Liberals’ discomfort with inequality

Lees hier het pdf van dit artikel. The discussion on inequality touches an open nerve in the Netherlands. Usually, liberals are not the strongest advocates of a more equal society, as to a certain degree inequality is part of their meritocratic principles. The wealth inequality that Piketty has put on the agenda, however, should worry liberals also. By Mark Sanders Inequality is hot. Piketty visited the Netherlands on his world tour and all policy makers, left and right, came to see him. To fight him, to put him on a pedestal or just to see a real live star. And although Piketty admitted to not having studied the Netherlands, all pundits on social and traditional media rushed in to claim that inequality in the Netherlands is not as bad as it is perhaps elsewhere. The theme apparently does touch an open nerve, also among liberals. And, as I will argue below, rightly so. The reason is not that inequality is (getting) out of control in the Netherlands. It is far more fundamental. Liberals cannot uphold their view of man and society and therefore their political program unless they can believe that we live in a meritocracy, where reward is justified by effort. Under liberalism the individual is free to pursue the good life, but it is society that defines and rewards success. And individual freedom also comes with taking responsibility for failure. And that is only just if both success and failure are at least largely determined by effort. A liberal accepts good and bad luck, but only to an extent. Rewards for pedigree, social position or inherited power do not fit the liberal worldview. In fact, feudal society, where societal status and position were determined from birth, was the very breeding ground for liberalism to emerge as a political force. Fighting the injustice of class society was the common thread in the liberal project ever since Enlightenment and the French Revolution. And it continues to be to this day. It is exactly the premise of meritocracy that Piketty questions with his analysis of inequality. He shows that in neoliberal market capitalism there is no natural tendency for wealth and income distributions to be or to remain just in the sense that reward reflects effort. In other words, the natural state of capitalism is one in which wealth concentrates in the hands of ever fewer people, without their effort or merit justifying such concentration. The latter tends to happen when the returns on capital (R) exceed the growth rate of the economy (G), leading to Piketty’s instant classic: R > G. Under that condition, the income share of capital will rise and the wealth distribution will eventually become so skewed that social stability cannot be maintained. This sort of inequality presents a problem particularly for liberals. Not so long ago, at the Utrecht School of Economics ‘Day of Inequality’, political philosopher Rutger Claassen presented a table in which he distinguished between inequality of outcomes and that of starting positions. He then argued that political currents and parties could be distinguished by the extent that they accept inequality in those dimensions. Neoliberals accept all inequality as natural, unavoidable and (therefore) just. This includes genetic predisposition, social and psychological background and extends all the way to the (resulting) unequal outcomes, such as high bonuses in the financial sector and rentier incomes. Liberals, however, in principle try to level out the luck-based inequality in starting positions. This is certainly the case for a social-liberal party as D66 with its emphasis on education, radical democracy and equality before the law. People who cannot succeed in life due to bad luck are not held responsible and are entitled to support in the minds of social liberals. One should not be punished for bad luck. In that same spirit, however, a social liberal cannot abide high rewards for good luck without merit. The problem for a social liberal can be related directly to the D66 guiding principles (the so-called ‘richtingwijzers’). From “Trusting in the strength of people” it is clear that social-liberals expect something of people. They are encouraged to take the initiative and actively pursue the good life. “Share wealth and reward achievement” clearly expresses the balance to be struck between creating a safety net against bad luck and rewarding merit, not luck. Finally, history has shown that the goal to “Achieve social harmony and sustainability” is undermined by fortunes that are accumulated or obtained through anything other than personal effort and merit. For social liberals, it is personal merit that justifies income and wealth above a set social minimum. This quid pro quo principle of justice is not only strongly embedded in liberal philosophy, but is also a core part of the Dutch social contract. For socialists and social democrats the concept of income out of pure possession of the means of production, that is, without labor, has always been problematic. Christian democrats uphold the biblical “by the sweat on thy brow shalt thou eat bread” (Genesis 6:13). And even on the right, in the VVD or beyond, there are not many who would seriously want to justify the inherited fortunes of Paris Hilton or the Disney heirs as justified by their personal merit. Thus, income and wealth inequality are not a problem for liberals per se. But large, inherited fortunes that sustain themselves and even grow over generations, cutting the link between effort, merit and reward, should be. And it is those fortunes and their tendency to grow over time that Piketty has in mind when he focuses on the top 1%. And by simply comparing the returns and growth rates of US university endowments, he shows that large fortunes remain large and outgrow the small ones. Again the argument is intuitive. Large fortunes have a larger return because percentagewise less needs to be spent on portfolio management and because the owners cannot consume enough of the return to limit growth. You can easily spend a 3% return on a 1 million euro asset base. Spending a 5% return on a 10 billion euro asset base is a lot more work. This implies that large fortunes, once established by whatever means, tend to grow faster than small ones and wealth distribution will become more skewed even among the wealthy. Piketty revives the old wisdom that money attracts more money. And this mechanism also works in the Netherlands. It is hardly a coincidence that the Dutch magazine Quote published its new list of the most wealthy 500 Dutch nationals and showed that on average their fortunes grew by 5-6% annually over the last few years. That is, in the aftermath of the biggest recession since the 1930s, Dutch large fortunes grew at a rate more than double that of the economy as a whole. R > G. And in addition 5-6% is a lot more than the return on the wealth of the average middle-class hero. The price increase of my house, the interest on my savings account and the return on my investment policy with Avéro don’t even begin to come close. So when fortune and merit are no longer aligned, that presents a problem for liberals. Yet liberals are hesitant to intervene. There are both pragmatic and ideological reasons for this. In the terminology of Governing Governance (VMS 2012) efficiency and justice are both in play. Inequality in income and wealth is efficient because it motivates people to use their talents for their own and society’s benefit. Even if the distribution of such talent is unequal by the luck of the draw, not rewarding the use of talent ultimately keeps everybody equally poor. But this inequality in outcomes is also considered just, as social liberals feel that effort and merit should be rewarded. Even behind Rawls’ veil of ignorance, a social liberal would organize society such that, above some minimum standard of living, individual achievements are rewarded, also financially.[1] To the left of the political spectrum political parties tolerate less and less inequality, also in outcomes. On the premise that even individual achievement is often, if not always, ultimately caused by luck, they have a meritocratic point. After all, the good fortune to have been born in the Netherlands, a well-organized society, enjoying peace, excellent education and infrastructure etc. etc., implies much of what we typically consider individual achievement is in fact not so individual after all. To turn things a bit into a caricature, for neoliberals all luck is individual achievement whereas for socialists all individual achievement is luck. Social liberals should differentiate, for pragmatic and ideological reasons. But although liberals find individual achievement to be a justification for income and wealth inequality, this is not the case for the achievements of parents or ancestors. And it is to prevent such unjustified propagation of wealth that piketty proposes a wealth tax on fortunes above the amount that a person can amass in a lifetime of hard work. His wealth tax is aimed at the rentier who receives a big income from investments only and still has enough to increase the fortune for his or her heirs. A successful entrepreneur can enjoy the good life as far as many of us are concerned, even giving away his or her fortune in any way he or she sees fit. But when we take the perspective of the receiving generation, inheritance creates inequality in starting positions that should discomfort a true liberal. This, I believe, is the true importance of Piketty’s work. He warns us that there are no natural mechanisms in modern capitalism to reverse wealth concentration over generations. And that this may well violate our meritocractic principles as it did in the Belle Epoche. Piketty’s warning is well timed. A tax reform is due in the Netherlands and this issue is too important to leave to neoclassicals and socialists.   Mark Sanders is assistant professor at the Utrecht University School of Economics. His research topics include entrepreneurship, innovation and sustainable growth. He is also a speaker on social -liberalism for the Van Mierlo Foundation.   Heeft dit artikel uw interesse gewekt? Klik hier voor meer info en abonnementen.   Notes [1] Note that Rawls himself drew a different conclusion and argued a rational human being would apply the maximin principle, maximizing the standard of living of the least well off. This goes to show that behind the veil of ignorance we forget what our position in society is, but not that we are liberals. - - Dit artikel verscheen in idee nr. 6 2014: A Divided World, en is te vinden bij de onderwerpen kansengelijkheid, liberalisme en ongelijkheid.