the difference principle and that is an inadequate conception of justice.

I think this difference is brought out by arguing that Hackers policies are not

going to do well in dealing with the problem of the squeezed middle even though that

was their avowed goal. This is because adopting the goal of an equality and

opportunity society encourages meritocratic defences of inequality; defences that seem

to play some role in explaining widespread tolerance of extensive inequality combinedwith reflective disapproval of this state of affairs.35Pikettys data shows that putatively

meritocratic justifications have been given to justify some of the income inequality of

the last forty years; he is sceptical about their factual basis. Admittedly, not even that

meritocratic justification fully explains this inequality; unequal capital holding also plays

an important role. But my point is that, for Rawls, meritocratic justifications are

unacceptable from the perspective of justice even if their factual basis were correct.

The ideology of meritocracy has certainly played some role in justifying the

stagnant income position of the lower middle class the very sector that Hacker wants to

help with a further expansion of welfare state commitments. Examples of the kinds of

policies he favours are the extension of effective social insurance schemes on a

stakeholder basis and the extension of transfer schemes like the working families tax

credit. I do not think any party to this debate can believe in good faith that the current

extreme inequality in capital holding and income has been shaped by free and open

competition on a level playing field.36The great risk shift has taken place in a context


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that was already unfair. My point is that if we make the playing field fair solely by

realizing the goals of equal liberty and fair equality of opportunity, then there willstillbe

a problem of the squeezed middle.

This point is also made by Lane Kenworthy in his own assessment of Hackers

pre-distributionism: if our goal is to solve the problem of the squeezed middle by

finding high quality jobs for the highly educated middle class in a new knowledge

economy, then this can hardly be expected to solve the problem for this entire class of

people.37 [Kenworthy, 2013a; see also Turner, 2012, p. 86] It will, in fact, look like a

retrospective vindication of meritocracy. That is why Kenworthy, even more thanHacker, pins his hopes on an expanded social democratic conception of the welfare state

that he contrastswith a strategy that he labels pre-distributionism. [Kenworthy, 2013a,

2013b]

Kenworthy accurately identifies a bundle of Center-Left social democratic

policies envisaged as paradigmatically pre-distributive in recent policy debate: more

investment in education; an expanded manufacturing sector; stronger trade (labour)

unions; minimum wage increases; the macro-economic goal of full employment;

mandatory codetermination arrangements in large companies; profit sharing; increasing

the number of workers in employment; finally, government intervention in the form of

more public goods and services. [Kenworthy, 2013b]

His evaluation of this raft of policies is ambivalent: some seem unrealistic, such

as increasing trade union representation (down to 5% - 7% in the US private sector)38or

expanding the manufacturing base. A realistic minimum wage or the goal of full

employment seem unrealistic solely because of lack of political will39; by contrast, he


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thinks that co-determination or profit sharing are good policies, but only work at the

margins in developed economies. Together, they will have a limited effect on the

problem of inequality.

Kenworthy believes that we should resign ourselves to some of the social changes

of the last forty years and aim further to increase the number of secondary earners in the

workforce.40Everyones quality of life can be improved by the provision of more public

goods, but the primary policy instrument we need is a working families tax credit: a

conditional earnings subsidy.

This is, obviously enough, a return to a traditional form of re-distributiveegalitarianism. Kenworthy is honest enough to admit that it produces its own moral

hazard problem: if the general taxpayer funds this re-distributive subsidy, then the

employers who have held wages stagnant for forty years face no pressure at all to change

their policy. This kind of approach to the problem of the New Inequality contrasts with

the kind of pre-distributionism I defend that is clearly more radical than the version that

Kenworthy criticises. My objection to Hackers proposals is that they do not go far

enough; my objection to Kenworthys revamped welfare state capitalism is that it leaves

the fate of the squeezed middle at the mercy of democratic politics. They are to be

assisted by re-distributive taxation so long as that political will exists. This is not a

structural reform: it leaves the incentives of employers to underpay untouched. Indeed, it

subsidises them to make that choice.

This point, it seems to me, reinforces the fact that neither Hackers pre-

distributionism nor Kenworthys re-distributionism is likely to be effective in addressing

the problem of the squeezed middle. This is because neither of them aims at the


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comprehensive re-structuring of the relations between labour and capital that is

distinctive of Meades and Rawlss egalitarian property-owning democracies. Meade and

Rawls demanded nothing less than the reform of the basic wage-setting institutions of

society. Marginal changes brought about by a patchwork of particular policies will not

add up to a change of the scale required. Only such a macro-level restructuring will

provide an appropriate context for more local and restricted policies that may seem

attractive as stand alone initiatives, but which can lead to a damaging policy of the

second best if implemented piecemeal. In particular, Rawls makes the case that

vindicating meritocracy cannot even be a part of our normative goals.

41

The aim is not toameliorate the conditions of those currently being harshly treated by the market, but to

remove structural sources of unfairness. In the envisaged just society prosperity is

diffused and no sector of society is squeezed at all because of a fundamental reform of

the basic economic structure of our societies.

I do not want to place any artificial distance between my view and Hackers. His

goal is a fair distribution of income and opportunity alone. The former shapes his

endorsement of a minimum wage; it is the latter that shapes his belief that increased

public spending should be on education. However, Hacker also focuses on the big

picture of encouraging macroeconomic stability overall, as he puts it, before the next

asset bubble. [Hacker, 2013] That was Meades goal, too; I have emphasized how a

property-owning democracy, combined with responsible attitudes to public debt and a

rigorous regime of financial regulation smooth out boom and bust capitalist cycles in the

economy.42


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A crucial factor for Hacker is the loss of organised labour as a countervailing

force in the market to organised controllers of capital. This is one of his three pillars of

mid-twentieth century America prosperity: the first is a neo-Keynesian macroeconomic

policy; the second a high quality education system; the third is the existence of the kind

of public-private partnerships that shaped a distinctively American welfare state.

However, the first two of those pillars remain even if the loss of the countervailing power

of organised labour has contributed to the loss of the third pillar of prosperity, namely, its

distinctive public-private partnerships at the service of social security, broadly

conceived. In my view the situation facing current egalitarians takes us straight back toMeade and to Rawls: to a neo-Keynesian economic policy that targets underlying capital

and a derivative focus on education and the development of human capital. In particular,

an egalitarian strategy that does not focus solely on organised labour as its most effective

political vehicle of social change has become relevant once more.

I have throughout contrasted pre-distributive and re-distributive egalitarian

strategies in general terms, but David Singh Grewal makes a specific point about our

current circumstances with a direct bearing on this choice:

The question of whether ex ante or ex post mechanisms are more efficient assumesthat both are politically feasible and it may be nave to assume that after lettingthe inequality-producing market runs its course there will be any agent left at theend of the process capable of demanding redistribution. Indeed, on a more path-dependent conception of political action, it may only be through structural changesto the economy which galvanize political coalitions while resurrecting distributivequestions that an electorate becomes capable of demanding higher tax rates.[Grewal, 2014, p. 665, emphasis added]

I think it is undoubtedly true that, on this precise point, Grewal, Hacker and I are in

complete agreement. The political changes of the last forty years have been deliberately


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engineered to remove any agent for a redistributive politics, but the same is not true of an

agent of pre-distributive politics. Meade thought that an egalitarianism driven by

organized labour was counter-productive and so formulated a policy that made no such

appeal; that helps to explain the relevance of this egalitarianism when such an agent is

not even available.

When Meade first formulated his revisionist proposals in the 1960s and 1970s

they had some influence on Labour Party policy, but this was limited for two reasons.

The first was that it represented a shift away from an appeal to organized labour that was

difficult in a party created by the trade union movement. Secondly these policies could berepresented by political opponents as soak the rich policies that imposed taxes on

wealth with no positive proposal as to how that transfer of wealth would inform an ideal

of a just society. That was a misrepresentation at the time and it is a misunderstanding

now: if we face, in Pikettys terms, a tipping point in the emergence of a new, capitalist

form of feudalism in the guise of a society of unproductive rentiers whose interests lock

in place a fixed structure of class based social relations, then we also face an historic

opportunity to alter this course. Expanding the economic basis of citizenship for all

citizens through a property-owning democracy is just, efficient, and stable. I turn, now,

to the question of whether it is realistically utopian.

Conclusion Two Cheers for Capitalism?

This is, obviously enough, a large and complex subject and I can only end with some

general remarks.43 My suggestion that a property-owning democracy is a realistically

utopian egalitarian ideal is certainly open to misunderstanding: I am not suggesting that it


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represents an individualistic ideal of self-sufficiency that suits an American society of

conservative egalitarians (to invoke Jacobs and Pages well-known phrase). [Jacobs

and Page, p. ix, pp. 234] That idea has been, indeed, the province of the Right wing

version of the ideal that, far from inhibiting radical inequality, has played a role in

generating it. 44 (That which distinguishes that version of the ideal is its moral

individualism and its in principle anti-statism.)

By contrast, the grounds I see for limited optimism are, first, that the tradition

with which I am concerned here seems to me to have identified the correct targets and to

have dispelled some crucial legitimating myths in this debate over the sources andremedies for inequality. By identifying the correct targets, I specifically mean directing

our gaze away from high gains in the financial sector or executive remuneration: we

know, collectively, how to deal with both even if in some jurisdictions political factors

mean that we do not do so (such as in the USA). Products of political action, they can be

reversed by political action: democratic determination of effective financial regulation

and corporate governance, plus a very high rate of progressive income taxation, plus an

acceptance that any financial institution too big to fail is too big to exist, ought to

eliminate these problems. Piketty, for example, is comparatively relaxed about the issue

of extensive rewards in the financial sector.45[Piketty, 2014b] It has its special features

and it has certainly benefitted from regulatory drift from public policy being behind the

curve of industry change but the percentage of economic activity reflected in these

rewards is comparatively low.46 Focusing on hedge fund managers is as misleading as

focusing on sports stars or entertainment celebrities: in all three cases we are not baffled


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when it comes to a policy response. From being behind the curve taxation and regulation

needs to be ahead of it.

Piketty takes as his target the underlying distribution of who holds capital and the

issue is not the current massive inequality in returns from income, but on what happens

next in a society such as the USA. America has always tolerated inequality tied to

individual circumstance, partly because it was assumed that it would dissipate over a

limited period of a generation or so. That which Americans have always resisted is the

recreation of an Old World neo-feudalism, with fixed relations of hierarchy based on

static social relations, fixed social classes, unproductive activity, rent seeking and asignificant role for inheritance.47Yet that seems, if the historical pattern is not changed,

to be where the bad faith putatively autonomous logic of capitalism is taking the

USA over the next generation or so where todays personal fortune grounded on merit

becomes someone elses unearned inheritance.

When it comes to eliminating legitimating myths, I take it the real contributions of

the Meade-Rawls-Piketty tradition is to expose any argument that defends either income

or wealth inequality as a product of a fictional autonomous logic of capitalism or, for

that matter, of pure meritocracy. If we thought that the benign development of post-

War capitalism represented by the Kuznets curve was, in fact, an historical anomaly then

the next question is how we can make this anomaly our new normal instead of the

contrasting normal with which we seem to be stuck. [Galbraith, 2014] The particular

version of the autonomous logic argument most cited in the recent literature is the

claim that extensive inequality is a product of globalization: this is, for various reasons, a

bad explanation.48There is no reason to believe that the global context has, in any


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politically relevant sense, changed between 1970 and 2010 yet the US economy has

radically diverged from other Western economies when it comes to inequality of wealth

and income.

This leads to the vexed question of the agents of any future change towards the

implementation of a property-owning democracy. Here my view contrasts with that

expressed in David Singh Grewal in his very insightful review of Pikettys book.

Influenced by the neo-Marxist theorist Wolfgang Streeck and by the idea that political

action is path-dependent Grewals policies for addressing the New Inequality do not

aim to reconstruct the political conditions of the post-War neo-Keynesianism that formedthe context of Meades work. [Streeck, 2011, 2014; Grewal, 2014, pp. 664-667] Grewal

accepts Streecks diagnosis that neo-Liberal political action has taken us to a situation

comparable to the period before the trente glorieuses; it follow, then, by an argument

from analogy that our current political remedies should be analogous to those applicable

to the period before the exceptional times began. [Grewal, 2014, p. 665] These include

general strikes and labor activism, experiments with new forms of cooperative industrial

organization, and radical political and social movements. [Grewal, 2014, p. 665]

I simply note that a striking omission in Grewals otherwise insightful review

is that he does not place Piketty in the pre-distributionist, capital-egalitarian tradition of

Meade and Rawls where he belongs; Grewal takes him to be an orthodox ex post factore-

distributivist. 49 But I hope to have shown here that the twentieth century neo-

Keynesianism of Meade and Rawls was considerably more innovative than that. I fully

accept that the decline of organized labour was no co-incidence, but the result of political

action, and any further strengthening of civic and organizational life will form part of a


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solution to the problem of inequality. [Hacker and Pierson, 2010, pp. 127-132] However,

as Kenworthy notes, that will not be enough in itself to reverse the changes of the last

forty years. [Kenworthy, 2013a, p.4]

But it is a resonant historical irony that Meade formulated his strategy to avoid

dependence on the traditional resource of organized labour as the basis for a conventional

form of social democracy: in his historical context he thought this would be counter-

productive. That strategy remains available to us, not when this collective agency is not

one that we elect not to use, but when it has been rendered unavailable even if only for

a limited historical period. I have also noted that both Alperovitz and Grewal make thepoint that the conditions for capitals politically successful assault on labour are about to

change: the shift in the basis of the US economy from manufacturing to services and the

slowing of both immigration and population growth will see the return of labour.50

In his own policy for the re-capitalising of American citizens Thad Williamson

argues that, given that Americans have never had it so bad when it comes to inequality,

this is an historically opportune moment to intervene to change the narrative.

[Williamson, 2012] Williamson, like Alperovitz, thinks that community wealth building

initiatives from the ground up are an appropriate path combined with political leadership

to bring about the re-distribution of wealth. [Alperovitz, 2005] After all, whatever one

might think of the justification for extensive wealth and inheritance taxes and steeply

progressive income taxes, it can hardly be objected that the one percent are going to live

substantially worse lives if this regime of taxation is implemented. We seem to be, then,

living through a crucial historical juncture: whatever the outcome, my argument in this

paper has been that we are not at a loss for a normative orientation for what ought to be


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the outcome. In that sense, I think, we are entitled to a limited degree of optimism about

the future.51

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Aspiration?, in ONeill and Williamson [2012] pp. 287306.

Winters, Jeffrey A. and Page, Benjamin I. [2009] Oligarchy in the United States?

Perspectives on Politics, vol. 7. No. 4, pp. 731751.

Wolin, Sheldon [2008] Democracy Incorporated: Managed Democracy and the Specter

of Inverted Totalitarianism,Princeton University Press.


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#Professor of Ethics, Tilburg University. [email protected] material in

this paper re-capitulates some of the central arguments ofRepublic of Equals: Pre-

distribution and Property-owning Democracy, to be published in 2016 by Oxford

University Press.

$Krouse, Richard and MacPherson, Michael [1998] Capitalism, Property Owning

Democracy and the Welfare State in Guttmann, A [1988] pp. 79-106; Richard Arneson

[1986]. See also Arneson [2011].

3The publication of ONeill and Williamsons anthology [2012] may yet mark a change

in the fortunes of property-owning democracy.4From 1979 until the eve of the Great Recession [2008] the top one percent received

36 percent of all gains in household income . Economic growth was even more skewed

between 2001 and 2006 the share of income gains going to the top one percent was

over 53 percent . the top 0.1 percent one out of every thousand households received

over 20 percent of all after-tax income gains between 1979 and 2005, compared with the

13.5 percent enjoyed by the bottom 60 percent of households. [Hacker & Pierson, 2010,

p. 3] Hacker and Pierson largely rely, in their 2010 book, on the data supplied by Piketty

and Saez from 1913 up to 2007. [Hacker & Pierson, 2010, p. 14, p. 312, fn. 1] This is

supplemented by data from the Congressional Budget Office. [Hacker & Pierson, 2010,

p. 21] It is noteworthy that this is income data and that the wealth data is even more

skewed. [Hacker & Pierson, 2010, p. 32] See also Atkinson, Piketty and Saez [2011];

Saez and Zucman [2014]; Saez [2015].5

[Freeman, 1996/7]%Regarding the latter, Hacker and Pierson argue that The precipitous fall in union

membership occurred even though workers continued to voice strong and after 1984,

increasing public support for unions and their goals. [Hacker & Pierson, 2010, p. 142]


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&[T]he Great Recession has been particularly hard on those at the bottom, and even

those in the middle, and this is typical: ordinary worker face higher unemployment, lower

wages, declining house prices, a loss of much of their wealth. Since the rich are better

able to bear risk, they reap the reward that society provides for compensating for the

greater risk. [Stiglitz, 2012, p. 91, emphasis added]

'As Hacker and Pierson memorably put it Recessions, it turned out, were for suckers,

not bankers. [Hacker and Pierson, 2010, p. 292]

(The rising share of national income captured by the richest Americans is a long-term

trend . Moreover, that is not obviously related to either the business cycle or the

shifting partisan occupancy of the White House. [Pierson & Hacker, 2010, pp. 17-18]

#)

Hacker and Pierson are also drawn to the metaphor of drift as government regulationand tax/transfer regimes fail to adapt to new economic realities step by step, as it were

and leading to governmental sins of omission at the behest of special interests. [Hacker

and Pierson, 2010, pp. 52-3]

##Two of the most insightful interpreters of Thomas Pikettys work, Brad DeLong and

Suresh Naidu, argue that the major flaw in the argument of Capital in the Twenty-First

Century is a lacuna on precisely this connection between wealth inequality and the

politics of oligarchy. See DeLong [2014] and Naidu [2014a, 2014b] So extending the

argument from neo-classical economics into political economy and back again greatly

strengthens Pikettys conclusions. I defer a full examination of DeLongs and Naidus

arguments to another occasion. That the equation r > g is meaningless in itself as a

critique of inequality is acknowledged by Piketty in his recent [2016], but the relevant

connection with the politics of oligarchy is, it seems to me, clearly present in Piketty

[2014a].12Thus I agree entirely with Gar Alperovitz: until the foundational question of whether

some other way to reduce inequality is confronted and resolved, it is unlikely that thedemocraticquestion of how to curb the influence of money in politics can be effectively

dealt with. [Alperovitz, 2005, p. 52]13In particular, Gilens and Page falsify the median voter theorem [Hotelling, 1929]; that

theorem has, as a corollary, Melzer and Richardss derived thesis that the median voter


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will inhibit substantial inequalities. [Melzer & Richards, 1981] For some empirical

assessments of the general Melzer and Richards model see Lind [2005] and Milanovic

[2000]. The median voter theorem seems, in any case, currently to be empirically false

for the USA.14It excerpts some of the central arguments of Republic of Equals: Pre-distribution and

Property-Owning Democracyto be published in 2016 by Oxford University Press (USA).

#*The extent to which the view I call liberal-republicanism is a friendly amendment to,

or re-interpretation of, Rawlsian political liberalism is discussed in Republic of Equals

chapter one.16As Bohman also puts it: Hegels claims about the modern state only make sense if it

fulfills the central republican demand: that the capacity of others to dominate is not justcurrently absent, butstructurally impossible. [Bohman, 2010, p. 440, emphasis added]

#&I argue that a property-owning democracy is normatively prior to liberal market

socialism inRepublic of Equals, chapter 8, in partial agreement with the arguments of the

arguments of Arnold [1994] and Bob Taylor [2013]. See also Thomas [2012].18 Although in theory the difference principle permits indefinitely large inequalities in

return for small gains to the less favoured, the spread of income and wealth should not be

excessive in practice,given the requisite background institutions, [Rawls, 1971, p. 536,

emphasis added]

#(One version of this argument is that the US paid the price of inequality for superior

growth compared to, for example, European states. Hacker and Pierson effectively

debunk that particular myth. [Hacker & Pierson, 2010, pp. 26-7]

$) Hacker and Pierson note the popularity of this argument with some US based

economists: unfortunately, it fails to explain the pulling away of the very top and the

effect of education is to avoid the devastatingly slow growth at the bottom. The

economic impact of being a college educated knowledge worker are minimal.Furthermore, this explanation fails to generalize; why didnt workers in other advanced

economies suffer the same fate? [Hacker & Pierson, 2010, p. 35-7]


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21The main consolation for those worried about this enormous concentration of power is

that, like the rest of us, even these very privileged individuals will eventually die. But

Pikettys point is that their fortunes dont. [Grewal, 2014, p. 641]

$$Hacker and Pierson cite both Mankiw and DeLong as arguing that, since inequality in

income is in pre-tax income, its explanation cannot significantly involve political factors,

but it is the market bringing us the bad news. Hacker and Pierson point out that this

argument ignores the political context of markets as well as the role played by tax and

transfer policy in allowing these income inequalities to become wealth inequalities to

help to convert these income inequalities into unproductive rent seeking. [Hacker &

Pierson, 2010, p. 43-44, citing Mankiw, 2008; DeLong, 2006] 23

Any Europeans who complacently think that Pikettys focus is the woes ofcontemporary America are right to a limited extent: he thinks that very high executive

remuneration is a culturally explicable local phenomenon. However, on the issue of

inheritance, European social democrats have more reason to be more concerned than their

American counterparts. See Piketty [2014a], p. 378, 381. I think Brad DeLong is correct

to note that, in spite of the unremitting hostility of North American commentators to

Pikettys work, his primary focus is understandably not America, but France.

[DeLong, 2014] For sympathetic treatments of Pikettys central argument see DeLong

[2014], Grewal [2014], Krugman [2014], Naidu [2014], Milanovic [2014] and Solow

[2014].24We have to multiply the capital-income ratio by the rate of return, and the same law of

diminishing returns suggests that the rate of return on capital will fall. As production

becomes more and more capital-intensive, it gets harder and harder to find profitable uses

for additional capital, or easy ways to substitute capital for labor. Whether the capital

share falls or rises depends on whether the rate of return has to fall proportionately more

or less than the capital-income ratio rises. [Solow, 2013]25[O]ther advanced industrial countries with similar technology and per capita income

differ greatly from the United States in inequality of pretax income (before transfers), in

inequality of after tax and transfer income, in inequality of wealth, and in income

mobility. These countries also differ greatly from the United States in the trendsin these


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four variables over time. If markets were the principal driving force, why do seemingly

similar advanced industrial countries differ so much? Our hypothesis is that market forces

are real, but that they are shaped by political processes. [Stiglitz, 2012, p. 52, emphasis

added] See also footnote 10.26 In strict logic, it could be otherwise, but the forces pushing in this direction are

extremely powerful. The inequality r > g in one sense implies that the past tends to

devour the future: wealth originating in the past automatically grows more rapidly, even

without labour, than wealth stemming from work, which can be saved. Almost inevitably

this tends to give lasting disproportionate importance to inequalities created in the past,

and therefore to inheritance. [Piketty, 2014a, p. 378]27

As Grewal notes, Crosland also wondered if these societies were indeed still accuratelyto be described as capitalist and his answer was no. [Grewal, 2014, p.657, fn, 103 ;

Crosland, 2006, p. 46]28This is where the distinction becomes pertinent between ballooning executive pay and

the workings of r > g; a return to a top rate of tax of over 80 percent solves the first

problem as it was only a politically motivated departure from a high top progressive rate

that incentivized bargaining for his executive remuneration. So that is one problem that

social democratic politics had already solved before the UK and the US decided to

unsolve it once again. See Piketty [2014], pp. 512-514.

$(Lane Kenworthy, whose views I will discuss in the next section, proposes that the USA

increase spending on social programs from 37% to 47% of its current ($17 trillion) GDP.

[Kenworthy, 2013a, p. 11]

+) Kenworthys relative optimism is grounded on his belief that Americans are

pragmatists and they like institutions that work: the major institutions of the social

democratic tradition dowork. [Kenworthy, 2013a, pp. 1213] (This represents the kind of

efficiency argument, as opposed to redistributive arguments, for such institutionsdefended by Joseph Heath. [Heath, 2011]). A separate, and open, question is the

historical success of this tradition in bringing inequality within a permissible range. Cass

Sunstein, for example, argues that it was not Roosevelts New Deal that ended the

economic depression of the 1930s, but WWII. [Sunstein, 2004] That is consonant with


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Pikettys argument that the only effective shocks to capital that have prevented

extensive wealth inequality is the experience of world war. These arguments are not

encouraging for the social democrat.

+#Virtually stagnant as the modest average gains per household are negated by the

increase in hours worked by all the earners in a household. [Hacker & Pierson, 2010, pp.

22-3, p. 26] By comparison the household after tax income of the 0.1 percent rose from

$4 m to $24.3 m between 1979 and 2005. [Hacker & Pierson, 2010, p. 24]

+$This reflects the importance to Rawls of his two claims that, in a just society, the

expectations of all groups are both close-knit and chain-connected. If these two

assumptions hold, then arguments grounded in justice and solidarity produce the same

outcome as arguments grounded in efficiency, but the theory of justice cannot assumethat these exogenous assumptions are true. By implementing justice as an integrated

whole we thereby make them true. I discuss this crucial argument inRepublic of Equals,

chapter 2.33For the truly extraordinary story of Americas current capital gains taxation regime see

Stiglitz [2012] pp. 713.

+,This is, of course, one aspect of their undue influence on austerity policies part of

that which Mark Blyth calls a creditors paradise of positive real interest rates, low

inflation, open markets, beaten-down unions, and a retreating state. [Blyth, 2015]

+*For a very helpful complementary discussion of changing attitudes to inequality see

Adair Turner: If the worlds of celebrity, fashion and media generate very high pay, and

if there are more highly paid corporate lawyers and investment bankers than there once

were, and if there are some businesses (e.g. fashion retailing) in which a star CEO can

make a big difference and get highly rewarded, thenthe sense among highly paid people

of what is normal and justifiable shift. [Turner, 2012, p. 22, emphasis added] The

superstar hypothesis a special version of the meritocratic argument that great gainsare going to the most talented in intense winner takes all competitions that have mass

audience appeal (whether in sports or entertainment) may work well as a legitimating

myth, but as Hacker and Pierson, Rosanvallon and Piketty all note, sports stars and

celebrities form only a small percentage of the very wealthy (Hacker and Pierson put the


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figure at 3%). [Hacker & Pierson, 2010, p. 45; Rosanvallon, 2013, pp. 241-2] The classic

paper on the economics of superstars is Rosen [1981]. As Dew-Becker and Gordon

point out: superstars and other market-driven occupations have their incomes chosen by

the market, whereas CEO compensation is chose

Documents

Thomas: Rawls Piketty and the New Inequality (2016)