The market, competition, and equality

Politics, Philosophy and Economics

Volumn 9, Issue 2, 2010, Pages 213-244

  Dietsch, Peter ^a  

^a UNIVERSITÉ DE MONTRÉAL   (Canada)

Author keywords

Determinants of income inequality; Economic justice; Kinds of redistribution; Shaping markets; Theories of competition

Indexed keywords

EID: 77951922565     PISSN: 1470594X     EISSN: 17413060     Source Type: Journal    
DOI: 10.1177/1470594X09359148     Document Type: Article

References (102)

1. Pareto efficiency is to be distinguished from x-efficiency, which focuses on the relation of inputs and output in economic production. A system of production is x-efficient if it produces maximum output with a given quantity of inputs, in other words, if it minimizes waste.
2. A notable exception is a recent article by Nien-Hê Hsieh, who analyses normative questions related to the nature of work under capitalist institutions as well as to the participation of the worker in the governance of these institutions. See Nien-Hê Hsieh, 'Survey Article: Justice in Production', Journal of Political Philosophy 16 (2008).
3. One of the few passages in which John Rawls, for example, even mentions this issue remains superficial as to how the influence of competition on distribution actually works: 'Inequality can be wrong or unjust in itself whenever society makes use of fair procedures. Two examples are: fair, that is, open and workably competitive markets; and fair political elections. In these cases a certain equality, or a wellmoderated inequality, is a condition of economic and political justice. Monopoly and its kindred are to be avoided, not simply for their bad effects, among them inefficiency, but also because without a special justification they make markets unfair.'
4. See John Rawls, Justice as Fairness: A Restatement (Cambridge, MA: Belknap Press, 2001), p. 131.
5. Ronald Dworkin's 'equality of resources' is another example. The feature of the market that is relevant for Dworkin and captured in his auction of clamshells among the shipwreck survivors is that the price mechanism coordinates people's preferences by making individuals pay for the opportunity costs their choices impose on others. This mechanism only works well in the absence of market failure, and the validity of Dworkin's argument is therefore confined to a hypothetical, perfectly competitive market. The distributive issues that arise when we depart from this benchmark model, and when the level of competition varies, are not addressed by Dworkin's analysis.
6. See Ronald Dworkin, 'What is Equality? Part 2: Equality of Resources', Philosophy and Public Affairs 10 (1981): 285-9 in particular.
7. Liberal egalitarians, for instance, hold that the distribution of talent is arbitrary from a moral point of view and that its impact on the distribution of income should be mitigated in some way. To put such an approach into practice, one needs to be able to trace income inequality to its various determinants. Economists call this the 'decomposition' of income inequality. For a classic, technical article on inequality decomposition,
8. see Anthony F. Shorrocks, 'Inequality Decomposition by Population Subgroups', Econometrica 52 (1984): 1369-85.
9. In contrast to ex post and ex ante redistribution, which ultimately also rely on institutions, the idea of process redistribution as employed here construes institutions more narrowly. As will become clear further down, process redistribution operates through the dynamics of market interaction itself, whereas ex post and ex ante redistribution are grafted on to this interaction with a view to modifying its results. I deliberately avoid using the label 'procedural redistribution' to preempt confusion with the notion of procedural justice in political philosophy.
10. For instance, I bracket considerations regarding the extent to which a particular job bears risks (for example, firemen). Other determinants of wages and, a fortiori, of income inequality could be added to Table 1, but are not necessary for the argument of this article.
11. Obviously, the entries in Table 1 by no means claim to be complete. Other contributions to economic theory and to the literature on theories of justice may be added to the classification. All I claim is that they conform to the soon-to-beidentified pattern of the table.
12. Treating normative principles and policy instruments as if they were part of one and the same category might strike some readers as inappropriate. However, I choose this approach here in order to reflect the different points of emphasis in economics and political philosophy respectively. Note also that these two different levels of abstraction can be bridged by either giving examples for concrete policies that implement the principles put forward by philosophers or by inquiring into the principles that underpin policy proposals by economists. For example, an instance of a policy in line with an egalitarian theory of education is a school system that streams pupils according to skill level relatively late - this is one of the features of the Finnish school system, and it is often invoked as an important factor in explaining the high average scores of Finnish children in cross-country comparisons of educational achievement.
13. See OECD, press release, URL (consulted 2 December 2009): http://www.oecd.org/document/22/0,3343,en_2649_34487_39713238_1_1_1_1,00.html.
14. Vice versa, moving from policy to principle, one way of justifying a progressive fiscal policy is a principle of fair equality of opportunity.
15. Of course, a progressive fiscal policy reduces income inequalities in general and not only those due to differential skills. But one plausible justification of a progressive fiscal policy appeals to this wage determinant in particular.
16. On this issue, see for instance Samuel Bowles, Herbert Gintis and Melissa Osborne Groves, Unequal Chances: Family Background and Economic Success (New York and Princeton, NJ: Russell Sage Foundation and Princeton University Press, 2005).
17. See for instance Branko Milanovic, 'Can We Discern the Effect of Globalization on Income Distribution? Evidence from Household Surveys', World Bank Economic Review 19 (2005): 21-44.
18. Jeffrey G. Williamson puts this question in a historical context.
19. See Jeffrey G. Williamson, 'Globalization and Inequality, Past and Present', World Bank Research Observer 2 (1997): 117-35.
20. That said, they are usually thought of as lease payments for the use of crown land rather than as a tax.
21. Joseph Heath, 'The Benefits of Cooperation', Philosophy and Public Affairs 4 (2006): 313-51.
22. The First Fundamental Theorem states, conversely, that any outcome of a perfectly competitive market will be Pareto optimal.
23. Compare Amartya Sen, 'The Moral Standing of the Market', Social Philosophy and Policy 2 (1985): 11.
24. I would like to thank Daniel Hausman for alerting me to the expression 'shaping markets'.
25. Robert E. Goodin, 'Institutions and Their Design', in The Theory of Institutional Design, edited by Robert E. Goodin (Cambridge: Cambridge University Press, 1996), p. 7.
26. This is why the policies listed in the bottom right-hand cell of Table 1 are in square brackets. They are, of course, part and parcel of economic analysis, but always from an efficiency perspective rather than informed by a concern with distribution.
27. See also n. 5.
28. Compare, for instance, Rawls, Justice as Fairness: A Restatement, para. 49 or Dworkin, 'What is Equality? Part 2: Equality of Resources', pp. 323-34 in particular.
29. Eventually turns to a progressive income tax to implement his ideal of 'equality of resources'. In this sense, his approach could also be listed in the ex post redistribution column of Table 1.
30. Compare Hillel Steiner, An Essay on Rights (Cambridge, MA: Blackwell, 1994).
31. Left-libertarian theories such as Steiner's do not fall under the umbrella of liberal egalitarianism, but they import certain elements from liberal egalitarian thought.
32. These are the elements that preoccupy us here. For arguments in favor of a basic income, see Philippe van Parijs, 'Competing Justifications of Basic Income', in Arguing for Basic Income: Ethical Foundations for a Radical Reform (London: Verso, 1992).
33. See Harry Brighouse and Adam Swift, 'Defending Liberalism in Education Theory', Journal of Education Policy 4 (2003): 355-73.
34. Michael Walzer, Spheres of Justice (New York: Basic Books, 1983), Ch. 8.
35. For a classic illustration of this tension, see Rawls's discussion of the family in Rawls, Justice as Fairness: A Restatement, para. 50.
36. Philippe van Parijs, 'Philosophie de la fiscalité pour une économie mondialisée', Archives de philosophie de droit 46 (2002): 329-48.
37. The examples taken from Van Parijs in the 'process redistribution' column of Table 1 are descriptive rather than normative. They depict how redistribution actually takes place rather than how it should take place.
38. In fact, as Julian LeGrand convincingly argues, economic efficiency does not represent a social objective in its own right at all, but is only of instrumental value in promoting other goals such as the maximization of social welfare or economic growth.
39. See Julian LeGrand, 'Justice Versus Efficiency: The Elusive Trade-Off', Ethics 3 (1990): 554-68.
40. The reason why these suppliers take the form of firms rather than individuals has been elucidated by Ronald Coase, who put forward the idea that assembling a productive venture under the umbrella of a firm allows a significant lowering of transaction costs. See Ronald Coase, 'The Nature of the Firm', Economica 1 (1937): 386-405.
41. I thank François Claveau for making me realize the importance of the distinction between output and input markets for my argument.
42. If not exhaustive, I believe these roles to represent the categories most important to a distributive analysis of competition.
43. See John Roberts, 'Perfectly and Imperfectly Competitive Markets', in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate and Peter Newman (London: Macmillan, 1998), p. 838.
44. Returns to scale are increasing when, upon an increase of all the inputs to production, output increases more that proportionately. A proportionate increase corresponds to constant returns to scale. A less than proportionate increase corresponds to diminishing returns to scale. It is important to distinguish increasing returns in this sense from increasing returns as understood by classical economists such as Adam Smith. Smith emphasized the network effects that arise from the division of labor in society and the specialization it entails. The more specialized a society, the higher individual productivity, and the bigger the cooperative surplus, that is, the extra output produced thanks to the division of labor.
45. As in the case of increasing returns to scale, the neglect of network effects has important normative consequences - I discuss these in Peter Dietsch, 'Distributive Lessons from Division of Labour', Journal of Moral Philosophy 1 (2008): 96-117. However, I choose to bracket them for the purposes of the present article.
46. Intermediate Microeconomics, p. 407.
47. Ibid., p. 409.
48. Another way to express the idea of deadweight loss is to look at it as the consumer and producer surplus foregone by moving from qc to qm. Areas A + B measure the consumer surplus foregone, whereas C - A represents the producer surplus foregone. The net 'deadweight' loss therefore amounts to B + C.
49. I do not discuss the cases of oligopoly or duopoly here.
50. See Joan Robinson, The Economics of Imperfect Competition (London: Macmillan, 1933).
51. and Edward H. Chamberlin, The Theory of Monopolistic Competition (Cambridge, MA: Harvard University Press, 1933).
52. See also Russell Hardin, Indeterminacy and Society (Princeton, NJ: Princeton University Press, 2003), p. 18.
53. This theory is set out in William J. Baumol, John C. Panzar and Robert D. Willig, Contestable Markets and the Theory of Industry Structure (New York: Harcourt Brace Jovanovich, 1982).
54. Robert D. Willig, 'Contestable Markets', in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate and Peter Newman (London: Macmillan, 1998), p. 618.
55. Some economists will criticize my use of the neoclassical analysis of competition in this section as misleading. All the theories of competition discussed here, so their objection will run, rely on a static rather than dynamic conception of efficiency, which tells us very little about how real economies work.
56. For an eloquent formulation of this position, see Mark Blaug, 'Is Competition Such a Good Thing? Static Efficiency Versus Dynamic Efficiency', Review of Industrial Organization 19 (2001): 37-48.
57. This is a forceful objection. However, it does not undermine the basic claim of this article that theories of distributive justice as well as institutional design should take into account the distributive consequences of competition. What it does show is that there are various ways to conceptualize competition. Trying to arbitrate between these here would take us too far into economic history.
58. I borrow this example from Willig, 'Contestable Markets', p. 622.
59. I should add that price is not the only variable through which various degrees of competition affect the consumer. Competitive pressures, or the lack thereof, also have an impact on the rate of innovation as well as on the quality of products available for purchase. One might think, for instance, that more intense competition increases the pressure to innovate on the one hand, while reducing the resources potentially available for research and development on the other. For simplicity's sake, I bracket these considerations here.
60. Measuring the distributive impact of competition in terms of other focal variables altogether, such as social primary goods or capabilities, is possible. However, it is both more complicated and less relevant in the present context, where income distribution is my primary focus.
61. They will use the additional disposable income either to shift more of their consumption to the now cheaper good (substitution effect) or buy more of other goods they are now able to afford (income effect).
62. For example, one might say international air travel has been made accessible to lower-income segments of the population by the rise of low-fare airlines.
63. The change in consumer surplus is only an exact measure of the change in utility if the consumer's utility function is quasi-linear. A quasi-linear utility function is one that is linear in one of its arguments (goods). In other words, the demand for that good is insensitive to changes in income.
64. See Varian, Intermediate Microeconomics, pp. 63, 247-8. For simplicity's sake, I assume quasi-linear utility functions here.
65. One principal reason is the problem of expensive tastes. Imagine that the only way for X to be minimally happy is to consume caviar and champagne all day, whereas Y will be pretty happy even on a much less fancy diet. It seems unreasonable to think that justice requires us to subsidize X's expensive tastes.
66. See, for instance, Ronald Dworkin, 'What is Equality? Part 1: Equality of Welfare', Philosophy and Public Affairs 3 (1981): pp. 228-40).
67. hough a substantial portion of these is no doubt due to advances in technology, it is safe to assume that increased competition due to the deregulation of these markets has also played a significant role. Note that deregulation and privatization are by no means coextensive.
68. Scenario 1 is also the context in which two economists, Christian Broda and John Romalis, have recently argued that the prices of goods consumed by the poor in the USA have risen more slowly than prices of goods consumed by the rich and that, as a result, the rise in US inequality has been smaller than is usually assumed. According to the authors, the reason for this development lies in the fact that the poor tend to consume more nondurable goods such as clothing, footwear, and toiletries, the relative prices of which have fallen thanks to cheap Chinese imports.
69. See Christian Broda and John Romalis, 'Inequality and Prices: Does China Benefit the Poor in America?', working paper, URL (consulted 2 December 2009): http://www.freit.org/EIIE/2008/SubmittedPapers/John_Romalis.pdf.
70. While it may be true that traditional inequality measures have neglected this phenomenon, I disagree that it necessarily follows that inequality has been overstated. After all, the long-term goal of the poor is to shift some of their spending from nondurable goods to services, that is, toward a spending pattern more like that of the rich. As long as the price inflation of the latter outpaces the growth in disposable income, attaining this goal becomes less likely. In this sense, inequality could even be said to increase.
71. I would like to thank Joseph Heath for drawing my attention to this aspect, and for pointing out the potentially progressive impact of price discrimination discussed later in the article.
72. As in the previous section, this question can be addressed using different focal variables. I will limit myself to the impact of price discrimination on disposable income.
73. See Andrew Glyn, Capitalism Unleashed (Oxford: Oxford University Press, 2006), p. 191.
74. Given the enormous and increasing wealth held offshore and therefore hidden from the fiscal authorities, these numbers might even underestimate the share of capital.
75. On the so-called 'tax gap', see for instance Richard Murphy, Tax Us If You Can (London: Tax Justice Network, 2005).
76. For the former, see Thomas Piketty and Emmanuel Saez, 'Income Inequality in the Unites States, 1913-98', Quarterly Journal of Economics 1 (2003): 1-39. For the latter.
77. see for instance Lawrence Mishel, Jared Bernstein and Sylvia Allegretto, The State of Working America 2004/2005 (Ithaca, NY: Cornell University Press, 2005).
78. See Hsieh, 'Survey Article: Justice in Production', pp. 10-12.
79. On the idea of renting labor, see for instance Carole Pateman, 'Self-Ownership and the Property in the Person: Democratization and a Tale of Two Concepts', Journal of Political Philosophy 1 (2002): 20-53.
80. The following examples are taken from Andrew Glyn's book Capitalism Unleashed in which he documents the shift in power from labor to capital since the 1960s.
81. Not all the manifestations of this shift are financial. Workers in liberal economies in particular have seen their hours increase. Besides, competition might 'force' companies to make only minimal efforts to comply with health and safety regulations, which can be another way of saying that the interests of the shareholder trump those of the worker. Finally, some critics have suggested that capitalist competition renders many forms of work less meaningful and intra-firm relations even more hierarchical; for a lucid discussion of these concerns, see Hsieh, 'Survey Article: Justice in Production'.
82. See the itemized list above (p. 229).
83. I borrow this term from Van Parijs, 'Philosophie de la fiscalité pour une économie mondialisée'. 'Internal' redistribution, for lack of a better term, is an imperfect translation of the French term 'redistribution implicite'. See also redistribution within the firm or within the family in Part I and Table 1.
84. For a recent analysis of the effect of technological change on inequality, see Gilles Saint-Paul, Innovation and Inequality: How Does Technical Progress Affect Workers? (Princeton, NJ: Princeton University Press, 2008).
85. For a discussion of these trends in practice, see for instance Glyn, Capitalism Unleashed, pp. 107-13.
86. Two of the most widely held positions are as follows. Some commentators believe that high executive salaries serve an important function as incentives. Especially when ownership and control are separated, as they are for the model of the shareholder-owned company that dominates our economy, high and performancerelated executive salaries can help align the interests of management with those of the owners. For evidence supporting this hypothesis.
87. see for example Hamid Mehran, 'Executive Compensation Structure, Ownership, and Firm Performance', Journal of Financial Economics 2 (1995): 163-84.
88. Others believe that high executive paychecks are the result of shortcomings in corporate governance that have enabled managers to influence how much they take home.
89. See for example Lucian Arye Bebchuk and Jesse M. Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, MA: Harvard University Press, 2004).
90. Savers, by definition, are capital owners.
91. For simplicity's sake, I set aside rent as a separate category of return on capital.
92. This is true at least for the period prior to the financial crises of 2008.
93. See Glyn, Capitalism Unleashed, Ch. 6.
94. As in the case for workers, one should add that while profits have increased, so has their volatility. At first glance, one might think that capital owners are better equipped to deal with this volatility than workers, since their capital income is rarely their only source of income. However, workers are also affected by this volatility in profits through the investments made by their pension funds. The impact of the corporate scandal at Enron on its employees is instructive here.
95. The ratio of property income (dividends, interest and rent) to labor income (wages and self-employment income) rose from about 15% in the USA in 1979 to 18% in 2002 and from 7% to 12% in France.'
96. See ibid., p. 170.
97. Although wealth inequalities today are lower than 50 years ago, Förster and d'Ercole show that in the rich OECD countries, the top 20 percent of the population still receive 53 percent of property income.
98. See Michael F. F̈rster and Marco Mira d'Ercole, 'Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s', OECD Social, Employment and Migration Working Papers, No. 22 (2005).
99. See, for instance, The Economist, 'Opening the Big Box: Measuring the Wal-Mart Effect', 23 February 2006.
100. See Varian, Intermediate Microeconomics, p. 406.
101. on perfect competition and monopoly: 'Counting both the firm and the consumer, it is not clear whether competition or monopoly will be a "better" arrangement. It appears that one must make a value judgment about the relative welfare of consumers and the owners of firms. However. one can argue against monopoly on grounds of efficiency alone.' Austrian economics may provide a more helpful perspective in this regard. Schumpeter's notion of creative destruction, for instance, could be interpreted as requiring certain inequalities in the short term in order to raise both the quantity and the quality of products and services in the long term.
102. See Robert E. Goodin (editor), The Theory of Institutional Design (Cambridge: Cambridge University Press, 1996), pp. 24-30 especially.