Strict equality and marginalism

As far as I can tell, the best alternative to (nearly) strict equality of income is marginal productivity theory: each person should receive the social permission to consume socially produced goods and services in proportion to his or her marginal productivity. People who are very productive at the margin receive more of the social product; people who are not very productive should receive less.

Of course, arguing against one alternative among many is not much of an argument for a position, but knocking down the best alternative offers better support.

It's notable that Mankiw makes a deontic moral argument for marginalism rather than a utilitarian or pragmatic argument. I suppose he must, because the utilitarian argument looks pretty bad.

What do we mean by the marginal product? Generally speaking, the marginal product of something is the productivity of adding one more of that something; if we model production as a continuous function, the marginal product is the slope (partial derivative) of that something's contribution to production.

One problem, then, is that for an individual competitive firm, wages are exogenous: nothing the firm can do can affect wages. Thus the firm hires labor until the wage of the last worker exactly equals his or her contribution to production. At the level of the individual firm, therefore, the causality is exactly the reverse of the marginalist story: people are not paid according to their marginal productivity; the firm employs people until their marginal productivity equals their pay. If the prevailing wage were to exogenously increase or decrease, the marginal product of labor would still, at each individual firm, be equal to the wage.

But if the wage is exogenous to the individual firm, how is it set? Well, capitalism is very careful (with a notable exception, finally corrected, in the last half of the twentieth century) to ensure that most people's wages are set in a perfectly competitive market. In a perfectly competitive market, prices fall to costs, i.e. the cost of labor power, i.e. the cost of minimal subsistence. Only political reasons, not economic reasons, push some wages above subsistence in the long run. (In the short run, demand for a new specialty, such as computer programming, can race ahead of supply, allowing specialists oligopoly pricing, but after ten or twenty years, supply will eventually catch up.)

Thus, marginalism entails that most people should receive subsistence wages; not because most people can produce only that much, but because we will hire labor until the last person hired produces that much. And they produce that much not because of their personal characteristics, but because the firm has made a choice between labor and capital based on the exogenous subsistence wage. I can't imagine that anyone would consider these circumstances "fair."

What about the capitalist? Even allowing the polite fiction that capital (machines, trucks, buildings) produce anything at all, the capitalist himself produces nothing; he just sits around owning things. Even if the marginal product of capital is equal to the wage, an individual capitalist, unlike a worker, can own an unlimited amount of capital. Moreover, the more capital a capitalist owns, the more he can acquire, so capital ownership, absent political limits, is self-concentrating. And, concentrated enough, the capitalist can enjoy monopoly pricing, exogenously setting the price of capital. And again, firms will choose just enough capital so that the marginal product of capital is equal to its price.

So, yes, everyone receives his or her marginal product, but the decision about what that marginal product should be is not economically but socially determined; it has nothing to do with any individual's characteristics or capabilities. Fair? I think not.

What about the millionaire CEO? Is he paid his marginal product? If so, if the marginal product of a CEO really is in the eight figures, then bog-standard economic theory tells us we should be producing a lot more CEOs. We should be producing so many CEOs that the last one we hire produces the subsistence wage. If the CEOs we have are really producing tens of millions of dollars per year, we should experience an enormous boost in productivity by vastly expanding the number of CEOs.

Heh. Not gonna happen. Even if it's true that each CEO really is directly responsible for tens of millions of dollars of productivity (they're not), the fact that we have politically limited the supply of CEOs is why their marginal productivity is so high. And, of course, a CEO's marginal productivity is not really that high; they are pseudo-capitalists, paid not for their productivity but their social status.

Fundamentally, the problem with marginal productivity theory is that marginal productivity is politically determined; marginal productivity precedes wages and prices of capital.

There are, of course, limits on these prices. There is a physical limit as to how far real wages can fall, there are political pressures keeping wages above mud huts and just enough food to avoid starvation, and given some politically determined wage, there are high and low limits on the marginal productivity of capital. However, within those limits, marginalism entails that most people should live as poorly as possible, and that a small few should live as wealthily as possible, regardless of the individuals' characteristics, and regardless of the potential productive forces of society. Marginalism moves us away from the shared goal of abundance.

Another way of looking at it is that yes, it is a matter of economic necessity that everyone does in fact receive his or her marginal productivity; however, within physical limits, we are free to set marginal productivity. And if we are free to set it, we are free to set it such that everyone's marginal productivity is nearly equal. As productivity increases, equality tends to increase, until we really do have abundance and absolute income equality, i.e. as much as everyone wants.

Capitalism's mysterious triumph

Capitalism's Mysterious Triumph: "Communism failed because of an inability to provide a sustaining reason for existance; only under crisis could it work."

Krugman has some real insights, which any good communist should study. However, he looks only on the more pleasant aspects of capitalism; but the ugliness of capitalism is just as much a cause of its "triumph."

More on strict equality

It seems pretty clear that our economic goal is to have economic abundance, where everyone can have as much ordinary stuff as they want; by definition, we would then have strict equality of income. We do not, of course, presently actually have economic abundance, so at best this form of strict equality lies in the future. What of today, then? First, does the present level of economic inequality per se help or hinder progress towards a goal of abundance? Second, should we address economic problems other than inequality, perhaps using inequality as a diagnostic or measure of success, or should we address economic inequality directly?

We do not have a world of abundance, but we do presently have (or are very close to) a world of "plenty": a world where everyone can have enough to avoid the most obvious kinds of physical and social suffering, such as malnutrition or starvation, homelessness, treatable death and disease, undereducation, and barriers to ordinary civic participation. Moreover, everyone can have the "necessities," and we will still have enough social surplus to continue expanding the forces of production. We know we presently have a world of plenty simply because all economic crises of modern capitalism are crises of overproduction. Overproduction is possible only in a world of plenty.* Given that we do in fact have plenty, we have to talk about the morality and practicality of how we distribute it.

*If you don't buy this claim, let me know, and I'll write about it elsewhere.

Because we do have enough that no one has to materially suffer, then it is a moral evil to allow anyone to suffer from material deprivation. This position is not a matter of argument: either we have this moral opinion or we don't. I'm going to proceed under the assumption that we do. (It's notable that people who seem to hold the alternative moral opinion seem to hide that opinion.) If we are going to both ensure that everyone has these necessities and account for people's consumption, then regardless of any other considerations, we must ensure that everyone has sufficient income to afford the necessities. We can, of course, do other things — e.g. improve education, equalize access to capital, ensure appropriate political and economic socialization — but we must also simply ensure that people have enough income to buy what they need. Criminality is beyond the scope of this post and topic, but we already at least pretend to offer even the worst criminals these basic necessities; how can we refuse them to law-abiding citizens? Clearly, to the extent that we share this moral vision, we must address income inequality directly.

Of course, setting a floor on income is not strict income equality. However, the need for an income floor requires that income inequality become an issue we need to address directly, neither irrelevant nor merely diagnostic. Sometimes we need to stick the camel's nose in the tent: if we accept an income floor, it becomes more politically feasible to continue to equalize income and wealth. Opponents might, seize normalization of strict equality as an argument against an income floor. But this argument presupposes the absolute good of income inequality, a presupposition that I do not think can be justified. The goal of strict equality is not some Procrustean bed of drab sameness; the goal is a society of material abundance. To be against strict equality in principle is to be against material abundance.

Strict equality: A world of abundance

Consider an "ideal" (in the sense of theoretically "perfect") world, a world of abundance, a world where everyone has as much ordinary stuff as they want; if someone wants something extraordinary, we would have some democratic process to decide if they should get it. This ideal world has perfect equality of income: everyone has the same demand on the social product — at least the ordinary product — as everyone else, i.e. as much as they want. There are some technical and philosophical problems: we would have to ensure we didn't have over- or under-population, and a lot of people might choose to sit around doing nothing, but I think it would be a stretch to find a specifically ethical problem with such a society. We would have to say that there is enough physical stuff that people can have as much as they want, but it is good that we deny some people what they want.* Why would we do that?

*I am excluding wanting "bad" things, e.g. wanting slaves or the enforced subordination of other people.

Contrast the above ideal world with ideal capitalism. Ignoring the considerable philosophical and practical problems with free markets, what happens with capitalism when we have a lot of stuff?

By ideal capitalism, I mean a political-economic system with the following characteristics. First, all markets for all commodities are perfect: there are perfectly competitive markets for all commodities (no monopolies, monopsonies, or oligarchies), free entry and exit in the production of all commodities, no externalities in the production or consumption of all commodities, and everyone has perfect information about all prices, costs, and benefits. Second labor power is a commodity with a perfect market. Third, capital, whether in its direct physical form as machines, buildings, etc. or its indirect, financial, form as a demand on the product produced by physical capital, is privately, individually owned.

Note that capital is not a commodity-by-definition above. Capital cannot be a commodity-by-definition; if it were, then no one would have a demand on the surplus social product (the amount of production in excess of the needs of survival and reproduction): there would not be any market at all for the social surplus, and we would produce only as much as everyone needed to survive and reproduce.

I'll discuss later the question of whether capitalism is or is not (it's not) a pragmatic way to grow society's productive forces to the point where there is enough stuff that people can just have what they want. I want to ask here whether or not ideal capitalism is compatible with a world of abundance.

The problem of labor is sufficient to show that capitalism is not compatible with abundance. Either there is labor or there is not (all production is by capital). If there is labor, and labor power is a commodity with a perfect market, then the price of labor power is equal to its marginal cost. Furthermore, competition ensures that the marginal cost would be as low as possible. Thus, people who labor would receive for their labor just enough to survive and reproduce. Even if there were enough that everyone could have as much as they want, people who labor would not have as much as they want.

Furthermore, there is no opportunity for people who labor to acquire capital. If they received enough for their labor to acquire capital, then the price of labor power would be above its marginal cost, and we would conclude that the market for labor power was imperfect.

If there were no labor, if all production is only by physical capital, then the private ownership of capital becomes the problem. If capital is privately owned, then an individual's consumption is limited by the amount of capital they own. Again, there is enough (or the potential to produce enough) that everyone can have as much as they want, but some people's consumption is limited by what is nothing more than an arbitrary social convention. If we were to redistribute the social ownership of capital, we would not have private ownership.

Thus, regardless of its utility as an intermediate mode of production, capitalism cannot be a universal mode of production. This result should not be surprising: capitalism is a social response to scarcity, specifically scarcity of capital. We should not expect it to be robust to abundance.

We could relax the assumptions of capitalism, perhaps specifically the assumption of labor power as a commodity. And, of course, at some point we must relax them, unless we want to deliberately impose scarcity just to keep the system intact.

In later posts, I'll take up the issue of capitalism as an intermediate mode of production, and why it begins to fail far short of an abundance of production.

$70,000 minimum wage

Here's What Really Happened at That Company That Set a $70,000 Minimum Wage

Dan Price decided to pay all 120 employees at least $70,000. Grown men cried. Profits soared. Then things got really crazy.