Competitive Equilibrium and the Social Ethos: Understanding the Inegalitarian Dynamics of Liberal Market Economies

J.H. Goldthorpe , “ The current inflation: Towards a Sociological Account,” in The Political Economy of Inflation, eds. F. Hirsch and J. H. Goldthorpe (London: Martin Robertson, 1978). See also the other articles in Hirsch and Goldthorpe , The Political Economy of Inflation and in The Politics of Inflation and Economic Stagnation, eds. L. N. Lindberg and C. S. Maier (Washington DC: The Brookings Institution , 1985). Both volumes include a range of attempts at that time to explain the downturn in more interdisciplinary terms.

An early account of the reversal of the post-war trend towards greater equality can be found in B. Harrison and B. Bluestone , The Great U-Turn: Corporate Restructuring and the Polarization of America (New York: Basic Books, 1988). More recent accounts detailing the phenomenon can be found in F. Green , A. Henley and E. Tsakalotos , “Income Inequality in Corporatist and Liberal Economies: A Comparison of Trends within OECD Countries,” International Review of Applied Economics 8, no. 3 (1994): 303-31; A.B. Atkinson , “Bringing Income Distribution in from the Cold,” Economic Journal 107 (1997): 97-321; and T. Piketty and E. Saez , “ Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics 68, Issue 1 (2003): 1-37.

Atkinson , “ Bringing Income Distribution in from the Cold” and Paul Krugman, “For Richer,” New York Times (October 20, 2002).

See Green, Henley , and Tsakalotos , “ Income Inequality in Corporatist and Liberal Economies.” For evidence that many capitalist economies have faced similar shocks, see D. Card , F. Kramarz , and T. Lemieux , “ Changes in the Relative Structure of Wages and Employment: A Comparison of the United States, Canada, and France,” National Bureau of Economic Research Working Paper No. 5487 (1996 ).

Elizabeth Anderson , Value in Ethics and Economics (Cambridge, MA: Harvard University Press, 1993), 158-9.

G.A. Cohen , “ Incentives, Inequality, and Community,” in The Tanner Lectures on Human Values, vol. 13, ed. G. Peterson (Salt Lake City: University of Utah Press, 1992). G.A. Cohen , “The Pareto Argument for Inequality,” Social Philosophy and Policy 12 (1995): 160-85. G.A. Cohen , “Where the Action is: On the Side of Distributive Justice,” Philosophy and Public Affairs 26, no. 1 (1997): 3-30. G.A. Cohen , If You're an Egalitarian, How Come You're So Rich? (Cambridge, MA: Harvard University Press, 2000).

A more formal account of Cohen's argument is given in the Appendix.

Again see the Appendix.

J. Rawls , A Theory of Justice (Oxford: Oxford University Press, 1973) quoted in A. Levine , Arguing for Socialism: Theoretical Considerations (RKP, 1984 ): 82-3.

What constitutes the essential elements of mainstream neoclassical theory is, of course, controversial and often difficult to pin down. In this article, I am mainly concerned with neoclassical general equilibrium theory which was, for most of the twentieth century, considered the “high theory” of the overall approach. But certain of the central assumptions criticized here, especially those related to homo economicus, characterize nearly the whole of the neoclassical worldview. So I would argue that some of the inegalitarian implications of general equilibrium theory would carry through, even if in an attenuated form, to broader neoclassical theorizing, or indeed (as note 13 makes clear) approaches that rely heavily on the fundamental building blocks of the high theory.

A. Sen , “ The Moral Standing of the Market,” in The Economic Borders of the State, ed. D. Helm ( Oxford: Clarendon Press, 1989).

For instance, any redistribution needs to be one-off if it is not to distort future consumption and production decisions, the information to determine the distribution will be difficult to ascertain, and there may be few genuinely lump-sum taxes on which the exercise depends.

This suggests that relying too much on neoclassical underpinnings may have implications even for models that seek to go beyond capitalism. Thus M. Katz , “ Comment,” Science and Society 66 (2002): 22-4, criticizes M. Albert and R. Hahnel's , “In Defense of Participatory Economics,” Science and Society 66 (2002): 7-21, scheme for a participatory economy (which does not challenge the assumptions of atomistic maximizing agents) precisely on these grounds—if individuals continue to act as self-interested maximizing agents “why should they bother to organize an economy dedicated to radical fairness and equality?” (23). Similar arguments may apply to models of market socialism. I discuss these issues more fully in E. Tsakalotos , “Homo Economicus, Political Economy and Socialism,” Science and Society 68 (2004): 137-60.

F. Peter , “ Choice, Consent, and the Legitimacy of Market Transactions,” Economics and Philosophy 20 (2004 ): 1-18.

See C.B. Macpherson , Democratic Theory: Essays in Retrieval (Toronto, 1973). For a more general treatment of the ethical limitations of the market, see A.O. Hirschman , “Against Parsimony: Three Ways of Complicating Some Categories of Economics Discourse ,” Economics and Philosophy 1 (1985): 7-21; E. Anderson , Value in Ethics and Economics (Cambridge, MA: Harvard University Press , 1993); D.H. Hausman and M.S. McPherson , Economic Analysis and Moral Philosophy (Cambridge: Cambridge University Press, 1997); and C.R. Sunstein , Free markets and Social Justice (Oxford: Oxford University Press, 1997).

Anderson , Value in Ethics and Economics, 165. See also S. Bowles and H. Gintis , Democracy and Capitalism: Property, Community and the Contradictions of Modern Social Thought (London: Routledge and Kegan Paul, 1987), 131.

Peter , “ Choice, Consent, and Legitimacy of Market Transactions,” 14. Marginalization of institutions of voice may also lead to the phenomenon of adaptive preferences, whereby people come to terms with the lack of acceptable alternatives (see J. Elster , Sour Grapes (Cambridge: Cambridge University Press, 1983).

Charles Taylor, Philosophy and the Human Sciences: Philosophical Papers, vol. 2 (Cambridge: Cambridge University Press, 1985).

Taylor , Philosophy and the Human Sciences, 76, emphasis added.

The same, it could be argued, holds for intergenerational equity, which is not the subject of this article. In mainstream theory the rate of interest is also considered the result of countless individual choices, rather than a political choice of society on how much to consume now as opposed to in the future (see P. Auerbach , M. Desai , and A. Shamsavari , “The Transition from Actually Existing Capitalism,” New Left Review 170 (1988): 61-78.

A. Fung and E.O. Wright , “ Deepening Democracy: Innovations in Empowered Participatory Governance,” Politics and Society 29, no. 1 (2001): 5-41.

Fung and Wright , “Deepening Democracy,” 24.

Fung and Wright , “Deepening Democracy,” 20.

Fung and Wright , “Deepening Democracy,” 26-7.

Krugman , “ For Richer,” emphasis added. Economists have not been slow to come up with explanations, which seek to preserve the autarky of economic explanations for the rise in incomes at the top of the scale. Krugman refers to two in particular—the idea of managerial leadership and the role of incentives to top managers within a principal-agent framework. Neither is particularly convincing. P. Gregg , S. Machin , and A. Manning , “High Pay, Low Pay and Labour Market Efficiency,” in Paying for Inequality: The Economic Cost of Social Injustice, eds. A. Glyn and D. Miliband (London: IPPR/Rivers Oram Press, 1994) provide a summary of the empirical evidence that suggests that the increased pay for top managers has less to do with efficiency, as a result of incentive contracts, and much more to do with an exercise of monopoly power.

One aspect ignored by Krugman, “For Richer,” is the role of trade unions in the decline of inequality during the early post-war period, an important omission given our discussion in the following section.

N.M. Fortin and T. Lemieux , “ Institutional Changes and Rising Wage Inequality: Is There a Linkage?” Journal of Economic Perspectives 11, no. 2 (1997): 75-96.

Atkinson , “ Bringing Income Distribution in from the Cold” and S. Austen, “Norms of Inequality,” Journal of Economic Issues 33, no. 2 (1997): 435-42.

S. Bowles , “ Endogenous Preferences: The Cultural Consequences of Markets and Other Institutions ,” Journal of Economic Literature 36, no. 1 (1998): 75-111.

Bowles , “Endogenous Preferences,” 99.

Ariel Rubinstein , “Dilemmas of an Economics Theorist,” Econometrica 74, no. 4 (2006): 865-83.

Bowles , “Endogenous Preferences,” 87.

Sunstein , Free Markets and Social Justice, 17.

See Austen , “ Norms of Inequality,” 441.

G.A. Cohen , “Back to Socialist Basics,” New Left Review 207 (September/October 1994): 10-11.

More worrying still is that New Labour, and other center-left parties, have recently been restricting the democratic element even in the traditional political sphere. On this issue see P. Mair , “Partyless Democracy: Solving the Paradox of New Labour?” New Left Review 2 (2000): 21-35 and D. Marquand , “Revisiting the Blair Paradox,” New Left Review 3 (2000): 73-9.

D. Marquand , “After Euphoria: the Dilemmas of New Labour ,” Political Quarterly 68, no. 4 (1997): 335-8.

And there is evidence that authoritarian practices in the workplaces adversely affect individuals' behavior in other spheres of life (see Bowles, “Endogenous Preferences”).

For the inegalitarian dynamic of the “welfare to work” proposals, see R. Solow Work and Welfare (Princeton, NJ: Princeton University Press, 1998). For a broader discussion of such a dynamic with respect to European employment strategies, see E. Tsakalotos , “Social Norms and Endogenous Preferences: The Political Economy of Market Expansion,” International Papers in Political Economy 8, no. 2 (2001).

D.C. North , “The New Institutional Economics,” Journal of Institutional and Theoretical Economics 142 (1986): 230-7.

J. Stiglitz, Wither Socialism (Cambridge, MA: MIT Press, 1994): 276-7.

A. Gamble and G. Kelly , “ The New Politics of Ownership,” New Left Review 220 (November/December 1996): 62-97.

For an analysis that combines Marxist and regulation approaches, see A. Glyn , A. Hughes , A. Lipietz , and A. Singh , “ The Rise and Fall of the Golden Age,” in The Golden Age of Capitalism: Lessons for the 1990s (Oxford: Clarendon Press, 1990).

See F. Hirsch , “The Ideological Underlay of Inflation ,” Hirsch and Goldthorpe , The Political Economy of Inflation, Goldthorpe , “The Current Inflation: Towards a Sociological Account”; J.H. Goldthorpe , “Problems of Political Economy after the Post-War Period,” in Changing Boundaries of the Political: Essays on the Evolving Balance between State and Society, Public and Private in Europe, ed. C. S. Maier (Cambridge: Cambridge University Press, 1987); and L.N. Lindberg , “Models of the Inflation-Disinflation Process,” in eds. Lindberg and Maier , The Political of Inflation and Economic Stagnation, 31.

As Sen , “ The Moral Standing of the Market” argues, even if the wage represents the marginal product of the worker, this cannot be equated with what the worker in some sense deserves, not least because of the collective nature of production. Moreover those losing out from the market may well, at some time, express their previously latent opposition to the background conditions of choice.

Goldthorpe , “Problems of Political Economy after the Post-War Period.”

C.S. Maier and L.N. Lindberg , “ Alternatives for Future Crises” in eds. Lindberg and Maier , The Politics of Inflation and Economic Stagnation, 597-8. See also P. Armstrong , A. Glyn , and J. Harrison , Capitalism since 1945 (Oxford: Basil Blackwell, 1987): 322 and chap. 17.

For a discussion of Pizzorno's concept of political exchange and the different forms of corporatist arrangements that existed during the golden age, see A. Henley and E. Tsakalotos , Corporatism and Economic Performance: A Comparative Analysis of Market Economies (Aldershot: Edward Elgar, 1993).

J. Delors , “ The Decline of French Planning,” in Beyond Capitalist Planning, ed. S. Holland (London: Basil Blackwell, 1978): 78.

S. Cohen, Modern Capitalist Planning: The French Model (University of California Press, 1977): 162.

Similar arguments apply to the opposition to the proposals for wage-earner funds in Sweden.

See W. Streek , “Beneficial Constraints: on the Economic Limits of Rational Voluntarism,” in Contemporary Capitalism: The Embeddedness of Institutions, eds. R. J. Hollingsworth and R. Boyer (Cambridge: Cambridge University Press, 1997) and Hollingsworth and Boyer , Contemporary Capitalism.

E.O. Wright , “Beneficial Constraints: Beneficial For Whom?” Socio-Economic Review 2, no. 3 (2004): 407-14.

In a symposium on Streeck's influential article, “Beneficial Constraints,” both Wright “Beneficial Constraints: Beneficial for Whom?” and E. Tsakalotos , “Market Constraints, Economic Performance and Political Power: Modernizers Versus Leftists,” Socio-Economic Review 2, no. 3 (2004): 415-24, look at various possible cases along these lines.

R. Grant , “ The Ethics of Incentives: Historical Origins and Contemporary Understandings ,” Economics and Philosophy 8 (2002): 111-39.

Grant , “The Ethics of Incentives,” 116.

Grant , “The Ethics of Incentives,” 119.

Grant , “The Ethics of Incentives,” 112.

Fung and Wright , “Deepening Democracy,” give a balanced account of some of the issues here.

P. Ginsberg , “The Patrimonial Ambitions of Silvio B ,” New Left Review 21 (May/June 2003): 23. The liberal tenets give little protection from rich and powerful individuals and corporations acting in this manner, and this has become increasingly obvious in the more liberal economies.

Gamble and Kelly , “The New Politics of Ownership,” 83.

Hall , “New Labour's Double-Shuffle.”

See B.S. Frey and B. Jegen , “Motivation Crowding Out,” Journal of Economic Surveys 15, issue 5 (2001): 589-611 and S. Bowles , “Social Preferences and Public Policy: Are Good Laws a Substitute for Good Citizens?” unpublished mimeo, 2006, for more on the ways in which market-type material incentives often crowd out other-regarding norms. 64. F. Adaman and Y. Madra , “Theorizing the `Third Sphere': A Critique of the Persistence of the “Economistic Fallacy,” Journal of Economic Issues XXXVI, no. 4 (2002): 1045-78.

Alternatively such institutions may be necessary only in the transition to the development of the market, or even be preventing the market solving the problem more optimally.

E.P. Thompson , The Poverty of Theory and Other Essays (London: Merlin Press, 1978): 161-2.

Thompson , The Poverty of Theory and Other Essays, 169-70.

Cohen , “The Pareto Argument for Inequality,” 174-5.

Cohen's analysis does allow for the possibility that the inequality is justified. For instance, the extra production may require greater burdens to be placed on the talented. In this case, there would be no unjustified inequality because what inequality existed would be the result of differential burden.

Cohen , “The Pareto Argument for Inequality,”175, emphasis in the original.

Cohen , “Where the action is,” 16-17.

Cohen , If You're an Egalitarian, How Come You're so Rich? 140, emphasis in the original. A full account of this debate is beyond my scope here, although, to me at least, Cohen's arguments seem compelling.