Month: December 2014

Efficiency or Dignity

A seemingly eternal dialogue of the deaf between right and left is that over the role of the individual; whether the individual should be considered as a consumer or as a producer.

Empowering individuals as consumers renders an economic system efficient and productive. The needs and wants of consumers are revealed to the production side of the economy. The price mechanism efficiently transmits the relative value of different products and thus the differing profit margins of different activities. Entrepreneurs can deploy capital in the most efficient manner and production managers can optimise their production. I would add that this path is also the more sustainable since it emphasises efficiency, particularly if you use the price mechanism to bring externalities into the economic system.

But when you talk of consumerism and the now generation, it is with disappointment or contempt. Going out and buying as much as we can and then talking about it is not well received. While we might want to impress a girl by describing what we own and can buy, it would be different it we wanted to convey a sense of moral worth. We would then want to talk about what we do. It is no accident that you turn to your neighbour at dinner to ask what do you do and not what do you consume. It is a question that is meant to be flattering.

It is by working, or doing, that we have dignity and a sense of self worth. We may just be adapting to a harsh reality. After all, we generally spend more time working than consuming; even allowing for a Welfare State, our ability to consume is constrained by our ability to work and not the other way around. There was a time when to be leisured was dignified, although I would note that leisure often meant working gratis as a JP, or some other public role.

Moreover, it is one of life’s ironies that it is in our consumption that we see inequality. While working, we are more equal. There may well be hierarchy but it is in a common purpose and will usually either conform to relative, and hopefully evident, ability or, at the least, to, much more obvious, relative age or seniority. It is when we take the hierarchy of work and production, and turn it into a hierarchy of consumption that inequality becomes evident.

Yet we know that exalting the role of the individual as a producer and developing public policy to support production leads us to nationalised industries, subsidies, overmanned industries and economic failure. There are endless historical examples of which the Eurozone crisis is but the latest. Moreover, a production focused economy is unlikely to be the more sustainable. Resource efficiency comes second to worker status.

So the real topic of debate is not whether to exalt the individual as consumer in order to create an efficient economy or whether to exalt the individual as producer in order to enhance individual dignity and thus general welfare. The topic is how to get an efficient economy whilst allowing individuals to find the dignity of work.

Inequality – how much is inherited?

How much of the equality about which we nowadays talk is inherited or passed down, and how much is temporary and inter-generational?

On Friday 19 December, I attended a seminar at London Business School where Thomas Piketty discussed his work on inequality with challenges from Gavyn Davies and the chair of the debate, Matthew Bishop of the Economist.

Piketty’s arguments, summarising his book, seem to be twofold. First of all, he shows that income and, more importantly, wealth inequality, have been increasing since the immediate postwar period and, what’s more, neither inequality shows any sign of falling. He attaches more importance to wealth than income inequality because the former is more persistent. Although you know this is coming, his second, and separate, argument is that this is bad thing and public policy makers should respond, in particular, through wealth taxation.

Gavyn Davies’ critique was, to my ear, also twofold. First, he used Piketty’s charts to show that the increase in inequality since the mid-twentieth century low point was, with a historical perspective, a return to normal. So, while you might want to do something about inequality, you cannot argue that you should do so because the current levels of inequality are unusual. Second, he argued that the recent increase in wealth inequality was coming to a natural close. The sharp rise in wealth inequality was largely due to the fall in the risk free rate and the concomitant rise in asset values. This was temporary.

Michael Bishop’s contribution was more anecdotal but he seemed to be saying that the rise in billionaire philanthropy, particularly in the US, meant that the wealthy were voluntarily reducing inequality by giving their wealth to good causes.

What none of the speakers helped me understand is what part of the income and wealth inequality that we see is persistent and which temporary. What part of the sum of inequality reflects the persistent income and wealth poverty of social groups, which is passed from parents to children, and what part reflects inequality between generations. Through our lives, most of us occupy at different times different points on the income and wealth distributions.

My sense is that part of the rise in inequality comes from the intersection of greater longevity, low inflation and interest rates and the privatisation of education. Longevity means that death-based taxation has steadily lesser impact on wealth distribution; an estate, be it modest or large, is taxed less often. Low inflation and interest rates protect financial wealth. And young people who self-finance their way through higher education emerge with negative wealth and low income, which is temporary.

What you do about inequality is another matter. You might care as much about inter-generational equality as inequality between social groups. But it is probably fair to say that the policy measures are likely to be different.