Income Inequality and Citizenship: Quantifying the Link

Our level of income is unarguably dependent on where we live in the world. But evidencing this is tricky. This Posting presents a model that explains global income variability using one variable only – where you live. The results suggest that we might want to reassess how we think about both economic migration and global inequality of opportunity.

It is as obvious as it is well known that the world is unequal in terms of individuals’ incomes (e.g. Mohammed 2015).  But it is unequal in a very particular way – when split into ‘inequality within countries’ and ‘inequality between countries’, the latter accounts for by far the biggest gap.

Inequality within countries measures, for instance, gaps between poor and rich Americans or between poor and rich Chinese. For simplicity, let’s call it ‘class’ inequality. But there is also another equally obvious inequality – that between rich and poor nations. More specifically, this inequality is measured as the gap between the ‘representative’ or ‘average’ individuals of any two countries, be they Morocco and Spain or Mexico and the US. For simplicity, let’s call this ‘locational’ inequality.

Inequality, as it is commonly understood in today’s world, is such that whatever measure we choose, the lion’s share of global inequality is ‘explained’ by the differences in mean incomes between countries.

This was not always the case. Although our data for the past are far more tentative than our data for today’s global income distribution, we can still state with little doubt that the dominant type of equality in the 19th century was that within countries (see Milanovic 2011).

Citizenship Premiums and Penalties

If income differences between countries are large then your income will significantly depend on where you live, or even on where you were born (97% of the world’s population remain in the countries where they were born). This is what I call a ‘citizenship premium’ (or a ‘citizenship penalty’) – a ‘rent’ that a person receives if he or she happens to be born in a rich country, or, if we use the terminology introduced by John Roemer, an ‘exogenous circumstance’ which is independent from any one individual’s effort and episodic luck (Roemer 2000).

How big is citizenship rent, how does it vary with one’s position in the income distribution, and what does it imply for global inequality of opportunity and migration?

Estimating Citizenship Rent

I estimate citizenship rent by using data collected from household surveys conducted in 118 countries in and around the year 2008 (Milanovic 2015). For each country, I have micro-level (household) data ordered into 100 percentiles, with individuals ranked by their household per capita income. This gives 11,800 country/percentiles with ‘representative’ per capita incomes expressed in dollars of equal purchasing parity, making incomes across countries comparable.

I ‘explain’ these incomes using only one variable – the country where individuals live. Of course, people living in the US will tend to have higher incomes at any given percentile of the distribution than people living in poor countries in, for instance, Africa. But how will it look for the world as a whole? In a least-square dummy variable regression, I use Congo (the poorest county in the world) as the ‘omitted country’ so that I can express the citizenship premium in every other country in terms of the income gain compared to Congo. The premium for the US is 355%, it is 329% for Sweden and 164% for Brazil. But for Yemen, another very poor country, it’s 32%.

According to this regression, we can explain more than two-thirds of the variability in incomes across country/percentiles by only one variable – the country where people live. This estimation shows that, as we thought, a lot of our income depends on where we live.

Citizenship Rent across the Distribution      

But this is only an average premium that compares countries. Does citizenship rent vary along the entire income distribution? If I were to take into consideration only people belonging to the lowest part of the income distribution in each country, would the premium still be the same?

Intuition may help here. Suppose that I focus only on the incomes of the lowest decile (with rich countries more equal than poor countries). Then the gap between rich and poor countries should be greater for the very poor people than for the average individual.  And this is indeed what we find – Sweden’s citizenship premium compared to Congo is now 367% versus 329% on average. But Brazil’s is 133% versus 164%.  The situation at the top is exactly the opposite – Sweden’s advantaged position at the 90th percentile of the income distribution is ‘only’ 286%, but Brazil’s becomes 188%.

Implications for Migration

The existence of the citizenship premium has obvious implications for migration: people from poor countries will have the opportunity to double or triple their real incomes by moving to a rich country.

But the fact that the premium varies as a function of one’s position in the income distribution carries additional implications. If I consider moving to one of two countries that have the same average income, my decision on where to migrate – based on economic criteria alone – will also be influenced by my expectations regarding where I may end up in the recipient county’s income distribution. My decision will thus be influenced by the extent to which the recipient country’s income distribution is unequal.

Suppose that Sweden and the US have the same mean income. If I expect to end up in the bottom part of a recipient country’s distribution, then I should migrate to Sweden. The poor people in Sweden are better off compared to the mean, and the citizenship premium, evaluated at lower parts of distribution, is greater. The opposite conclusion follows if I expect to end up in the upper part of the recipient country’s distribution – I should migrate to the US.

This last result has unpleasant implications for rich countries with greater ‘in-country’ equality. More equal rich countries will tend to attract lower-skilled migrants who generally expect to be placed in the bottom part of the recipient country’s distribution. Developing a national welfare state would have the perverse effect of attracting migrants who can contribute less.

Even in this rough sketch, we also have to consider the levels of social mobility in recipient countries because more unequal countries with strong social mobility will, everything else being the same, tend to appeal to more skilled migrants.

Global Inequality of Opportunity

The mere existence of a large citizenship premium implies that there is no such a thing as global equality of opportunity because a lot of our income depends on the accident of birth.

So should we strive for global equality of opportunity or not? It is a political philosophy question that philosophers have thought much more about than economists. Some, following John Rawls in The Law of Peoples, believe that this is not an issue and that every argument for global equality of opportunity would conflict with the right of national self-determination. But other political philosophers like Thomas Pogge believe that in an interdependent world, the dominant role of chance in people’s life is not to be accepted lightly (Pogge 2008). I am not proposing a solution to this issue, yet, I believe that economists should not shy away from addressing it.1

As gaps between nations diminish, mostly thanks to the high growth rates of Asian countries, the citizenship rent will tend to reduce. But there is such a huge gap today that even a century of much higher growth in poor countries (in comparison to rich countries) will not eradicate citizenship rent.

However, it will reduce. As it does, it will also reduce overall global inequality. This might then lead us to a world not dissimilar to the mid-19th century, in which class is again more important for one’s global income position than location.

Do I hear the distant sound of Marx?

References

Milanovic, B (2011), The haves and the have-nots: a short and idiosyncratic history of global inequality, New York: Basic Books.

Milanovic, B (2015), “Global Inequality of Opportunity: How Much of Our Income Is Determined By Where We Live?”, The Review of Economics and Statistics 97(2): 452-460.

Mohammed, A (2015), “Deepening income inequality”, World Economic Forum report.

Pogge, T (2008), World Poverty and Human Rights, Polity Press.

Rawls, J (2001), The Law of Peoples, Cambridge, MA: Harvard University Press.

Roemer, J (2000), Equality of Opportunity, Cambridge, MA: Harvard University Press.

Shachar, A (2009), The Birthright Lottery, Cambridge, MA: Harvard University Press.

Footnote

1 Legal scientists such as Ayalet Shachar have written about addressing global inequality from a legal standpoint, proposing a much more flexible and open definition of citizenship (see Shachar 2009).

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Equality, Justice and Other Nonsense

There are different conceptions of “equality”, and “justice”, but only some of these conceptions are commensurate with the institutions of individual liberty, private property, consensual contractualism and personal accountability. This essay argues that classical-liberal thinkers like Adam Smith and John Locke offered superior conceptions of equality and justice than much of the contemporary discourse does. This essay claims that the contemporary use of equality and justice is nonsensical; whereby nonsense is the absence of meaningful denotation and the intentional hiding of subjective normativity. 

Sound and Fury 

“I have found that words that are loaded with pathos and create a seductive euphoria are most apt to promote nonsense” – The German novelist Günter Grass was not referring neither to equality nor justice in this interview to Der Spiegel on August 20^th, 2010. But the warning stands. In the contemporary discourse, both concepts are loaded with pathos. Agents of different persuasion use the seductive euphoria of these terms to promote nonsense, or even worse.

Thomas Piketty, in his 2014 Capital in the Twenty-First Century, is one example. He studies wealth and income inequality in Europe and the US since the 18^th century. Piketty claims that inequality is not an accident but rather a feature of capitalism that can be reversed only through state intervention. And further, unless capitalism is reformed, the very democratic order will be threatened. The recipe for capitalism’s reform is a global tax on wealth.

There have been many criticisms of Piketty (2014) for reasons of methodology and his treatment of data, which is rather generous to himself (Sutch 2017, Acemoglu & Robinson 2015). Carlos Góes, an economist with the International Monetary Fund, did not find any empirical confirmation of Piketty’s (2014) central empirical thesis. According to him, when the rate of return on capital (r) is greater than the rate of economic growth (g), over the long term, the result is concentration of wealth. in fact, Góes even identified an opposite trend in 75% of the countries that he studied (Goes 2016).

Nonsense is, in the meaning of this essay, the absence of meaningful denotation and the intentional hiding of subjective normativity. Piketty, in reducing all economic issues to one and not defining his independent variable (capital), puts himself outside the factual, or academic, discourse.

But the most problematic failure of Piketty’s work occurs on a conceptual level. He reduces all economic problems of the past 200 years to inequality. He makes readers think that nothing else matters. Furthermore, he does not define some of his most important concepts, such as capital. Not even the conception of inequality is duly explored: Piketty seems to reduce it to a comparison of results, namely the stocks of (some) capital held by different people. Finally, he does not explore different solutions and their possible impacts on capital itself, its allocation, or distribution. He only suggests one remedy and does not even offer an economic explanation for why or how the tax on wealth reforms capitalism or strengthens the democratic order. Piketty (2014) does also not discuss the impacts of such a tax on private property, contractualism, liberty, and on productivity. To his defense: he does not need to address these issues, because he disregards them. For him, only inequality matters – the rest does not.

Piketty is an example for the nonsensical use of a concept – in this case, equality. Nonsense is, in the meaning of this essay, the absence of meaningful denotation and the intentional hiding of subjective normativity. Piketty, in reducing all economic issues to one and not defining his independent variable (capital), puts himself outside the factual, or academic, discourse. If a model cannot be assessed by a third-party observer and if data can neither be replicated, proven false, nor made plausible, then an argument cannot be convincing by its validity, but only, if anything, by its normativity. Similarly, when Piketty (2014) proposes a wealth-tax without even examining its consequences or alternatives, it becomes clear that his work reflects a personal normative agenda. He uses the concept of equality to hide his normative intentions and to give academic pedigree to his argument.

A similar discourse occurs regarding justice, or its absence. For example, Buchanan & Mathieu (1986) said that “justice is usually said to exist when a person receives that to which he or she is entitled, namely, exactly those benefits and burdens that are due the individual because of his or her particular characteristics and circumstances”. John Rawls’ (1971) theory is that justice is fairness and fairness can be achieved by redistribution. But Rawls is not a crude redistributionist. He echoes Ricardo when he bases his Theory of Justice on two principles. First Principle: Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all. Second Principle: Social and economic inequalities are to be arranged so that they are both: (a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and (b) attached to offices and positions open to all under conditions of fair equality of opportunity.

However: What is suspicious of being result-oriented thinking in Rawls’ (1971) case, is clearly normative in Buchanan & Mathieu (1986). Neither seems interested in justice, per se, but in policy-prescription. They hide personal normative agendas behind the concept of justice; they create the impression of their own idea of justice as an objective one. And they rely on the moral intuition attached to that term as well as on its apparent objectivity to legitimize the policies they advocate. In both cases, policies are being suggested without alternatives being evaluated and without the consequences of such policies being studied – at least not the consequences for the individual. Note also that both policy prescriptions heavily rely on institutions – as bureaucratic entities with regulators privileged over the individual – administering these policies. At the same time, neither reviews how institutions in their organizational sense and their structures of incentives and power might contribute in making situations unjust. 

Nonsensical Discourse 

When this essay claims justice and equality to be nonsense, it understands much of the contemporary discourse about it as nonsensical. Instead of evaluating the conceptions of equality or justice, result-oriented thinking and masked normativity guide the contemporary use of these terms. This might be intellectually dishonest, but it is especially perilous to the institutions – in the sense of the rules of grammar of social interaction – that protect and empower the individual: individual liberty, private property, consensual contractualism, and personal accountability.

The interesting turn of events is that classical liberalism was at the vanguard of the advocacy for equality and justice in the 18^th and 19^th centuries. Both concepts are central to thinkers such as John Lock, David Hume, or Adam Smith. What happened? Why were these concepts, if anything, valid then, and are invalid, nonsensical, or even destructive now?

They hide personal normative agendas behind the concept of justice; they create the impression of their own idea of justice as an objective one. And they rely on the moral intuition attached to that term as well as on its apparent objectivity to legitimize the policies they advocate.

The problem is not the concept, but the conception, i.e. the set of ideas standing behind the terms. In the past 50 years, the framework of reference for both changed radically. These concepts were appropriated by a specific political normativity. Uncovering the change helps to understand why most contemporary talk about equality and justice is nonsensical in the understanding of this paper. But it also points at how to make sense of them. Looking back at the ideas of classic liberal thinkers proposes meaningful alternatives to understanding and using justice and equality – without result-oriented thinking, hidden normativity, and political appropriation.

McIntyre (1988) cautions that:

An analysis of the concepts of justice and rationality contends that unresolved fundamental conflicts exist in our society about what justice requires, because basic disagreement exists regarding what the rational justification is for acting one way rather than another. […] Thus, no such thing exists as a rationality that is not the rationality of some tradition. Aristotle, Augustine, Aquinas, and Hume are four major philosophers who represent rival traditions of inquiry. Each tradition developed within a particular historical context and sought to resolve particular conflicts. Allegiance to one tradition can allow for meaningful contact with other traditions in a way that can lead to understanding, vindication, or revision of that tradition in its continuing form. Thus, only by being grounded in the history of our own and opposing traditions will we be able to restore rationality and intelligibility to our moral attitudes and commitments today.

Going back to the conceptions of justice and equality of classical liberalism is an exercise to enrich and make contemporary discourse better. It offers an alternative view that is neither result-oriented nor particularistic. It is based on liberty, private property, and voluntarism, as well as and guided by the principle of proportionality – which can be summarized by the folksy-ism: “You must not use a steam hammer to crack a nut, if a nutcracker would do (for the reference, see common law case R v Goldstein [1983] 1 WLR 151, 155).” 

On Justice 

Defining justice is a difficult task. Theories of justice are abundant. It seems that conceptions of justice are bound by culture, historicity, and most importantly, ethical preferences. While some define justice as the pre-established harmony of a society (Plato, Aristotle), others understand it as the product of Divine Command (Bible) or of Nature (Ancient China) or of Natural Law (Scholastics). Yet others take justice to be a human creation, for example either through despotism (Chinese Legalism) or mutual agreement (Rousseau). Then, there are conceptions in which justice only plays the role of a subordinate value, for example in Mill’s utilitarianism. There, justice is just the by-product of social utility-maximization (Fay 1996).

Theories of justice usually focus on distributive, retributive, and pragmatic issues: 

• Theories of distributive justice need to answer three questions:

1. What goods are to be distributed – e.g. wealth, power, opportunities, etc.?
2. Between what entities are they to be distributed – e.g. present people, future people, past people, sentient beings, members of groups, objects, etc.?
3. What is the proper distribution – e.g. equal by input, equal by output, equal by process, meritocratic, by property, by status, by need, or can justice even be distributed?

Typical issues in distributive justice are social justice, fairness, property rights, and welfare-maximization. Generally, distributive justice theorists do not answer the question of who has the right to enforce a favored distribution. On the other hand, theories of distributive justice do not necessarily favor a type of distribution. Rather, many of them merely observe and describe distribution patterns according to some conceptions of justice. Other yet observe how distribution changes, as individuals interact. There is also a subset of this group of theories, focusing on the re-distribution of justice. This subset asks how to remedy unjust distributions. This group of theories first tries to identify what an unjust distribution is and then resort to institutions of redistribution – as organizations and/or as grammars of social interaction – tasked with redistribution. 

• Theories of retributive justice are concerned with punishment for wrongdoing, and need to answer three questions:

1. Why punish?
2. Who should be punished?
3. What punishment should wrongdoers receive?

Utilitarian theories look at the future consequences of punishment. Some often claim that strict punishment is just because it brings disincentives to wrongdoing. Others claim that lenient punishment is just because it reinforces inclusive social values. Then, there are retributive theories that look back to particular acts of wrongdoing, and attempt to balance them with deserved punishment. Some theories belonging to the redistributionist subgroup attempt arguing for redistribution based on retributive justice, i.e. if a good is unjustly distributed, the unjust distribution is a wrongdoing which must be retributed by redistribution. 

• Pragmatic theories of justice are concerned with the application of justice.

For example, which institutions guarantee justice, who is in charge of observing what is unjust, what is the relationship between justice and law, or, which theories of sentencing are there? Pragmatic theories of justice are also interested in the evolution of the conception of justice. 

The Complexity of Justice 

The uses of the word “justice” criticized in this essay as well as the classic liberal theories discussed in its remainder belong to the first group, distributive justice. Note, again, that this does not by necessity entail a normative desideratum of how justice ought to be distributed – let alone a distribution of justice by organizations of distribution. It merely treats justice as a good and asks how this good is factually encountered or exchanged in a community or society. John Locke (1632 – 1704) claiming justice to be a propriety of the natural rights of humans and Buchanan & Mathieu postulating justice as an entitlement belong both to the group of distributive justice, even if they want justice to do different things.

The problem is not the concept, but the conception, i.e. the set of ideas standing behind the terms. In the past 50 years, the framework of reference for both changed radically. These concepts were appropriated by a specific political normativity.

Note furthermore that all conceptions of justice are based upon assumptions. Some assumptions seem relatively easy to accept, for example the existence of things, the reality of human behavior, or the group-orientation of this behavior. However, many other assumptions prove much more difficult to defend, for example, objective social desiderata, transitive valuation of desiderata and utility, context-independence of justice, or social independence of justice. The problem with most of the difficult and with some of the easy assumptions is that they fail at the individual. They fail to conceptualize justice as something that underlies subjective valuation. While most distributive theories of justice accept that justice is a good, not all of them do conceive this good as something that could have different values depending on its scarcity, context, or the preferences of the individuals involved in the distribution of the good. Instead, most theories of distributive justice imagine justice as a context-independent objective value – a value that can be asserted either by the community, by the society, by experts, or by organizations (Primeaux et al 2003, Sandel 1998).

What does justice being a matter of individual and subjective valuation mean? Firstly, it entails that justice is dependent on the individuals involved in the distribution and exchange of justice. Secondly, it says that the value judgement of those involved will vary from individual to individual, but also from context to context.

For example, Aðaldís is the owner of a bakery in Northern Iceland; without explaining or advertising for it, she lets everyone, customer or not, use the bakery’s toilet. Regina is a first-time customer. She wants to use the washroom but thinks it improper to do so without consuming, so she orders a cup of coffee. Ada is not a customer either; she enters the bakery and uses the toilet without buying anything. If there is no further exchange between them, everyone seems to accept the situation – tacitly – as just.

But imagine a different context: here Regina complains that she feels treated badly, because, to use the washrooms, she felt compelled at buying coffee. Also, Aðaldís might feel unjustly treated by Ada. And if any of them signal their feelings to Ada, even Ada might judge having been treated unjustly, because there were no signs of the obligation to consume in order to use the toilet prior to its use; or she might feel entitled to using the washroom and perceives therefore any attempt of preventing her from doing so as unjust. In this example, however, the three have possibilities of dealing with their individual judgements of justice. These possibilities entail exchange; for example, the exchange of money, the exchange of information, and the exchange of rules.

As far as the first is concerned, Aðaldís could set a fee for using the toilet. In the second case, she could put up a sign telling the rules of washroom-use. If she does not, she thinks that non-customers using the toilet is just, or she is just indifferent to it. But Ada and Regina alike could engage in the exchange of money and information. Ada could try to reason with either Aðaldís and / or Regina. If either makes a case and the others accept it, who is to say that the solution is unjust? In any case, there are different ways of dealing with the situation and the different, maybe divergent judgements of what is unjust. But what if no conclusion is reached? What if Ada, for example, still feels treated unjustly? What if Aðaldís wants to treat Ada and Regina differently, which leads Regina to feel unjustly treated?

While the appreciation of justice is dependent on context and individual valuation, the remedies against its distributions that are perceived as unjust are not. There are institutions – grammars of social interactions – that at the same time enable different valuations of justice and ward off incursions into an individual’s valuation, if that individual has an ultimately legitimate claim to ward off the incursion. The individual with the legitimate claim in the sense of the grammar of social interactions will be better equipped to implement its valuation of justice, trumping others while doing so.

While some define justice as the pre-established harmony of a society (Plato, Aristotle), others understand it as the product of Divine Command (Bible) or of Nature (Ancient China) or of Natural Law (Scholastics). Yet others take justice to be a human creation, for example either through despotism (Chinese Legalism) or mutual agreement (Rousseau). Then, there are conceptions in which justice only plays the role of a subordinate value, for example in Mill’s utilitarianism. There, justice is just the by-product of social utility-maximization.

In the example above: Aðaldís could resort to her property rights to impose her view on justice. It could either be letting everyone use the toilet or not, charging for the use of the washroom or not, differentiating between who can use, or even banning Regina from the bakery for complaining. Because of Aðaldís’ legitimate claim to private property, one of the main aspects of the grammar for social interaction, her subjective valuation of justice can prevail, albeit only in the context of her bakery. This does not mean that the other two individuals will accept Aðaldís’ decision as just. Perhaps they will do so; but due to the context they at least have to accept the hostess’ legitimate claim to the grammar of social interaction. Despite their individual valuation of the situation, they can react to the prevailing view, for example by seeking other bakeries or by turning into regulars. Finally, as context changes, valuations change. Maybe a massive inflow of tourists leads the baker to reconsider her position.

This example shows that the ensemble of individual valuation, discourse, exchange and claims basing on the grammar of social interaction makes the situation justice-apt. The valuation of justice is subjective, but the exchange of it is intersubjective. While the valuation is context dependent, the exchange relies on the grammar of social interaction, which, in turns, takes the context into account. 

Virtues and Justice 

Justice being a subjectively valued good does not entail absolute relativism, as far as classical liberalism is concerned. Instead of focusing on inputs, processes, and outputs – these being all a matter for subjective valuation and intersubjective transactionalism –, classical liberalism pivots on the moral character of the individual. After all, it is the individual that seeks justice and therefore wants to act justly, at least in a given context. Most importantly, this vision of justice captures an important intuition and institution: (Some) Individuals just want to do the “right thing”. The “right thing” depends on the individual’s circumstances, possibilities, and judgement. Since it will be the individual’s character guiding the person through these situations, according to many conceptions of classical liberalism, justice is a subjectively valued good but also a virtue of the individual.

There is no confusion in the double use of the same term. While justice, as a good, is the result of a context-sensitive subjective valuation by the individual, that individual can make that judgement on the basis of the virtue of justice. It is the strength of an individual’s character that allows for the subjective valuation of the justice of a given situation.

Virtues are the traits or strengths of character of individuals. (Vices, on the other hand, are the weaknesses of character). A virtue is a disposition, well entrenched in its possessor – something that “goes all the way down”, unlike a habit – to notice, expect, value, feel, desire, choose, act, and react in certain characteristic ways. To possess a virtue is to be a certain sort of person with a certain complex mindset. Possessing a virtue is a matter of degree. To possess such a disposition fully is to possess full or perfect virtue, which is rare, and there are several ways of falling short of this ideal. Most people who can be described as virtuous, and certainly markedly better than those who can truly be described as dishonest, self-centered and greedy, still have their blind spots – little areas where they do not act for the reasons one would expect. So, someone honest or kind in most situations, and notably so in demanding ones, may nevertheless be trivially tainted by snobbery, inclined to be disingenuous about their forebears and less than kind to strangers with the wrong accent.

Practical wisdom goes hand in hand with virtue. It is the individual’s capability of recognizing the context in which to act and which virtue to privilege. Generally, given that good intentions are intentions to act well or “do the right thing”, practical wisdom is the knowledge or understanding that enables its possessor to do just that, in a (or any) given situation (for a more complete discussion of virtue ethics, virtues, and practical wisdom, refer to Snow (2010) and (2015)).

Justice was already considered a virtue by Adam Smith (1723 – 1790). The author of The Wealth of Nations as well as The Theory of Moral Sentiments can be read as a virtue-ethicist (see Schneider (2018, forthcoming), McCloskey (2006), and Griswold (1999)). In fact, in both books and in the collection of essays and lectures later named The Theory of Jurisprudence, Smith stresses five virtues, which he understands as strengths of character: love, courage, temperance, justice, and self-interested prudence (which are different from the medieval set, the Cardinal and the Christian virtues: Prudence, Justice, Fortitude or Courage, Temperance, and Faith, Hope, Love).

In Smith’s work, justice is not a social desideratum neither is it an objective outcome. It is the capability of the individual to “do the right thing” in each context and under particular constraints. In fact, whether someone acts justly, or not, is something that can only be assessed in terms of introspection and of inter-subjective scrutiny. For Smith, there is no distribution, institution, institute, process, or outcome that is just or leads to justice (as an abstract term or theory). Justice is the strength of character of the individual and it is the individual that acts justly in given situations. Smith contends that there is a long-termed convergence of the individuals’ abstract notion of justice in The Theory of Moral Sentiments (1759). There, his theory of the impartial observer asserts some form of ethical convergence of virtues. But as the application of virtue to a specific circumstance is, as the observer is, too, a matter for the individual, there is only the long-term convergence because of actions by the individuals. 

Adam Smith on Justice 

In The Wealth of Nations, Smith defines natural liberty using justice (1776, 311):

“Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man”.

A not careful reading could suggest, here, that Smith is thinking about a justice rulebook. But in other passages of The Wealth of Nations, he makes it clear that justice is an infinite set of permissible actions that depend only on the agent. It does not mean that the induvial is free to do anything and rationalize actions as just. But it means that it is the individual that judges which virtue to apply, and how to apply it. It is the individual that values justice in a specific context and given the different courses of action to take. Justice, for Smith, is also the individual’s commitment to the negative of his proposition on injustice, which states that improperly motivated (that is, intentionally) hurtful actions alone deserve punishment because they are the objects of a widely shared sense of resentment.

By the way, The Wealth of Nations reserves a whole book to jurisprudence – which Adam Smith confusingly calls justice, or the administration of justice – in which the improperly motivated actions are treated. In this book, he makes it clear, again, that despite the individual valuation of justice – or the failure in doing so – there are instruments like the grammar of social exchanges, that lie outside the scope of virtue to give way to a person’s legitimate claims, especially private property.

Smith sees society as seeking human socio-economic betterment through the control of actions that common experience leads to judge as hurtful rather than through collective actions designed to achieve future conjectured benefits. The latter is uncertain and fraught with unintended consequences; moreover, to his appreciation, history is full of examples of grandiose failures in the name of objective desiderata disguised as justice. The former relies on natural impulses for individuals and assemblies to pursue betterment, risking only their own resources; this framework led him to oppose slavery, colonialism, empire, mercantilism, and taxation without representation at a time when such views were unpopular.

In Smith’s work, justice is not a social desideratum neither is it an objective outcome. It is the capability of the individual to “do the right thing” in each context and under particular constraints.

Also – and as every virtue-ethicist – in Smith’s thought, the individual never acts on one virtue alone. The virtuous individual knows how to combine all the strengths of character to address the specific situation. Smith’s analogy of writing, and his use of it to contrast justice with the rest of the virtues, is one of the most important parts of The Theory of Moral Sentiments. He considers how precision and vagueness, clear rules and ambiguous ideals, both have important roles to play in moral judgment (1759, 3, VI,11):

The rules of justice may be compared to the rules of grammar; the rules of the other virtues, to the rules which critics lay down for the attainment of what is sublime and elegant in composition. The one, are precise, accurate, and indispensable. The other, are loose, vague, and indeterminate, and present us rather with a general idea of the perfection we ought to aim at, than afford us any certain and infallible directions for acquiring it. A man may learn to write grammatically by rule, with the most absolute infallibility; and so, perhaps, he may be taught to act justly. But there are no rules whose observance will infallibly lead us to the attainment of elegance or sublimity in writing; though there are some which may help us, in some measure, to correct and ascertain the vague ideas which we might otherwise have entertained of those perfections. And there are no rules by the knowledge of which we can infallibly be taught to act upon all occasions with prudence, with just magnanimity, or proper beneficence: though there are some which may enable us to correct and ascertain, in several respects, the imperfect ideas which we might otherwise have entertained of those virtues.

Adam Smith’s and the classic-liberal approach to justice is in many ways less problematic than the contemporary discourse. It is less bound by unrealistic assumptions such as an ultimate objectivity of justice, or the organizational administration of the redistribution of justice. Considering justice as a good underlying subjective valuation and as a strength of character of the agent captures important notions of how individuals act without prejudging outcomes. On the other hand, it burdens individuals with responsibility. If justice is a strength of character, every individual becomes challenged by the own idea of justice in action and is therefore held accountable in every single action. In this view, justice cannot be outsourced to society, to organizations, or to government; justice is an immediate value and motivator of the individual in action.

On Equality 

This second term employed with seductive euphoria in the contemporary discourse is no less of a problem than the first. Equality, too, underwent some changes in its meaning over time. While it long ago meant equal obligation to follow the social desiderata pre-determined by nature and unveiled by the Logos (Ancient Greece), it was also understood as an isonomy of power relations among chieftains (Scotland, Iceland), clans (Mongols), aristocrats (most European monarchies and city-states) or as an equal subordination under a monarch (Qin and Tang China). Equality could furthermore be understood as an equitable value of human life (Hebrew Bible) (Siedentop 2014).

At the latest in 16^th century Europe, the idea that all people – at least all men – were created equal and therefore had equal claims to political rights became widespread. There was, however, considerable discussion about the implication of the claim. One of the most intrepid theorists of equality was the classical liberal John Locke. To his mind, equality is a property of the human being and the basis of the individual’s political and judiical rights – and namely it is not an adjective to outcomes, disparities, or processes (Waldron 2002).

Justice burdens individuals with responsibility. If justice is a strength of character, every individual becomes challenged by the own idea of justice in action and is therefore held accountable in every single action. In this view, justice cannot be outsourced to society, to organizations, or to government; justice is an immediate value and motivator of the individual in action.

Locke sponsors equality on the grounds that all people are created equal and therefore share the same liberty. As fellows in liberty, people should treat each other as equally free – namely not as subjects, subordinates, unfree, or slaves. As the basic condition of human life, equality enables people to deal with themselves and each other on a “level playing field”. It specially enables them to engage in the exchange of views and goods. This exchange being freely guided by valuations and merits and not by the supposed entitlements of a few in function of their birthright or state. In short, equality in Locke is a basic condition of life; all individuals have the same liberty, and property over themselves – this is equality. Locke’s problem is, then, how to maintain this absolute and equal liberty of the individual in a society? He solves his problem by examining the creation of society.

Locke begins with a thought experiment stipulating pure equality and liberty of all people in a “state of nature”. Equality, in his sense of the term, means that all people have equal individual liberties. It does not mean equal resources, or equal outcomes; it does not even mean that all have the same initial opportunities; it just means that all are equally free. Locke is quite outspoken about equality not being the absence of inequality of outcomes:

Though I have said above, Chap. II. that all men by nature are equal, I cannot be supposed to understand all sorts of equality: age or virtue may give men a just precedency: excellency of parts and merit may place others above the common level: birth may subject some, and alliance or benefits others, to pay an observance to those to whom nature, gratitude, or other respects, may have made it due: and yet all this consists with the equality, which all men are in, in respect of jurisdiction or dominion one over another; which was the equality I there spoke of, as proper to the business in hand, being that equal right, that every man hath, to his natural freedom, without being subjected to the will or authority of any other man (Locke, second Treatise, 54).

In the “state of nature”, equality empowers any individual to try anything as long as it does not interfere with any other individual. Equality also gives the individual the power to ward off incursions by others on their property, since no person can without consent be subordinated to another. Any attempt at curtailing someone’s property is, in Locke’s view, an aggravation against the person’s liberty, disrespecting equality. In this “state of nature”, Locke pictures people being guided the laws of nature as God intended them to be – the philosopher was, however, not too critical of his own reading of the Bible, which was quite literal. He begins his Second Treatise of Government establishing as truths of nature mainly that God is the creator and that he did not grant superiority to any individuals. “In races of mankind and families of the world, there remains not to one above another, the least pretence to be the eldest house” (Locke, Second Treatise, 1). 

The Polity 

Locke discards the notion of royal or noble superiority and sponsors, instead, the idea of equal liberties of all individuals. In the “state of nature” where all individuals are equal in their liberty, these individuals can find each other and voluntarily exchange goods, information, or even create groups. The freely created groups of equals develop, of course, their own version of a grammar for social interaction. If this set of rules becomes mandatory to the members of the group, it does so because the members freely opted into the group and can freely opt out. In these voluntaristic contracts forming groups – established by individuals dealing with each other on grounds of equality – Locke sees the beginnings of the polity. As it is the case with any contract, the basis of the social contract lies in mutual consent, and individuals, coming from a state of “perfect freedom” – i.e. the equal distribution of freedom in its absolute sense, would not be willing to settle for less when they leave this “state of nature” when they form groups and especially when they agree to create the polity through a social contract.

The Lockean meaning of equality entails equality before the law and the general rules of society and it necessarily excludes any claim by any member of the polity on results, entitlements, or even transactional chances – these types of claim, for Locke are profoundly unjust and lead to inequality.

The transition, from the “state of nature” to community, society, or polity fundamentally builds upon this idea that equality is the equal distribution of absolute liberty. In forming a polity, the parties of the contract transform their liberties into clauses of rights, more specifically, the rights to ward off non-agreed interventions of this polity on personal freedoms as well as any incursions by other individuals. Interventions and incursions are not only problematic per se, they also distort the equality of liberties:

Man being born, as has been proved, with a title to perfect freedom, and an uncontrolled enjoyment of all the rights and privileges of the law of nature, equally with any other man, or number of men in the world, hath by nature a power, not only to preserve his property, that is, his life, liberty and estate, against the injuries and attempts of other men; but to judge of, and punish the breaches of that law in others, as he is persuaded the offence deserves, even with death itself, in crimes where the heinousness of the fact, in his opinion, requires it. But because no political society can be, nor subsist, without having in itself the power to preserve the property, and in order thereunto, punish the offences of all those of that society; there, and there only is political society, where every one of the members hath quitted this natural power, resigned it up into the hands of the community in all cases that exclude him not from appealing for protection to the law established by it. And thus all private judgment of every particular member being excluded, the community comes to be umpire, by settled standing rules, indifferent, and the same to all parties; and by men having authority from the community, for the execution of those rules, decides all the differences that may happen between any members of that society concerning any matter of right; and punishes those offences which any member hath committed against the society, with such penalties as the law has established: whereby it is easy to discern, who are, and who are not, in political society together. Those who are united into one body, and have a common established law and judicature to appeal to, with authority to decide controversies between them, and punish offenders, are in civil society one with another: but those who have no such common appeal, I mean on earth, are still in the state of nature, each being, where there is no other, judge for himself, and executioner; which is, as I have before shewed it, the perfect state of nature (Locke, Second Treatise, 87).

Because the individual is free and equal in the “state of nature”, there must be an assurance of continuing freedom as the individual enters society. Thus, for Locke, the establishment of the polity occurs on the basis of assured equal liberties without which there would be no incentive to enter into society. This assurance occurs by making the individuals’ rights part of the social contract. Natural equality transitions as people leave the “state of nature” and form a society and a polity. Once the polity is established, equality becomes a constraint to the polity’s organizational design. Equality, in what later would be called status negativus, gives individuals the right to use institutional instruments – be them rules of the grammar of social interaction or the organization of the polity, or both – to which they have a legitimate claim to ward off intrusions by the polity and incursions by other individuals.

Equality is the driving force of Locke’s political theory because it is the basis for a consensual participation in society of equally free people, a prerequisite for the establishment of any polity. As such, equality is not just necessary in the establishment of government but also a protection of the citizen against this polity, once it is set up. The Lockean meaning of equality entails equality before the law and the general rules of society and it necessarily excludes any claim by any member of the polity on results, entitlements, or even transactional chances – these types of claim, for Locke are profoundly unjust and lead to inequality.

Locke’s idea stands in sharp contrast to more recent conceptualizations of equality, for example as ex-post or ex-ante states of affairs, results, social desiderata and so on. In fact, these more recent notions do contradict the Lockean view in many instances. Establishing equality ex post automatically disrespects the equality before the law of some; guaranteeing equality ex ante equally hurts the idea that every person has the same rights. Any intervention of the polity on the liberties of an individual hurts equality, unless the particular incursion has been explicitly agreed upon by the concerned individual. It hurts equality because it turns the individual into a subject, the very definition of inequality, according to Locke.

Locke’s ideas have been reviewed here because his conception of equality respects the principle of proportionality and does not hide its normative component. Granted, it is attached to normative presuppositions, but these are made transparent. To regard all people as free and equal is a normative assumption of classical liberalism. It is the operationalization of this conception of equality that remains free of normativity and respects a diversity of individuals as well as a plurality of outcomes. It is not prejudging the result; it respects the decisions made by equally free but differently-willed, capable, endowed, ingenuous, industrious, or lucky people. At the same time, it holds these individuals accountable to their decisions, even or especially in cases in which the decisions led to negative outcomes to the agent. Locke’s conception is undetermined and open textured and as such compatible with a free society. 

Sense 

The contemporary discourse on equality and justice is nonsensical: it uses these two concepts not to study them, but to hide normative preferences which lead to policy prescriptions. Since the contemporary conceptions of justice often generalize personal preferences by those putting them forward, they do injustice to individuals. Often, these generalized opinions about outcomes hurt liberties, property, and consensual contractualism. Additionally, these objectifications of personal values set aside the grammar of social interaction replacing it with the “rulebook” of an organization tasked with administering equality and justice. This move leads, per se, to the dehumanization of these conceptions.

When the terms “equality” and “justice” are just used as academic cover-ups for advancing particularistic agendas, they become nonsense, or mal-sense.

On the other hand, the classical liberal conception of justice as a good that is subjectively valued and dealt with according to individual virtues is much less normative. It is also less intrusive allowing for a plurality of outcomes mirroring the diversity of individuals. In addition, the classical liberal understanding of equality as the unconditional freedom which is equally distributed among all people is a proportionate way of committing to equality while allowing for individual development. This conception is made operational by the rights of individuals to ward off intrusions by the polity as well as incursions by other individuals, foremost on their private property.

Equality and justice are important concepts in the classic liberal discourse. They are important because they make sense in offering the individual an un-determined, open-textured, and level playing field in which each can act freely and be held fully accountable for the actions. A meaningful way of conceptualizing both terms maximizes individual liberty, private property, consensual contractualism and personal accountability. When, however, the terms “equality” and “justice” are just used as academic cover-ups for advancing particularistic agendas, they become nonsense, or mal-sense. 

References 

Acemoglu, D. & Robinson, J. (2015). The Rise and Decline of General Laws of Capitalism. Journal of Economic Perspectives, 29(1), 3–28.

Buchanan, A., & Mathieu, D. (1986). Philosophy and justice. In Justice (pp. 11-45). Springer US.

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Griswold, C. L. (1999). Adam Smith and the virtues of enlightenment. Cambridge University Press.

Locke, J. (1698, 1946). The second treatise of civil government: And a letter concerning toleration. B. Blackwell.

MacIntyre, A. C. (1988). Whose justice? Which rationality? University of Notre Dame Press.

McCloskey, D. N. (2006). Bourgeois Virtue. University of Chicago Press.

Piketty, T. (2014). Capital in the Twenty-First Century. Belknap Press.

Primeaux, P. S., Karri, R., & Caldwell, C. (2003). Cultural insights to justice: A theoretical perspective through a subjective lens. Journal of Business Ethics, 46(2), 187-199.

Rawls, J. (1971). A Theory of Justice. Belknap Press.

Sandel, M. J. (1998). Liberalism and the Limits of Justice. Cambridge University Press.

Schneider, H. (2018). Virtues Matter: The interested self in Adam Smith and Confucius. Dao, forthcoming.

Siedentop, L. (2014). Inventing the individual: The origins of Western liberalism. Harvard University Press.

Smith, A. (1759). The theory of moral sentiments. Raphael, D & MacFie, A. (eds.), Liberty Fund.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Longman.

Snow, N. (2010). Virtue as Social Intelligence: An Empirically Grounded Theory. Routledge.

Snow, N. (ed.) (2015). Cultivating Virtue. Oxford University Press.

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China, Piketty, and Patrimonial Capitalism

Thomas Piketty’s new book on inequality, Capital in the Twenty-First Century, has stirred renewed and widespread interest in growing global inequality. Although the title of Piketty’s book is provocatively similar to Marx’s magnum opus, Das Kapital, Piketty openly rejects Marx’s work because it fails to incorporate empirical evidence (he also reveals in an interview that he hasn’t read it all). By contrast, using copious empirical data based on surveys and tax records, Piketty points out that capitalism fundamentally leads to inequality, since the profit rate grows faster than income and output. Piketty’s work revives the debate over the “social state” versus pure capitalism and, as we discuss in this article, can be used to highlight the enormous change of course in China’s political economy and the predicament of growing inequality in the country today.

As is known, China under Mao was strictly anti-capitalist and, in some crucial ways, egalitarian. Within work units and communes, families received equal amounts of income. Despite the fact that there were some differences between incomes in rural and urban areas (as has been pointed out by scholars like Martin Whyte), no citizens were allowed to accrue wealth. Capital accumulation by individuals and capitalism itself were strictly verboten and viewed as “feudalist” and “imperialist,” while revolution from the bottom classes was encouraged. The idea was that capitalism was inherently unequal, and the answer to this inequality was a Chinese strain of socialism.

Unfortunately, this ideology, as implemented under Mao’s leadership, resulted in a cycle of poverty, since no one had access to capital. As a result, China’s economic stagnation under Mao was used in the West to illustrate the failure of anti-capitalist economics, and after Mao’s death, it appeared that promotion of a market economy was the only way out of poverty.

Indeed, Deng Xiaoping saw the growth of markets as a way out of economic torpor. Even so, China’s leadership faced a strong debate over whether it should become capitalist or retain control over its economy in the eighties. Following the Third Plenum of the Twelfth Central Committee in 1984 through the Tiananmen debacle in April 1989, two schools emerged regarding economic modernization. One feared reform and continued to revile capitalism, while the other greatly desired an opportunity to enrich itself. Over time, those in the latter camp won out, despite Deng’s firm commitment to rout out “bourgeois liberalization.”

China chose its own form of (dare-we-call-it) capitalism, a socialist market economy, which incorporated both government intervention and market movements. This form of state capitalism has ultimately rejected the target of economic equality, which was an important component of Maoist ideology (however muddled the latter became over time). In a perverse display of economic modernization, “the people” – that is, the lower classes and particularly the peasantry – have been entirely stripped of economic and social power, while those with capital have gained power in multiple avenues: economic, social and political. The economic “feudalism,” which Mao strenuously opposed, has regrettably taken root.

In China, the socialist market economy has, as in other nations, developed into a “patrimonial capitalism” (Piketty’s term for unequal capitalism in the West), in which wealth is handed down from one generation to the next. Although millions of Chinese were pulled out of poverty by growing wages attributable to sheer economic growth, a searing inequality has now arisen. This can be attributed to the uneven growth of returns to capital versus output (i.e., profit versus wages) that Piketty underscores in his book. The horror of rampant poverty, in which individuals were forced to “eat bitterness” in the name of egalitarianism has, in China, given way to the devil of pervasive capitalism, in which the poor remain underfed while the wealthy fatten themselves in luxury. It appears that, after all of this time, neither Mao nor Deng had the whole answer when it came to economic dogma. So what is the solution to China’s problems associated with equality versus growth?

Piketty, without intending a policy prescription specific to China, provides a middle way between these two extremes that is eminently applicable to China today. Piketty resurrects the idea of a “social state” that redistributes wealth, via taxation, from the rich to the poor via the state, which would provide public services and replacement incomes to boost access to health, education, and pensions. An increase in taxes on the wealthy would increase government funds used to finance social programs.

This is a strong solution for China’s growing income gap, which has fuelled social unrest and generated immense disparities between the elite and the economically disenfranchised. While Piketty himself lauds progressive taxation in China, he neglects the nature of wealth holdings by China’s elite within corporate and/or state entities. This, coupled with insufficient enforcement of tax laws, has dampened the benefits that a progressive tax might offer and has resulted in deepening inequality.

Enforcing tax laws and curtailing the use of loopholes in wealth holdings would provide the state with more funds, which it should use to expand social services as it grows. These policies would require substantial state support, but only in this way can China’s capitalist trajectory be checked and a meaningful compromise between egalitarianism and growth be struck. Perhaps then, capital can take on a gentler, less inflammatory meaning in China.

More read

Mark McKerrow (1999) The Differential Development of Capitalist Agriculture in Patrimonial and Feudal Societies

Oliver Schlumberger (2004) Patrimonial Capitalism; Economic Reform and Economic Order in the Arab World

Branko Milanovic (2014) The Return of Patrimonial Capitalism

François Bonnet & Clément Thery (2014) Sociology and Political Science in the Patrimonial Society: Implications of Piketty’s Capital

Robert Hunter Wade (2014) The Piketty Phenomenon: Why Has Capital Become a Publishing Sensation?

Ingvild Almas et.al (2019) Cutthroat Capitalism versus Cuddly Socialism