In one of my favorite essays by James Buchanan, he argues that the liberal economic order of the 19th century while simultaneously achieving previously unimagined levels of individual autonomy, economic prosperity and peaceful cooperation among diverse groups nevertheless proved vulnerable to the critique of socialism based on injustice. Does liberalism suffer from a lack of justice? Buchanan raises the challenge to economists and political economists, and it requires that we as political economists not only study the technical principles of economic science that are necessary to assess how alternative institutional arrangements either enable or impede productive specialization and peaceful cooperation but the underlying philosophical issues associated with any proposed policy change or system of government. As his student, this meant grappling with the ideas not only of the great political economists such as Hume, Smith, Mill and of course Knight, but more contemporary political philosophers such as John Rawls, Robert Nozick, Michael Walzer, Michael Sandel, etc. And, of course, Hayek.
There should be no doubt that the 2000s has seen an increased discussion among economists about inequality and the implied injustice. This work has been driven not by theoretical, let alone philosophical concerns (as least not explicitly), but by greater access to data. Still, it is vitally important to remember in the sciences of man that there is no theory-less inquiry -- there is either inquired guided by articulated and defended theory, or inquiry guided by inarticulate and undefended theory. But theory is there throughout whether we discuss it or not. So we must unearth the theory, and force the articulation and defense of various lines of argument that constitute the logical structure.
Reporting on the conversations at the annual American Economic Association meetings, Justin Fox asks "Why Economists Took So Long to Focus on Inequality" and he reports that "at least 70 papers, speeches and panel discussions devoted to income and wealth inequality." Yet, he claims that prior to this recent wave of interest, economic inequality was treated as a 'backwater field' and largely ignored. This claim would have a hard time being sustained by any long term view of political economy and the central focus throughout on the plight of the least advantaged and the policy focus on what institutions best raise the living standards of the least advantaged --- a focus one can see in Adam Smith to Alfred Marshall, and in Milton Friedman and in Joe Stiglitz. The debate, of course, was not about ends of alleviating poverty, ignorance and squalor, but about means to achieve those ends. And, at the end of the day, this remains the fundamental issue once we sort through the various interpretations of the data. But neither the varied interpretations of the data nor the fundamental debate about means-ends efficacy get raised in Fox's discussion.
Moreover, while various competing explanations for growing income and wealth inequality are offered -- e.g., skill based technological change -- other hypotheses are not discussed. Perhaps these alternative interpretations and competing hypothesis belong in the category of, what Fox raises when he wonders "what important knowledge the economists are inadvertently suppressing today." Let me suggest one angle to these discussions that doesn't in my mind get discussed enough -- and that is the role that political privilege plays in some of the cases being discussed.
Let me quote from Murray Rothbard's Power & Market (1970, 169ff) to lay out the basic perspective:
There are two and only two ways of acquiring wealth: the economic means (voluntary production and exchange) and the political means (confiscation by coercion). On the free market only the economic means can be used, and consequently everyone earns only what other individuals in society are willing to pay his services. As long as this continues, there is no separate process called "distribution"; there is only production and exchange of goods. Let government subsidies enter the scene, however, and the situation changes. Now the political means to wealth become available. On the free market, wealth is only a resultant of voluntary choices of all individuals and the extent to which men serve each other. But the possibility of government subsidy permits a change: it opens the way to an allocation of wealth in accordance with the ability of a person or group to gain control of the State apparatus.
Government subsidy creates a separate distribution process (not "redistribution" as some would be tempted to say). For the first time, earnings are severed from production and exchange and become separately determined. To the extent that this distribution occurs, therefore, the allocation of earnings is distorted away from efficient service to consumers. ...
It is obvious that production and general living standards are lowered in two ways: (1) by the diversion of energy from production to politics, and (2) by the fact that government inevitably burdens the producers with the incubus of an inefficient, privileged group. The inefficient achieve a legal claim to ride herd on the efficient. This is all the more true since those who succeed in any occupation will inevitably tend to be those who are best at it. Those who succeed on the free market, in economic life, will therefore be those most adept at production and at serving their fellowmen; those who succeed in the political struggle will be those most adept at employing coercion and winning favors from the wielders of coercion. Generally, different people will be adept at these different tasks, in accordance with universal specialization and the division of labor, and hence the shackling of one set of people will be done for the benefit of another set.
So lets talk about injustice and structural inequality of the unleashing of the rent-seeking state since 2000, and the ossification of the European social democratic economies prior due to the privileged economy. It is important to remember that in Hayek's discussion of law and legislation, he singles out the word legislation to dissect its origins in leges and thus connection to privileges and to contrast that with law and the generality norm. Buchanan picks up the discussion of the generality norm and seeks to find a political-institutional structure that would exhibit neither discrimination nor dominion. Any sort of structural discrimination -- privileging one group over another through political means -- is unjust, in the same way that any individual or group claiming dominion over others is unjust.
Where are these concerns being expressed in the contemporary debate? Luigi Zingales raised these to a considerable extent in his A Capitalism for the People, though this work seemed to get swept away in the public imagination once Piketty's work took center stage. Zingales's work is important for a variety of reasons -- (a) it does the comparison between Europe -- which he escaped because of the ossification and stratification based on privilege rather than merit, and (b) he is expressly concerned that the US system was moving toward the European, and thus becoming move a system based on privilege than individual merit.
Lobbying has increased steadily throughout the 2000s both in terms of annual dollars spent in the effort and the number of individuals engaged in that profession. According to the latest US census, 5 of the 10 richest counties in the US surround Washington DC, including Fairfax and Loudon (which are #2 and #1 respectively).
The world of the mixed economy is very difficult to sort out all the distortions and the logical chains of causation, and this is made that much more difficult by the constantly shifting parameters in economic life -- such as changes in tastes, technology, and resource availability. As 2015 Nobel Prize winner Angus Deaton has correctly pointed out, some of the great returns to individuals in the business world are due to the fact that in a global market place a CEO may very well be compensated that way a great singer or ballplayer might be compensated. And, as he has pointed out, if we study consumption patterns we get a much better sense of well-being than if we just limit our study to income -- and this is true in the developed world as much as it is in the less developed world. Markets despite the shackles they currently operate under -- as Adam Smith pointed out -- can overcome impertinent obstructions that human folly may put in the way. But there are limits to this ability, and especially when the privileging seeking economy (and the promissory politics that goes along with it) results in significant distortions to exchange and production and in fact impedes the Smithian gains from trade, and/or thwarts the Schumpeterian gains from innovation, the economic system will reflect the structural inequities and perversities. The gap between those privileged and those not so privileged will produce social tensions and caste conflicts; the mobility between the income groups will become sluggish and based on who you know more than what you can do. In short, an unjust social order emerges.
But who is called upon to address the injustice? Government! To quote Rothbard's Power & Market (p. 207) once again, "It is curious that people tend to regard government as a quasi-device, selfless, Santa Claus organization. Government was constructed neither for the ability nor for the exercise of loving care; government was built for the use of force ..."
Economics cannot answer all philosophical/ethical questions -- that is not its purpose. For example, economics cannot tell say whether profits are "deserved" or not per se, but economics can explain the consequences of alternative answers to that question. In that capacity, economics plays a fundamental role in transforming philosophical speculation into a serious study of social philosophy. To translate ethical claims into meaningful propositions, they must pass through the intellectual test that basic economics imposes. Ethical goals that are incoherent and impossible to fulfill are to be discarded. Economics puts parameters on utopias; it has a certain intellectual veto power over philosophical/ethical speculations about 'worlds' that are either conceptually impossible or internally inconsistent. This exercise is all about means-ends analysis, and the play between strategies and the proposed rules of the game.
It is about time that we economists returned to the grand tradition of political economy. That, Mr. Fox, is what is being missed in these debates.