Friday, 4 July 2014

Commons, Hale, Polanyi, and, naturally, Piketty

I. Commons and Hale: Capitalism is a bargaining power economy in which coercion is omnipresent

The great institutional economist John R. Commons specified (see pages 65-69) that to understand any apparently bilateral transaction one must actually look at five parties:
  1. the buyer
  2. the seller 
  3. the buyer's next best option
  4. the seller's next best option
  5. the state, which shapes what the parties are allowed to do, what they are allowed to agree to, and whether and how agreements will be enforced.  
This is the minimal information one needs to understand bargaining power in the individual transaction, and thus the determinants of prices and wages.

One consequence of this, especially clearly set out by Robert Hale, is that it's not useful to think about market economies as eliminating coercion by enabling people to engage in voluntary transactions. As soon as you realise parties to transactions have to choose between available options what counts as "voluntary" becomes entirely a matter of taste.  "Your money or your life," "Accept my wage offer or starve," "Accept my wage offer or live on the dole," "Accept my wage offer or the one 10% lower at an easier job," "Buy this candy bar for £1.10 or walk to the next shop and buy an identical one for £1.05" are all choices. I've arranged them in rough order of how much subjective sense of coercion we might feel, from most to least, but there's no point at which you can draw a line and say: here's where the coercion starts. 

II. Polanyi: The meaninglessness of self-sufficiency in the net of bargained prices

Now, dear, patient reader, please consider the following passage from the sacred writ Polanyi's The Great Transformation:
Liberal economy gave a false direction to our ideals. It seemed to approximate the fulfillment of intrinsically utopian expectations. No society is possible in which power and compulsion are absent, nor a world in which force has no function. It was an illusion to assume a society shaped by man’s will and wish alone. Yet this was the result of a market view of society which equated economics with contractual relationships, and contractual relations with freedom. ... Vision was limited by the market which “fragmentated” life into the producers’ sector that ended when his product reached the market, and the sector of the consumer for whom all goods sprang from the market. The one derived his income “freely” from the market, the other spent it “freely” there. Society as a whole remained invisible. The power of the state was of no account, since the less its power, the smoother the market mechanism would function. Neither voters, nor owners, neither producers, nor consumers could be held responsible for such brutal restrictions of freedom as were involved in the occurrence of unemployment and destitution. Any decent individual could imagine himself free from all responsibility for acts of compulsion on the part of a state which he, personally, rejected; or for economic suffering in society from which he, personally, had not benefited. He was “paying his way,” was “in nobody’s debt,” and was unentangled in the evil of power and economic value. His lack of responsibility for them seemed so evident that he denied their reality in the name of his freedom.  
But power and economic value are a paradigm of social reality. They do not spring from human volition; noncooperation is impossible in regard to them.

(2001 ed., p. 266-267)
How are we to make sense of Polanyi's implication, that "every decent individual" is entangled in power and economic value? The idea of capitalism as a bargaining power economy helps quite a bit.  In such an economy, each bargain struck or contemplated involves a balancing of threats and opportunities that are part of a vast interconnected net of bargaining contexts. For example:

  • A consumer who has paid a low price for one good may be better able to pay a higher price for another, allowing that seller to capture a higher share of the consumer surplus.  
  • An employer paying high wages may be able to bargain harder with suppliers, by making them aware of the tight margins these wages imply. 

To buy, to sell, to consume, to produce is necessarily to introduce ripples into this interconnected net, expanding the choices of some, narrowing those of others, redistributing, minutely or massively, coercive capacities.  One pulls at the net's strings as soon as one chooses one purchase over another, helping to establish the current and prospective economic value of both.  Unemployment and destitution, as prospects or realities, shape wage and price bargains, sending out their own ripples. Any state with a remotely serious claim to a monopoly of legitimate violence is in the net as well, often constituting the resources bargained over (such as money and property), employing physical coercion against some to defend the property rights of others, everywhere affecting bargaining power.

Polanyi's suggesting that the language of self-reliance, "paying your way," being "in nobody's debt,"
obscures the "reality of society," the reality of the net--obscures how every individual in a market economy is causally implicated in all sorts of coercion that seem quite distant from her at first glance. Going a bit further, to ascribe moral status to paying your way is to implicitly to ascribe legitimacy to the price system that shapes your income and spending. If you thriftily make all your purchases at Wal-Mart so you can spend less than you earn, you're "paying your way," but you're doing so by taking advantage of, and contributing to, the company's enormous bargaining power in its dealings with suppliers and workers.

By the same reasoning, recognition of the net of bargaining power makes it extremely hard to give a sensible definition of a "meritocratic" income distribution. Some people believe that in a well-functioning market economy people are paid according to their marginal product and that this is what they deserve (although the second is not a logical implication of the first). But marginal product is defined as the addition to firm revenue achieved by hiring the person in question, and so again fundamentally depends on the price system. A moral defence of meritocracy along these lines would have to begin with a defence of the legitimacy of the prices shaped by the net of bargaining power (as Hale pointed out nearly a century ago). As an outstanding example of such a defence let me cite... well, actually, let me know if you ever see one; I haven't. Without such a defence, advocacy of meritocracy obscures the omnipresence of bargaining power just as the language of self-reliance does.

III. Piketty, meritocracy, and bargaining power

One of the most interesting criticisms of Piketty, to my mind, is that he ignores the processes that give rise to profits and the rate of return on capital. Here's an influential take from Deborah Boucoyannis, building on her outstanding reading of Adam Smith:
Where Smith emerges as more “radical” [than Piketty], ironically, is in his insistence that if we see high profits (a high r) it is sophistry, deception, and power that are to blame, not technology and trade increasing demand for capital. He may have said, faced with Piketty’s turn to taxation to fight inequality, that this treats the symptom, not the disease; that we should not be just treating inequality as pathological and inefficient, but high profits, too. As I argued also here, unless we start seeing high profits as a symptom of something wrong, any effort to limit them, either before or after taxes, will founder faced with the “insolent outrage of furious and disappointed monopolists.”
In other words, Smith is more radical than Piketty because he offers a critique of excessive bargaining power and an analysis of its origins. Galbraith also attacks at the same point, arguing for a reconfiguring of the bargaining power net:
If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.
What I'd like to suggest is that one reason Piketty ignores this issue is his ambivalent, but still real, affection for the meritocratic ideal. It's very easy to start making an argument about merit and immediately assuming the moral legitimacy of the price system that is merit's metric, and this is a trap into which Piketty falls.

The case is a little bit difficult to make, because Piketty really is very ambivalent. At some points Piketty comes off as an advocate of meritocracy who believes it crucial to democracy, and who fears that patterns of wealth accumulation will undermine it.
Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well. (p. 422)
Piketty the engineer of meritocracy on rational and universal principles is on display in his proposal for a highly progressive income tax. On the basis of his own and others' research, Piketty concludes that there is an enormous gulf between what US top executives are paid and their contribution to productivity.  (He can be quite scathing on the misuse of "meritocratic extremism" as a mere cover story for vast divergences in pay unrelated to performance; p.417,487.) His diagnosis of the causes is that the top executives are winning this outrageous level of compensation from bargaining hard with "incestuous" corporate boards. And thus he proposes 80% marginal rates on high incomes, as this would reduce managers' incentive to push for high compensation, which would "drastically reduce remuneration [at the top] but without reducing the productivity of the US economy, so that pay would rise at lower levels."(p. 512).

I submit that the principle of meritocracy has really limited the scope of this argument. Piketty is only able to produce his critique of managerial pay in excess of productivity by accepting the field of prices that determines productivity. He finds such a disjuncture that he decides to look at what distorted meritocracy in this case and comes up with a bargaining situation that he hopes to re-engineer. But he never considers the possibility that the economy is bargaining situations all the way down, presumably because this would deprive him of a meaningful standard by which to measure productivity. That he assumes that pay denied managers would pass downwards, without offering any bargaining-power argument for this claim, is a striking illustration of the problem.

There's a second reason Piketty's proposals don't focus on tweaking the bargaining power net. Despite his analysis of excessive executive compensation, he doesn't seem to believe that such assessments are generally possible
[We need to] move beyond the futile debate about the moral hierarchy of wealth. Every fortune is partially justified yet potentially excessive. Outright theft is rare, as is absolute merit. (p.443) 
Broadly speaking, the central fact is that [wealth accumulation] often inextricably combines elements of true entrepreneurial labor (an absolutely indispensable force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft [not so rare, then?]. The arbitrariness of wealth accumulation is a much broader phenomenon than the arbitrariness of inheritance. (p. 446)
And this is why Piketty advocates his progressive global wealth tax. Forget about creating a fair economy; it can't be done. Just tax wealth, whatever its origins. Remarkably enough, both the attractions of meritocracy and its practical infeasibility turn out to give reasons to stay away from a restructuring of bargaining power--which is what a fairer capitalism would really need.

P.S. I've had Polanyi on the brain even more than usual thanks to a wonderful talk by and stimulating conversation with Peggy Somers this week--she and Fred Block have more on Polanyi's views on the "reality of society" in their great new book.

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