The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, January 12, 2011

Critique of a critique of a critique of inequality, which only started rising in 80s

While I am theoretically on vacation, I have read Matt Cowgill’s attempt at deconstructing my brief essay on 'inequality and social capital', which, frankly, I thought was pretty straightforward and logically robust. In what follows I enclose a few impressions.

First, if you are going to debate someone in this fashion, take what they write at face value, and don’t try to decipher meaning that does not exist. Matt falls foul of this mistake, which is a bit disappointing. Put plainly, Matt has misrepresented what I communicated in my essay, and twisted my remarks in order to construct a faux target with which to assault. Yes, Matt has created a 'straw-man' that honestly bears scant resemblance to what I said. It is almost as if he had a preconceived image of the values and ideological predispositions I represent in his mind, and then contorted my commentary to fit that projection. This also conveniently permits him to deploy a range of superficially sophisticated set-piece contentions on 'ideology, politics and moral philosophy', which one gets the sense he has rolled out before.

Before I address Matt’s points one-by-one, I want to put on the record that I have little time for ideology or political philosophy. I think these are just simplified belief systems that people use to try to understand the way the world works. Many evidently also find it comforting to identify themselves with one of these cohorts. So you are a 'social-democrat', or a 'small-l liberal', or a 'conservative', whatever those terms actually mean (often different things to different people, and folks waste hours debating them with little resolution).

The application of these labels arguably does more damage than good. They certainly don’t seem to assist with facilitating harmonious human interactions, and frequently create artificial divisions that need not exist. Most worryingly, labels lead to lazy thinking, which is in evidence in Matt’s article.

Matt begins by declaring, quite unconditionally, that he “thinks Governments should act to reduce inequality.” As I explained in my essay, which motivated Matt’s response, this beguilingly appealing policy objective has the capacity to be enormously destructive (think of the empirical precedents around the world).

I would further submit that this is an unnecessary policy ambition if government and the community more broadly are collectively working to (a) maximise equality of opportunity, (b) alleviate extreme poverty, which, admittedly, I did not define, and (c) vigilantly seeking to protect those members of society who are prevented from properly participating in it (eg, the sick, mentally ill and/or disabled).

Without restating my entire text, perhaps the most powerful insight into the toxicity of the ‘let’s reduce inequality’ logic is Matt’s repeated admission that he does not actually know what this means:

“It’s true that social democrats (myself included) have difficulty pin-pointing the precise degree of inequality we are willing to tolerate…The judgement is necessarily arbitrary and imprecise, but it is informed by the community’s widely held sense of justice [CJ: But what does that specifically mean?].

That is a nebulous and ill-defined means by which to assess the acceptability of a given degree of inequality [CJ: Yes, it is!]...In the end, the question of how much inequity we allow, and how much liberty we preserve, is one of moral philosophy and of politics [CJ: So what does that actually give us practically?].”

The problem here is that it is not tenable to have a benign central authority that arbitrarily forces us all to conform to a predetermined distribution of financial results (where the dispersion associated with that distribution would meet the ‘equality’ test that the benign authority--ie, Matt's visible hand--deems satisfactory); that is, outside of socialism there is no Utopian panacea to reducing inequality to a preconceived level that makes everyone better off. In a capitalist market economy the financial welfare we generate during our lifetimes is the result of voluntary interactions between individuals that aspire to maximise their happiness, however that happiness might be interpreted.

Imagine you have a self-sustaining island inhabited by, say, a million residents. During each resident’s lifetime he or she will produce a different wealth outcome depending on a range of factors. Those results might resemble something like a normal distribution with the x-axis denoting the wealth achieved and the y-axis showing the number of residents that fall into that wealth category (I suspect it is a positively skewed distribution, but let's leave that for the time being).

Under a socialist regime, there is no bell-curve: everyone in theory gets the same payoff. In the vastly more durable capitalist model, individuals are encouraged to pursue their dreams and are ordinarily compensated according to what they achieve. This gives rise to the bell-curve or dispersion in the distribution of payoffs referred to above.

Since seeking the equality advocated under the socialist model destroys our incentive to work (given we have no reason to do so with guaranteed welfare), which in turn undermines the viability of the overall system's integrity (as demonstrated by history), we are left with the inherently individualist capitalist solution.

To my mind, the role of public policy is then straightforward: you want to focus on minimising the disadvantage associated with the extreme left-hand-side of the wealth distribution while maximising the (economic and social) incentives for all citizens to productively realise their potential. This is accomplished principally through the redistributive tools that elected representatives have available to them; namely taxation.

This means practically striving to level the opportunities furnished to all citizens, safeguarding those who are intrinsically destitute to the point that they cannot avail themselves of such opportunities, and otherwise encouraging all individuals to go out into the world and be the best that they can be. Of course, by fully harnessing our abilities, there will inevitably be a spectrum of payoffs that will vary on an individual basis according to both chance and the extent to which we are able to utilise our endowments.

Matt decided to define what I meant by ‘equality of opportunity’ notwithstanding the absence of any such definition in the essay. He limits me to a purposefully restrictive lens:

“Christopher understands equality of opportunity to mean equal treatment before the law and by public institutions, in other words ‘procedural fairness’, plus perhaps support for public school education. If society ensures equality of opportunity, defined in those terms, should we be comfortable with the dimensions of the inevitable inequality of outcomes that results? I suggest not.”

For what it is worth, I did not have Matt’s attributed definition in hand when I wrote my essay. By equality of opportunity, I meant equality of all future possibilities that a member of society could reasonably expect to have a shot at benefiting from: eg, access to similar levels of primary, secondary and tertiary education; health services; public amenity, such as transport and public spaces (eg, parks); utilities; a fair and easy-to-access legal and judicial system; the safety and support afforded, respectively, by law enforcement and emergency agencies; and, as Matt himself argues, access to similar prospects to progress vocationally.

To be sure, there will some individuals that get lucky care of the dice of life. They will be born into wealthier families, have a reduced financial burden (eg, no HECS), access to ostensibly superior professional networks, and so on. It is not, however, obvious to me that this really supplies this minority with deleterious advantages over everybody else.

I was born into one of these families, and many of my most talented (private) school mates fell by the wayside because they were overwhelmed by the temptation yielded by their good fortune. There was no imperative to work hard, or to strive for a better way of life, precisely because their initial conditions were so prosperous. They were, as a rule, quite complacent. In contrast, many of my contemporaries today who have been professional successes started from highly inauspicious beginnings, and did not attend a private school (unless they had a scholarship).

Matt seems motivated to reduce inequality because of the advantages it supposedly confers on those who are born into the ‘right’ families:

“Over time, vast inequality of outcomes erodes equality of opportunity. Wealth, privilege and connections are handed down through generations. Last generation’s meritocrats [fn1] become this generation’s entrenched, quasi-aristocratic elite, able to secure their children’s place in the hierarchy by paying for them to attend expensive schools, or by buying them houses or providing start up capital for entrepreneurial ventures.

If we were to start in one generation with a truly level playing field, with meaningful and substantial equality of opportunity, subsequent generations would nevertheless face unequal opportunities by virtue of the intergenerational transmission of relative status. Significant disparities in parental incomes, and therefore disparities in access to high quality education and health services, stable housing, and the justice system, erode poorer children’s ability to achieve their potential, even if there is procedural fairness. Equality of opportunity is an unstable equilibrium.”

After centuries of wealth creation in Australia, I don’t know of any “entrenched, quasi-aristocratic elites”. I don’t know of any company today that hires people in consequential positions because of the school they attended or the family they came from. Of course, at the margin, there are always exceptions. John Howard’s sons were presumably assisted in their career choices by having a father that was prime minister.

But if you have talent combined with patience and persistence, there are few real barriers to progress in contemporary Australia (again, there are clearly exceptions found amongst various minorities). My founding business partner was an orphan who moved from foster home to foster home only to win a scholarship to a private school and voluntarily lift himself out of the quagmire of his adversity. (And the 'system' could have certainly served him better.) Another one of my colleagues rose from a strikingly similar background.

Matt’s insinuation that hard work and professional success generate ‘entrenched, quasi-aristocratic elites’ that end up undermining the rest of the community’s quality of life seems to me to be divisive and lazy rhetoric that only feeds further polarisation.

Another mischaracterisation concerns Matt’s claims around what I meant by ‘extreme poverty’:

“Christopher…implicitly draws a distinction between extreme poverty (presumably defined in absolute terms) and relative poverty. This distinction has been the basis for the famed ‘poverty wars’ of Peter Saunders (et al) vs Peter Saunders (et al).

The question for those, like Christopher, who express a concern with absolute or extreme poverty, but not with inequality or relative poverty, is to define what they mean by absolute poverty. Is it a fixed quantity of income, for example $US2/day? If so, that is very low, and is indeed an arbitrary figure. Is it the quantity of income necessary to acquire a fixed basket of goods that are seen as being required for subsistence? If so, what is in that basket of goods?

I think we’ll find that defining which goods and services are necessary to live in dignity in a civilised society is a necessarily relative question; the answer depends on the prevailing attitudes and norms of the society the individual inhabits.”

I neither defined extreme poverty, nor distinguished between absolute and relative poverty. I agree that ‘absolute poverty’ is a limited policy concept. Poverty has to be defined with reference to the cost of living and constructively participating in a society at any given time, and these variables naturally change as that time elapses. It is also probably undesirable to restrict poverty metrics to purely financial measures; one may have adequate financial resources but a poverty of choice.

I would define extreme poverty as being the threshold below which an individual cannot adequately sustain themselves in our society: that is, they cannot feed themselves, and/or find shelter, and/or capitalise on the educational and vocational possibilities that the community supplies to them (assuming it actually does). (Please note the use of the 'and/or' operators.) This is not ideology or political philosophy--it is a practical, sensible thinking.

You can see the vivid straw-man that Matt draws in the next paragraph, noting that I never came remotely close to talking about the differences between absolute and relative poverty:

“By saying that he is concerned about extreme poverty, rather than relative poverty (inequality), Christopher is really just saying that he is willing to tolerate a higher degree of relative poverty than social democrats. Being willing to accept a higher degree of inequality still implies that you draw the line at some point, and that point is ultimately just as arbitrary as the point at which social democrats would draw it.”

Finally, Matt criticises my contention that, “I am pretty sure that the latest research shows that rising income inequality is a relatively recent phenomenon (ie, since the 1970s), and it is not clear to me that this will necessarily persist through time. That is, it is just as likely to be a once-off 'level effect' that manifested as a result of the relentless centre-right campaign of market liberalisation that took place over the last three to four decades.”

Matt kindly supplies the research that I had read, which is illustrated in the chart below. What this analysis-- which was prepared by Dr Andrew Leigh--shows is that inequality in Australia fell consistently between the 1920s and early 1980s (a little later than I speculated in my essay). That is, inequality was actually declining for at least 60 per cent of the last century. As I correctly argued, inequality has only risen relatively recently. In fact, it is now back around the levels that Australia experienced in the middle of the 20th century.

I hypothesised the that sudden shift from the 60 or so years of declining inequality to three decades worth of rising inequality might have been wholly or in part an artifact of the aggressive campaign by political parties of all persuasions to liberate private enterprise by privatising public entities, deregulating industry, elastifying labour relations, and generally promoting the efficiency gains associated with market-orientated solutions, which, at the very least, has been correlated with material increases in per capita wealth in all developed countries over the period in question

I suggested that it is not obvious that the sudden change in inequality that occurred in the early 1980s will necessarily continue inexorably over future decades. That is, this shift in resources over the last three decades might be what we call a 'level-effect' rather than a perpetual 'growth effect'. As a matter of pure logic, there has to be a limit to this process at some point (ie, the rich cannot continue consuming a rising share of national resources forever). And since the cataclysm of the financial crisis we have witnessed many of these dynamics reverse, with *some* (note the conditioning!) justification in my opinion: eg, government activism; more thoughtful regulation; wider taxation; empowered unionisation, etc.*

Matt nevertheless maintains that I am wrong, remarking, “My reading of the evidence suggests to me that we have not experienced a ‘step up’, but rather a persistent upwards trend in inequality.”

The question of whether or not current levels of inequality will stabilise is an empirical one. In contrast to what Matt claims, I never said that inequality had flat-lined. Rather, I simply observed that this is a recent historical development, and noted that I had yet to see compelling evidence explaining why inequality in Australia will ineluctably widen.

Future criticism should perhaps take what one writes a little more literally.

*This latter point is an entirely separate debate that I do not propose to wade into here.