The New Economics of Inequality and Redistribution

Yes, it’s another econ book.

A retro review from March 1, 2013 …

(And, no, I didn’t pay for this one. It was an Amazon Vine title.)

Review: The New Economics of Inequality and Redistribution, Samuel Bowles, 2012.New Economics of Inequality

I came to this book as a layman who suspects that globalization, automation, and an increasing percentage of the population not having the innate intelligence for the jobs of the future will necessitate some sort of new economic order. This book really didn’t go very far in suggesting a new economic system, but it is worth a look.

Or, to be more precise, it’s worth a partial look if, like me, you are not a trained economist. I suspect few laymen will have the time, patience or money to follow up on the bibliographic suggestions to check up on Bowles’ arguments. Those laymen are also going to have to put up with a lot of equations. To be sure, they are simple algebra for the most part, but you can get lost in the thicket of variables. Bowles should have spelled out his variables instead of just designating them with place holding letters. An interested reader could probably just read the “conclusion” of each chapter and backtrack, if interested, to see Bowles’ evidence and math.

Still, there is some stuff of value.

First, Bowles is a behavioral economist meaning he relies on experiments to show how people really make economic decisions and not the classical theory of man as a utility maximizing animal. Second, while economic redistribution is thought of as a liberal or left-wing desire, Bowles does not fall into conventional policy notions of how to do that. There is, I think, material and arguments to vex and please stereotypical liberals and conservatives.

Lower income people are not, as some conservatives would have it, all lazy or stupid. Many have personality profiles that are risk-averse which means they may not engage activities with higher payoffs. On the other hand, Bowles lapses into the liberal cliché of seeing the rich-poor divide (or spectrum, if you will) as being the same as the lucky-unlucky spectrum. To be sure, luck is a factor, but often “luck”, as a military strategist once noted, favors the prepared mind. What we call “luck” is often the result of certain behavioral tendencies. Indeed, while Bowles forsakes the fiction of the utility-maximizing human, he implicitly embraces the blank slate human whose behaviors and innate abilities can be molded with appropriate public policies. In Bowles’ world, there are no people who can consistently be lucky, make money in the same environment as the poor. Conversely, there are no people whose innate lack of abilities, self-control, and prudence doom them to poverty.

To his credit, Bowles forsakes most liberal notions which tacitly assume a static pie, a zero sum game. He makes it quite clear he wants to grow the pie before slicing it in a different way. He puts a large emphasis on an interesting concept called “guard labor”. Basically, guard labor is the sector of the economy that protects property and enforces contracts. It includes police, lawyers, courts, the military, security guards, and supervisors. (Supervisors, after all, largely exist to make sure that business capital is used according to the tacit or explicit contract of employment, that employees don’t misuse the resources they have been given temporary custody of.) Bowles is interested in making more people self-employed. The self-employed, by definition, don’t have the “principal-agent problem” that guard labor tries to address. He also thinks credit markets should be more open to the poor so they have greater opportunities to invest in riskier enterprises like the more wealthy. This, of course, assumes there is some great untapped market of the poor that banks are too stupid to lend to despite the fact that profits from interest are there to be made. (Of course, the assumption that there were large minority populations unjustly denied housing loans and that government mandating and guaranteeing of such loans was necessary led to the infamous housing crash of 2008. To be fair to Bowles, he seems to have commercial loans more in mind than loans for consumption.) His other proposals for pushing more people into productive activity where guard labor is less necessary include a variety of social safety net programs including a guaranteed personal income. He also makes vague reference to labor-management relationships more in the line of Scandinavian countries where there is a less hostile relationship and employees police each other to insure productivity.

Bowles cites studies where those who inherit above a certain amount are more likely to start their own business. First, I don’t recall being bombarded with stories of lottery winners becoming entrepreneurs. Second, how much more likely are these people to start businesses?

And, of course, some attention is given to that magic modern nostrum of education. Bowles is curiously incurious about why the children of the upper class take liberal arts classes and the children of the more risk adverse lower classes take engineering. The answer would seem obvious in that, without family wealth and inheritance to fall back on (and the networking benefits of elite schools), engineering is the safer option.

Globalization is often cited as a barrier to national income redistribution. Bowles agrees that after-tax returns must be at a certain minimum to maintain wealth producing capital investments. But he then proposes that perhaps a maximum after-tax return could be mandated. A maximum would seem to simply be a second-tier minimum, another incentive to not invest in a particular jurisdiction though Bowles could conceivably be right that a high enough maximum would keep most investment around.

Bowles notes that support for welfare programs is not very heavily correlated to personal income. There is a significant number of the wealthy that will support higher taxes for social programs. (So a survey question says. One wonders if said wealthy will, Warren Buffet-style, support income taxes which will not personally affect them.) A significant portion of the poor do not support redistribution. Variability of income and gender seem more close correlates of welfare support than income. And, crucially, the support is for the “deserving poor”. Bowles also notes that, when it comes to supporting welfare, diversity is not your friend. While Bowles postulates racism and innate human tendencies to be more generous to one’s own ethnic group, it’s kind of hard to square this with his proposal for higher welfare spending on those who are deserving and not given to behaviors such as producing children with no obvious means of support or drug addiction. Black rates of out-of-wedlock birth, which are higher than whites, would invalidate more of them under his own proposal – and racism wouldn’t enter into it. Thus, we get back to the problem that different groups seem to have, for whatever reason – innate personality and cognitive traits or culture – different levels of response to Bowles’ proposed stimuli to be productive. To put it baldly, some groups are going to have more of the deserving poor by his or most people’s definitions.

And there is the old problem of who ultimately decides, politically, to render the favors of the state in the form of welfare. This comes up, for instance, in his proposal that socially valued but “market under-valued” workers should be paid more. But who makes those determinations and why? Is it to change with every change in controlling party or administration?

In short, Bowles doesn’t convince me of his solutions. But he asks some good questions and, even if he sides with blank slate orthodoxy, he also raises some good points. It’s a provocative book to sharpen your thoughts against.


More reviews of economics title are at the Economics Page.


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