The Economics of Inequality

Book Preface

The question of inequality and redistribution is central to political conflict. Caricaturing only slightly, two positions have traditionally been opposed.

The right-wing free-market position is that, in the long run, market forces, individual initiative, and productivity growth are the sole determinants of the distribution of income and standard of living, in particular of the least well-off members of society; hence government efforts to redistribute wealth should be limited and should rely on instruments that interfere as little as possible with the virtuous mechanisms of the market—instruments such as Milton Friedman’s negative income tax (1962).

The traditional left-wing position, passed down from nineteenth-century socialist theory and trade-union practice, holds that the only way to alleviate the misery of the poorest members of capitalist society is through social and political struggle, and that the redistributive efforts of government must penetrate to the very heart of the productive process. Opponents of the system must challenge the market forces that determine the profits of capitalists and the unequal remuneration of workers, for instance, by nationalizing the means of production or setting strict wage schedules. Merely collecting taxes to finance transfers to the poor is not enough.

This left-right conflict shows that disagreements about the concrete form and desirability of redistributive policy are not necessarily due to contradictory principles of social justice but rather to contradictory analyses of the economic and social mechanisms that produce inequality. Indeed, there exists a certain consensus in regard to the fundamental principles of social justice: if inequality is due, at least in part, to factors beyond the control of individuals, such as inequality of initial endowments owing to inheritance or luck (which cannot be attributed to individual effort), then it is just for the state to seek in the most efficient way possible to improve the lot of the least well-off (that is, of those who have had to contend with the most adverse factors). Modern theories of social justice have expressed this idea in the form of a “maximin” principle, according to which a just society ought to maximize the minimum opportunities and conditions available within the social system. The maximin principle was formally introduced by Serge-Christophe Kolm (1972) and John Rawls (1972), but one finds it more or less explicitly formulated in much earlier works—for example, in the traditional idea that everyone should be guaranteed the broadest possible range of equal rights, a concept widely accepted at the theoretical level. Often, the real conflict is about the most effective way to improve the actual standard of living of the least well-off and about the extent of the rights that can be granted to all in the name of abstract principles of social justice.

Hence only a detailed analysis of the socioeconomic mechanisms that generate inequality can sort out the competing truth claims of these two extreme versions of redistribution and perhaps contribute to the elaboration of a more just and effective set of policies. The purpose of this book is to present the current state of knowledge as a first step toward that end.

The contrast between the left- and right-wing views sketched above highlights the importance of different systems of redistribution. Should the market and its price system be allowed to operate freely, with redistribution effected solely by means of taxes and transfers, or should one attempt to alter the structure of the market forces that generate inequality? In the jargon of economics, this contrast corresponds to the distinction between pure redistribution and efficient redistribution. Pure redistribution occurs when the market equilibrium is “Pareto efficient,” meaning that it is impossible to alter the allocation of resources and output in such a way that everyone gains, yet social justice nevertheless calls for redistribution from the better-off to the worse-off. Efficient redistribution occurs when the existence of market imperfections allows for direct intervention in the production process to achieve Pareto-efficient improvements in the allocation and equitable distribution of resources.

In contemporary political conflict, the distinction between pure and efficient redistribution is often conflated with the distinction between redistribution on a modest scale and redistribution on a large scale. The traditional right-left conflict has grown more complicated over time, however. For instance, some on the left advocate a “guaranteed basic income” for all citizens, to be financed by taxes without direct intervention in the market. This guaranteed basic income differs from Friedman’s negative income tax solely by virtue of size. Broadly speaking, therefore, the question of how redistribution is to be achieved is separate from the question of the extent of redistribution. In this book I will try to show that it is best to treat the two questions separately, because they involve different analytical considerations and lead to different answers.

To pursue these issues further, it is useful to begin by reminding the reader of the history and extent of today’s inequality. Doing so will enable us to identify the principal sets of facts that any theory of inequality and redistribution must take into account (Chapter 1). The next two chapters (2 and 3) present the leading analyses of the mechanisms that produce inequality, emphasizing both the political stakes involved in the intellectual conflict between opposing theories and the observed or observable facts that can help us decide which theories are correct. Chapter 2 looks first at inequality between capital and labor, a fundamental inequality that has deeply influenced the analysis of the social question since the nineteenth century. Chapter 3 deals with inequality of income from labor itself, which has perhaps become (if it hasn’t always been) the central question in regard to contemporary inequality. It will then be possible to delve more deeply into the key issue, namely, the conditions under which redistribution becomes possible and the tools for achieving it (Chapter 4). Special attention will be paid to inequality and redistribution in France, although the relative paucity of available data and analyses (in sharp contrast to the attention devoted to unemployment, the “social fracture,” and other central issues of French political debate in the 1990s) will force us at times to rely mainly on studies of other countries, especially the United States, to illustrate, confirm, or refute the theories discussed.