inequality

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Paying for the Pandemic

Published by Anonymous (not verified) on Thu, 16/09/2021 - 3:03am in

Will expanding government debt only entrench the wealth divide? 

The COVID pandemic still has a long way to run. Nevertheless, with the first Australian outbreak nearly eighteen months behind us, it is possible to take a preliminary look at the economic impacts of the pandemic, and the prospects for the future.

Economic activity fell sharply during the 2020 lockdown. Although GDP is a problematic concept in many ways, it is the best available measure of economic activity. GDP fell by 7 per cent in the June quarter of 2020. This decline represents all sorts of production that ceased during the lockdown—restaurant meals that weren’t served, work and recreational journeys that weren’t taken, production that was stopped by supply-chain disruption and so on. 

Under the normal operations of a market economy the values output lost during the pandemic lockdown would be reflected in lost wages for unemployed workers and lost profits for the owners of businesses forced to shut down. However, income-support programs, most importantly JobKeeper and JobSeeker, meant that most of the loss was transferred to the government. Most, though not all, households and businesses experienced either no loss of income or an increase.

The recovery from the lockdown recession was rapid, and by March 2021, GDP was 1 per cent higher than in March 2020, before the pandemic had had any serious impact. Similarly vigorous recoveries in other countries reflect the impact of massive government stimulus, which prevented the second-round effects that usually arise from a shock of this kind. There has been little effective pressure for the adoption of austerity policies to reduce public debt and control incipient inflation. 

This outcome contrasts sharply with the experience of the 2007–08 Global Financial Crisis, when the resurgence of Keynesianism was short-lived. As Henry Farrell and I showed, the advocates of austerity went silent while Keynesians rescued the global system from complete meltdown, but they re-emerged as soon as the danger of collapse was past. The policies of austerity failed miserably. The disaster was greatest in countries such as Greece, but nowhere did austerity produce the robust expansion promised by its advocates.

In the wake of COVID-19, there has been little interest in calls for austerity. Budget projections showing deficits extending indefinitely into the future no longer cause the alarm seen in the past. A crucial factor here has been the long-term decline in real rates of interest, which accelerated during the pandemic. The result has been that the cost of servicing government debt has fallen dramatically. This in turn means that alarming projections of unsustainable growth in debt have been replaced by the acceptance that governments can run significant budget deficits indefinitely into the future. The failure of austerity and the decline of interest rates are two sides of the same coin. The assumption underlying austerity was that cutbacks in public expenditure would make room for private investment, and therefore for sustained economic growth. The failure of private investment to respond reflects, at least in part, the long-term decline in business investment that, in combination with public-sector austerity and high savings levels, ensures falling investment.

The capacity of governments to take on large volumes of debt has meant that, in the short run, most households appear to be no worse off as a result of the pandemic. This does not mean, however, that we have discovered a magic pudding from which everyone can take as many slices as they like. Rather, the income support provided to those the pandemic prevented from working, and to those already unemployed, has been financed by the issue of government debt, which has, directly and indirectly, increased the wealth of already wealthy households.

Because many kinds of luxury spending, such as overseas travel, have been restricted or unavailable during the pandemic, high-income households have been willing to consume less and save more. But once the economy reopens completely, high-income households will want to spend more, especially as they will benefit from generous tax cuts due to come into effect in 2024–25. At the same time, with government spending also likely to remain high, the aggregate demand for goods and services will exceed the productive capacity of the economy. And with similar developments around the world, it will be difficult to rely on foreign borrowing.

There is a variety of ways in which balance between aggregate demand and aggregate supply can be restored, all of them problematic in some way. The government could cut public expenditure, ignoring the increased social needs that have been exposed by the pandemic. Alternatively, the Reserve Bank could raise interest rates, depressing aggregate demand and risking a renewed recession.

The final option, and the most desirable from a progressive viewpoint, is acceptance of a higher rate of inflation, say 4 per cent, in place of the current target range of 2 per cent to 3 per cent. That would erode the real value of bonds, and thereby place the burden primarily on the wealthy. A higher rate of inflation is also necessary to allow for effective monetary policy.

As this discussion shows, the distributional outcomes from the pandemic will not be determined by the inexorable workings of an impersonal market. Rather, they will be the result of political and social choices.

More generally, the experience of the pandemic has been one that highlights the largely arbitrary nature of risk and reward. The risk of being infected with COVID-19, and the chance of recovery, depended critically on accidents of timing and of geographical and social location. The same was true of the distribution of economic losses and gains.

As always, the poor and ethnic minorities fared worse than others. But to an unusual extent, well-off people who are usually insulated from many of the hazards of life were exposed to economic and health risks, and to the deprivations associated with lockdowns and travel restrictions. The lesson of this experience is that luck is at least as important as any notion of deserts in determining life outcomes. Those who do well are naturally tempted to impute this outcome to their own merits. But accidents of birth, and lucky or unlucky breaks over the course of one’s lifetime, are equally important.

This point has political as well as personal implications. In combination with the experience of the GFC, the COVID-19 pandemic will further undermine the central tenet of the neoliberal theory of income distribution. This is the claim, pejoratively referred to as ‘trickle down’, that the massively unequal incomes generated under capitalism represent a reward for the most productive members of the community, whose activities ultimately benefit everybody.

The trickle-down theory has never been true. But at least in the nineteenth and twentieth centuries, the economy was dominated by firms that produced goods and services for sales consumers, with General Motors as the definitive example. The value of that production was divided unequally (though not as unequally as at present) between workers, managers and owners of capital, but there was real economic value.

In the twenty-first-century economy, the dominant sources of profit are the financial sector and the information economy. The financial sector has grown massively without any significant improvement in the efficiency of the services it provides to household and business customers, as measured by the margin between borrowing and lending rates. Profit in the information economy is driven, in one way or another, by monopoly power. The archetypal illustration of this is Google, which derives its massive value from the sale of advertising attached to an index of content produced not by Google itself but by internet users. The public good character of information creates natural monopolies that, under neoliberal models of light-handed regulation, are invariably captured by private firms.

There is little evidence, so far, that the Australian political class has any capacity to respond to these fundamental developments. We have recently witnessed a massively regressive tax cut, locked in place nearly a decade in advance, when neoliberalism retained some residual credibility. The Labor Party, still shell-shocked from its unexpected (though narrow) loss in the 2019 election, has made a decision to say nothing that might cost votes, and deal with the consequences if it slides into government with no capacity to do much.

By contrast, the Biden administration in the United States has responded boldly, putting forward a radical program of reconstruction (though without the Green New Deal label associated with the party’s Left). This includes expanded child benefits, a renewed push to provide health insurance to all, and massive spending on infrastructure, broadly defined to include climate policy, health and education.

On Australia’s present trajectory, the rich will be massively enriched, the well-off will be better off, and the costs of the pandemic will fall on the rest of the population. But the scope for radical change has rarely been greater.

Should we tax wealth to fund social care?

Published by Anonymous (not verified) on Wed, 15/09/2021 - 2:21am in

Photo by Jingming Pan on Unsplash

PEF Council members recently discussed, via email, the government’s plans for social care and its financing. We were unanimous in agreeing on the bad design of the scheme, on the absence of real funding and reform for social care. And we also agreed on the need for a significant shift in the balance of taxation towards wealth. The points of contention are around how the latter should take place and a macroeconomics that might help explain why.

Stewart Lansley

The case for financing social care through wealth is overwhelming. There are two broad options: first, the 2010 Burnham Plan, which means all those needing care would keep their home and a charge made at death. Alternatively, an annual property charge of say 1% pa up to say a maximum of 5%. Both of these could be paid into a social care fund, as argued in Remodelling Capitalism.

The last two decades have seen a great surge in asset values and unearned wealth (what John Stuart Mill called “getting rich in your sleep”), notably in property. The total value of personal wealth in the UK in 2018 was £14.6 tr of which property is £5tr and financial wealth £2.2tr – so a hypothetical one per cent tax on all property and financial wealth would yield £70bn a year, and just on property would be £50bn per year. Any such tax should be charged on assets above a certain level, which would then yield less than the estimates given here.

Yet the tax take from wealth is tiny, with the UK tax system disproportionately dependent on taxing income. In 2015/6, the combined revenue from existing capital taxes – stamp duty on property transactions and shares, capital gains and inheritance tax but excluding council tax – raised about £27bn a year, some 3.9% of all tax revenue.  This accounts for less than one per cent of total private asset holdings.

The case for higher taxation on personal and corporate wealth is being widely recognized. Before the 2017 November budget, the National Institute of Economic and Social Research proposed an annual tax on net wealth (assets minus liabilities) above £700,000 (including residential property) to replace three existing capital taxes on inheritance tax, capital gains and dividends. A tax set at 2 per cent would raise £72 billion (gross).

The scheme would may have been unpopular in 2010, but might be much more popular now given that the public accept that we need to find a way of paying for social care and are unconvinced by Johnson’s plan. This is surely an area where KS should be out with all guns blazing!

Danny Dorling

I was one of the people earlier suggesting taxing wealth would be difficult. I don’t think I explained myself well. It is not the taxing of wealth that is difficult, that is easy. Ireland showed how it could be done on property with a progressive property tax where the percentage taken rose according to the value of property. They did it in an extremely short amount of time when forced to by the Troika in the Eurozone crisis at the start of the last decade. When that process began, they had no “gazetteer” – no universal register of properties – let alone any decent sets of valuations.

The best systems of wealth taxation make paying the tax annually part of the way you claim and maintain a record of your ownership of property. You can chose not to pay the wealth tax if you wish to gift that wealth to the state. You can also argue that your property is worth less than the valuation of the state. However, when you then come to sell that property, you may find that buyers don’t wish to pay more than you have said it is worth. Wealth taxes should also decrease the value of property which would not be a bad thing. So my concern is not with the idea of wealth taxes.

My concern is with suggesting it – and suggesting introducing a wealth tax to pay for the NHS/Social Care, without suggesting all the other mitigations you would do at the very same time that would make it appear plausible to many people.

But so many mitigations are needed that you end up needing a whole manifesto to explain them. I’ll give just one example. A large group of people in their 40s and 50s who have managed to get a mortgage now talk of their home as their pension. Their various precarious jobs have meant they have no decent pension, and although they may now be being auto enrolled into a pension. It is not one where they can envisage a future of being able to “keep the thermostat on 17 in their old age” as it was recently put to me by one home owner (still paying off their mortgage, and with the annual average income of the UK). What they plan to do is sell their home when they retire, downsize and use part of the savings to (among other things) pay the gas bill in winter.

If we suggest a wealth tax, taxing away a slice of what they see as their savings every year without also suggesting how pensions will be improved, then in the mind of someone in that position your policy will condemn them to an old age of being cold. Gas and electric bills have just risen very quickly so these bills are on peoples’ minds at the moment. In effect, for them a wealth tax is an annual tax on their future pension. And quite a low pension at that.

I think this is one of the dangers of talking about raising a new tax to pay for one thing, when all the others things are not considered.

My preference is to keep taxing and spending separate, not hypothecated. So talk about rebalancing the tax system to make it fairer – with the emphasis always on fairness. And I would bring the overall level up to what is normal in Germany (almost identical to what Labour promised in their 2019 manifesto). Talk about bringing in taxes on wealth solely for the purpose of increasing fairness, not to pay for a particular policy, but also partly to allow other less fair taxes to be reduced, and partly to allow overall public spending to be at normal European levels.

On spending, we shouldn’t talk too much about the amounts of money in each sector, but much more about what it is you actually want to see. Something that is very good need not be very expensive. The Finns spend less as a share of GDP on their school than we do on ours, but their schools are much better. In contrast, we spend an enormous amount on our now almost entirely privatised universities, but we don’t see that as a tax. In the USA, they have the highest spending on health care in the world – and in general poor health.

I’ll stop there, but hope it helps explain my worry about suggestions of introducing a wealth tax to pay for health and social care.

Josh Ryan-Collins

I agree governments should not hypothecate (and I’m amazed HMT broke its own golden rule on that in this case) both because it can lead to less politically popular services getting neglected but also because it embeds the idea that we can’t pay for stuff unless we raise the money first which is simply not the case in sovereign currency issuing nations.

Having said this, the Tories have hypothecated and they have just implemented the biggest tax rise in living memory indicating (perhaps) a seismic shift towards the centre on economic policy. This threatens Labour in quite a serious way if they can’t differentiate themselves effectively.  The way to differentiate is to focus less on the amount of tax needed and for what (as you say Danny and Sue) but on how that tax should be raised and from whom in a way that is both socially just and economically sensible.

It is not sensible to be withdrawing purchasing power from workers and businesses when the economy remains fragile. But the even bigger issue is that tax needs to be seen as a key tool via which issues like inequality and falling productivity can be addressed via pushing against economic rents and favouring investment and wages.  This NIC tax hike broadly does the opposite. If you make your money from rental income, interest fees or capital gains, don’t pay a penny more, in contrast to workers and firms. The chart below from Resolution Foundation shows how crazy the situation is:

Source: Resolution Foundation

Will Hutton

I am all for taxing capital and am in violent agreement that too much capital taxation has been allowed to atrophy: no revaluation of residential property since 1991 so that council tax yields a fraction of the old rates, de facto semi-voluntary inheritance tax, too low capital gains tax, etc. During the 1945-50 Labour government tax on estates ran at 10 per cent of all tax revenues. There is huge scope to increase capital taxes, and as Josh has argued, property is immovable.

Stephany Griffith-Jones

I agree with Will on practically all points – including the extraordinary absence of  a revaluation of residential property since 1991, which includes periods when Labour was in power! An effective and fairly high inheritance tax is very desirable, as one of the structural problems is perpetuation of wealth concentration via inheritance.

Stewart Lansley

Just on Danny’s points:

1. ONS wealth figures are net wealth and any wealth tax on residential property would be net of mortgage debt, so Danny’s examples would not be affected. 

2. Yes, we must do more to make the existing taxation of income fairer, for example by reform of National Insurance system, but this would not be enough on its own to create a more equal society. 

3. As I argued in Return of the State, we are close to the limits of income taxation, So if we want to raise funds for improving social provision we need to turn to  asset-redistribution, though this would require taking public with us. Wealth is much more unequally distributed than income –  Top fifth hold 64 % of personal net wealth and 80% of financial wealth – and unless we tackle that we will not be able to reduce inequality and poverty on a sustainable basis.  It’s perfectly possible to design a wealth tax system that is concentrated on top wealth holders. 

Geoff Tily 

The TUC have argued that reforming Capital Gains Tax is a much fairer way to fund social care than hiking workers’ and businesses’ national insurance contributions.  But like President Biden’s notion of “work not wealth”, I want to make a broader macro argument that the interests of wealth and of labour are fundamentally opposed.  

My Keynes Betrayed was concerned with restoring Keynes’s conclusion that the long-term rate of interest must be set permanently low. Since I have been at the TUC, it occurs to me that this rate should interpreted more broadly as the return to capital/wealth and should be compared with the return to labour. Keynes’s conclusion that “we must avoid [dear money] … as we would hell-fire” (Collected Works XXI, p. 389) then means that we orient the system to the interests of wealth at our peril.    

The below chart shows a measure of the real (inflation-adjusted) long-term interest on US corporate debt, going beyond the normal comparisons of rates on government bonds. Even this doesn’t capture well the experience since the global financial crisis, but plainly we know full well what has happened to the broader return to wealth versus the return to labour over the past decade. (I suspect US investment grade corporate debt has simply become increasingly regarded as retreating from risk – and this goes right back to dot.com bubble.) “Dear money” can be seen coming in rapidly from 1979 (in parallel to the ‘Volcker shock’), and interest rates were sustained some way above the post-war levels (and back to the 1920s).  

US real interest rate

Source: Federal Reserve for BBA corporate debt and BEA for GDP deflator; y-axis truncated for years of severe deflation.   

Josh’s chart from the Resolution Foundation is a nice one, not least because the timing of the key dislocation matches well the restoration of dear money on the above. Above all, this rise in returns to assets is a consequence, not a cause, of dear money.

Previously I had argued (following the General Theory chapter 22) that macroeconomic disarray comes in through overinvestment, but now I like a broader over-production/under-consumption (or rather, under-compensation) approach (it’s trade union friendly, has recently been revived by Matthew Klein and Michael Pettis [though Stuart Lansley had done so nearly a decade sooner], and is likely to be more correct!). Rather than spending to compensate for the underspending of labour, the wealthy speculate and so exacerbate over-production. This leads to unsustainable private debt, and ultimately meltdown; the fear here is Quantitative Easing has simply kicked the can down the road, with the risk of meltdown appearing later.    

Tax on the wealthy can be part of the solution (as in the opening of the final chapter of General Theory), but to restore the balance to labour requires wholesale macroeconomic change that operates on a global basis. Hence my recent argument that ‘internationalism begins at home’.  

We were convened in the first instance as a group inspired by Keynes, so I hope colleagues engage with this argument. On my view, it’s how Attlee, Dalton, Gaitskell, Bevin, Blum and FDR understood the world, helped them successfully to win office, and to begin to make real change.    

Jan Toporowski

The real con trick in the government’s proposals is the claim that this is a solution to the social care crisis, when the funding for that is being explicitly postponed until the difficulties in the NHS have been overcome. So the social care funding is conditional on that same funding being enough to overcome NHS difficulties, a most unlikely prospect. The electoral con is the message that the residual of working people on proper contracts will get in their payslips that their money is going to be spent by the government not once but twice to solve both health crises.

Guy Standing

One cannot sensibly discuss how to pay for social care without a systematic view of what care entails, which encompasses its messy definition, who should receive it, who should receive money being spent on it, how they should receive it, and so on. Once one opens the Pandora’s box one should realise that any hypothecated approach, as implied in what the Tories are doing, makes no sense whatsoever. Hypothecated taxation opens the door to the worst features of utilitarianism, 

The Government’s tax and NI rise is doubly regressive, since it lowers the earning of most paid carers at a time when their income and morale are abysmally low. If a government does not alter the structure of the so-called ‘social care industry’, the primary beneficiaries of pouring more money into it will be the private equity interests (mostly foreign capital) which are plundering money being spent on social care. Removing private equity should be a top priority. And any funding scheme that relies on means-testing will accentuate what is a highly regressive scheme, not reduce it.

More generally, there must be a huge shift in taxation from earned incomes to wealth of all kinds and to incursions into the commons, which means much increased eco-taxation. Ironically, incomes are nowadays the least taxable, with the UK being a rank outlier in the very high extent of tax evasion by high-income earners. But changing the incidence of taxation should be the secondary concern to the need to restructure the care sector. The social care crisis is a structural one, not primarily a fiscal one. Perhaps a Royal Commission should be set up to devise a proper plan for an integrated, universally-based system.

Sue Himmelweit

I agree strongly with Danny about not muddling up comments on taxing and with those on spending. But I don’t think that means that Labour should comment soley on alternative forms of taxation.

The first thing that has to be said about the so-called plan for social care is that it isn’t one, that it won’t be doing anything to improve provision nor even get back to the already failing system that we had in 2010. As the party that stands for protecting the vulnerable by collective provision this must be Labour’s first call. If they are commenting on a policy on social care, their first comment should be on social care and the need for it to be adequately funded (in the sense of enough spent on it), not on different forms of taxation. This should be true of PEF too!

Labour should also make clear that we could benefit from an overhaul of the tax system, so that it taxes, at the very least, gains in wealth. Reforming CGT so that is charged at the same rates as income tax with no specific tax allowance (except to exempt gains too small to count) would be a first step. And I would also like to see inheritance tax replaced by a receipts tax covering all ways of receiving wealth, also taxed at income tax rates (with some allowance for spreading a windfall over a few years). This way all ways of gaining wealth would be taxed at a reasonably high rate. This to me seems easier and more logical than taxing wealth itself at a low rate.

The post Should we tax wealth to fund social care? appeared first on The Progressive Economy Forum.

One way of telling them…

Published by Anonymous (not verified) on Tue, 14/09/2021 - 6:41pm in

This is Congresswoman Alexandria Ocasio Cortez at that hang-out of the wealthy, the recent New York Gala Fashion Show:... Read more

The National Insurance increase shows that levelling up has been consigned to the Conservative bonfire of easy promises

Boris Johnson playing Connect 4 with an elderly lady and a nurse whilst visit Westport Care Home in East London 7/9/21Picture by Andrew Parsons / No 10 Downing Street. Creative Commons 2.0 license

A country ruled by criminals needs two revolutions, one small and one big: The small revolution is to overthrow the criminal government, the big revolution is to radically undo the damage these criminals have inflicted on the country!

Mehmet Murat Ildan, Contemporary Turkish playwright, novelist, and thinker

 

This week, Boris Johnson announced that his government would not ‘duck the tough decisions needed to get NHS patients the treatment they need’, or ‘to fix our broken social care system’. After all the fanfare and promises, from an already morally bankrupt government, the reality is somewhat different. The proposed solution to increase National Insurance will not only do nothing to resolve the growing crisis in social care, or create a fairer system for social care provision, it will also create further burdens on an economy already creaking at the seams.

When Johnson refers to a ‘broken’ health and social care system, he is ignoring the elephant in the room. Who broke it? The actions of successive Conservative governments are to blame, through a decade of cuts that have deliberately starved the public sector of adequate funding, along with decades of allowing a private profit-seeking sector to benefit from public money, at the expense of those needing health or social care services. It did so as a result of its fixation with fiscal discipline and market-driven economic dogma.

The Covid-19 pandemic has exposed the folly of austerity, the toxic and harmful obsession with private sector involvement in the delivery of public services, and the consequences of the lack of strategic planning for such events, which have resulted in the NHS and social care struggling to function effectively during this crisis and led to unnecessary suffering and deaths.

Adding to the already existing shortage of nurses (over 40,000) and other health workers, insufficient ICU facilities, ventilators, beds and PPE, were the warning indicators that something was seriously wrong, as hospitals burst at the seams with very sick patients needing treatment. As a result, we are now facing a growing backlog of patients awaiting diagnosis or treatment (or who have even died waiting), with experts warning of the future consequences on staff already suffering from burnout, stress, and exhaustion. It is humanly unsustainable.

Social care services have not been immune from the same economic illiteracy. The warning signs preceded the pandemic. Social care is in meltdown now, and the proposal to increase National Insurance will not only fail to enable the fairer payment system for social care promised by the government, but it will also do little to alleviate the immediate problems caused by government policies.

Government officials have been clear that most of the money raised by the new tax will be spent on the NHS in the first three years, on the assumption that demand for state-funded care will increase from 2026, as people reach the spending cap. These proposals make no attempt to deal with an already failing underfunded system, and social care providers and charities have already indicated that the extra resources would not be sufficient to improve standards.

The problems faced by social care have been longstanding, exacerbated over decades by a mishmash of reforms by governments unwilling to grasp the nettle, as a likely result of the uncomfortable, but false, question of affordability and how it would be paid for. As a result, under an unfair means-tested social care system, which has for decades been served by private profit-seeking companies and charities relying on state funding to function, social care services have increasingly been impacted by years of funding cuts affecting local council budgets, putting increasing pressures on care standards, wages and employment terms and conditions, as private providers struggle to make their businesses profitable.

This is just pushing the problem yet again down the line, when social care can already no longer meet the needs of those requiring support. Recently published figures showed that nearly 300,000 people are on local authority waiting lists for adult social care, a situation which has arisen as a result of funding pressures and delayed assessments. Figures also reveal a chronic shortage of care workers which has meant that those requiring a home care package have had no option but to accept a ‘temporary’ placement in residential facilities.

The government’s decision to increase National Insurance, a regressive tax that will affect the poorest, not the richest, will lead to many of those already poorly paid workers losing substantial income, as figures now show. Coupled with the looming cuts to the universal credit uplift of £20 a week and rising energy and food prices, it will add more unnecessary pain and suffering to people’s lives. A study published this week by the Health Foundation has shown that the UC cut will hit areas with the worst health hardest and is likely to widen inequality in health and wellbeing, running counter to the government’s promised levelling-up commitment.

Analysis by Policy in Practice noted that by April 2022, the combination of the new Health and Social Care Levy and the removal of the uplift to Universal Credit would mean that carers would be £1035 per year worse off, despite the planned (but scarcely generous) increase to the National Living Wage. Its Director Deven Ghelani said: ‘The unfairness of paying for social care through a rise in national insurance, whilst cutting support for the lowest earners at the same time, means those that kept us going through the pandemic are the ones hardest hit.’

It isn’t any wonder that the media reported this week that many were already choosing to leave social care and find work elsewhere. When Amazon becomes a better alternative to working in social care and playing a vital role in society, then we should question our societal values. When we are told that affordability is key to public service provision, the cruel consequence must be that, down the line, people must suffer higher taxes to balance the budget. How can that even be a consideration for a government which is a currency issuer and has the power of the public purse?

Astonishingly, even the free-market Adam Smith Institute called these plans ‘morally bankrupt’, saying that the government was asking ‘poorer workers to bail out millionaire property owners.’ They also criticised the plan as a ‘kick in the teeth for all the young working people of this country who have already been hard done by the pandemic.’

Whilst the solution is simple, ditching the for-profit motive and replacing it with an adequately funded, publicly paid for, managed, and delivered social care system, getting politicians to agree is quite another matter. Obsessing over how it will be paid for, we have two extremes of economic nonsense being touted in the news and on social media. Both sides of the political spectrum are dedicated to raising taxes to pay for health and social care. The Tories, as these plans show, through punishing already poor people, and Labour by taxing the rich to raise revenue.

Quite rightly, one should tax the rich for reasons of equity and to strip away the power and influence their wealth brings them, but this week some left-wing progressive MPs have flogged the ‘taxing the rich’ to pay for social care narrative to death on social media. James Meadway, a former advisor to John McDonnell, also got in on the act saying that Labour should, ‘seize the opportunity to make the alternative funding case’. A wealth tax and other changes to tax arrangements would fit the bill, he suggested. At the same time, as his party came under pressure to set out a ‘costed plan’, the leader of the Labour Party, Keir Starmer, suggested that Labour would consider taxing wealth even more heavily to raise funds.

How depressingly predictable that the question of how you are going to pay for it is the standard response to funding public services, but the same question is never asked for bailing out banks or going to war.

Yes, of course, we want to see a more equitable society, but playing to Mrs Thatcher’s ‘There is no such thing as public money. There is only taxpayers’ money,’ assertion is a highly damaging tactic. When those supposedly on the progressive left associate themselves with an acolyte of the arch neoliberals Hayek and Friedman, it is scarcely an advert for confidence in them. Although the fact that such views are still underpinning policies and spending is not surprising, given the entrenchment of such narratives in political discourse. Playing to the understanding of one’s audience works every time.

What we need now, desperately, is an opposition which is prepared to put citizens before the profits of private companies and for politicians to reject the gibberish that the belief that taxes fund spending represents. It is hardly progressive to reinforce in the public mind the false household budget narratives of government spending; that tax rises will be necessary to fix what actually has been a deliberately broken health and social care system, or that they could be needed to keep the public accounts straight, as per Sunak’s coming ‘hard choices’ in the October Spending Review.

The insistence that there is no alternative to tax rises to pay for social care is both macroeconomically unsound and cruel to those who are already struggling to keep their heads above water. The consequences of higher taxes in these still uncertain times will be very hard on some of the poorest and most vulnerable in our society, and will do nothing to support the economy, businesses or the working population and their families, as the UC uplift is terminated, and energy and other costs rise. There still remains the looming potential crisis of rising unemployment as furlough ends, and even if there are sectors crying out for workers, there will likely be a mismatch in terms of skills requirements to fill new posts, and that will take time to correct.

In this respect, the government has put all its eggs into the free-market basket, expecting it to come up trumps, and it has failed, unsurprisingly. This government and decades of previous ones have trusted in the market to deliver. The invisible hand of the market, whatever that mythical beast is, has done no such thing. The private sector is a profit-seeking juggernaut which puts its own interests over public purpose. And therein lies the heart of the problem. Government has put fiscal discipline above people’s lives and allowed the private sector to run amok, in an unforgivable free-for-all bonanza of deregulation and profit-seeking.

The question is never, ‘is there enough money’ or ‘how will we pay for it?’ The question is do we have the real resources to deliver a better health and social care service, and if not, what are the solutions? That is the role of the government to plan and deliver through its spending and taxation policies. The government should be us, but now democracy is made a mockery, as government and corporations become one and the same thing, serving not the interests of the people or indeed the planet, but their own rapacious greed.

The price of a hands-off approach has been and will continue to be a heavy one. Government, as an elected body, should have a responsibility to serve its citizens to ensure fair and equitable wealth distribution, to create the vital public and social infrastructure upon which the economy depends, to plan for the future whether in a post Brexit era, for future pandemics, or indeed for a just green transition to deal with the climate emergency. Words and actions, however, like oil and water, don’t mix in Conservative terms. It has done none of those things, and now we have seen how easy it was for Conservative MPs in the Red Wall, who were originally objecting to the NI tax rise, to dutifully line up behind their macroeconomically challenged leaders to vote for more pain and suffering. Levelling up has been consigned to the Conservative bonfire of easy promises, and the people yet again duped into acceptance that there will be no alternative to tax rises, either to fund social care or balance the public accounts.

The failure of government hinges on a lie used to justify austerity. The lie of monetary scarcity. Over decades, despite the rhetoric and promises, the issue of social care has been swept under the carpet, and now the system is barely functioning. It will not be fixed by increasing taxes of any sort. It can only be fixed by a government with the political will to do so. Shamefully, successive governments have made a political choice not to fund it adequately. They invited the private sector in, as if social care or the NHS should be beholden to the god of business efficiency and profit, not public service for human well-being. The real cost has been lives, disaffected, poorly paid staff who are on the edge financially and physically.

We should be shouting it out loud. We have a government that chose this path. A government that chose to let social care collapse for the lie of fiscal discipline. What a terrible price we and our loved ones are paying. It didn’t and doesn’t have to be like this.

There are two potential outcomes: Either that we carry on with ‘business as usual’, as the work and pensions minister Baroness Stedman-Scott put it earlier this week to the House of Lords, referring to the removal of the UC uplift, or something else.

We could imagine a world where monetary reality informs government policies and spending decisions. Where government puts its citizens first. A world in which we could have a functioning public and social infrastructure, funded, managed and delivered publicly. An economy, underpinned by full employment and a Job Guarantee, that works for everyone, not just for an excessively wealthy elite that uses its power and influence to dominate public policy. A society where real resources and wealth are distributed more fairly, and a just transition to a green agenda to address the climate crisis looming close behind. Just imagine! The way may be rocky and uncertain, but if we don’t try, we will never know.

 

 

 

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The post The National Insurance increase shows that levelling up has been consigned to the Conservative bonfire of easy promises appeared first on The Gower Initiative for Modern Money Studies.

How the Labor Theory of Value Emerges from Egalitarianism

Published by Anonymous (not verified) on Sat, 11/09/2021 - 11:38pm in

… the value of a commodity is determined
by the quantity of labour spent on it …

Karl Marx

In the 1860s, Karl Marx declared that all value stemmed from labor. A century-long firestorm ensued.

On its own, Marx’s claim seems innocent enough. But what made it incendiary was how he used it. Starting from the idea that labor creates value, Marx built a seductive critique of capitalism. If workers alone create value, then capitalists are ultimately parasites — engorged ticks living off the blood of their unwitting hosts.

Marx’s arguments were impeccable and his theoretical edifice towering. But there’s just one problem. The whole thing was based on a foundation of quicksand.

Marx proclaimed that value is proportional to labor time. But he never bothered to check if this was correct. He simply defined it to be true, and got on building his theory of capitalism. Nor did Marx think about what his theory implied about human nature. If Marx’s theory is true, why do humans judge value in terms of labor time? Do we possess some universal value-judging faculty? If so, how did it evolve? Marxists rarely ask these questions, probably because the answers are uncomfortable.

When he wrote Capital, Marx thought he was making a seminal contribution to science. The reality is sadly different. While the ideological component of his work has thrived, the scientific component has withered. Beaten back by contradicting evidence, Marxists have largely abandoned the idea that the price of a commodity is proportional to labor time. What remains is a thin husk of Marx’s original theory.

To ‘validate’ the labor theory of value, Marxists now look not at commodities, but at vast chunks of the economy. There they find that monetary value correlates strongly with labor time. This correlation, Marxists claim, is robust evidence for the labor theory of value.

I argue that it is not.

The purpose of this essay is to put the last vestiges of the labor theory of value to rest. My goal is to explain why when we look at large sections of the economy, we find that value added correlates with labor time. The correlation comes not from some universal law of value. Instead, I argue that it results from a simple heuristic: humans seek income that is equivalent to their peers’. I call this principle the ‘egalitarian heuristic’. If it holds, even in rough form, then value added will correlate strongly with labor time. In short, we do not need the labor theory of value to explain the evidence.

In a sense, my argument is tragic because it brings us back to Marx’s starting point. Looking at human society through the lens of egalitarianism, Marx concluded that capitalism was unjust. But instead of admitting that this was a value judgment, Marx attempted to enshrine his values as an objective truth. By doing so, he used the cloak of science to create a rapturous ideology.

Marx’s armchair

Economists are often accused of doing armchair philosophy. From the comfort of their academic thrones, they postulate ideas about human behavior. But they don’t follow up with the grunt work of science — the messy business of testing ideas against real-world evidence.

The armchair method was pioneered by political economists like Adam Smith and David Ricardo. Both men claimed that prices were proportional to labor time. But neither economist bothered to check the data. When Marx began writing about political economy, he adopted the same armchair method (admittedly on a ‘throne’ that was less comfortable than Smith’s or Ricardo’s). In what would become his seminal work, Marx began Capital by reasserting Smith and Ricardo’s principle that value is proportional to labor time. And like these earlier thinkers, Marx provided no evidence that this claim was true. But what followed was entirely different.

Marx took the labor theory of value in an unanticipated direction, using it to create a devastating critique of both capitalism and of mainstream political economy. The results live with us today. While Smith and Ricardo are remembered as important thinkers, there are few self-professed ‘Smithian’ or ‘Ricardian’ economists. But there are plenty of economists who call themselves ‘Marxists’.

Ernest Mandel was one of them. A Holocaust survivor and Nazi resistance fighter, Mandel was a tireless advocate of Marxist principles. But while his life as an activist was exemplary, his work as a scientist was less so. The problem boils down to the armchair method. Is it okay to build a theory on a hypothesis that goes untested? Mandel seemed to think so. In fact, he celebrated it. The labor theory of value, he argued, was not a hypothesis. It was a definition:

For Marx, labour is value.

(Ernest Mandel, 1990; emphasis in original)

Other Marxists have come to similar conclusions. The economic historian (and self-professed Marxist) E.K. Hunt concludes that the labor theory of value is “not a theory in any usual sense”. It is a definition, plain and simple. And because it is a definition, Hunt argues, the labor theory of value can’t be evaluated in the normal way (say, by testing its assumptions). Instead, we must judge the theory by asking whether it gives ‘insight’ into the nature of capitalism:

[T]he labour theory’s scientific merit rests entirely on the usefulness of the insights gained by looking at capitalism in this [Marxist] way.

(E.K. Hunt, 1983)

Given this standard for ‘scientific merit’, Hunt argues that the labor theory of value is wildly successful:

[W]hile this conception of value is definitional, it represented, for Marx, a profound scientific discovery whereby one could go behind the superficial appearance of market exchange to discover the hidden essence of capitalism.

(E.K. Hunt, 1983)

Generations of Marxists have been hypnotized by this type of euphoric thinking. But there’s a glaring problem. If you don’t test your assumptions, how do you know if your theory gives ‘useful insights’?

And there’s the rub. E.K. Hunt is doing the Marxist equivalent of Milton Friedman’s ‘F-twist’. In an attempt to defend absurd neoclassical assumptions, Milton Friedman proclaimed that assumptions are irrelevant. If the theory is ‘useful’, Friedman argued, that’s good enough. The trouble is that ‘usefulness’ is in the eye of the beholder. In other words, it is a value judgment.

In this light, the labor theory of value is an exercise in circular values. Marx used anti-capitalist sentiment to define a theory of value that he then judged by the apparent ‘rigor’ it gave to his anti-capitalist sentiment. What Hunt and Mandel seem not to realize is that this is bad science. You cannot judge a hypothesis using the same criteria that were used to create it.

Why do Marxists always go up?

Misgivings aside, suppose that we accept Hunt’s claim that we can judge the labor theory of value based on the insight it gives into the ‘hidden essence of capitalism’. There is still a problem. Scientists are not allowed to put boundaries on how others should test their theory.

Imagine if after proposing his theory of gravity, Isaac Newton declared that it could only be tested using the orbit of Mars. If scientists had obeyed such a command, no one would have discovered that Newton’s theory failed for the planet Mercury. And without this well-known aberration, there would have been no motivation for a better theory. Hence, there would be no general relativity (and today, no debate over dark matter).

If we look carefully at Hunt’s words, we see that he is doing something similar to our counterfactual Newton: Hunt is defining the terms by which we are ‘allowed’ to test the labor theory of value. Unsurprisingly, those terms place the theory in a good light. The theory, Hunt claims, reveals the ‘hidden essence of capitalism’. And it is based ‘entirely’ on this insight that we are to judge the labor theory of value.

Fortunately (for critics like me), science does not work like that. Once a theory is proposed, other scientists can test it anyway they like. Sure, Marx took the labor theory of value ‘up’ to the nature of capitalism. But we can equally take it ‘down’ and see what it implies about human nature. The problem, though, is that taking the labor theory of value ‘down’ leads to uncomfortable questions.

Figure 1: Why must we take the labor theory of value ‘up’?

Marxists like E.K. Hunt argue that we should evaluate the labor theory of value based on the insight it gives into the ‘hidden essence of capitalism’. But we are not obliged to do so. We can also judge the labor theory of value by the insight it gives into human nature. The trouble is that doing so yields nonsense.

Suppose that Marx is correct, and that ‘value’ is universally proportional to labor time. How could this be?

After having admitted that the labor theory of value is based on a ‘definition’, Marxists are immediately in a tough spot. If this definition is arbitrary (as most definitions are), then the labor theory of value is not science … it is a branch of ethics. It represents Marx’s ethical claim about value, and nothing more. But if we admit this arbitrariness, then we admit that the labor theory of value says nothing about the ‘hidden essence of capitalism’. It merely tells us what we already knew: that based on his ethics, Marx thought capitalism was unjust.

The alternative is to claim that Marx’s ‘definition’ of value is not arbitrary, but instead reveals a ‘hidden essence’ of the human mind. That is a bold claim with bold consequences. It implies that all humans are somehow endowed with a ‘value-judging faculty’ that determines value by calculating the labor embodied in a commodity. Supposing this claim is true, many questions arise:

  1. Is the ‘value-judging faculty’ omnipotent? Is it the equivalent of the neoclassical agent with ‘perfect information’? If so, how do humans acquire this information?
  2. If the ‘value-judging faculty’ is not omnipotent, does it make mistakes? If so, are they pervasive enough to render the labor theory of value moot?
  3. How did the ‘value-judging faculty’ evolve? What evolutionary problem did it solve? How long has it been with us?
  4. Is the ‘value-judging faculty’ encoded at birth? Or is it a product of cultural evolution?
  5. If the ‘value-judging faculty’ is influenced by culture, do some cultures value labor differently than others? Do some cultures value things other than labor? If so, does this variation undermine the labor theory of value?
  6. Does the ‘value-judging faculty’ differ between people? If so, why?
  7. If the ‘value-judging faculty’ is universal, why do capitalists not seem to recognize it? Why don’t they ‘price’ wages using the same method that they price commodities?
  8. If some people (like capitalists) are able to ignore the ‘value-judging faculty’, does everyone have this ability? If so, when (if ever) is the labor theory of value valid?

Looking closely at these questions, they imply one of two things. Either the human mind is endowed with a remarkably uniform method for judging value, in which case the labor theory of value is a ‘law’ of human nature. Or the human mind does not come with such a faculty, in which case ‘value’ is a complex outcome of culture, and the labor theory of value is false.

We can see, then, why Marxists rarely take the labor theory of value in this direction. Doing so gives the wrong ‘insight’. But while Marxists avoid questions of human nature, a scientific theory of value cannot. That’s because any claim about how human’s judge ‘value’ is also a claim about human nature.

Marx’s mistake was to suppose that value is underwritten by some universal substance. It is not. Instead, what seems likely is that value is the outcome of a rough heuristic. The irony is that it is a heuristic that Marx himself used when formulating his theory. It is the heuristic of egalitarianism. Humans strive for income that is similar to their peers’.

Because this is a loose heuristic, it tells us virtually nothing about the price of individual commodities. But what it does tell us is that across large sections of society, monetary value ought to correlate with labor time. Yes, that is a rather weak claim. But it is the only remaining empirical claim that the labor theory of value makes.

Evidence for the labor theory of value

If the labor theory of value were true, one would expect a striking correlation between prices and labor time. The trouble is, this correlation has always been strikingly absent. Everywhere we look, we find exceptions.

Take art as an example. A painting that took a month to create might sell for $1000. Another month-long painting might sell for $1 million. And when artists die, the price of their art usually goes up, yet the work embodied in their paintings doesn’t change. And speaking of that, why does the price of high art fluctuate wildly with time? The painters are long dead, and the work embodied in their paintings is fixed for all time. What gives? We can dismiss these examples as ‘exceptions’ to the labor theory of value. But if we take that route, we quickly realize that the exception is the norm.

Realizing this problem, Marxists have largely given up trying to test Marx’s claim that commodity prices are proportional to labor time. Instead, they’ve switched to a far weaker test of the labor theory of value. Instead of looking at individual commodities, Marxists look at sectors of the economy.1 And there they find what they are looking for — a striking correlation between value added and labor time.

Figure 2 shows an example. I’ve plotted here the correlation between value added and employment across US sectors in 2020. Variation in sector employment explains about 70% of the variation in value added. This strong correlation holds in other years (in the US), and in other countries. It appears to give striking support for the labor theory of value.

Figure 2: Across US sectors, value added scales with the number of employees.

Note: Each point represents a US sector in 2020. [Sources and methods]

Bichler and Nitzan balk

Looking at the sector-level evidence for the labor theory of value, political economists Shimshon Bichler and Jonathan Nitzan are unimpressed. The problem, they point out, is that Marx stated that his theory of value applied not to sectors, but to individual commodities.

Now, if prices correlate with labor time at the commodity level, they will also correlate at the sector level. But what about the reverse? If prices correlate with labor time at the sector level, must they correlate at the commodity level?

The answer is no.

To illustrate why, Bichler and Nitzan construct a simple thought experiment, visualized in Figure 3. Imagine that at the commodity level, there is no correlation between prices and labor time. Panel A shows what this lack of correlation might look like (a blob of data with no trend). This commodity-level evidence spells trouble for the labor theory of value. Yet when we look at the sector-level data (Panel C), we find a striking correlation between monetary value and labor time. How can this be?

Figure 3: Bichler and Nitzan’s spurious correlation.

Note: Panel A plots the labor time and unit price of individual commodities. Since there is no correlation, at the commodity level the labor theory of value fails. Panel B shows sector size (the number of commodities in each sector) plotted against itself. The correlation is (obviously) perfect. When we multiply unit prices and unit prices by sector size, we suddenly get a strong correlation between monetary value and labor time (Panel C). But this results from autocorrelation — sector size correlating with itself. (You can download Bichler and Nitzan’s original presentation of this argument here.)

The answer to this apparent paradox is contained in Panel B. Here I’ve plotted a perfect correlation. It is perfect because it plots the same variable on both axes — the number of commodities produced by each sector. It is this autocorrelation that produces the trend between value added and labor time.

Here’s the math. To get the labor time within each sector, we multiply the number of commodities by the labor time per commodity. But the latter is just statistical noise:

\displaystyle \begin{aligned} \text{sector labor time} &= (\text{number of commodities}) \times (\text{labor time per commodity}) \\ \\ &= (\text{number of commodities}) \times \text{noise} \end{aligned}

Likewise, to get the monetary value of each sector, we multiply the number of commodities by commodity price. But the latter is just statistical noise:

\displaystyle \begin{aligned} \text{sector value} &= (\text{number of commodities}) \times (\text{commodity price}) \\ \\ &= (\text{number of commodities}) \times \text{noise} \end{aligned}

Notice what happens when we compare monetary value with labor time. We get a striking case of autocorrelation — the number of commodities correlated with itself:

\displaystyle \begin{aligned} \text{sector value} & \sim \text{sector labor time} \\ \\ (\text{number of commodities}) \times \text{noise} & \sim (\text{number of commodities}) \times \text{noise} \end{aligned}

The result, Bichler and Nitzan argue, is that testing the labor theory of value at the sector level tells us nothing about behavior at the commodity level — the level that Marx intended. Any correlation between sector value added and sector labor time could easily be spurious — the result of sector size correlating with itself.

Cockshott’s D-twist

Faced with Bichler and Nitzan’s critique, Marxist political economist Paul Cockshott (and colleagues) responded with an argument that I’ll call the ‘D-twist’. The only valid way to test the labor theory of value, Cockshott claims, is at the sector level. That’s because a commodity-level test violates the principles of ‘dimensional analysis’.

Cockshott’s thinking works as follows. When we compare things quantitatively, they must have the same dimension. This is a measurement truism. Cockshott’s D-twist is to claim that this truism makes it invalid to compare the prices (or labor times) of different commodities.

The reason, he argues, is that all prices come with a different dimension. The price of a pencil has dimensions of $/pencil. And the price of a shirt has dimensions of $/shirt. Faced with these different dimensions, we are not allowed to test the labor theory of value at the commodity level. Dimensions forbid it.

What Cockshott seems not to realize is that this argument does much more than he claims. If we accept his reasoning, it follows that the entire price system is dimensionally invalid. That’s because the purpose of prices is to compare them to other prices. It’s this relative value that gives prices meaning. But according to Cockshott, such a comparison is unsound. By the dictates of dimensional analysis, humans must only compare the prices of identical commodities.

Luckily, no one heeds Cockshott’s advice, because doing so would make prices meaningless. The whole point of prices is to compare the otherwise incommensurable. By virtue of having a price, non-identical commodities are reduced to an identical dimension: money. The purpose of a theory of value is to explain how this reduction happens.

In this light, Cockshott’s D-twist is self-refuting. Cockshott rescues the labor theory of value by arguing that the price system (which the labor theory of value tries to explain) is dimensionally invalid. In his attempt to save the bathwater, Cockshott kills the baby.2

Show me the third factor

After arguing for the ‘D-twist’, Cockshott and colleagues lay out their ground rules for debunking the sector-level evidence for the labor theory of value. If the correlation between labor time and value added is indeed spurious (as Bichler and Nitzan claim), then we must find a third factor that causes the correlation:

The argument that the correlations [between sectoral labor time and value added] are spurious depends on the idea that there exists an independent third factor that is the cause of concomitant variation in the persons and monetary flow vectors. … [F]or an allegation of spurious correlation to be borne out, one must both identify this third factor and show that it actually does induce the correlations observed. So what could this third factor be?

(Cockshott, Cottrell and Valle Baeza, 2014)

At first glance, Cockshott’s argument sounds reasonable. If the correlation between two variables is spurious, we should find the third factor that actually causes the correlation. The problem with this reasoning is that sometimes there is no single ‘third factor’. Instead, there are many ‘third factors’, each of which contributes partially to cause and affect.

Human height is a good example. Suppose that in an effort to explain human height, I measure differences in skeletal length. I find a striking correlation between individuals’ height and the length of their skeleton. I then claim to have explained human height.

You are unimpressed. You respond: ‘The height vs. skeletal-length correlation tells us nothing about why some people are taller than others. It simply restates the data it was given (human height), with some added noise.’

I retort: ‘If my correlation is meaningless, show me the third factor that causes height.’

If you accept my premise, you have lost the argument. That’s because there is no single factor that explains variation in height. Instead, height is a complex outcome of many factors (genes, nutrition, life history, etc.). The same principle is true of prices. Like human height, prices are caused by many different factors. As such, there is likely no ‘third factor’ that explains the correlation between value added and labor time.

On that front, Bichler and Nitzan’s example of ‘spurious correlation’ is a nice thought experiment. But Cockshott and colleagues correctly note that we cannot objectively measure the proposed ‘third factor’ — the quantity of commodities produced in each sector. (Doing so would require an objective dimension for aggregating the various commodities produced by each sector — a dimension that does not exist.)

Having shot down Bichler and Nitzan’s third factor, Cockshott concludes that we must accept the labor theory of value. The reason? Nothing measurable correlates more strongly with value added than does labor time. Case closed.

I don’t buy this argument. While there is no third factor that explains value added, there is a process that does. If we assume that humans are egalitarian, then a value-labor correlation is unavoidable, and the labor theory of value is unnecessary.

The egalitarian heuristic

Let’s assume that the labor theory of value is wrong. If so, why does value added correlate strongly with labor time. The answer, I propose, is because of human egalitarianism.

This idea may seem like a non-sequitur, and in some sense it is. It’s not obvious how humans’ desire for equality would produce a correlation between labor time and value added. But I’m going to show you that it can. The basic idea is that the desire for egalitarianism places (rough) limits on income. And these limits, in turn, put constraints on value added. The result is that unless humans live with oppressive inequality, value added will strongly correlate with labor time.

We’ll get to the math in a moment. But for now, let’s look at some examples of how egalitarianism relates to income. Suppose you hire your friend Alice to paint your house. The job will take about 1 month. How much would you offer to pay her?

Although in principle you could offer any amount, in practice you will not offer her $1 for the job. But why not? One reason is that $1 per month is a starvation wage. Since Alice is your friend, you don’t want her to starve. So you’ll offer her a living wage. I call this sentiment cooperative egalitarianism. When valuing a job done by someone you care about, you offer to pay a wage that is similar to your own.

What about when you buy things from a stranger? Then cooperative egalitarianism becomes less important. Most people won’t low-ball their friends. But many people will low-ball a stranger. Still, if you hire a stranger to paint your house, you’re unlikely to get someone to do it for $1. Why? Because of competitive egalitarianism.

If you ask a neoclassical economist, they’ll tell you that an unemployed person should take any job they can get, since some income is better than no income. But this is not how humans behave. If a job pays far below the social norm, many people will refuse to do it, even if doing so means earning nothing. That’s competitive egalitarianism. Its effect is to put a lower bound on income.

The same principles of cooperative and competitive egalitarianism put an upper limit on income. For instance, few people would offer to pay Alice (the painter) a wage that is hundreds of times their own. And if they did, they’d have a horde of painters at their door offering to do the job for a smaller (but still handsome) sum.

The effect of the egalitarian heuristic, then, is to put a loose bound on income. And this loose bound is all we need to get a strong correlation between value added and labor time.

Exchange without labor, prices without ‘value’

Having proposed the ‘egalitarian heuristic’, let’s look at some evidence of its use. The evidence described below is particularly relevant since it contradicts the labor theory of value.

According to the labor theory of value, monetary value is proportional to labor time. It follows that when people participate in an exchange that has no embodied labor, they ought to price it a zero. But it turns out that humans don’t behave this way. Instead, they use the egalitarian heuristic.

We know this because of a widely-studied scenario called ‘ultimatum game’. It works as follows. The game has two participants, who we’ll call Alice and Bob. To start the game, we give Alice a small sum of money (say $20). Then we ask her to split the money with Bob. Alice makes an offer, which Bob either accepts or rejects. If Bob accepts the offer, the split goes ahead and both participants keep the money. But if Bob rejects the offer, both participants get nothing.

Notice that in the ultimatum game, there is no exchange of labor. (Neither Alice nor Bob do any work.) Hence if both Alice and Bob adhere to the labor theory of value, Alice should offer Bob nothing. Why? Because she knows that Bob has done no labor, and hence, created no value. And Bob knows that he has done no work, and so accepts the offer of nothing.

Unfortunately, when real people play the ultimatum game, they don’t heed this prediction. Instead of offering nothing, the Alices offer the Bobs a (roughly) fair share of the pie. In other words, the participants follow the egalitarian heuristic.

Figure 4 shows the pattern. I’ve plotted here data from Joseph Henrich and colleagues’ seminal study of the ultimatum game. The horizontal axis shows the offer made by the Alices, expressed as a percentage of the original sum. The black points represent the average offer within different cultures. Unsurprisingly, there is variation across societies — an indication that culture affects how people judge value. More surprising is the fact that ultimatum offers clump tightly around an average value of about 40% (as illustrated by the blue density estimate).

Figure 4: Egalitarianism in the ultimatum game.

Note: The horizontal axis shows offers made by participants in the ultimatum game (the portion of the money the Alices offer to the Bobs). Black points show average offers made within different small-scale societies. The blue curve shows the density estimate. Data is from Joseph Henrich and colleague’s paper ‘Cooperation, Reciprocity and Punishment in Fifteen Small-scale Societies’.

This evidence illustrates the heuristic of ‘cooperative egalitarianism’. Given a sum of money, people offer to split it in a way that is (roughly) egalitarian. The fact that no labor has been done seems to be irrelevant.

Henrich and colleagues also found evidence for what I’ve called ‘competitive egalitarianism’. Every now and then, the Alices would lowball the Bobs, offering them less than 20% of the pie. When that happened, the Bobs rejected the offer about 40% of the time. In other words, these spiteful Bobs would rather take nothing than accept an offer they considered unfair. That’s competitive egalitarianism.

The simplest interpretation of this evidence is that humans don’t judge value based on labor time. Instead, they judge value based on the ethic of fairness.

Accounting for ‘value added’

With the human desire for equality in mind, let’s do some math. I’m going to explain how the tight correlation between value added and labor time can result from egalitarianism.

To make the case, we’ll start with the concept of ‘value added’ itself. The name suggests a contribution to society … as in ‘Bob added value’. That’s no coincidence. Mainstream economists conceive value added as exactly that — a measure of economic contribution. But beneath the sanguine name lies a more banal definition. Value added is really just net income.

‘Value added’ is defined as the difference between a firm’s sales and the expenses it pays to other firms. This is net income by another name. Once paid to the firm, this net income then gets split between the firm’s owners (capitalists) and the firm’s employees (laborers). So value added is the sum of two types of income:

\displaystyle \text{value added} = \text{labor income} + \text{capitalist income}

Mathematicians call this kind of equation an ‘identity’, because it is something we’ve defined to be true. It is the definition of value added.

Let’s use this identity to relate value added to labor time. To do so, we’ll split labor income into two components. Labor income is the product of labor time multiplied by the average wage. Noting this fact, we can rewrite our identity as:

\displaystyle \text{value added} = (\text{labor time}) \times (\text{average wage}) ~+~ (\text{capitalist income})

Using more compact notation, we can write:

\displaystyle  Y = L \cdot W + K

This identity tells us that value added (Y) is proportional to labor time (L), with some statistical ‘noise’ mixed in:

\displaystyle  Y = L + \text{noise}

The statistical ‘noise’ is produced by variation in wages (W) and capitalist income (K). In principle, the noise could be huge, and hence drown out the correlation between labor time and value added. But in practice, the noise is negligible. To see why, we must leave the realm of pure mathematics and look at the messy world of human behavior.

A strong signal with weak noise

In mathematical terms, the value-added identity remains valid no matter what numbers we throw in for L, W, or K. But in the real world, these numbers represent configurations of human societies. And human societies cannot take just any form.

Let’s start with labor time L. Interestingly, this is the most arbitrary number in the value-added identity. No, it’s not because human work is itself arbitrary. It’s because here we’re dealing with the labor time within economic sectors, and these sectors have arbitrary boundaries. Some sectors (like ‘wholesale trade’) contain many workers. Other sectors (like ‘pipeline transportation’) contain few workers. This size difference is an artifact of how the various sectors have been defined. But it has an important mathematical consequence — it ensures enormous variation in labor time between sectors.

This labor-time variation is our ‘signal’. It is what will produce the correlation between value added and labor time. But this signal is corrupted by ‘noise’ caused by variation in wages and capitalist income. If the signal is to get through, the noise must be small.

What is key is that this noise is produced by variation in income. And this income variation, in turn, is limited by the human desire for equality. With the US as our example, let’s have a look at this egalitarian heuristic.

The egalitarian heuristic among US workers

In the United States, there is tremendous wage inequality. Superstar employees (such as CEOs) can earn hundreds of times more than minimum-wage workers. But when it comes to the value-added identity (below), it’s not wage differences between individuals that matters. What we care about is wage variation between sectors. That’s what W represents:

\displaystyle  Y = L \cdot W + K

This sector variation in wages turns out to be rather small. Figure 5 tells the story. Here I’ve taken the average wage in each US sector (the annual income of a full-time-equivalent employee). Then I’ve calculated the Gini index of these average wages, and plotted the trend over time. Over the last two decades, wage inequality between sectors had an average Gini index of 0.25. On the spectrum of conceivable inequality, that’s quite low.

Figure 5: Wage inequality between US Sectors.

Note: I have plotted here the Gini index of wage inequality between US sectors. To calculate this index, I input into the Gini formula the average wage in each sector. Inter-sector wage inequality has increased slightly since 1998, but remains low when judged on the 0–1 scale of possible inequality. [Sources and methods]

Returning to our value-added identity, wage inequality between sectors creates noise in the value-labor relation. But in the US, this noise is small.

In other countries, could the wage noise be slightly larger? Almost certainly. But could it be significantly large? That’s doubtful. Given the human desire for income parity, it is extremely difficult to maintain huge wage differences between sectors. Doing so would require barring low-wage workers from moving to high-wage sectors. To some extent, trade guilds create such a barrier. Apartheid regimes do it even better. But unless there is an armed barrier between sectors (i.e. a state border), people will move where the money is, and thus limit inequality. That’s the principle of competitive egalitarianism.

The egalitarian heuristic between US workers and capitalists

When Marx wrote Capital his goal was to explain capitalist income. More specifically, he wanted to explain the capitalist share of income, which he argued was the outcome of class struggle.

Here, I think Marx was on the right track. Unfortunately, he was mute on how this class struggle should play out, other than to claim that it would culminate in the overthrow of capitalism. In most cases, that prediction didn’t pan out. Instead, capitalism has persisted, as has the capitalist share of income.

In the US, for instance, the capitalist share of income has fluctuated between about 5% and 20% of national income (Figure 6). Admittedly, these fluctuations have corresponded to seismic shifts in society. But at least in principle, we can imagine the fluctuations being much larger. There’s no mathematical law that forbids capitalists from taking 90% of income. And yet capitalists seem to take only a small minority of the pie. Why? Marx gives us no answers. But the egalitarian heuristic offers a clue.

Figure 6: Capitalist share of US national income.

Note: The capitalist income share is the sum of before-tax profits and net interest, expressed as a fraction of national income. [Sources and methods]

A defining feature of stratified societies is that there are far fewer elites than there are commoners. The exact ratio is a matter of debate. But in modern societies, capitalist elites makeup about 1% of the population.3 Let’s take this number and see what it implies about individual income.

The income of the average capitalist is proportional to the capitalist share of income (K/Y), divided by the portion of the population who are capitalsts (1%):

\displaystyle \text{average capitalist income} \propto \frac{K/Y}{0.01}

Likewise, the income of the average worker is the labor share of income (1 - K/Y) divided by the portion of the population who are workers (99%):

\displaystyle \text{average worker income} \propto \frac{1 - K/Y}{0.99}

Putting the two equations together, we can see that the capitalist share of income affects inequality between capitalists and workers. For example, if the capitalist share of income is 2%, the average capitalist earns about 2 times more than the average worker. But if the capitalist share of income is 20%, the average capitalist earns about 25 times more than the average worker.

In Figure 7, I’ve plugged these values into the Gini index to illustrate how capitalist-vs-worker inequality varies with the capitalist share of income.4 What’s interesting is that the trend is extremely non-linear. Almost all of the inequality action happens when the capitalist share of income is below 20% — a region I’ve dubbed the ‘class struggle sweet spot’.

Figure 7: The class struggle sweet spot.

Note: This figure plots a model in which I assume that capitalist income flows exclusively to the top 1%. I then measure how the capitalist share of income (horizontal axis) affects inequality between the average income of capitalists and the average income of workers (vertical axis). The vast majority of the inequality action occurs when the capitalist share of income is below 20%, a region I’ve dubbed the ‘class struggle sweet spot’. [Sources and methods]

This simple model gives a plausible reason why the capitalist share of US income has never exceeded 20%. If workers desire equality between themselves and their capitalist peers, then the battle is to keep the capitalist income share below 20% — and preferably much lower. So while the capitalist share of income could (in principle) be anything, in practice, the human desire for egalitarianism limits the capitalist share of the pie to a small minority.

Back to our value-added identity:

\displaystyle  Y = L \cdot W + K

Although the identity is true for all conceivable values of capitalist income K, only a tiny subset of these values describe real-world societies. In practice, societies restrict capitalist income so that it constitutes a small portion of total income, Y. And this restriction, in turn, limits the amount of statistical noise between labor time and value added.

The egalitarian heuristic among US capitalists

In Capital, Marx’s favorite character is a fellow named ‘Mr. Moneybags’. He is Marx’s caricature of the money-grubbing capitalist who cares only for profits. This satire has a strong element of truth. The capitalists of Marx’s day (the Vanderbilts, Rockefellers, and Carnegies) did not have a reputation for being generous to workers. Nor, for that matter, do the capitalists of today. So it would seem a bit crass to argue that capitalists (then and now) follow the egalitarian heuristic. But that is exactly what I’ll claim.

The key is that the egalitarian heuristic has two sides: a cooperative side and a competitive side. Most capitalists suppress the cooperative side, at least when it comes to solidarity with workers. But all capitalists vehemently believe in competitive egalitarianism. Indeed, it is the core of their ideology. Capitalists’ goal, Jonathan Nitzan and Shimshon Bichler observe, is to meet (or beat) the normal rate of return. In other words, capitalists want a return that is similar to their peers. That’s competitive egalitarianism.

With this egalitarianism in mind, let’s return to our value added identity:

\displaystyle  Y = L \cdot W + K

We’ve already seen that capitalist income K is restricted so that the capitalist share of total income is fairly small. The principle of competitive egalitarianism further restricts this income. Because capitalists try to meet or beat the normal rate of return, the capitalist share of income tends to be quite uniform across sectors.

Figure 8 tells the story. I plot here the results of a 2-step analysis. I first calculate the capitalist share of income (K/Y) in each US sector. I then plug this capitalist income share into the Gini index, and plot its inequality over time. Since 1998, the Gini index has averaged about 0.3. In other words, capitalist margins are fairly equal across sectors.

Figure 8: Inequality of capitalist income share between US sectors.

Note: This figure plots results from a 2-step calculation. In step 1, I measure the capitalist share of value added (K/Y) in each US sector. In step 2, I calculate the Gini index of this income share across all sectors. [Sources and methods]

The effect of this capitalist-income-share equality is to limit noise in our value-added identity. Yes, capitalist income could conceivably be anything. But in practice it is not. The capitalist share of total income tends to be below 20%. And this income share does not vary much between sectors.

From egalitarianism comes a value-labor correlation

We’re now ready to explain the tight correlation between value added and labor time. Marxists argue that this correlation is strong evidence for the labor theory of value. I propose that the correlation stems purely from the egalitarian heuristic.

To test the latter idea, I’m going to throw random numbers into the value-added identity. Then I’ll discard outcomes that are inconsistent with egalitarianism (as we observe it in the United States). I call this thought experiment the ‘random-egalitarian model’.

I’ve explained the model in detail in Box 1. But here’s a quick summary. I start by taking real-world labor times (the sector labor times observed in the US) and putting these numbers into the value-added identity. Then I input random numbers for wages and capitalist income. Next, I look at the distribution of income that results, and discard outcomes that look nothing like the real world. Finally, I measure the correlation between value added and labor time and see what I find.

Box 1: The random-egalitarian model

Randomly generated societies, selected for egalitarianism

  1. Start with the value-added identity, which relates value add (Y), labor time (L), wages (W) and capitalist income (K). We’ll apply it to each sector s:

\displaystyle  Y_s = L_s \cdot W_s + K_s

  1. Into Ls, input the actual labor times worked in US sectors in 2020. I measure labor time in terms of the number of full-time-equivalent employees, as shown in Figure 2;
  2. Generate random numbers for sector wages Ws and capitalist income Ks. (For details about the generation method, see Sources and methods);
  3. Discard (as follows) outcomes that violate the egalitarian heuristic:
    • Discard outcomes in which between-sector wage inequality exceeds a Gini index of 0.3 (the US maximum in Fig. 5);
    • Discard outcomes in which the society-wide capitalist share of income (\sum K_s /\sum Y_s ) is greater than 20% (the US maximum in Fig. 6);
    • Discard outcomes in which the capitalist income share (Ks/Ys) has a between-sector Gini index greater than 0.5 (the US maximum in Fig. 8);
  4. For the societies that remain, measure the sector correlation between value added and labor: Ys ~ Ls.

The results of the random-egalitarian model are shown in Figure 9. Let’s break down what you see. I’ve plotted here the outcome of a 2-step calculation. I first measure the sector correlation between value added and labor time in both the random-egalitarian model and the real-world US. The resulting correlation varies over time (in the US) and over different iterations (in the model). Then I take this correlation and plot its histogram, shown in blue for the US and red for the random-egalitarian model.

You can see that on average, the random-egalitarian model produces a value-labor correlation that is stronger than the one found in the United States. And it does so without a labor theory of value. It is merely randomness, selected for egalitarianism.

Figure 9: Randomness, selected for egalitarianism, creates a value-labor correlation.

Note: This figure visualizes a thought experiment in which I test if egalitarianism can create a value-labor correlation. The red histogram shows the results of a model in which I put random numbers into the value-added identity, and then discard outcomes that are non-egalitarian. (See Box 1 for details.) I’ve plotted here the distribution of correlation coefficients for the relation \log Y_s \sim \log L_s (the sector correlation between the log of value added and the log of labor time). The blue histogram shows the distribution of US values over the last two decades. The red histogram shows the correlation distribution in my random-egalitarian model. [Sources and methods]

This result does not bode well for devout Marxists. Contrary to what they claim, the strong correlation between value added and labor time may not be evidence for the labor theory of value. Instead, it could be evidence for a more fundamental feature of human nature: the desire for equality.

If we restrict inequality to a range found in the real world, then otherwise purely random numbers will generate a value-labor correlation … and a strong one at that. The idea that labor creates value is unnecessary.

Selecting against the labor theory of value

Having shown that when we select for equality, a value-labor correlation emerges, let’s now do the opposite. Let’s select for no value-labor correlation and see what happens to inequality. I call this thought experiment the ‘random-anti-Marx’ model. It is ‘anti-Marx’ because in the hypothetical societies that remain, the labor theory of value is overwhelmingly contradicted by evidence.

The random-anti-Marx model starts the same way as the random-egalitarian model. We take our value-added identity and input real-world values for labor time. Then we throw in random numbers for wages and capitalist income. Finally, we select outcomes where value added does not correlate with labor time. Box 2 outlines the steps.

Box 2: The random-anti-Marx model

Random societies, selected so that value added does not correlate with labor time

Repeat steps 1–3 from Box 1.

  1. Measure the correlation (r) between sector value added and sector labor time (r= \log Y_s \sim \log L_s) ;
  2. Discard (as follows) outcomes in which value added correlates with labor time:
    • Discard outcomes where |r| > 0.01 ;
    • Discard outcomes where the correlation p-values are less than 0.5;
  3. Observe inequality in the societies that remain.

The point of the random-anti-Marx model is to generate counterfactual societies that do not exist and will never exist. At first, this goal sounds odd. Why would we want to simulate societies that have nothing to do with reality? Because doing so helps us understand why these societies don’t exist.

Think of it as the Sherlock Holmes principle. One way to understand the path taken is to rule out the paths that were avoided:

When you have eliminated the impossible, whatever remains, however improbable, must be the truth.

The random-anti-Marx model gives clear reasons why we always find a value-labor correlation. To understand why, let’s return to our value-added identity:

\displaystyle  Y = L \cdot W + K

The question we’re asking is — under what conditions will value added (Y) not correlate with labor time (L)? The mathematical conditions are simple: the ‘signal’ must be drowned out by the ‘noise’.

In our value-added identity, the ‘signal’ is the variation in L (here taken to be variation in the labor time between sectors). The ‘noise’ is the variation in wages (W) and capitalist income (K). As we dial up this noise, we remove the correlation between labor time and value added.5

The purpose of the random-anti-Marx model is to reveal what it takes for value added to be utterly uncorrelated with labor time. The requirements, it turns out, are rather bizarre. I’ll divide them into two scenarios, shown in Box 3.

Box 3: Scenarios in which sector value added does not correlate with labor time.

The fat-capitalist/starving-capitalist scenario:

  • There is no value-labor correlation, but wage variation is in a normal range. (Condition: wage inequality between sectors has a Gini index less than 0.3.)

The fat-worker/starving-worker scenario:

  • There is no value-labor correlation, but capitalist income is in a normal range. (Conditions: the capitalist share of total income is less than 20%, and the capitalist income share has a between-sector Gini index less than 0.5.)

The fat-capitalist/starving-capitalist scenario

In the fat-capitalist/starving-capitalist scenario, there is no value-labor correlation, but wage variation between sectors is ‘normal’ (meaning it is not more extreme than found in the US). By selecting for these conditions, we create a distribution of capitalist income that is bizarre.

Figure 10 shows what these imaginary societies look like. I’ve plotted here the distribution of the capitalist share of income by sector. The blue histogram is actual US data, which has a familiar bell-curve shape. Capitalist margins clump around an average value of about 15%. In contrast, when we select for a lack of value-labor correlation (alongside a realistic wage distribution), we get a strikingly different pattern. The resulting societies (shown in red) have essentially two types of sectors:

  1. A ‘fat-capitalist’ sector where capitalist margins verge on 100%;
  2. A ‘starving-capitalist’ sector where capitalist margins verge on 0%.

Figure 10: Selecting against a value-labor correlation creates a fat-capitalist/starving-capitalist system.

Note: The blue and red histograms plot the distribution of the capitalist share of income by sector (K_s/Y_s) . The blue histogram shows actual US values over the last 2 decades. The red histogram shows what happens when we select for societies that lack a value-labor correlation, but have wage inequality within normal bounds. [Sources and methods]

The results in Figure 10 tell us why value-added always correlates with labor time: because to imagine otherwise is unthinkable. Killing the correlation between value added and labor time (while keeping a realistic wage distribution) requires a fat-capitalist/starving-capitalist system of income. But such a system violates everything we know about human behavior. It requires that starving capitalists remain idle while their peers reap vast riches.

This scenario is like imagining a herd of cows in which one group is content to starve while the other group gorges itself. Such cows do not exist. And neither do such humans.

The fat-worker/starving-worker scenario

In the alternative scenario, we select for no value-labor correlation, but keep only the societies with a realistic distribution of capitalist income. When we do so, we produce societies with wage inequality that is obscene. Figure 11 runs the numbers.

I’ve plotted here the results of a two-step calculation. I first take average wages in each sector and measure their inequality using the Gini index. Then I plot the distribution of this Gini index. The blue histogram shows the results for the US over the last two decades. Between-sector wage inequality clumps tightly around a Gini index of 0.25.

In contrast, when we kill the value-labor correlation (but keep capitalist income in a realistic range), the resulting wage inequality is extreme (red histogram). The Gini index averages 0.98.

Figure 11: Selecting against a value-labor correlation creates extreme wage inequality.

Note: The histograms plot the distribution of wage inequality between sectors. The blue histogram shows actual US values over the last 2 decades. The red histogram shows what happens when we select for societies that lack a value-labor correlation, but have capitalist income within normal bounds. [Sources and methods]

Again, this result tells us why value-added always correlates with labor time: to imagine otherwise is unthinkable. The fat-worker/starving-worker scenario kills the value-labor correlation by making wage inequality more extreme than anything found in the real world.

To give you some context, the most unequal societies on Earth — places like Botswana and Swaziland — approach a Gini index of 0.8. But this is for individual income, not sector averages. Achieving comparable inequality across sectors would mean having a sector of paupers living next to a sector of billionaires. Humans do not tolerate such inequality. And that’s why value added always correlates with labor time.

The tragedy of Marxism

Let’s review. With 150 years of hindsight, it seems clear that Marx’s contribution to science has been largely tragic. The problem is that Marx had two sides, one of which undermined the other.

On the one hand, Marx was an unrivalled empiricist. He was an astute observer of capitalism and a lucid documenter of its abuses and inequalities. And after a decade spent in the British Museum Library, he was a wise (and often riveting) historian. Marx the empiricist made seminal contributions to science.

On the other hand, Marx was also a theorist. It’s here that his work was disastrous. Yes, Marx was wrong … but that’s not the real problem. (Being wrong is part of science.) Marx’s problem was that he framed his ideas in a way that couldn’t be wrong. From the get-go, Marx’s conclusions about capitalism were so seductive that he and his followers forgot to (and often refused to) test their premise.

Marx looked at capitalism and saw a system that, in his eyes, was unjust. Then he took this ethical judgment and encoded it in a theory of value. The result was a seemingly objective way to show that capitalists exploited workers. But it all hinged on a leap of faith — the assertion that labor is value.

In a way, Marx was too clever for his own good. On top of his simplistic assertion about value, he built a towering theoretical edifice that he then wielded to great effect. Marx’s followers took up the mantle and became ‘lords of the labyrinth’6 — masters of wielding Marxist theory without ever questioning its foundation.

When the philosopher Karl Popper looked at the state of affairs in the mid-20th century, he was not impressed. Marxists, he noted, were able to explain anything and everything:

A Marxist could not open a newspaper without finding on every page confirming evidence for his interpretation of history;

… Whatever happened always confirmed [Marxist theory]. Thus its truth appeared manifest; and unbelievers were clearly people who did not want to see the manifest truth …

(Karl Popper, 1953)

Popper’s insight was to turn this triumphant attitude on its head. When your theory can accommodate any type of evidence, that’s not a strength. For Popper, it’s a sign that your theory is pseudoscience.

To be fair to Marx, we should distinguish between his theoretical edifice and the foundation on which it rests. The edifice, described by Popper, came to be known as ‘historical materialism’. It’s an approach to understanding history that is so sweeping that it can accommodate almost any sort of facts. At the core of Marx’s theory, though, is a very simple hypothesis about human behavior: we judge value in terms of embodied labor. This hypothesis is easily tested. The problem is that it is immediately falsified.

The funny thing about theories of value is that if you proclaim them ‘universal’, any opposition disproves your point. If labor was the sole source of value, then the labor theory of value should be uncontested. Everyone would agree that labor time is how they judge value. But everyone does not agree. Real-world humans, it seems, judge ‘value’ using many different dimensions. So the labor theory of value appears to be obviously false.

Faced with this glaring problem, Marx had a clever response. Yes, Marx admitted, some people may not equate value with labor. But this fact does not falsify the labor theory of value. It falsifies people’s consciousness. In other words, if you claim to judge value other than by labor time, you’re fooling yourself — you have a ‘false consciousness’.

What Marx seemed to forget is that such a bold claim should be backed by extraordinaire evidence. It’s true that human ideas can be ‘false’. (If I believe that the Earth is flat, I’m wrong.) But what does it mean for human values to be false? If I claim to value trees because they provide shade (not because they have embodied labor), what evidence would prove me wrong? Here we enter the quicksand of human psychology. The thing about values is that there is no external standard for judging them. The mere fact of holding a value makes it true for the person who holds it. Such is the power of ideas.

From the beginning, then, the labor theory of value made nonsensical claims about human psychology. Marxists, however, were undeterred. That’s because they weren’t concerned with understanding the behavior of individuals. They wanted to understand capitalism’s ‘laws of motion’. The tragedy here is that Marx’s rich empiricism could have given rise to a flourishing interplay between evidence and ideas. But that did not happen. Enamoured by Marx’s conclusions about capitalism, his followers decided that the core of Marx’s theory was not a hypothesis. It was a dogma. The task was then to find evidence that supported the conclusion.

It’s in this light that we should interpret the correlation between value added and labor time. Yes, this evidence is consistent with the labor theory of value. But it is also consistent with a much broader theory of human behavior. If humans have evolved to be egalitarian, then a correlation between monetary value and labor time is nearly unavoidable. Indeed, to create a society that lacks a value-labor correlation requires preposterous inequality.

The irony here is that in his writings, Marx clearly espoused the ethic of egalitarianism. The tragedy is that he cloaked this ethic in the facade of objective truth. We are still paying the price for his mistake.

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Sources and methods

Data for the ultimatum game (Fig. 4) is from Joseph Henrich and colleague’s paper ‘Cooperation, Reciprocity and Punishment in Fifteen Small-scale Societies’.

US income data comes from the BEA, using the tables shown below. I have defined ‘sectors’ to be the smallest unit with available data.

  • average wage by sector: Table 6.6D (annual income per full-time-equivalent worker)
  • full-time-equivalent employees by sector: Table 6.5D
  • value added by sector: Table: Value Added by Industry
  • capitalist share of national income: Table 1.12. (Capitalist income is the sum of net profits and corporate profits before tax.)
  • capitalist income by sector. Net interest data is from Table 6.15D. Corporate profit data is from Table 6.17D. The caveat here is that net interest is reported with less detail (fewer subsectors) than other forms of income. The result is that we know the distribution of capitalist income across sectors with less detail than we know the distribution of value added.

Generating random societies

My simulation assumes that sector value added Y_s is given by the identity:

\displaystyle  Y_s = L_s \cdot W_s + K_s

Sector labor time L_s equals the full-time-equivalent employment in US sectors in 2020.

I assume that sector average wages W_s and sector capitalist income K_s are random numbers that follow a lognormal distribution, dictated by the scale parameter \mu and the shape parameter \sigma :

\displaystyle  W_s \sim \text{lognormal} (\mu_W, \sigma_W)

\displaystyle  K_s \sim \text{lognormal} (\mu_K, \sigma_K)

I let \mu vary uniformly between -10 and 10. I let \sigma vary uniformly between 0 and 10.

For each iteration of the simulation, I select \mu_W , \mu_K , \sigma_W , and \sigma_K independently from a uniform distribution. I use these parameters to generate random values for W_s and K_s , which I then enter into the value-added identity. The result is simulated value added in each sector of the hypothetical society.

I repeat the simulation millions of times, after which I apply the selection criteria outlined in Box 1 an Box 2.

Notes

  1. Anwar Shaihk pioneered the method of using input-output tables to measure the total embodied labor used by each sector. Unfortunately, the complication (pointed out by Bichler and Nitzan) is that input-output tables report the flow of money. So to estimate labor time, you must convert monetary flows to labor flows. The problem is that labor time is supposed to predict monetary value, so it would seem invalid to use the latter to estimate the former.↩
  2. We can also use Cockshott’s dimensional reasoning to ‘invalidate’ physics. According to Einstein, energy and mass are related by the equation E=mc^2 . Imagine that we test this equation by converting different items (cars, pencils, houses, etc.) into pure energy. To see if Einstein’s equation holds, we then compare the change in mass against the change in energy. Lo and behold, the data checks out. Einstein’s equation is correct.

    Using Cockshott’s reasoning, however, we can argue that the experiment is invalid. Why? Because we are not minding our dimensions. The different objects we annihilate (cars, pencils, houses, etc.) have different dimensions, meaning any comparison of their mass or energy is invalid.

    The reality is that like prices, the whole point of mass and energy is to compare the otherwise incomparable. So if we accept Cockshott’s dimensional argument, we break physics.↩

  3. The exact number of ‘capitalists’ depends on how we define ‘capitalist income’. Should it include proprietors who are self employed? What about small-scale landlords who earn rent? I follow Nitzan and Bichler in defining ‘capitalist income’ narrowly as the sum of interest and corporate profits. Using this definition, the evidence suggests that virtually all capitalist income goes to the top 1%. For details, see ‘How the Rich Are Different’.↩
  4. To calculate inequality between workers and capitalists, I use the ‘adjusted’ Gini index, which accounts for small sample size. If the Gini index is G , the adjusted Gini index divides by the maximum possible Gini for the given sample size n:

    \displaystyle  G_A = \frac{G}{G_n^{max}}

    In the case of inequality between capitalists and workers, the sample size is n=2 , giving a maximum possible Gini index G_n^{max} = 0.5 .↩

  5. Interestingly, the interplay between signal and noise tells us why Marxists test the labor theory of value at the sector level. One way to counteract the statistical noise is to dial up the signal — variation in L. You do that by looking at swaths of the economy containing vastly different numbers of people. The greater the differences in sector size, the greater your ‘signal’, and hence, the stronger the correlation between value added and labor time.

    In contrast, when you look only at consumer commodities, variation in the embodied labor time is small. Because the ‘signal’ is weak, it is easy to drown out. That’s why Marxists have given up testing the labor theory of value at the commodity level. They don’t get the evidence they want.

    One way to counteract the signal-noise problem would be to redefine what you mean by a ‘commodity’. To most people, a ‘commodity’ is something small — shoes, shirts, cars, etc. If you want to dial up the labor-time signal, you could expand the concept of the ‘commodity’ to include big infrastructure projects — factories, power plants, roads, etc. By doing so you’d guarantee a price-labor correlation. You’d find that thermo-nuclear power plants are far more costly than pencils, and take far more labor. And by demonstrating this correlation, you would surprise nobody.↩

  6. ‘Lord of the labyrinth’ is linguist Rudolf Botha’s characterization not of Marx, but of Noam Chomsky. Anthropologist Chris Knight observes:

    Botha pictures Chomsky as a skilled fighter at the centre of a vast intellectual labyrinth whose forks and hidden pitfalls are used aggressively to defeat anyone foolish enough to intrude. Nobody ever wins in a battle with ‘the Lord of the Labyrinth’, because the Master makes sure that each contest will take place on terrain which he himself has landscaped and designed.

    (Chris Knight, 2016)

    Marx constructed a similar labyrinth. The best way to critique it is by not entering.↩

Further reading

Cockshott, P., Bichler, S., & Nitzan, J. (2010). Testing the labour theory of value: An exchange. https://bnarchives.yorku.ca/308/

Cockshott, P., Cottrell, A., & Valle Baeza, A. (2014). The empirics of the labour theory of value: Reply to Nitzan and Bichler. Investigación Económica, 73(287), 115–134.

Fix, B. (2020). How the rich are different: Hierarchical power as the basis of income size and class. Journal of Computational Social Science, 1–52.

Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E., Gintis, H., & McElreath, R. (2001). In search of homo economicus: Behavioral experiments in 15 small-scale societies. American Economic Review, 91(2), 73–78.

Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E., Gintis, H., … others. (2001). Cooperation, reciprocity and punishment in fifteen small-scale societies. SFI Working Papers, (2001-01-007), 1–9.

Hunt, E. K. (1983). Joan Robinson and the labour theory of value. Cambridge Journal of Economics, 7(3/4), 331–342.

Knight, C. (2016). Decoding Chomsky: Science and revolutionary politics. Yale University Press.

Nitzan, J., & Bichler, S. (2009). Capital as power: A study of order and creorder. New York: Routledge.

Popper, K. (1953). Science: Conjectures and refutations. Philosophy of Science, 104–110.

Shaikh, A. M. (1998). The empirical strength of the labour theory of value. In Marxian economics: A reappraisal (pp. 225–251). Springer.

The Most Fatal Ailment

Published by Anonymous (not verified) on Thu, 09/09/2021 - 12:42pm in

Part II of The Souls of the People series:

The souls of the people
The most fatal ailment
Ill fares the land

So long as you are happy
What we yearn to be
The sane and beautiful

The sum of what we have been
A little world made cunningly
Like a sinking star

The cries of the harvesters
The earth with its starkness
Written in blood

To do and die
In this fateful hour
So that we may fear less
The rags of time

Introduction

Kurt Andersen wrote a superb piece in The Atlantic on inequality (2020), especially its trajectory in the US, although much applies to the rise of neoliberalism everywhere. I highly recommend the entire article for the insight it gives into what the heck happened in the last 50 years. As I can write no better, I quote Andersen:

From my parents’ teenage years in the 1930s and ’40s through my teenage years in the 1970s, American economic life became a lot more fair and democratic and secure than it had been when my grandparents were teenagers. But then all of a sudden, around 1980, that progress slowed, stopped, and in many ways reversed…

In 40 years, the share of wealth owned by our richest 1 percent has doubled, the collective net worth of the bottom half has dropped to almost zero, the median weekly pay for a full-time worker has increased by just 0.1 percent a year, only the incomes of the top 10 percent have grown in sync with the economy, and so on. Americans’ boats stopped rising together; most of our boats stopped rising at all. Economic inequality has reverted to the levels of a century ago and earlier, and so has economic insecurity, while economic immobility is almost certainly worse than it’s ever been.

And this is no accident of history. As Andersen observes:

What’s happened since the 1970s and ’80s didn’t just happen. It looks more like arson than a purely accidental fire, more like poisoning than a completely natural illness, more like a cheating of the many by the few—and although I’ve always been predisposed to disbelieve conspiracy theories, this amounts to a long-standing and well-executed conspiracy, not especially secret, by the leaders of the capitalist class, at the expense of everyone else.

But it is not a conspiracy precisely, as Andersen notes. Although the most powerful part—the subtle, unceasing manipulation of law to favor the rich happens out of sight and thus out of mind of the average citizen. On the other hand, much of the tax part is brazen, as well as calls to stop the people from organizing—not unions (although that too), but from using their own government to organize the country’s strengths, its collective skill, productive capacity and resources, and apply these to public goods. This is discussed in a later post.

If the best way to rob a bank is to own one (Black 2005) the best way to rob a society is to be in control of its laws. Like a bank owner, this is both public and behind the scenes, and like a bank, viewed as boring and thus ignored. It doesn’t need to be a conspiracy.

These issues are yet again the problem of our age. Their seeming trajectory towards resolution post WWII, with widespread prosperity and a rising middle class, has been undone. What undid them points to the underlying problem: immediate causes include the spectacular increase in financialization and unearned rents (Fischer 2021), the lack of and lack of enforcement of progressive taxes, both in turn largely due to a shift in the public’s understanding of these issues. What caused this shift in public understanding is the age old problem—power and the lack thereof.

“We Worry Less”

In 1985 economist John Munkirs painstakingly demonstrated the interconnections of a corporate fraternity that essentially ruled the US economy, calling the shots on what does and does not happen in many spheres (The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning, 1985). This wasn’t conspiracy but fact, with details of the firms, interconnections, places and people as researched by a staid academic, not a wild-eyed conspiracist.*

And it was ignored precisely because of that. And because of the rise of the “economics” that would serve this new order. As a fellow institutional economist writes, “Unfortunately, as the corporations became more powerful and sophisticated in the post-war era, both the hoe and the hand upon it began to lose their vitality, as we institutionalists were ushered out of government and by and large made into second class citizens in economics departments.” (Sheehan in Neale et al. 1986).

And that was 1985. How far have we gone from there? Leaps and bounds it turns out. I note how bad the ailments related to inequality (in part stemming from corporate dominance of law) are now in the last post—many are worse than 1985, and inequality undoubtedly so. The gains of the post-war decades were lost as the wealthy managed to diminish them through law and finance. Just one example, by financial means: getting rid of “old-fashioned” pensions while enriching themselves in the process. With academic cheerleading not just from Chicago School types but New Keynesians as well, the “triangulation” strategies of the ’90s New Democrats, New Labour in the UK…you know it’s bad when an icon of 60’s counterculture and rock-n-roll is publishing the best economics reporting on a real issue such as this (Greed and Debt: The True Story of Mitt Romney and Bain Capital 2012, and Looting the Pension Funds: All Across America, Wall Street is Grabbing Money Meant for Public Workers 2013). The dominance and easy acceptance of this ethos by the 2000s was made clear in the inadvertently leaked and now infamous “Plutonomy” report by Citigroup. It opens:

The World is dividing into two blocs – the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies – economies powered by the wealthy…In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary “ global imbalances.” We worry less.

Citigroup, 2005

A year later Citigroup came out with a follow up, “Revisiting Plutonomy: The Rich Getting Richer.” Its summary:

Citigroup, 2006

A similar leak with much wider implications occurred in 2016 with the Panama Papers. If there was a hint at revolution at the end of the last post, I wonder why? You know it’s bad when The Economist asks “Can inequality only be fixed by war, revolution or plague?” (2018) and CNN notes “This billionaire warns that America’s massive wealth gap could lead to conflict” (2020).

The Non-Wealthy and Policy

There is a huge literature asking why the non-wealthy vote for candidates that support policies that harm them financially (against minimum wage laws, reduction in welfare programs, regressive taxes) or that do not support policies that would benefit them (public transport, healthcare, jobs programs, minimum wage laws, progressive taxes, environmental laws).

Two major factors commonly cited for the United States are:

  • Race (especially salient in the US; Alesina et al. 2001, see Zeitz 2017 for a thorough overview). Overall, racial divides across countries are highly predictive of less redistributive policies.
  • The Vietnam War. In the US in the late 1960s, unions and traditional Democrats became split from the anti-war and countercultural left, with significant numbers voting Republican. This split allowed for the rise of Republicans for decades, and eventually also the triangulation response of the Democrats, bringing the entire US political spectrum far to the right on core economic issues. (Frank 2004, Andersen 2020)

Other factors (note, of course, that these could all simultaneously occur with varying degrees of effect; the degree of the dilemma is enough to suggest there are multiple factors working simultaneously):

  • A federal system (especially in the US), making redistributive policies at the national level more difficult.
  • The Senate in the US (giving rural areas more power; rural communities may have traditional values that are against redistribution or “big government;” see Sargent 2021).
  • First-past-the-post electoral systems. The natural outcome of which is two parties; this may make a progressive faction less likely to influence outcomes, although other factors would need to explain why this seems to happen more to the left than right; e.g., corporate influence, other structural or sociocultural factors. This directly relates for another reason to lower middle-class apathy and voting on “values” rather than economic issues. There is a vague sense that there is no real difference on economic issues regarding regulation, corporations, free trade, investment in infrastructure, taxation, and industrial policy between the two major parties. There is little sense in voting for a third party in a first-past-the-post system, and the two main parties genuinely haven’t offered the working class true choices on economic policies. Given Democratic corporate connections, New Keynesian and neoclassical economic dominance, New Labour in the UK etc., this vague sense was well-founded.
  • The association, especially with 90s New Democrat and New Labour New Keynesian (not Postkeynesian!), pro-market, pro-privatization beliefs and the “triangulation” strategy of capitulation by the left. Relatedly, a disdain by the working class for a “liberal elite” real or imagined (see Frank 2016).
  • The emphasis on “values” and social issues by the right, sometimes with a bait-and-switch: a conservative candidate runs on values and emotive issues, then if wins actually focuses policy on economic issues in favor of the wealthy and corporations. When it is noticed that change on social issues isn’t happening, the politician blames a “liberal elite” for blocking them, thus setting the stage for another electoral victory on value issues in the next election. (see Why Working-Class People Vote Conservative 2012 by Haidt for an argument that voting on “values” makes sense to the working class; I disagree but it calls attention to key issues).
  • The influence of think-tanks. Directly on the public and media, and indirectly via academia on media and policy.

On a number of comment sections from articles on these issues there are comments “from the people” that should not be ignored—they are direct evidence of what people are thinking, and from my long personal experience working, living in and listening to working class America, they ring true (as representative of what the working class opine).

  • Service industry and blue collar jobs are both physically and mentally demanding and do not provide financial security, all in ways that are qualitatively different than professional and white collar jobs, no matter how hard the latter work. This combines with a strong traditional work ethic that makes “freebies” distasteful. “I work by butt off everyday and they can too.” This is greatly amplified when imagined and/or real increases in (regressive) taxes are claimed to be needed for social programs and public goods (because both Republicans and Democrats believe public projects can only happen with increased taxes). Even a small rise in taxes (or insurance rates, or rent, or inflation) significantly impacts the quality of life of the working poor, again in a way that is qualitatively different than for the financially secure. The middle class and above are secure and comfortable enough that they can afford the idea of paying a little more for redistributive programs (taxes don’t work like that at the national level. However, it only matters how people think taxes work, and they do indeed work like that at the municipal and state level, especially when they are regressive). This simple dynamic is vastly underestimated. The poor in America are deeply suspicious of government programs and redistribution and often the worse-off they are and the harder, less pleasant, and more precarious their job, the more they say that “if I can work so hard and make it with no welfare, then so can they” and then vote for candidates who are against social programs.
  • Successful underfunding and lack of exposure: these are somewhat similar and also reflect the success of conservative and/or libertarian long-term strategy. The right has managed to purposefully underfund public goods. In part, this directly achieves their end goal. More importantly, it greatly furthers the goal, as the right then uses poorly functioning underfunded systems as “examples” that “government does not work,” enabling an overall public sentiment that aids in their objective of reducing public goods and increasing profit-providing privatization (besides the US, this is occurring, for example, with rail transport and healthcare in the UK, and broadband in Australia [Mitchell 2017, 2019]).
    Relatedly, because of the lack of development or scaling back of public goods and services in the past, many Americans have not been exposed to quality public goods. To a degree that would scarcely be believed by a European who has not lived in the United States many Americans believe it is normal for healthcare to be incredibly expensive (with difficult paperwork involved, and tied to one’s employer), that public schools are necessarily low quality, have had little to no exposure to quality public transport (neither local nor long distance), and lack experience or perspective on other public goods such as civic architecture and an efficient bureaucracy (underfunded and unsurprisingly notoriously slow Departments of Motor Vehicles and the like; the experience with underfunded government at all levels fosters a belief that government doesn’t work, which is precisely what the right wants). Many now have low opinions of unions even in the North and coastal West; as a Southerner, I can tell you firsthand that a vast majority of Southerners literally have no idea what unions do and what they have accomplished in the past. This ties in with the dominance of neoclassical economics and the discredited belief that there is some “fair” and knowable distribution of wages and profit, when the truth is that wages and profit are always a political outcome. On two huge issues—healthcare and public infrastructure—and smaller ones as well, two generations or more of Americans literally do not know what quality public goods look like in practice. They won’t vote for what they don’t know.

The above ties in again to the deeply rooted success of think tanks, perhaps amplified by the internet. Again, through long personal experience, the amount of times one hears in conversations among the working class soundbites whose wording can only be from think tanks or think-tank-informed politicians—that minimum wage causes unemployment, that progressive taxes are unfair, that the wealthy create jobs, that welfare causes laziness, that government programs are always corrupt, that regulations stifle small businesses—is very high.

Note that explaining that the belief we must tax in order to organize public goods is a fallacy is a logical approach, as it is both true and should assuage the above fears (of the middle class on the ability to provide public goods). However, the message that social programs will lead to taxes and/or make people lazy is profoundly ingrained in the working poor and middle class in America, and may well make that approach unsuccessful despite it being true. Furthermore, taxes do raise funds for public goods at the state and municipal level. And those are especially regressive. Until those issues are fixed, the strategy to ignore taxation in order to facilitate public goods creation by separating it from the “tax the rich” slogan, will fail at those levels, and since many lump all taxes and public projects together, possibly at the national level as well.

The above attitudes and beliefs combine with the belief, whether cynically used by the right or legitimately held, that upward mobility is high, and high due to some kind of “free market” combined with a weak welfare system (maintaining “incentives”), and thus that 1) moving up is attainable and 2) progressive changes would somehow reduce upward mobility. As example, consider a primary benefit for the working poor in the US, the Earned Income Tax Credit (EITC). The power of a combined aspiration of upward mobility and disdain for “welfare” is common among the poor, e.g., “Because the EITC raises the incomes of so many, some low-income beneficiaries of the federal anti-poverty program regard themselves as middle class Americans—a struggling middle class who look down on “welfare cheats” but are confident nevertheless that upward mobility is theirs to claim.” (Why Working Poor Think They Are ‘Middle Class,’ 2015).

Note the irony that conservatives (and not infrequently, self-styled libertarians) vote in ways that increase government funding dramatically for corporations and the wealthy: subsidies, monopoly laws, corporate and patent law in ways that are interventionist and in favor of the wealthy (Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer 2016) not to mention interest on treasuries mainly held by the wealthy, laws favorable to individual asset holders and corporations (investments, real estate, anti-inheritance tax, liability laws, the 2008 bailouts and Federal Reserve/Treasury policies in general [TARP etc, “rescuing” rather than nationalizing failed companies and directly aiding individuals], or student loan bankruptcy laws).

Although the social and technological changes surrounding decades-long social change are of course vastly complex, the one thing that seems to always be just beneath the surface and that, both in their timing and mechanisms, seem causal, are economically conservative and libertarian think tanks.

The Influence of Think Tanks

These started early and highly ideological. By 1946 there was already a conservative reaction to the New Deal, The Foundation for Economic Education (FEE), whose aim “was to roll back policies of the New Deal. FEE opposed the Marshall Plan, Social Security and minimum wages, among other American social and economic policies” with corporate and industrial backing by “J. Howard Pew [President of Sunoco], Inland Steel, Quaker Oats, and Sears.” (“Foundation for Economic Education,” Wikipedia; see citations by Phillips-Fein 2009; Hamowy 2008; Schneider 2009 and Lichtman 2008).

FEE helped inspire and/or pay for the foundation of other conservative and libertarian groups, such as the Mount Pelerin Society and the Institute of Economic Affairs in the UK. There followed a long line of other think tanks, often umbrella groups which in turn funded or organized conferences, journals, youth outreach, and endless sub-groups funded or organized by an underlying foundation of think tanks, media owners, billionaires, and corporations (e.g., Koch brothers, Murdoch). Incidentally, the point that 1960s counterculture was part of what helped weaken Democrats/strengthen conservative and libertarian policies is supported by the history of the early (1953) and ultimately highly influential John M. Olin Foundation, with its effective fostering of the “law and economics” movement that would greatly increase conservative and libertarian views in law schools in the US. Although founded early, it was not very active until its founder was galvanized by the Willard Straight Hall takeover at Cornell University in 1969. It would go on to be a pillar of pro “free market” policies that law, above all else, could implement.

In total, the amount of influence via professorships, academic departments, organizations or institutes (George Mason, Mercatus Center, CATO, Mises Institute, the underestimated and extremely influential State Policy Network, the Fraser Institute), publishing and other media, programs for youth, providing an academic imprimatur to ideologically motivated economics, advising and consulting…all of these combined has cumulatively in size and over time had a massive influence, especially in the United States. Behind many politicians, talk radio and cable news hosts (and local news through the Sinclair Group) one can directly discern these earlier think tank writings and ideas, and at least indirectly, funding. Personal experience with how deeply their basic framing of issues shapes the acceptable range of discussion on economic issues suggests the impact runs deep (and shapes elections, e.g., Yglesias 2019).

Of course there are progressive and centrist think tanks (some are cited here), some of which predate the rise of conservative think tanks. Yet it seems their influence on the media and everyday people is far less. This is partly a question of funding imbalances (the wealthy and corporations can more easily fund think tanks with a wider academic and media reach than the working class can). Wealthy donors on “the left” seem to largely support what are in reality centrist think tanks; in the age of New Keynesianism this is hardly helpful. Overall the right supports what seems to many observers to be a more calculated, strategic, patient, and dogged approach, that has indeed had long term and fundamental impacts on framing and votes.

Overall, there is a sense that in the United States especially, and in many other countries as well, policies that aid the wealthy at the expense of equality—if not the poor directly—are dominating. And as the ancient Greeks already knew, “An imbalance between rich and poor is the oldest and most fatal ailment of all republics” (Plutarch). The next post looks into the distribution of this imbalance at the the national and international scale.

________________

Notes & Selected References

* Munkirs’ aim is not related to conspiracy, but rather to highlight the unique, and essentially non-capitalist, system that had developed in the US. It is different than the centralized public planning of the USSR, the decentralized public planning of Western Europe, and from a Galbraithian decentralized private planning system; the US had by 1985 become a centralized private sector planning economy.

________________________

Note: I am interested in poverty and inequality everywhere. However, there is a default in this series towards the US, in part simply because I am from the United States, but also because the US, being an outlier among wealthy nations on poverty, inequality, and welfare, seems to offer useful lessons on what can go wrong even in a wealthy country with vast resources. Many countries are wealthy or becoming wealthy, and it would be a bad thing for them to fall into the traps that the US has. And the US is the third largest country in the world by population; it would be good to help the millions of poor or struggling Americans. Although inequality and poverty in developing countries is discussed some, the problem of poverty in developing countries is an entire field of study beyond the scope of this series. I hope this small series can shed some light or be useful in thinking about these problems more broadly, even with its focus on the US.

Update: Tom Hickey at mikenormaneconomics noted the relevance of the infamous 1971 Powell Memo. It powerfully demonstrates the concerted, intentional effort and outlines the succesful tactics of think tanks I discuss above. I overlooked mentioning it in the main body but its importance is difficult to overstate.

But one should not postpone more direct political action, while awaiting the gradual change in public opinion to be effected through education and information. Business must learn the lesson, long ago learned by labor and other self-interest groups. This is the lesson that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination — without embarrassment and without the reluctance which has been so characteristic of American business.
As unwelcome as it may be to the Chamber, it should consider assuming a broader and more vigorous role in the political arena.

Powell Memo 1971

References

Alesina, Alberto, Edward Glaeser and Bruce Sacerdote. 2001. Why Doesn’t The US Have A European-Style Welfare State? Harvard Institute of Economic Research, Discussion Paper Number 1933, Nov.

Andersen, Kurt. 2020. College-Educated Professionals Are Capitalism’s Useful Idiots. The Atlantic, Aug. 7.

Appelbaum, Binyamin. 2019. The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. Little, Brown and Company (Hachette).

Baker, Dean. 2016. Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Center for Economic and Policy Research.

Black, William. 2005. The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. University of Texas Press.

Fischer, Amanda. 2021. The rising financialization of the U.S. economy harms workers and their families, threatening a strong recovery. Washington Center for Equitable Growth.

Frank, Thomas. 2004. What’s the Matter with Kansas? Metropolitan/Picador.

Frank, Thomas. 2016. Listen, Liberal: Or, What Ever Happened to the Party of the People? Metropolitan/Picador.

Haidt, Jonathan. 2012. Why working-class people vote conservative. The Guardian, June 5.

Linden, Michael. 2012. The Rich and Powerful Really Are Rich and Powerful. Center for American Progress.

Madrick, Jeff. 2020. Why the Working Class Votes Against Its Economic Interests. New York Times, July 31. (Review of Reich 2020 and Teachout 2020).

McElwee, Sean, Brian Schaffner, and Jesse Rhodes. 2016. Whose Voice, Whose Choice? The Distorting Influence of the Political Donor Class in Our Big-Money Elections. Demos.

Munkirs, John. 1985. The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning. M. E. Sharpe.

Neale, Walter C., Michael F. Sheehan, and Ronnie J. Phillips. 1986. “Three Reviews,” of The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning by John R. Munkirs. Journal of Economic Issues, Vol. 20, No. 1, pp. 203-215.

Reich, Robert B.2020. The System: Who Rigged It, How We Fix It. Alfred A. Knopf.

Sargent, Greg. 2021. The GOP scam is getting worse — for Republican voters. A new study shows how. The Washington Post. March 8.

Segelken, H. Roger. 2015. Why working poor think they are ‘middle class.’ Cornell Chronicle; on Sarah Halpern Meekin, Kathryn Edin, Laura Tach, and Jennifer Sykes It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World. 2015. University of California Press.

Teachout, Zephyr. 2020. Break ‘Em Up: Recovering Our Freedom From Big Ag, Big Tech, and Big Money. All Points Books/St. Martin’s.

Yglesias, Matthew. 2019. Fox News’s propaganda isn’t just unethical — research shows it’s enormously influential. Without the “Fox effect,” neither Bush nor Trump could have won. Vox, March 4.

Zeitz, Joshua. 2017. Does the White Working Class Really Vote Against Its Own Interests? Politico Magazine.

 

Yesterday’s tax plans were all about capturing tax revenues for private gain to the wealthy at cost to working people

Published by Anonymous (not verified) on Wed, 08/09/2021 - 5:07pm in

Given that much of yesterday’s Tory tax plan was well-trailed and had been subject to comment here beforehand there would seem little left to say on that issue now that the announcement has been made. Except, that is, to consider how it was announced and why it happened in that way, and the one unexpected element, which was an increase in the dividend tax rate by 1.25%.

Dealing with the latter first, this should be seen for what it is. It is a sop to criticism. It supposedly addresses the issue of national insurance avoidance by those who pay themselves using dividends from limited companies. I have no particular problem with tackling that issue, but there is a flaw. The implication is that genuine investment income - the dividends received in ISAs and by savings institutions, interest and rents - should all remain exempt from this charge. Implicit in this move was another attack on working people as a consequence, with the very obvious intention being that genuine wealth should be untouched by the demand that it contribute to society. The bias could not be clearer.

Then there is the way in which the announcement was made. It was deeply partisan. Rishi Sunak took much pleasure in announcing that he was imposing a tax on Scotland, Wales and Northern Ireland. It is apparent that they were not consulted.

The claim was that there was no alternative to raising tax was also wrong. As I noted yesterday, there is a substantial government underspend against budget already this year, whilst all deficits are being covered by the Bank of England quantitative easing as a matter of fact without inflation risk arising as a result, and so that claim was completely untrue.

As for there being no tax alternatives, that was also incorrect. I have shown that making NIC a more progressive tax could raise £14 billion a year, which is all that was required.

Capital gains tax could raise maybe £9 billion a year if rates were the same as income tax. The capital gains tax allowance could also have been reduced.

An investment income surcharge could raise maybe £7 billion a year.

And if the tax reliefs on pensions and gifts to charities were restricted to basic rate tax more than the required sum to supposedly meet this need could have been raised.

So, even using the Tory logic that tax funds spending (which is untrue) there were ample opportunities available. But they were not chosen. And that is indication of their true intention.

As I have noted this morning the most plausible interpretation of that intention is to capture yet more tax revenue for private gain. That must be the case because it is not clear that these tax increases were needed and in the case of social care at least it is not at all clear that there will be any on the ground impact arising from them. In that case it is entirely reasonable to look for the real motive for yesterday’s action and if one that is entirely consistent with their other actions in other areas can be found - and flooding wealth upwards has been the whole aim of the Johnson government - then it is reasonable to conclude that it reflects policy.

The regressive nature of the plans for social care and NHS funding are not, then, accident. They are by design. And that is what is so troubling about them. We have a government that in the middle of crisis is only concerned with the self-interest of a few. That’s becoming increasingly obvious. I just hope the electorate realise.

Social care and the Tories’ raid on paypackets

Published by Anonymous (not verified) on Mon, 06/09/2021 - 8:21pm in

The Conservative government looks set to announce that it will be introducing a rise in National Insurance Contributions of up to 1.25 percent on Tuesday this week. The intention is to raise around £10bn to attempt to staunch the crisis in social care – a crisis, it should be added, of the government’s own making, with the Tories smashing up all-party talks on fair funding way back in early 2010, ahead of the May general election that year. The Dilnot Commission, meanwhile, made recommendations for reform as far back as 2011, including a cap on individual care cost contributions. The Tories have been in power for the entire time, and failed, during that entire time, to either provide adequate funding for social care – with a £4bn or more shortfall by 2025 to simply meet existing needs – and leaving 1.5m people without adequate care provision.

I’ve written elsewhere on what a poor way the National Insurance Contribution (NICs) rise would be to fund the contribution cap, amounting to a perverse redistribution from mainly younger and poorer workers to at least some better off elderly. Almost any tax alternative currently on the table – from increasing income taxes, with its broader base, to Capital Gains Tax increases, to introducing a proper, progressive wealth tax – would be fairer and preferable.

That the NICs rise currently polls ahead of other options is a tribute to the framing of NICs (and the polling question asked!) more than anything else: it isn’t called a tax, and there’s still a firmly held belief that NICs payments go into a grand national pot that people can draw from later. This was the original intention of the system, dating back to the 1944 Beveridge Report and beyond, in which “national insurance” would act as a genuine, contributory insurance system, providing for those who had paid in during times of need. It has never really functioned like that: the Treasury, as its wont, has always treated NICs payments as just another flow of tax payments (with some slight complications).

But the seeming popularity of NICs rises is likely to prove fragile if the case against them is made, and – crucially – if the case for an alternative is clearly presented. Labour have now indicated that they will oppose the hike, but to clinch the argument they will need to present an alternative. Otherwise, it really will look like the party is just moaning about the world: you can’t look like an alternative government if you don’t have alternative policies. And if they can bite the bullet on wealth taxes for social care – in whatever form here – it can force open the argument about wealth and taxation more generally: a must if the party is to go into the next election with something approaching a serious, long-term programme to solve Britain’s chronic economic problems. And wealth taxes, as the polling evidence keeps showing us, are popular. (Unsurprisingly: by definition, almost none of us are in the top 1%…)

Party Conference

Labour Party Conference, returning to Brighton at the end of the month after a two-year covid-induced pause, will be the biggest opportunity the party and its new leadership has had to date to present its case. You don’t often get a free hit at the following day’s front page headlines as the Opposition, but that’s what Conference can offer, Keir Starmer has offered some rather broad hints about his own speech, and of course it’s the leader’s closing address that gets the bulk of the media attention. But Shadow Chancellor Rachel Reeves’ own speech is going to be worth keeping an eye on. She has already marked out a few key commitments, including a strikingly anti-neoliberal Mariana Mazzucato-style policy to support domestic supply chains and jobs. This was particularly noteworthy: the first time that I can recall Labour offering a genuinely post-Brexit policy under Starmer’s leadership. Now that we have left the EU, there is a seam there to be mined – with a bit of policy imagination.

But the challenge for Reeves and her team in three weeks’ time will be to not only throw in some headline-grabbing policy announcements – essential for the front pages – but to start to create a convincing story about what sort of economy the next Labour government wants to shape. Credibility doesn’t come from parroting the economically illiterate nonsense that clutters Westminster political reporting; it’ll come from having a clear, simple story that potentially millions of people can grasp and understand. The Tories’ NICs hike has given Labour a free gift, the chance to show they are the party that will look after your pay packet. Tax the wealthy, not the workers has a certain ring to it.

The post Social care and the Tories’ raid on paypackets appeared first on The Progressive Economy Forum.

If the tax rates on wealth and wealth increases were the same as those on income the UK might collect more than £170 billion of extra tax a year

Published by Anonymous (not verified) on Sun, 05/09/2021 - 5:37pm in

I wrote the blog post that follows this introduction in April 2020. I was anticipating the fact that there would be a furious debate when the coronavirus pandemic was supposedly over as to how to pay for it with additional taxation.

Let's ignore for a moment that the coronavirus crisis has already been paid for with quantitative easing.

Let's also ignore the fact that tax never pays for government spending because it is always paid for in the first instance on Bank of England overdraft and the role of tax is to clear that deficit.

Let's instead note that the debate has begun, and that what I wrote right at the start of this pandemic remains wholly relevant. We do need additional taxation of wealth. And we need it now. What is more, the data I revealed then showed that this is not only where the capacity to pay tax is but is what is required if inequality is to be addressed - as was recognised as essential at that time. The impact of coronavirus quantitative easing will only have made this need more urgent.

The debate is now on. But the only acceptable answer is already apparent. 

Introduction

In the aftermath of the [emergence of the] coronavirus crisis there appears to be a widely held opinion that taxes on wealth should increase. Both the Pope and Archbishop of Canterbury appear to share this view, for example. They do so with the objective of reducing inequality in society.

They are not alone. There have been many demands that this be an objective for the After Coronavirus era. For example, the Financial Times has said:

Radical reforms – reversing the prevailing policy direction of the last four decades – will need to be put on the table. …. Policies until recently considered eccentric, such as basic income and wealth taxes, will have to be in the mix.

In this context it is appropriate to test data on the existing tax system that operates in the UK to see whether this demand for increased taxation of wealth is reasonable at this time.

Summary

To achieve this goal a report has been prepared to appraise data on whether or not there is the capacity for those with wealth to pay more tax in the UK, or not. Having appraised data from the Office for National Statistics, HM Treasury and HM Revenue & Customs four main conclusions are reached.

The first is that in the period 2011 — 18 the national income of the UK was £13.1 trillion, and in that same period the increase in net wealth was £5.1 trillion. It is stressed, that this figure is not for total wealth, but the increase in the value of that net wealth in that period.

Second, the overall effective tax rates on income during this period were unlikely to have averaged more than 29.4%, but those on wealth increases did not exceed 3.4%.

Third, if these rates had been equalised it would, at least in principle, have been possible to raise an additional £174 billion in tax revenue per annum from the owners of wealth.

Fourth, because there has been no attempt at equalisation and because the distribution of the ownership of wealth varies substantially across the UK, which variation is reinforced by factors such as age and gender where substantial inequalities exist, the effective tax rate of the 10% of those in the UK who are in the lowest earning group of taxpayers exceeds 42% of their combined income and wealth gains in a year, but the equivalent effective tax rate for those in the highest ten per cent of UK taxpayers ranked by earnings is less than half that at just over 18 per cent. This is summarised in this chart:

It is, as a result, suggested that there is considerable additional capacity for tax to be raised from those who own most of the wealth in the UK, many of whom are in that top ten per cent of income earners.

Whether or not it would be desirable, or even technically feasible, to raise £174 billion of additional tax from additional tax charges on wealth is not the primary issue addressed by the paper. Nor does it concern itself with the issue of whether that sum should be redistributed simply to redress wealth inequality. A value judgement is not being offered on the matter of wealth holding, as such. Instead the issue of concern being addressed is that those most vulnerable to precarity within the UK are also those paying the highest overall effective rates of tax.

Whether that is appropriate is the first question raised as a consequence, with the second being whether, if that is the case, any tax increases that might arise in future should have any impact upon those with lower income or earnings. In the context of the coronavirus crisis and the debates that will, inevitably, occur at some point on whether and if taxes should be raised to contribute towards its cost, these appear to be issues of considerable significance.

This evidence in the paper suggests that those with substantially higher income and wealth should bear the majority or all of that cost if it was thought appropriate that anyone should.

That does, however, then suggest that it might also be important that the disparity in the relative tax payments made by those on high and low earnings in the UK should be addressed whether or not overall net additional tax revenue is required, or not. That is because there is now ample evidence that inequality creates significant social costs within any society, and it is apparent that the UK tax system is contributing to this problem.

A manifesto for change that could result from this understanding might include suggestion that:

  1. The considerable scope for increasing the effective tax rates on wealth and income derived from it should now be very firmly on the UK policy agenda;
  2. Any such increase must be targeted at those with the greatest capacity to pay, which would be those in the top deciles of income earners and wealth owners in the UK;
  3. Tax increases impacting the income of those in other deciles would be very hard to justify if measures to increase tax on wealth and income derived from it did not also happen;
  4. Inequality in the UK could be considerably reduced by taking the taxation of wealth into greater account. Which taxes should be cut for those on lower income levels to help achieve this goal also needs extensive consideration especially given the stresses that have emerged as a result of the coronavirus crisis.

These issues will be addressed in further posts on how this matter should be tackled in practice.

Sunak’s 1% national insurance charge to fund the NHS is a deliberate, callous and unnecessary move to increase inequality and hardship in the UK

Published by Anonymous (not verified) on Fri, 03/09/2021 - 5:15pm in

There are widespread reports this morning that the Tories are planning at least a one per cent increase in national insurance to fund an increase in spending on the NHS of an equivalent amount. To describe a policy so poorly thought out as ill-conceived is to be overly polite. Let me point out some of the flaws.

First, this increase is not needed. The government can already afford to fund the £10 billion the NHS needs, with ease. I explained how here.

Second, the government does not need to raise any taxes to pay for increased funding for the NHS because the multiplier effect of additional NHS spending is high enough for such spending to pay for itself. Again, I have explained why.

In other words, the government simply does not need to adhere to the logic that an increase in spending must be funded. It did not follow that logic for £37 billion of track and trace funding that it is now admitted had no notable impact on the management of the coronavirus crisis, but which did massively line government cronies’ pockets. So why is this tax increase required? The answer is solely about politics. Rishi Sunak wishes that people should be punished for wanting more NHS spending.

That word ‘punishment’ is deliberately used by me. NIC is a deeply regressive tax. As the government’s own table of rates, allowances and reliefs makes clear, the tax targets those on lower pay. The charge starts on income below the income tax threshold. It is cut drastically on income above £50,268 a year. It is, therefore a deeply unfair tax already.

But worse are the exemptions from the tax. The retired, however well off they might be, do not pay it.

NIC is not paid at all on unearned income, whether from interest, dividends, rents, trusts or other sources.

And those with the means to manipulate their income - as many self-employed people with their own companies have been able to do - can avoid large parts of their NIC liability.

So, this is a tax on those in paid employment above all else.

This means that this is a tax on those most likely to be least able to afford a tax increase in this country.

It will hit those on very low incomes suffering cuts in Universal Credit and facing increased fuel poverty very hard.

And the wealthiest will not pay a penny more. You could not make up a tax outcome this bad however hard you tried.

Of all the tax options the government could have chosen this one is the worst. So why are they doing it? I actually genuinely think it is to punish. The punishment is on those who have not opted out of the NHS with private medicine. The Tory logic is that the wealthy will have done this - so they should not pay. Except, of course, in an emergency no one opts out of the NHS.

So, if this is the wrong tax increase, and assuming there had to be a tax increase (which as I noted above, need not be the case) then what should have been chosen?

I have listed many options for increasing tax on the wealthy, including these:

Let me elaborate on just a couple of the more obvious candidates. The first would be taxing capital gains at income tax rates. Notionally that would bring in over £9 billion in tax and still only bring the average capital gains tax charge to just over 30% when it is only 15% now. Allow for some behavioural change and such a move would easily bring in more than £5 billion a year. Cut the annual capital gains tax allowance - as social justice would demand - and the figure could be very much more.

Then there is an annual investment income surcharge. Annual investment income declared in the UK in the last year for which data was available was £92.3 billion. This does not include pensions. Two thirds of this sum was dividends. If around £40 billion this sum was exempt from any additional charge because it went to those with total income under £30,000 a year and the rest was subject to an investment income surcharge of 15%, equivalent to an approximate NIC charge, then £7.8 billion of additional tax would be due from this group - more than covering Sunak’s desired additional income.

So, with two simple changes I could fund dramatically more than the sum that Sunak is seeking from those with the ability to pay who are currently undertaxed instead of from seeking more from the lowest paid who currently pay much higher rates of tax than do those with investment income.

So why is Sunak proposing what he is? Simply because he holds most of the people of this country in contempt. There is no other explanation.  And worse, he is doing that for no good reason at all.

Worse though is this fact: making such a charge on these least able to afford it will increase demand on the NHS. That is how perverse this charge really is.

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