Wednesday, November 28, 2012

The New Math of Inequity and Wealth

Samuel Bowles, The New Economics of Inequality and Redistribution

Lost in the debate surrounding capitalism’s vast inequality structures has been the fact that inequality is as bad for the haves as the have-nots. As veteran economist Samuel Bowles demonstrates in his latest monograph, vast systemic inequity results in good-faith members of a free society operating below their economic potential. But implementing solutions will prove more difficult than pinpointing the problem.

Bowles has been at the forefront of innovative economics for decades (he name-drops Dr. King and Bobby Kennedy), during which time inequality has migrated from the margins of Marxist theory into the journalistic mainstream. The attention paid to massive inequity in the Presidential campaign just past makes Bowles’ theories, which have incubated for decades, all the more timely. And to his credit, he resists the desire for an ordinary partisan screed.

The debate, up to now, has turned on two contrasting points. Traditional conservatism holds that markets have a balancing effect, distributing rewards according to just principles of merit and reward. Progressives have countered that by saying that those who start out with more will receive greater rewards. Conservatives want the state to defend property rights and ownership, while progressives want government to redress injustices stemming from poverty and lack.

But Bowles asserts both these models omit important information. Market libertarianism and statist interventionism both assume a utopian system free from coordination failures. Yeah, right; we should live so long. Laissez faire only works if everyone plays by the same rules, which measurably happens too infrequently, while strict Keynesianism has been long-since overtaken by global technology. The old ways don’t work anymore.

Our problems arise from a perverse incentive structure. Consider the example of a factory, one Bowles explicates often and well. Owners have every incentive to resist modernization and demand workers do more, because they want to maximize profit on existing capital investments. Workers, by contrast, have no ownership stake in outcomes, and thus little incentive to obey owners’ expectations. Without governance structures, the two talk past each other.

Nor could they do otherwise. Because they have asymmetrical power (bosses have many reprimand mechanisms, while workers can only work or quit), no discussion can be truly frank and fair. Inequality therefore stretches beyond the realm of wealth, into distributions of power: the rich have many options, the poor have few. No wonder the poor stop participating in economic and political advancement. Diligence produces small, or no, reward.

Ownership, that conservative shibboleth, provides some answer. People work harder when they own the means of production. They care more for outcomes when they own the product of their work. But breaking into the world of ownership requires massive capital, which only the elites have. Bowles backs this up with graphs and charts, which make his math-rich narrative much more comprehensible, but it boils down to that old working-class proverb: Them that has, gets.

Credit markets compound this problem by limiting lending practices. Those already imbued with wealth need not borrow to finance new ventures, but the poor must borrow to finance anything new. And lenders, especially post-Great Recession, are notoriously averse to loaning money to those without a proven track record. Business loan interviews are more dreaded than dental exams. This creates material disincentive for innovators to try anything new, risky, and visionary.

The answer lies in redistribution, though not the methods traditionally arrayed. Conventional socialism and central planning have failed spectacularly. Direct capital transfers, as Bowles documents them, have not imploded with Kremlin-like flair, but have tended to die quietly, because giving the poor money and goods does not give them power, authority, or knowledge. We will only redress Twenty-First Century inequality with Twenty-First Century remedies.

This book is not for everybody. Bowles writes for fellow economists and political leaders, and his prose is dense with terminology. He provides definitions for some idioms, but not others. He’s particularly fond of the term “Nash equilibrium,” perhaps assuming we’ve all seen A Beautiful Mind. Alongside frequent allusions to other economists, Bowles’ jargon-rich prose makes for slow reading. This book could really use a glossary.

But for those eager to participate in the important discussions that will dominate economics in the coming years, Bowles does well. Not only does he lay out the terms that have defined the debate until now, he creates a persuasive third-way approach that defies doctrinaire thinking. His proactive proposals give activists something to speak for, and his charts offer ways to make it comprehensible. This slim, powerful book will help set the tone for years to come.

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