Monday, October 10, 2011

Think about assets and wealth, not income and equality

W. Brian Arthur says that the basic economic issue is shifting from producing prosperity to distributing prosperity.

I'm not sure it's a matter of redistribution or transferring income, an argument for the welfare state. Instead, it is an issue of ownership rights and property rights. It is about the legal obligations and claims that people have.

It is already more difficult to apply many of our current legal approaches to new circumstances. Look at the way patent conflicts are breaking out in the tech world, for example. Far from enabling prosperity, the legal system is stifling it.

Nor can it be like 19th century robber barons who saw their own property rights as almost limitless, regardless of the impact on others, and who saw freedom of contract as the most important right. Henry Frick cannot be the face of the future.

We need a new social technology to complement the market.

Progress may require a new concept of citizenship and membership in a society. It isn't enough to redistribute on the basis of fairness without thinking about who deserves what.

You need equality to the extent it promotes freedom and opportunity for the maximum number of people. But this does not entail an equal right to common wealth. That still has to involve some measure of contribution or membership or merit, some sense of the concrete story behind a person.

That may sound like John Rawl's difference principle, where inequalities are justified only to the extent they raise the income level of the worst off, which is at the heart of contemporary liberal political philosophy.

It isn't. This is not about reluctantly tolerating inequality for the sake of incentives. It is about lifting the veil of ignorance (the famous device in Rawl's A Theory of Justice: Original Edition) and asking what people ought to get.

That goes against the grain of liberalism, which tends to look at dollar income (or dollar wealth) alone. Liberalism has a blind spot when it comes to people's preferences.

A better way forward is likely to be through a closer look at ownership and asset endowments, not through equality or economic rights.

Assets and Wealth

The main challenge is not the distribution of income, nor equality of rights, but the distribution of assets and how that evolves over time.

We have to make value judgements about assets.

We should think more about what assets people own, not just the stream of income they get from the labor market.

What assets do people currently own? Money, for sure, and investments. Real estate. Claims on future streams of income like pension rights. Human capital such as education and skills.

We have to move from looking at household cash flows (income) to looking at household balance sheets (wealth). We need to ask better questions about what wealth is.

I think there needs to be enough income flow from assets to meet people's basic needs. But it is very difficult to do this without degrading or destroying key cultural institutions, as I discussed here.

Across-the-board welfare rights or minimum incomes are not the answer. The welfare state does not work. It may be that money transfers just are not suited to this at all.

So here's the questions. How do you redistribute or reconfigure ownership towards those that deserve it? Who deserves it? And what do we do with people who don't deserve as much? What is wealth?

These questions have been almost impossible to pose, let alone answer in recent decades, because the immediate objection is you would be making some people into "second class citizens."

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