McAuley finds much to commend in Atkinson’s latest work on inequality | 2 July 2015

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Ian McAuley 1CPD fellow Ian McAuley (pictured) reviews Anthony Atkinson’s recent work Inequality: What Can Be Done?

If, last year, you waded through the 700 pages of Thomas Piketty’s Capital in the Twenty-first Century you might reasonably believe that little more can be written on inequality.

But there is more, much more, in Anthony Atkinson’s recently published work Inequality: What Can Be Done?.

Like Isaiah Berlin’s hedgehog, Piketty deals with “one big thing” – the inevitability of wealth inequality developing when the return on capital exceeds the rate of a nation’s economic growth – captured in the simple “r>g” which you may see on the occasional T-shirt.

Like Berlin’s fox, Atkinson, a British economist who was an academic mentor to the younger Piketty, deals with the “many things” about inequality. His work takes us into the microeconomics of incentives, rewards, taxation, social security systems, and other mechanisms by which inequality rises. While Piketty made a general policy proposal (a global tax on capital), Atkinson goes into detail on policies that may be employed to counter inequality.

Atkinson rejects the idea that economics should avoid the normative question of distribution. He goes beyond the easy “left”/“right” consensus that equality of opportunity should be the main focus of public policy, pointing out, for example, that inequality in outcomes, through its intergenerational effects, inevitably leads to inequality of opportunity. On this point he and Piketty cover the same ground – inequality begets inequality.

“[Atkinson] calls on evidence … showing that among developed countries with market economies, greater equality contributes to better economic performance, a point confirmed (yet again) by the OECD’s recent report In It Together: Why Less Inequality Benefits All.”

But he goes further into what many right-wing economists would see as dangerous territory, because he argues cogently that greater equality (within bounds), is a “good” in its own right. He rejects the idea that on distribution economics should confine itself to Wilfredo Pareto’s parsimonious but morally empty idea that a distribution can be said to be beneficial only if some people are made better off while no one is made worse off.

He goes back to the common-sense but unfashionable redistributive philosophy of Jeremy Bentham. That is the utilitarian argument that because the pain in taking $100 from a rich person is less than the pleasure in giving it to a poor person, such a redistribution can result in a social gain. (That’s the economic philosophy I recall from Geoff Harcourt’s economics lectures at the University of Adelaide in 1969, before economics took its neoliberal turn.)

Even if some on the “right” are unconvinced by his moral argument, he calls on evidence, including the work of Richard Wilkinson and Kate Pickett (The Spirit Level), showing that among developed countries with market economies, greater equality contributes to better economic performance, a point confirmed (yet again) by the OECD’s recent report In It Together: Why Less Inequality Benefits All.

The first few chapters of his work are a “must read” for anyone seriously studying inequality. Along with Piketty and others (including our own Andrew Leigh) he describes the trend to lessening income and wealth inequality in “developed” countries up to around 1980, followed by the trend of widening inequality in the last 35 years. He takes great care to illustrate traps and difficulties in interpreting data, and in using indicators such as Gini coefficients. For example, countries that look unequal on conventional measures such as “market income” (pre-tax and social security transfers) or “household income” (after tax and transfers), may be far more equal than raw figures suggest when benefits such as public education, publicly-funded health insurance and provision of public cultural facilities are taken into account.

“At the outset, [Atkinson] points out that inequality is best met with policies that keep disparities in market incomes in check. “Transfers are only part of the story” he writes.”

Like Piketty he points out that the simple figure “r” is a simplification, because the very rich enjoy a much higher return on capital than the modest investor with a few shares or a small superannuation balance. He explains the difference: it’s the cut taken by financial intermediaries. What, he asks rhetorically, is the value-added by people shuffling around pieces of paper between one another?

At the outset, he points out that inequality is best met with policies that keep disparities in market incomes in check. “Transfers are only part of the story” he writes. Unsurprisingly he is an enthusiast for reasonably high minimum wages. In a description of power asymmetries and other departures from textbook models of the “labour market”, he dismisses the often-heard arguments that high minimum wages lead to unemployment.

Otherwise most of his book is about transfers and redistributive taxes. He acknowledges the work of Carl Frey and Michael Osborne showing how computerisation is leading to the displacement of jobs once considered “safe” (a theme picked up in CEDA’s report on Australia’s future workforce), but he doesn’t have much to say on how public policy can shape economic structures to achieve a fair distribution of employment and incomes before calling on the social security system. (For example, readers would be interested to learn how Switzerland has achieved high equality in market incomes, thereby not having to rely heavily on redistribution.)

His only significant suggestion about structural policy is his general proposal: “The direction of technological change should be an explicit concern of policy-makers, encouraging innovation in a form that increases the employability of workers and emphasises the human dimension of service provision.” While that proposal as written is uncontentious (it aligns with Amartya Sen’s capability theory and with general theories on human capital), in elaborating on this proposal he seems to be calling for policies to slow down the substitution of capital for labour. It’s as if he is unaware of the way the UK lost its industrial lead in the postwar era, when it stuck to labour-intensive manufacturing while Japan and Germany were investing in labour-saving machinery. That wasn’t just about production costs; it was also about reliability. To this day British industry suffers from its reputation for production of poor quality consumer goods.

“A work of this nature really has to be country specific, which is why its recommendations do not easily translate to other countries … Contrary to the Anglophilic disposition of our present prime minister, Australia has a different culture and economic tradition to the UK.”

He develops 14 other proposals, mostly dealing with UK issues in social security and taxation. Unfortunately it’s not always easy for the reader to disentangle his general theory from his specific UK- based recommendations. His main themes are calls for more progressive income tax (Britain, like many other countries, has cut top marginal taxes heavily in recent years), and for more universality and less means-testing in social security provisions, particularly in relation to payments for children. In short, he argues for a tax and social security system more like what is found in mainland European countries. To those conditioned to the idea, particularly strong in Australia, that assistance should be targeted and means-tested, his proposals may appear to be heretical, but his case is carefully argued on both instrumental and moral grounds.

Therein lies his intellectual strength – his capacity to match general principles with detailed economic analysis – analysis that points out the risks of unintended consequences, the importance of cultural norms (such as a “fair price”), the legacies of institutional power, and how his proposals can mesh with existing policies including those of the European Union. A work of this nature really has to be country specific, which is why its recommendations do not easily translate to other countries.

Contrary to the Anglophilic disposition of our present prime minister, Australia has a different culture and economic tradition to the UK. Our history as a convict settlement, the disruption of the gold rush, the development of a high-wage protected manufacturing sector, the Harvester Judgement, postwar immigration, minerals booms, and institutions such as compulsory superannuation all make for a unique economic structure – and a unique set of problems (taken up in the CPD’s publications More Than Luck (2010) and Pushing Our Luck (2013). We cannot simply lift Atkinson’s policy prescriptions and apply them here.

But while his detailed suggestions are necessarily linked to the UK, the principles he develops are relevant for anyone seeking ways to reverse the corrosive trend of worsening inequality.

Ian McAuley is a Fellow of the CPD. He and his colleague Miriam Lyons, former Executive Director of the CPD, have recently published the work Governomics: can we afford small government?, which covers many of the same themes as Atkinson’s work.

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