Why inequality and power imbalances still matter


10:30 am - May 21st 2011

by Chris Dillow    


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The Times yesterday provided an answer to Sam Bowman's question: does inequality matter?

It reports how corporate giant Glencore's profits arise, in part from "exposing thousands of Zambians to dangerous levels of sulphur dioxide emissions.

The firms is also accused of profiting from inside information obtained from an EU bureaucrat and using stolen land in Colombia. 

These are all examples of how income and wealth inequality – Glemcore CEO Ivan Glasenberg is a multi-billionaire* – arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on.

These, of course, are not isolated examples. As Rick says, "All pay is, ultimately, a function of power."

Some of this power is innocuous: Wayne Rooney earns a fortune because his rare skills give him the power to demand a high wage. But other forms of power are more questionable.

For example:

– top bankers are rich because they have the power to privatise gains but socialise losses.

– technical change has weakened the power of unskilled workers whilst raising that of bosses.

– profits and profit-related incomes have risen at the expense of wages because capitalists have power conferred on them by mass unemployment and declining militancy.

– workers have low pay because they lack bargaining power whilst capitalists can extract favours from government because they do have such power, as they can threaten to relocate.

And herein lies one of the blindspots of the free market right. It seems unable to see that in actually-existing markets, there is power and unfreedom; some of the more tedious passages of Hayek's Constitution of Liberty are where he tries to redefine coercion as something that hardly happens in a market economy.

If the Left is sometimes guilty of caricaturing the rich as evil exploiters, the right has its own caricature of them as heroic Howard Roark types. They are not.

However, it's not just the right that is at fault here. So is the non-Marxist left. It sometimes gives the impression that more progressive taxes are a sufficient response to inequality. They are not.

Such taxes fall as heavily upon the minority of the rich who are genuine public benefactors – entrepreneurs and talented sportsmen and artists – as it does upon exploiters and rent-seekers.They do not address inequalities of power.

Worse still, it's not clear that the soft left even has much idea here. It's not obvious whether the state is part of the solution or part of the problem. Those allegations against Glencore, for example, could all be seen as examples not (just) of corporate malfeasance but of state failure.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


“And herein lies one of the blindspots of the free market right. It seems unable to see that in actually-existing markets, there is power and unfreedom;”

Blindspots or strawmen? Insofar as there are rightwing Panglossians who think this is the best of all possible worlds, then I guess you are right. Most people in favour of free markets do not think that we do, e.g. with regard to money, which is a centrally-planned government monopoly.

“some of the more tedious passages of Hayek’s Constitution of Liberty are where he tries to redefine coercion as something that hardly happens in a market economy.”

Not sure what you’re thinking of, but you are blurring between a market economy, and a free market economy. The former refers to every economy that is not socialist, the latter is more a theoretical state, used in economics. In the latter, by definition, there is no coercion.

1
This is the problem with free-market economics, it is based on a theory which does not reflect reality. And even if it once reflected a reality, it was based on late 18th century reality and the economic and social conditions of that time.
Power cannot be observed only the exchange, but in ignoring it we come up with something more akin to a fairytale rather than a useful theory.

3. So Much For Subtlety

“It reports how corporate giant Glencore’s profits arise, in part from “exposing thousands of Zambians to dangerous levels of sulphur dioxide emissions.”

Well I can’t read the Times report but of course it does no such thing. There is a rumour that some recently acquired Zambian mines have exceeded government SO2 limits. That does not mean those levels are dangerous.

“The firms is also accused of profiting from inside information obtained from an EU bureaucrat and using stolen land in Colombia.”

But Glencore did not steal it. They were given land by the government. Which allegedly the government or its agents took from farmers.

“These are all examples of how income and wealth inequality – Glemcore CEO Ivan Glasenberg is a multi-billionaire* – arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on.”

I disagree. There is an inequality here but it is an inequality in power. Glencore may have money but it does not have power. So now it has made a public splash and shown people how much money it has, suddenly it has attracted the wrong sort of attention from people who do have power – and who are now shaking it down. No one cared when they were private because no one knew what a golden pot of cash they were sitting on. Now those with power – or the leverage with the media and the public to exercise power – are looking to take them down. The victim here is Glencore. Or at least that is likely to be the way it is going to go – Glencore will be forced to toss some NGOs some cash. It will continue to do business as usual. And no one will care.

“Some of this power is innocuous: Wayne Rooney earns a fortune because his rare skills give him the power to demand a high wage. But other forms of power are more questionable. For example: – top bankers are rich because they have the power to privatise gains but socialise losses.”

Well no. Top bankers, at least some of them, are wealthy for the same reason Rooney is. They have rare skills. Those bankers were rich before the crisis. They are still being paid for their rare skills now. They will go on being paid for them in the future. Why is it acceptable when Rooney does it and not some commodities trader?

“workers have low pay because they lack bargaining power whilst capitalists can extract favours from government because they do have such power, as they can threaten to relocate.”

Workers can and do threaten to relocate. And quit. They have vastly more power to do so than the bosses do.

“And herein lies one of the blindspots of the free market right. It seems unable to see that in actually-existing markets, there is power and unfreedom; some of the more tedious passages of Hayek’s Constitution of Liberty are where he tries to redefine coercion as something that hardly happens in a market economy.”

Except in actually-existing markets like the West there isn’t a lot of unfreedom. You can call every and any relationship you like an unfree one but that does not make it so. Hayek does not need to redefine coercion. It has been the Marxist Left that has done that so that they can pretend reducing actual freedom through more government control is somehow an increase in freedom. The collapse of the USSR should have put paid to that argument.

“Such taxes fall as heavily upon the minority of the rich who are genuine public benefactors – entrepreneurs and talented sportsmen and artists – as it does upon exploiters and rent-seekers.They do not address inequalities of power.”

Assuming such inequalities of power exist, then obviously reducing the wealth of the wealthy reduces their power. You can’t conflate the two when it suits and then pretend they are different when it doesn’t.

“Those allegations against Glencore, for example, could all be seen as examples not (just) of corporate malfeasance but of state failure.”

That is certainly true. But they are also evidence of how weak corporations really are. They cannot prevent tiny NGOs using the media to cause them massive – and often unjust – economic damage. And NGOs have track records on this. Look at Greenpeace’s shameful exploitation of Brent Spar or the attacks on Nike.

“These are all examples of how income and wealth inequality – Glemcore CEO Ivan Glasenberg is a multi-billionaire* – arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on.”

What is necessary in these examples, is that the property rights of the Zambian, Bolivian and Colombian people to be upheld. The state is not helping them, because it is in thrall to corporate wealth. You say later:

“It’s not obvious whether the state is part of the solution or part of the problem. Those allegations against Glencore, for example, could all be seen as examples not (just) of corporate malfeasance but of state failure.”

I agree with the second part, and think it answers your doubts: of course the state is part of the problem, because it is not protecting the property rights of the common people in the examples you cite.

@2 steveb,

“This is the problem with free-market economics, it is based on a theory which does not reflect reality.”

No, no, no. With respect, you’re not understanding what economic theory if for. It is to explain the underlying rules of human action.

5
With respect, I understand exactly what economic theory is and is for and in the case of free-market economics it proved very useful to Thatcher both as an ideology and a justification for policy.
And power imbalance is a human condition, is it not? And while any theory ignores this it is unlikely to reflect or predict anything useful.

@6 steveb,

you obviously see these things from such a great distance that you can’t distinguish very much.

You are rejecting the use of a free market economy as a theoretical model on wholly spurious grounds; namely that Thatcher was influenced by monetarism and you don’t like Thatcher. I think we need a new Godwin’s Law for argumentum ad Thatcherum.

You claim that such economic theory is useless, because it doesn’t address non-economic questions. Let me give you an example, where you are wrong:
If two shops on Tottenham Court Road are selling the same television, and one is £50 cheaper than the other, which shop, ceteris paribus (all other things being equal) will get the business? My economic theory tells me the cheaper shop. What does yours tell you?

@7 That is how Brighthouse manages to shift tellys yes. Course in that case it’s only the up-front cost that is cheaper.

@ Cylux,

“Course in that case it’s only the up-front cost that is cheaper.”

As I said; ceteris paribus!

For once, it seems that a highstreet bank being propped up taxpayers could be taking the decent route of demanding repayment of bonuses paid to senior executives for misselling Payment Protection Insurance:

Lloyds eyes bonuses clawback for PPI losses
http://www.ft.com/cms/s/0/c81917ca-8156-11e0-9360-00144feabdc0.html#axzz1MzAbrsUE

Of course, Lloyds wasn’t the only bank engaged in large scale misselling and we shouldn’t overlook the opportunities for banks and bankers to engage in insider trading:

“A City banker who amassed almost £600,000 through insider trading with his wife and a friend has been jailed for three years and four months.”
http://www.bbc.co.uk/news/uk-england-london-12345373

The challenge and cost of proving insider trading in court suggests that it could be more prevalent than is commonly supposed.

What of likely frequent conflicts of interest in investment banks in cases such as this?

Conflicts of interest beneath the surface
http://www.ft.com/cms/s/0/b4884874-e833-11de-8a02-00144feab49a.html#axzz1MzDqgiyY

@9 The fact that the owners of Brighthouse should really be dragged into the street and shot doesn’t factor into it then I suppose?
Because as much as I’m in favour of using fancy techno goods to in-debt the poor, it does tend to have a rather destructive effect on society.

12. gastro george

@7 “If two shops on Tottenham Court Road are selling the same television, and one is £50 cheaper than the other, which shop, ceteris paribus (all other things being equal) will get the business?”

The detachment from reality is that it is more likely that the cheaper shop will raise its price by £50 to maximise its profits. Free marketeers tend to hold the view that sellers automatically choose the minimum price to sell at the gives them a workable profit. More often they will sell at the maximum price that they can get away with.

7
Do you really need to be well read/qualified in economic theory to predict this very simple example, but even that is based on the assumption that all consumers will pay the least. However, many consumers prefer to pay more eg ‘fair-trade’ goods. You see some people have moral values which guide consumption. Economic theory does rely completely on ‘all things being equal’ and all people are of the same mind, but they are not, This is what this debate is essentially about.

@13:

Try this quote from a speech by Goering in 1936. He evidently didn’t think much of mainstream economics either:

“We must not reckon profit and loss according to the book, but only according to political needs. There must be no calculation of cost. I require that you do all that you can and to prove that part of the national fortune is in your hands. Whether new investment can be written off in every case is a matter of indifference.”
Source: John Hiden: Republican and Fascist Germany (Longman 1996), p.128.

The regular old complaint about economics was that with its many notions of market failure it was too leftist, not that it was too Thatcherite or too prone to justify capitalism. Try this recently published and well-reviewed book:

John Cassidy: How Markets Fail (Penguin, 2010)
http://www.businessweek.com/magazine/content/09_47/b4156079791251.htm

Try also this interview in the FT of Prof Carmen Reinhart on recurring patterns in 800 years of financial crises:
http://video.ft.com/v/82349517001/May-3-800-years-of-financial-crises

She is co-author of a book with Kenneth Rogoff: This Time Is Different – 8oo years of financial crises (Princeton UP, 2009)
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

Btw now a prof at Harvard, Rogoff was previously chief economist at the IMF.

Recap: market failures according to Adam Smith, who is widely rated as the founding ancestor of modern economics:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.”

Source: Adam Smith: The Wealth of Nations; (1776), Book 1, Chapter 10, Part 2] or p.111 in this link:
http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf

“The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.”
Source: The Wealth of Nations (1776), Book 5, Chapter 1, Part or P.590 in this link:
http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf

Of course, economics has developed more than a little since Adam Smith wrote The Wealth of Nations

15
Thank you Bob B, but I think the line is broken on your last reference.

Goering hated capitalism mainly because it proposed the ‘individual’ as the forefront of economic action, and it also provided another way of scapegoating Jews who were accused of spreading liberalism and capitalism, which was blamed for the downfall of Germany.
With regard to the theme of the latest financial crisis being different, and remaining with that theme is ‘Legitimation Crisis’ by Jurgen Habermaus, who, asserts that capitalism has been kept stable by the growing amount of government intervention, however, such intervention (welfare) cannot be sustained. Although this is a simple outline of this work, it was written in 1973 and it’s surprising how much he predicted.

@ Steveb

“Do you really need to be well read/qualified in economic theory to predict this very simple example, ”

It is a simple example indeed. You do not have to be well-read, you can apply common sense and get the same result.

“but even that is based on the assumption that all consumers will pay the least. However, many consumers prefer to pay more eg ‘fair-trade’ goods. ”

This poses no confusion: In this case the consumer values fair-trade goods higher than other goods. The fair trade coffee is worth a higher price, because you’re buying something additional; the satisfaction of supporting fair trade.

“You see some people have moral values which guide consumption.”

Value is subjective, certainly. This is another economic law, universality true, and common sense to boot.

” Economic theory does rely completely on ‘all things being equal’

I never suggested it did.

“and all people are of the same mind, but they are not,”

No, indeed not.

“This is what this debate is essentially about.”

Okay.

@ Bob B,

there’s only so much you can learn from Adam Smith.

@16

Keynes and later Hyman Minsky both produced analysis showing how market economies were prone to crises. Apart from macroeoconomic failures through crises and stagnation, with persisting high levels of unemployment, there is absolutely nothing new about remarking on the possibility of micro market failures.This is where mainstream microeconomics was 50 years ago:

The anatomy of market failure
http://instruct1.cit.cornell.edu/courses/econ335/out/bator_qje.pdf

Certainly, Goering and Mussolini believed in the Third Way – as did Tony Blair.

Economics is not short on critics from among academic and professional economists and they mostly make a far better job of criticism than those who jump in who manifestly know little about the subject. Indeed, economists are often chided for their diversity of views – Churchill famously joked that when he asked five eminent economists for their assessments of some issue, he got back six different replies, two from Keynes. IMO there is more to be gained here from discussing the themes of Chris Dillow’s thread, which I attempted @10, a contribution which can hardly be said to whitewash over the way markets work.

@18: “there’s only so much you can learn from Adam Smith.”

I agree – but then Adam Smith was writing in the 1770s and economics has developed a great deal since – eg try references @14.

The point of the quotes from The Wealth of Nations @15 was to show that he was aware of situations where the invisible hand of the market didn’t necessarily lead to benign outcomes.

@12 Good point, I seem to recall there being such a thing as “price-fixing scandals”.

The thing about private enterprise is that those undertaking it don’t want to engage in competition, they want to make money. Occasionally the latter desire will force one of them to do the former, but more often its a case of ‘keep yer prices roundabout the same’.

17 ‘Value is subjective’ and there lies the problem, we cannot create an all ecompassing theory to predict how humans will respond.
However, we can create environments which makes us compelled to act in a particular way, for example if the economic base is one which requires that we compete to survive, we will do so. If the environment compels us to co-operate to survive, this is what we will do.
The state, of course, creates laws which also compel us to act in a certain way or face punitive measures. When the capitalist state under Thatcher moved towards a free-market economy, the law changed to facilitate this eg the sale of nationalized corporations, changing financial service law and so on, but the state will always act in the interests of owners as the OP suggests. Richard Crossman’ Diaries outlines the power of the multi-nations to shape UK policy

SteveB

as the state is controlled by these interests you mention, which it certainly is to some extent, isn’t this all the more reason to limit state power, and as for this:

“However, we can create environments which makes us compelled to act in a particular way”

sounds awful. I resent being compelled to act in a particular way by do-gooding authoritarians, convinced that their meddling will compell people to happiness.

“‘Value is subjective’ and there lies the problem, we cannot create an all ecompassing theory to predict how humans will respond.”

This is self-refuting. Humans will respond according to their subjective value scales. This is all-encompassing.

23
Yes I agree, the state should be limited, in fact I would be happy for the state to disappear on the basis that it will always act in the interests of a particular class.

25. Chaise Guevara

@ 24 steveb

Without a state, things tend to go in favour of the interests of whoever has the biggest stick.

25
My own view is that the state is the biggest stick.

@25: “Without a state, things tend to go in favour of the interests of whoever has the biggest stick.”

Exactly, as Hobbes observed in The Leviatan (1660), chp. XIII

Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.
http://oregonstate.edu/instruct/phl302/texts/hobbes/leviathan-c.html

Compare:

“people who do not trust one another will end up cooperating only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated and enforced, sometimes by coercive means. . . .Widespread distrust in a society . . . imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.” [Francis Fukuyama: Trust (Penguin Books, 1996). p. 27]

27
Two good liberal writer’s viewpoint, note all of you libertarians.

This is another view:-
‘The state is a sphere of social life, not only separate from, but also opposed to civil society. The contradiction of state and civil society is characteristic of a society divided against itself. The police, the judiciary and the administration (of the state) are not representations of civil society, they are representations of the state and their task is to administer’. Karl Marx


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