Air traffic controllers must be observant, alert, concentrated and dependable, but need not be rocket scientists. For what they are and do, they earn salaries way above the average of their peers in the same kind of class. Traders in financial products and commodities in the major investment banks need to be similarly observant, alert, rapid but not rash, and dependable. Except for some specialists who fashion bespoke derivatives, they need no rocket science. For what they are and do, they earn from ten to fifty times more than the air traffic controllers. Stars among them may earn hundreds of times more.
When bank chiefs are castigated about this by their governments and the press, they reply that they can't help it; if they paid much lower bonuses, their best traders would be poached away by their competitors.
This is one of the small mysteries in the theory of income distribution. There are hardly more than about ten investment banks in the world with the capital and the trading volume that can bear the cost of astronomical trader bonuses. The chiefs of these ten or so banks all know each other quite well and are in frequent contact. The setting looks ideal for an oligopsony, a small number of buyers quietly agreeing to reduce the price at which they will all buy. It goes against the textbooks, and against common sense, that these banks do not gradually reduce traders' bonuses in tacit concert with one another.
This anomaly is but a minor incident, but as an irritant under the skin of public opinion it is most potent. It raises to real fury the banker-bashing passion which, understandably enough, has been exciting so many commentators since 2008. Like ever-widening rings in the water, passionate interest expands to the great questions of distribution. The really burning question facing our societies is that collective demands for welfare entitlements of all sorts, most of them arguably justified on grounds of compassion and solidarity, chronically exceed the resources we produce to meet these demands. We cannot afford the entitlements we have already granted to ourselves, but we refuse to cut them. The only sensible alternative would be to try and induce the economy to grow faster so as to fill in the resource gap. Instead, more attention than ever is paid to the "slicing of the cake", to the distribution of the resources that are actually being produced.
1. Some Economic Facts of Life
The elementary truth about distribution is that the product accrues to the factors that are producing it, each factor getting the value of its contribution. The cake is not, as popular and populist economics often falsely pretends, baked first and then bargained over who gets how big a slice. Production and distribution are not two distinct phases of a process. In a reasonably competitive market for labour and capital, the slice each gets is determined by their marginal contribution to the cake that is about to be baked. Capital and labour will be devoted to cake-baking as long as the marginal product of each is not less than their price. When marginal products are equal to factor prices and when the number of cakes that it is worth while to bake at these prices is equal to the number of cakes the owners of these factors want to buy, all is well. Profit from cake-baking is maximised, greed is satisfied, and "greed is good" because it is the sole incentive known to man that is satisfied by behaviour that happens to conform to the optimal allocation of resources.
Factors of production, however, are not homogenous. The labour of one person may be worth many times the labour of another depending on the brains and muscle, various talents or the lack of them, the character or its absence and the level of education of each. These personal endowments weigh even more heavily in the balance for independent entrepreneurs and heads of enterprises than for those they employ. Economic facts of life generate an unequal distribution for two major reasons. The primary one is that personal endowments are intrinsically different and so are the resulting marginal contributions of members of the labour force. The distribution of the national income would be growing more unequal over time even if, by some sinister miracle, an initial "starting gate" position of the same property and the same income for everybody could be created.
Once the distribution is unequal, a secondary reason kicks in to make it more unequal. Since the proportion saved from high incomes is generally higher than from low ones, capital accumulation from an unequally distributed total is higher than from an equally distributed one. This tends not only to speed up economic growth, but also further promotes inequality due to the unequally distributed ownership of capital.
Evidently, like most other facts of life, the tendency to inequality loses some of its force as it progresses. If capital accumulates faster than the growth of the labour force, and technical progress is not biased in favour of capital, the demand for labour will grow, the marginal product of capital will decline relative to that of labour, and the share of wages in national income will swing in favour of labour. Needless to say, when trade liberalisation and the fast advance in transport technology causes 400 million or so rural Chinese to enter the world industrial labour force, to be followed by as many Indians, basic wages will not rise as they would have done without this massive influx of fresh labour. Inequality will continue to grow instead of slowing down, let alone stopping. This is the actual situation which is, pardonably enough, so much resented. Sooner rather than later, however, the forces equilibrating distribution at a high but steady degree of inequality must gain the upper hand. The underlying tendency of unequal distributions to grow faster than equal ones remains intact, and so does their capacity to rescue the poor from permanent poverty.
2. Egalitarian Propensities
Three propensities account for many, and probably most, people leaning towards egalitarianism of a vague, ill-defined kind.
The simplest and most visceral is envy, the desire to see the "tall poppies" cut down to size and deprived of the good things of which they have such an outrageous excess. The envious is satisfied if the rich are deprived of the good things they do not deserve, but he does not count on these good things to be handed over to him. In this sense, envy is selfless, yet demeaning and therefore not openly avowed.
A different propensity, on the other hand, is the selfish one of looking for material gain from an egalitarian move. A society's mean income being above the median signifies unequal distribution. Convergence of the mean toward the median potentially increases all below-average incomes ; those with incomes below the median gain in any case, and those with incomes above the median but below the mean benefit if the egalitarian move takes the form of cutting down the excess of incomes above the mean and redistributing this excess only. Intermediate solutions that cut partially into incomes below the mean but above the median, as well as into the ones above the mean, would still leave a majority of gainers and a minority of losers. A majority would naturally tend to be egalitarian, subconsciously convinced that the equalising move would work to their benefit. A belief that the good of the majority is somehow the same as the "common good", a belief that is no less widespread for being grossly arbitrary, reinforces the egalitarian propensity.
A third egalitarian propensity is less evidently at work, and its very existence is open to dispute. Most evolutionary theorists contend that the conditions of life of wandering hunter-gatherers for at least a hundred thousand years imposed the equal sharing of irregularly obtained food in the extended family or group as the best survival strategy. The wandering life and the unpredictability of finding food, as well as the limited techniques of preserving surpluses for rainy days, promoted the survival of people inclined to share food. Their genes were selected for survival over the genes of the non-sharers. Present-day populations carry the same genes and hence have an egalitarian propensity.
This contention is neither verifiable nor falsifiable, but not wholly convincing. For at least the last ten thousand years, the wandering hunter-gatherer has been mainly replaced by the sedentary peasant who had an adequate technique of storing food as security for his nuclear family. Sharing it more widely would benefit the genes of kinfolk to the detriment of his own. As a genetic survival strategy, this would be an inferior one. Supposing that the peasant persists share-and-share-alike would mean that he allows himself to be fooled into an obsolete behaviour that no longer best serves his genetic survival. We cannot argue that he would not be so fooled, but we can at least doubt it that the genetic heritage of hunter-gatherer life makes of him a natural egalitarian today.
3. Some Political Facts of Life
When state-of-nature society first coagulates into a state and collective choice starts to dominate individual choices, the effect is initially inegalitarian. The leader of the war band, the tribal chief, the king asserts his power by acquiring the support of a minority group that he selects and rewards by large grants of land and serfs, or confirming it in its pre-existing large possessions. Command over the majority is exercised by relying on the organised force of this privileged group. Often the commanding minority selects itself in the course of conquering the land of the majority, as was the case of the Franks in Gaul, the Normans in Britain and the Scandinavians in Russia. The resulting very unequal distribution of wealth, income and status may remain fairly stable for centuries, subject only to dynastic and feudal conflicts and the slow erosion that economic forces inflict on political structures.
Political facts of life, inegalitarian at the outset, turned massively egalitarian as the conditions of exercising collective choice underwent accelerating change from the 17th century onwards, until they came to take the shape that we know as the democracy typical of the modern Western world. The two key changes were that the important decisions were to be made by the majority imposing them on the minority and not the other way round as in past centuries, and that the tenure of government power was no longer freehold—permanent until terminated by some stochastic event—but leasehold terminated automatically at intervals imposed by an electoral calendar. The power to govern expired periodically and had to be regained by winning the grace of the majority.
With competition for the majority's grace and favour more or less open a redistributive auction in order to recruit a majority was the obvious consequence. In its purely logical form, stripped of historical and incidental detail, the conclusion was defined by the median voter theorem. Competitive bidding for votes would, in this pure theory, converge to identical redistributive offers in which half of the electorate plus one would benefit at the expense of the other half of the electorate minus one. In real life, for a multitude of good reasons, the median voter theorem is only quite imperfectly realised. In its stead, we have the irregularly but irrepressibly expanding welfare state. It is the most robust fact of political life. In its effects, it is the diametric opposite of the economic facts of life that act upon distribution.
Ostensibly, equalisation of income and wealth is not the object of the welfare state. Its specific measures aim at entitling specific groups to specific benefits at the expense of the general public. The groups in question are invariably deserving of help. It takes stony hearts to oppose their entitlements. The raising of the necessary means is achieved in three main ways. One is by sales or value-added taxes that are regressive but are supposed to be largely unnoticed, painless. Another, increasingly important, is the shifting of the cost on to a future generation by deficit financing and unfunded pension liabilities. Only the third source, progressive income capital gains and inheritance taxes, is overtly egalitarian. But compared to the total budget, such direct taxes are not very large. However, they serve as a useful egalitarian figleaf and play well to the populist galleries.
The overwhelmingly largest part of the egalitarian work done by the welfare state is done not by taxation or borrowing on the revenue side, but by the targeted free or below-cost allocation of public goods and services to low-income groups and by compulsory "social" insurance. It is clear enough to the lucid mind that the phenomenon has little to do with right or left wing convictions and ideas about the common good. It is simply the consequence, or perhaps even the logical corollary, of the political facts of life—no matter how it is disguised and embellished as a moral imperative.
Editor's footnote: For a similar discussion see Robert Nozick "How Liberty Upsets Patterns" in Anarchy, State and Utopia (New York: Basic Books, 1974), pp. 160 ff. where he discusses the situation of Wilt Chamberlin after an initial equal distribution of wealth. Nozick shows how non-violent, voluntary exchanges might take place following this redistribution which would increase Wilt Chamberlin's income and thus disrupt the situation of income and asset equality. This would happen repeatedly thus destroying any plans for a permanent state of income equality.
Anthony de Jasay
is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State
(Oxford, 1985), Social Contract, Free Ride
(Oxford 1989) and Against Politics
(London,1997). His latest book, Justice and Its Surroundings,
was published by Liberty Fund in the summer of 2002.The State
is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.