Excerpt
List of contents
Abstract
Preface
List of contents
List of abbreviations
List of figures
1 Introduction
2 Economic theories as foundation for prosperity and progress
2.1 Emergence of the economic theory and the inheritance of its initial sin
2.2 Advancement of the human being to the central figure in the economy
2.3 Containment of devastating character traits in the economic domain
2.4 Correlation between the prevailing economic theory and (in)equality
3 Inequality levels in regions with diverse economic systems
3.1 Japan: Transition from planned development to free market economy
3.2 Germany: Social market order as consequence of ordoliberal thinking
3.3 USA: Meritocracy formed by an almost pure capitalist economic system
3.4 Failure of the (welfare) state and its potential harmful consequences
4 The most appealing philosophies of justice and (in)equality
4.1 Political equality – Justice of equal rights and political participation
4.2 Economic equality – Justice of the distribution of income and wealth
4.3 Social equality – Justice of opportunities and settings for a decent life
4.4 Equality matrix to achieve fairness as overarching societal objective
5 Compilation of a comprehensive tool kit to achieve fairness
5.1 Regulative: The economic alignment towards a long-term perspective
5.2 Corrective: The creation of a condition with fairly-distributed resources
5.3 Prevalent: The achievement of equality of opportunity in the society
5.4 Predictive: The state of inequality will not be an eternal circumstance
6 Human-centred business and market economy framework
6.1 Columns of an economic system that ensures sustainable well-being
6.2 Micro-level: Regulated scope of business behavior with a liberal quality
6.3 Macro-level: Intervention instruments for overall balance and stability
6.4 Theory of reasonable Progress as response to neoliberalism’s failure
7 European integration within a clear determined framework
7.1 Strong civil society as a precondition for further integration progress
7.2 Critical perspective on the integration process and remedy measures
7.3 Decision between two different categories of European collaboration
7.4 Vision of a continent that creates confidence by retrieving humanity
8 Conclusions
Bibliography
Abstract
The negligence of humanity in economics has already led to huge inequalities in different spheres. This paper does focus on social inequality as the considered root-cause for economic inequality while noticing the interrelations between political, economic, and social inequalities. Therefore, the introduced normative concept aims at the establishment of a long-term perspective in the economic sphere, the fairly-distributed allocation of resources as result of political interference, and the ensuring of equality of opportunity in the social sphere by realization of the Theory of liberal Fairness. The intention is to enable citizens as well as societies coping with future challenges while putting the human being back in center. To allow such state, the Theory of reasonable Progress is proposed as economic system that is based on Ordoliberalism with some Keynesian elements.
The inquiry begins with some theoretical economic concepts and examines the origins as well as different levels of inequality in three countries with their special adoption of a market economy while investigating in each of them the owners of social responsibility. It is followed by a selection of some applicable as well as practicable theories of justice and the compilation of diverse measures in form of a comprehensive tool kit for the establishment of fairness as a response to the growing inequalities in our society. Hereby, the ownership of social responsibility is shared between the public and the private sector. These outcomes will be utilized to develop a framework for the promotion of humanity in economics while also maintaining a high degree of fairness. Consequently, these concepts will be applied to the European Union as an example for their proposed functioning.
Preface
The issues of inequality have finally arrived in public, media, and private discussions but appropriate concepts are still lacking. Moreover, the awareness that something needs to change and the willingness of politicians to tackle todays grievances are widely missing. Immanuel Kant developed already in the 18th century a general rule and great advice. The Formula of Humanity is regarded as introducing the idea of respect for individuals which is essential to our well-being. Therefore, in the words of one of the most important philosopher of all time: “So act that you use humanity, whether in your own person or in the person of any other, always at the same time as an end, never merely as a means” (Kant 1785:66-67). Thus, no human being should use a contemporary as a device to accomplish his or her objectives. This rule does even imply equality of opportunity as an objective. Furthermore, it implies fairness. There are, as usual, various opinions about the meaning of fairness and about the owners of social responsibility in a society. Many people have suffered bad luck and things got worse, for which they cannot be held responsible. A child that is growing up in such circumstances should have the same life chances: to receive a good school education and to join a university, aiming at the creation of a better life for oneself and for his or her family. Social upward mobility doesn't work anymore as a general principle - at least not without some considerable indebtedness. The economic system in Germany as well as in other developed countries, does leave behind such people. Even with dedicated work is an escape quite difficult. The middle class is shrinking and something needs to change in our societies. I hope that this contribution will inspire some peers to think about it.
Patrick Pobuda
Berlin, Germany
March 2017
for
Anna Maria
List of abbreviations
illustration not visible in this excerpt
List of figures
Figure 1: Historical Data on Economic Development in the United Kingdom
Figure 2: Historical Data on Income Distribution in the United Kingdom
Figure 3: Historical Data on Wealth Distribution in the United Kingdom
Figure 4: Data on Inequality-related Indicators in Japan
Figure 5: Data on Inequality-related Indicators Germany
Figure 6: Data on Inequality-related Indicators United States of America
Figure 7: Equality Matrix of Theory of liberal Fairness
Figure 8: Micro-level of Prosperity Framework (Regulative)
Figure 9: Macro-level of Prosperity Framework (Corrective)
Figure 10: Prosperity Framework of Theory of reasonable Progress
1 Introduction
Economic prosperity in association with a liberal environment facilitates ingenuity and allows the human being to develop. Liberalism is not solely the freedom of thinking, speaking, and acting within the framework of democratic rights and a liberal market economy; it paves the way for accomplishing outstanding achievements and for getting compensation for those dedicated endeavors. Supported by the equality of opportunity, every human being can participate in the success story of mankind while having a decent life.
However, the current economic and societal development is in favor of a downward spiral since inequality is steadily rising which is heavily acting against the ideal of mutual human progress and equality of opportunity. Free market forces should regulate the balance between income and performance. The mechanism did never work sufficiently, or at least has stopped functioning, since the return on capital/investment is usually higher than the income through ordinary work. Accumulation of wealth accompanied by increasing political influence of wealthy people and diminishing moral principles in societies is an essential threat to the public order because political participation as well as equal opportunities are weakening for social groups who do not belong to the better-off. Unshackled greed in the wake of unregulated markets inspires wealth concentration and will constantly remove the synergies of individual liberty and prosperity. More regulation is required since the market itself is not sufficient to create a fair society that is worth living in. Most investors are seeking for opportunities to increase their returns rather than funding socio-beneficial measures. Human values seem to become less valuable, the world is increasingly turning to a clear divided two-class system – the rich and powerful, who almost govern the world by fuzzy linkages, while subordinate citizens are subject to the shareholder-subjugated companies and to the ruling classes. The goal of economic activity should simply be the prosperity of human beings and their societies, and not the formation of centers of enormous private equity accumulations and huge conglomerates who practically rule the world in their interest. Therefore, humanity, which should be the objective, is on the wane since the division of society is further increased by politicians and managers who are mostly obliged to short-term success and not to sustainability. Egoism and inconsiderateness seem to be the leading character traits in meritocracies.
The public concern about inequality and its consequences is steadily growing while the gap between the rich and the poor is increasing. Some associations and initiatives have been founded with the purpose to draw attention to the issues of social inequality as well as asymmetrical wealth concentrations in addition to unequal distribution among societies and regions. It took some time until the academic world has become sensible about these developments. In the beginning of the twenty-first century, Thomas Piketty and Emmanuel Saez published some evidences of income and wealth inequality as well as its significances. From this point on, inequality has become an important topic of economic research and rising incomes at the very top began to come into view. But before, economists mostly ignored these developments. Lester Thurow was a significant exception, but his arguments didn’t get much attention within the academia. The American political economist warned already in the 1970s of an expanding income inequality and its consequences for the society. In the early 1990s, James Poterba and Paul Krugman remarked what appeared to be a sharp rise in incomes among those at the very top. Income inequality was for a short time a central political matter; Bill Clinton cited estimates of Krugman about that topic on his campaign trail in 1992. Clinton’s political priorities as well as the research interests of these two economists had quickly shifted since it wasn’t a matter of concern by which academic and public prestige could be widely enhanced.
Moreover, inequality was at least in the early beginning of economic thinking considered as a crucial circumstance (and is still considered important in neoliberal reflections) because in a meritocracy are unequal living conditions required to motivate human beings for seeking wealth and happiness, but also to have less-educated people for dead-end jobs. Nowadays, menial jobs are usually outsourced or replaced by machines. Developed countries require, to maintain their business locations, highly skilled workers since technological progress and digitalization change the whole work environment as well as the society. Nevertheless, inequality reduces massively equality of opportunity and in this way, prevents several social classes from acquiring the needed knowledge to engage in the future job market. Therefore, the ability of a society to bring up open-minded and educated citizens is deeply connected with the equality of opportunity in our civilization. Equality, as a mean to achieve fairness, might be one of the future driving forces of economic growth and this lever might increase or decrease the progress of the economy which is decisive for the enhancement of the society as well as human life at all. Consequently, inequality is not just a moral, political, and social issue, but also an economic one. These considerations do finally lead to the central research question of this paper:
Which comprehensive political, economic, and social framework could create as well as retain the balance between individual liberty, social justice, and economic efficiency to contain destructive human misconduct in the wake of steadily increasing inequality?
The inquiry begins with some theoretical economic concepts and examines the origins as well as different levels of inequality in diverse systems (countries) around the globe. It is followed by applicable as well as practicable theories of justice and the compilation of measures for the establishment of fairness as consequence of decreasing inequality in our society while focusing on the ownership of social responsibility and obligations. These outcomes will be utilized to develop a framework for the promotion of humanity in economics and will be applied to the EU as an example for their proposed functioning.
2 Economic theories as foundation for prosperity and progress
The author of one of the most influential books in the 20th century believed that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else" (Keynes 1936:383). These words by John Maynard Keynes are indicating quite well the meaning of economic and political thoughts in the sphere of human development. In prosperous and settled times, tremendous progress in various fields of science could be observed in history – and a massive standstill in opposite circumstances. The Roman Empire enabled most groups of its society to enjoy and to create prosperity. Advancements in many areas of daily life were the result. But, the kingdoms of the Middle Ages were mostly eager to subjugate their people and to pile up their fortune through exploitation instead of economic growth and technological progress. However, the story changed again with the Renaissance and Industrial Revolution. Prosperity and liberty seem to be driving forces of progress and vice versa. Therefore, to further human development, a concept is required to empower these ones and to prevent the abuse of power.
Which economic theory in history has proved its ability to enable a path of sustainable growth and the willingness to foster human prosperity by reducing harmful inequalities?
The following analysis is not a comprehensive debate on economic thought of inequality. Instead, the focus is on the consideration of inequality and how some prominent economists thought about it, which laid the foundations of the two most debated economic theologies (Neoliberalism and Keynesianism). The range of the involved economists is limited to the two major theoretical schools of economic thinking since later theories are using these ones for their work as basic considerations. An exception forms the attention to the Ordoliberalism which will be discussed after them. Derived from their basic assumptions, it will be assessed which system might be the most sufficient one to combat the increasing separation between the rich and the (relative) poor in Western societies.
The classical and neo-classical theory (as school of Neoliberalism) has prevailed the economic thinking until the first decades of the 20th century. This school of thought, as the root deliberations for the free market capitalism, argues that the natural functioning of the market would always ensure prosperity and stability since self-interest, rationality as well as free competition will lead to an equilibrium. Government interventions would impair the ability of the market to regulate and manage itself. Nonetheless, this theory failed [1] and suffered a major setback in the end of the Roaring Twenties. But before, after a deep postwar recession in 1920/21, the USA entered a boom period, which was driven by enhanced technology (e.g. automobiles, electrical consumer goods) and high optimism. Improved fundamentals (e.g. income) and positive expectations increased stock prices (faster than earnings). Also, most European countries had an economic upturn after the shocking events of World War One. But some, like Germany, Austria, and Hungary, had to struggle with recessions and hyperinflations before, which were caused by international and domestic conflicts about reparations payments. However, the economic boom ended with the New York stock market crash of 1929, which is also called the Great Crash. On October 24, the so-called Black Thursday and its following days stand for the most devastating economic crash in the history of the US. The dramatic decline in stock prices had followed the crash at the London stock exchange some weeks before and signaled the start of the Great Depression. Consumption and investment had tumbled. All Western industrialized countries were effected and had to deal with economic, then social issues, for almost ten years. Many people became unemployed and governments in the affected countries had looked for remedies out of this huge crisis. “[…] the worst depression ever experienced by the world economy stemmed from a multitude of causes. Declines in consumer demand, financial panics, and misguided government policies caused economic output to fall in the US, while the gold standard, which linked nearly all the countries of the world in a network of fixed currency exchange rates, played a key role in transmitting the American downturn to other countries” (Britannica 2014).
The Keynesian Revolution (cp. Klein 1950) marked the change by turning the economic view from the supply to the demand side, while endorsing government interventions to overcome an economic crisis. The Keynesianism states that economic growth is not a steady state, but a long-term trend (due to technological progress etc.). Economic growth is, therefore, interrupted by downturns and can lead to mass unemployment since prices and wages are not able to quickly adapt to changes in demand and supply. The aggregated demand (total effective demand) is the major driver of business cycles; hence, government can influence such cycles by economic stimulus (e.g. deficit spending and fiscal policy). This school advocates a mixed economy, which means that private sector dominates, but with a role for government actions during recessions. It became the prevailing concept after World War Two and coined the Golden Age of Capitalism, but also failed due to public mismanagement and an increasing inflation. The economic liberalism entered the stage again in form of the Monetarism. However, in opposition to the laissez-faire of the (neo-)classical economists and the interventionism of Keynesianism with its uncertain realization of the Globalsteuerung[2] - the German Ordoliberalism was created around the middle of the 20th century and might be helpful to solve the inequality issues.
2.1 Emergence of the economic theory and the inheritance of its initial sin
The beginning of Capitalism might be seen in the early modern period between the 16th and 18th centuries as the Mercantilism was established. This one is an “economic theory and practice common in Europe […] that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers and was the economic counterpart of political absolutism” (Britannica 2016c). The exploitation of other states should create a prosperous, wealthy, and powerful homeland. Precisely, domestic manufacturers are exporting their products and importing less valuable goods. The system was designed to create and secure favorable trade balances for the home country. However, already in the early times of the capitalistic tradition was exploitation an acceptable as well as desired conduct to push through one’s own interests without considering the elementary needs as well as condition of their neighbors.
The subsequent philosophers and early economists opposed the concept and emphasized the role of individuals over the strong interference of the state as well as generally attacked Mercantilism. Influential theorists, such as Adam Smith, David Ricardo, Jean-Baptiste Say, Thomas R. Malthus, and John S. Mill, observed that markets, if they are free of coercion, generally regulate themselves and, therefore, opposed government intervention except for common goods, whose provision might not pay off for individuals. Thus, the state should fill in and undertake these tasks from companies for the society. However, they did not just consider the functioning of the economy, but they did also consider aspects of justice to a different degree and from diverse moral points of views.
Adam Smith interpreted justice more in a political sense instead of including the economic sphere. He argues, that “justice […] is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world, if I may say so, to have been the peculiar and darling care of Nature, must in a moment crumble into atoms. In order to enforce the observation of justice, therefore, Nature has implanted in the human breast that consciousness of ill-desert, those terrors of merited punishment which attend upon its violation, as the great safe-guards of the association of mankind, to protect the weak, to curb the violent, and to chastise the guilty” (Smith 1759:190-91). The father of modern economics built his concept of (self-)punishment on religious as well as moral principles but, this is, if it was ever so, not true anymore or is at least on the wane. The estrangement from God (Bertelsmann Stiftung 2014) and the “partially coarsening of our society”, as German interior minister Thomas de Maizière deplored (WAZ 2016:17), have been accelerated recently.
Smith’ considerations, that the “invisible hand”, as he wrote 1776 in his seminal work The Wealth of Nations, creates unintended social benefits by individual activities with respect to income distribution and production, are not complete and a contradiction to the before mentioned statement that human beings are morally obliged and have feelings of guilt. However, seventeen years later, he wrote that “every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Smith 1776a:35). Beyond his actual intention, the metaphor became an argument against protectionism and government regulation of the market. But which feature is required for high economic prosperity: egoism or moralism?
He pointed out that humanity is (usually) not in the focus of the better-off because “it is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. […] The rest he is obliged to distribute among those, who prepare, […] that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice” (Smith 1759:349). There are conflicts in his writings[3]. As outlined, his description of people as moral beings who have feelings of self-punishments contradicts his statement that everyone follows his own interests and only serves society unintentionally. If it is true that human beings are acting morally, why is it not true for landlords (wealthy)? If the opposite is correct and someone furthers the prosperity of the whole society by its selfish actions, why does it not sufficiently work out for the rich ones?
Nevertheless, Smith also argues against strong market power of single companies. Such market dominance of just a view conglomerates (e.g. Alphabet), as occurring these days, was not intended by Smith since “consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident […]. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as ultimate end and object of all industry and commerce” (Smith 1784:515). He created in some way the first distinction between income classes (workers, capitalists, landlords) but his idea of distribution and his solutions, respectively, were not satisfactory. Furthermore, he stated that wages could (actually) never rise since exploitation and an increasing population prevent an increase; almost only labor scarcity could raise wages.
Thomas Malthus wrote in his famous Essay on the Principle of Population that poverty is needed to prevent the poor from offsetting economic growth because higher incomes would cause increased reproduction. In his opinion, population increases in a geometric way, while food production could only grow arithmetically. Therefore, “allowing the stimulus of inequality of conditions to have been necessary, in order to raise man from the indolence and apathy of the savage to the activity and intelligence of civilized life” (Malthus 1826:43). However, most people could not escape from their poverty “to enjoy the benefit of a regimen which, like many other stimulants, having produced its proper effect at a certain point, must be left off, or exhaustion, disease, and death will follow” (ibid.).
David Ricardo also opposed direct government interventions to combat such grievances (favored private charity). But he argued more in favor of diminishing returns and limited natural resources which would not allow to reduce poverty. However, he states that the “friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a superabundant population. In those countries, where the labouring classes have the fewest wants, […] the people are exposed to the greatest vicissitudes and miseries. […] and dearth to them is attended with almost all the evils of famine” (Ricardo 1821:95). Thus, both wanted less children, but means were different: Malthus regarded poverty and Ricardo saw prosperity as remedy (by spending these opportunity costs for consumption).
Moreover, the “seemingly exaggerated claims made about incentive effects among critics of antipoverty policies around this time may well have been little more than the intellectual rationalizations of a political backlash against the First Poverty Enlightenment” (Ravallion 2016:51). Poverty relief cannot succeed without public aid or government intervention, respectively. Instead, the classics just considered private charity to remedy poverty. This assumption has manifested the “initial sin of economics” (Pobuda 2016:5). It refers to the circumstance that the scholars of that time did not incorporate mechanisms to level up the poor groups of the society by public actions. The ideas of liberalism changed their political situation but did not sufficiently enhance their economic standing.
2.2 Advancement of the human being to the central figure in the economy
There is, in most academic writing a clear transition between the classical economists and their succeeding generation which might be reasonable about economic thinking, but only little regarding justice attentions. John Stuart Mill is viewed as the consummate master of the Classical Economic Theory but is also one of the originators[4] of Utilitarianism, a moral theory which judges actions as morally right or wrong because of their effects, and considers the best action as the one which maximizes the utility (for the society). Even though, Mill was a proponent of David Ricardo and the classical school, he was also concerned by the inequality of wealth and opportunities in life. Contrary to his contemporaries, Mill did not see the conditions in Britain as natural, but rather as a result of the publicized egoism and profit seeking by individuals because higher moral goals were neglected. Therefore, he stated that the “distribution of wealth […] depends on the laws and customs of society. The rules by which it is determined, are what the opinions and feelings of the community make them, and are very different in different ages and countries; and might be still more different, if mankind so chose” (Mill 1848:242). The general condemnation of government intervention was not part of his believe. Furthermore, he proposed redistribution of capital by collection of taxes. “Society mainly consists of those who live by bodily labour; and if society - that is, if the labourers - lend their physical force to protect individuals in the enjoyment of superfluities, they are entitled to do so, and have always done so, with the reservation of a power to tax those superfluities for purposes of public utility; among which purposes, the subsistence of the people is the foremost. Since no one is responsible for having been born, no pecuniary sacrifice is too great to be made by those who have more than enough, for the purpose of securing enough to all persons already in existence” (Mill 1848:432-33). Unfortunately, a principle that liberal economists, politicians, and corporate managers have subsequently disregarded. Mostly, they have focused on his contribution to the ideas of economies of scale, opportunity cost, and comparative advantage but missed his humanitarian perspective.
The transition between the classical and the neo-classical theory might be seen in the revised theory of Functional Distribution of Income. The classical concept states that wages will practically not rise and workers are bound to their social class since wages just allow to maintain a living standard near to the subsistence level. The neoclassical version implies that workers, or as they call it, labor, receives a share of output in proportion to production of output at the margin. This Marginal Productivity proposes, in contrast, that hard work will pay off and that social upward mobility is actually possible. Another famous economist, who lived in this transitional period in the 19th century, was Alfred Marshall. He pioneered the theory of Marginalism with his concept of marginal utility as well as costs. Furthermore, he argued that economics has its legitimation due to the combat against poverty. One of his well-known questions, which he has raised in his influential book Principles of Economics, “will [the world] not outgrow the belief that poverty is necessary?” (1890:2), tends to end the classical idea of poverty as an incentive to work harder which would still not have an influence on one’s living standard. However, Marshall was an idealist and thought that the social problems of the working class could not be solved by overthrowing actions, but rather by some kind of revolution in thinking. He believed in “economic chivalry” (Marshall 1920:719) as a character trait of the leading classes and argued that “devotion to public wellbeing on the part of the rich may do much, as enlightenment spreads, to help the tax-gatherer in turning the resources of the rich to high account in the service of the poor, and may remove the worst evils of poverty from the land” (ibid.). Therefore, he supposed the businessman to act as a caretaker of the working class and disregarded the extent of human greed and selfishness. Therefore, he conveyed, among others, the deficiencies of the classical theory into the 20th century. The application of models as well as the mathematization of economic coherencies are also seen as one of his major contributions to this branch of science. Unfortunately, his more important input, namely that the “mecca of the economist lies in biology rather than in economic dynamics” (ibid: XIV) is/was almost forgotten. Nowadays, this approach celebrates a comeback due to agent-based models and psychological input in economics.
John Maynard Keynes, who introduced an emphasized view on humanity in modern economics (cf. Pobuda 2017) with his seminal book The General Theory of Employment, Interest and Money (1936), initiated a paradigm shift and is widely seen as father of macroeconomics. He criticized the (neo-)classical theory but “shared Marshall’s political perspective on individual liberty, tempered with the desire to actively promote social justice” (Hart 2013:76). “Despite the closeness of the intellectual relationship between Marshall and Keynes, the content of Keynes’ General Theory clearly differed markedly from that of Marshall’s Principles in critical areas” since Keynes “included [his former professor] Marshall […] as [one of the] prominent adherers to the postulates of classical theory” (ibid:77). Therefore, the appearance of Keynesianism established a paradigm change in the economic theory with a stronger focus on social justice. He argues, the “outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (Keynes 1936:372). As critique on the classical economists, like on Malthus with his extensively misleading concept of population growth and income distribution, Keynes states that “before the eighteenth-century mankind entertained no false hopes. To lay the illusions which grew popular at that age's latter end, Malthus disclosed a Devil. For half a century all serious economical writings held that Devil in clear prospect” (Keynes 1920:10). As mentioned before, Keynes introduced humanity in the economic theory because of the concentration on demand and, therefore, the domination of consumers. He delivered an unappreciated statement, namely, the centralization of the consumer and its interests as well as well-being in the economic theory. The economy needs to serve human beings and their prosperity, instead of the reverse directions. Harmful economic forces and their consequences, like the financial crisis in recent time, should be curbed and, therefore, “to control financial markets in the interests of full employment and social justice lies squarely in the Keynesian tradition” (Skidelsky 2016:78-79). Government intervention and, hence, The End of Laissez-faire (Keynes 1926) play a key role in his concept. Elliott and Clark (1987:381) argue, that “social justice is a significant theme in Keynes’s General Theory […] both in its own right and in its relationship to unemployment [and that his] views on social justice typically have been neglected”. Overriding objective of the General Theory is to discover the reasons for unemployment and how to increase the level of employment. Hence, he tried to discover connections between capital, consumption, interest, investment, and savings. In his opinion, employment is determined by the preferences of consumers and the investment activities of private as well as public entities. As Keynes argues, the homo oeconomicus does not exist and psychological factors, which he associates with “animal spirits” (Keynes 1936:161), are manipulating decisions about capital spending. Besides, Keynes “believe[s] that there is social and psychological justification [e.g. less commitment, laziness] for significant inequalities of incomes and wealth, but not for such large disparities as exist today” (Keynes 1936:374). Furthermore, he states that inequality retards economic development since any increase in the income of poor people would be spend for consumption. Their marginal propensity to consume might be higher than for rich people since the MPC is expected to decline for increasing income. Therefore, redistribution of income would lead to a higher aggregated effective demand and hence increase employment. Milton Friedman, ‘head’ of Monetarism as the consequent economic school of thought, questioned this assumption 1957 with his Permanent Income Hypothesis (Friedman 2008) which states that changes in permanent income, rather than changes in temporary income drive the changes in consumer's consumption patterns. However, isn’t it logical that people and families with a low income would spend their additional income for consumption since they are just able to afford the least things in quality and quantity? They cannot create savings. Inequality is growing and relative poverty is on the rise in developed countries. Theories explaining that such people would not need more income for consumption are just a derision for those and appeared as mathematical nonsense far away from reality. Keynes was right, his theory failed due to missing discipline of politicians (deficit spending in recession but no repayment in boom), deferred economic reforms, and unreliable economic projections.
2.3 Containment of devastating character traits in the economic domain
The efforts and thoughts of an elite group around Walter Eucken have begun to change the perspective on economics – but almost nobody outside the German sphere has appreciated the ideas of the Freiburg School and its form of the Neoliberalism (cp. Leipold 1998). In the middle of the 20th century, the European continent was coined by the devastating and heinous happenings of World War Two. The Nazi regime brought hate and annihilation over people in the entire world; ruins and grieve had been the legacy. The darkest hour in the German history had turned into a chance for an in the 1930s developed economic theory about a widely pre-defined framework: The Ordoliberalism states that the political system has to establish as well as maintain an appropriate legal environment for the market participants to facilitate a healthy level of competition through measures that adhere to democratic and liberal principles with a critical view on the ‘laissez-faire’ idea – a so-called ‘third way’ between the Classical Liberalism and Socialism.
Walter Eucken summarized the elaborated theory in his book Principles of Economic Policy (1952) and has pointed out seven constituent (Eucken 2004:254ff) and four regulatory principles (ibid:291ff.). This one can be seen as the ‘successor’ of his popular book Foundations of Economics which was issued in 1940 and already described the basic thoughts of an ordo-liberal system as well as considered fundamental aspects of his humanity approach. In contrast to the Classical Liberalism, the members of the Freiburg School argued that it is indispensable to place private business activities within a regulatory framework, determining the borders in which competition can operate. The gist of Ordoliberalism is directly rooted to its conviction of a liberal and competitive economic order that establishes the constitutional framework for the business activities within a market, without interfering in the market activities itself. A powerful political system shall endow the state with a clear structure (constituent principles), allowing participants to follow their business freely within the range of regulations. This market system requires a strong as well as decisive executive authority which combats malfunctions or failures and adapts the frame steadily (regulatory principles) to prevent market distortion and accumulation of power in the market (e.g. cartelization). Furthermore, there are some sectors which shall not exclusively be ruled by competition to ensure adequate quality, affordable prices, and unrestricted access to, for instance, education as well as other public goods and other necessities which are essential to uphold the social, political, and economic order. The central idea behind the approach is simply the empowerment of the individuals to benefit from a fair and liberal lifestyle – which is at the same time favorable for the society. This means simply the creation of a meritocracy while at the same time securing equality of opportunity as well as a fair distribution of income and wealth. The overarching goal is to increase the well-being of human beings. (cp. Ptak 2004:38-62)
The constituent principles are designed as regulatory framework to set up a reliable market order. These ones are intended as basic rules of market activities and consist of: (1) Functioning price system of perfect competition as the fundamental principle since a decentralized market structure is considered as a prerequisite for the underlying concept. (2) Primacy of the monetary order claims the stability of the currency that is ensured by an autonomous central bank (proposed as conclusion of the hyperinflation in the 1920s). (3) Open markets emphasizing the absence of prohibitive tariffs and other restrictions on free trade including any form of anticompetitive measures to protect the home market. (4) Private property/ownership must be secured by strong rights to allow fair competition. (5) Freedom of contract needs to be ensured if it is compatible with perfect competition. (6) Liability ( ‘ Haftung’) is supposed to force market participants taking responsible business decisions through the sanctioning mechanism of profit and loss as centralized and crucial point to secure the economic order as well as to avert damages from the society.
To let the private sector work out and to allow the planning of (medium- to long-term) financial investments, the reliability and consistency in economic policy is essential and a clear constituted framework may prevent political variety after governmental changes. These normative principles are the groundwork of the Social Market Economy and are demonstrating the core values of the Freiburg School. To understand the liberal idea behind, it is important to understand Eucken’s admiration of Immanuel Kant and his writings about liberty. In the centre of his discourse on liberty is the term autonomy as Kant had described it. The central objective is to overcome the immaturity and minority of humanity (cp. Kant 1784) which means the accomplishment of a personal enlightenment and individual emancipation, as well as the realization of everyone’s’ right to self-determination (cp. Böhm 1950:XXXV). Eucken has always emphasized the individual obligation to achieve the realization of such kind of autonomy, with the aim to be able to act freely within the proposed framework. Therefore, the considerations of socio-economic as well as political dependence, oppression, and exploitation is quite important to understand his basic concept of liberty. Perfect competition, by preventing the aggregation of market power, reducing market concentration, and decreasing imperialistic pressures, allow free development of each citizen from an economic and socio-cultural perspective. Eucken’s approach does not just foster economic prosperity, but also liberty, equality, and social cohesion. This could be understood as justice in the economic and political process itself, instead of the justification of outcomes by redistribution of income (social security etc.) and other measures to remedy the failures of an unappropriated market.
The regulatory principles are serving as corrective actions to sustain the market order; allowing the state to adapt the framework and to act therefore as a supervisor of the economic system. Allowing for the fact that the state was not supposed to intervene directly into economic and business activities, the political decision makers were supposed to provide a legal environment to which all actors would adhere and depend on. Nevertheless, it is also needed to adjust the rules of the market. Hence, four regulatory principles take care of the economic system and ensure viability as well as efficiency. (1) To prevent the abuse of power, authorities should secure the competition through the supervision and disruption of monopolies along with cartels; since a strong market power will impede market liberty and is tending to arranged prices as well as market distortion. (2) Corrective actions are required if market prices do not reflect the economic costs of goods and services, which will as result derogate the market functions. Such business behaviors may be applied by market leaders to squeeze competitors out of the market. (3) To establish and maintain a healthy society, certain redistribution of the income has to be achieved in the state by transferring payments to take care of the less fortunate and less able people. (This aspect is more crucial for Müller-Armack’s social approach). (4) Corrective measures are required in case of abnormal reactions on the supply side to protect a collapse in certain markets. It may be possible that some stronger interventions are needed if failures in the market structure emerge. (cp. Ptak 2004:109ff)
The cohesiveness of principles is a precondition for this market order since constituent and regulatory principles are the necessary conditions of a reputable, human, and healthy economic system and order, respectively. The sufficient condition is just fulfilled if both sets of principles are well established and geared to each other in a useful and efficient way (cp. Schüller 2012). The core of the Ordoliberalism is a market system with a perfect competition, embedded in a proper legal framework to facilitate a liberal market economy with a strong focus on well-being of its citizens and welfare. The dissimilarities between the original Ordoliberalism and state secretary Müller-Armack’s pragmatic political realization after WWII can be outlined in the understanding of the social security system and the interference of the state in misguided market activities. Müller-Armack’s credo has been that the economic order should deeply assist humanity (ibid:133-189).
Criticism on Ordoliberalism has mainly come up due to the strong focus on the microeconomic level and less regard of macroeconomic correlations (cp. Ptak 2004:289ff) as well as due to the informal (qualitative) character of the theory without a strong record on mathematical concepts. A more philosophic setup, however, is probably better than a beautiful piece of code or formula that cannot cover the humanitarian aspects and rules which are so essential to create a system that is supposed to support its citizens. The scientists Walter Eucken, Franz Böhm, Wilhelm Röpke as well as the politicians Alfred Müller-Armack and Ludwig Erhard have realized an economic concept which is, even by today, decisive for the success of the German economy and, which was significant important for the recovery of the whole country after World War Two (Wirtschaftswunder).
2.4 Correlation between the prevailing economic theory and (in)equality
Theorists and their theories should always be observed in the context of their point of living in terms of political, economic, and social conditions in which they had existed. Most of the famous economists came from the British Isles, hence, it might be interesting to have a look on some historical data which describes their country’s development[5].
After the overcoming of the Malthusian Trap [6] , the economic development has rapidly accelerated and made the United Kingdom to one of the most developed countries. Up to 1800, sustained growth of per capita income was unknown (Malthusian World). The escape of that setting was established by “death and disease [in the middle ages which] spelled riches and power, contributing to Europe’s economic ascendancy” (Voigtländer, Voth 2013:804) since these population checks increased the income per capita continuously to higher steady states. From 1700, urbanization and technology have changed.
Figure 1: Historical Data on Economic Development in the United Kingdom
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Source: Maddison (2003) [white line] and Office for National Statistics (2017) [grey line]
That created the ground for the Industrial Revolution in Britain. The country “became the leader of the IR because, more than any other European economy, it was able to take advantage of its endowment of human and physical resources thanks to the great synergy of the Enlightenment” (Mokyr 2010:122) and “its advantages were primarily on the supply side [cp. classical economists], not the demand side [cp. Keynes] of the economy” (ibid:99). Alternatively, “the Industrial Revolution, in short, was invented in Britain in the eighteenth century because it paid to invent it there” (Allen 2009:2) for the reason that “the macro-inventions were made [there] since Britain's high - and rising - wage induced a demand for technology that substituted capital and energy for labour” (ibid:140). Therefore, besides high factor prices, stable as well as reliable institutions (e.g. property rights, patent right) and an extended market size (esp. colonies for trading) were important[7].
The history of the British welfare state might well explain the level of income distribution and can be summarized in “four periods of welfare history” (Fraser 2009:14). Around 1800, social inequality increased massively because of the IR since “GDP per capita started to grow quite rapidly after about 1820, whereas real wages and other measures of the (biological) standard of living tended to lag behind. [Additionally,] this increase in inequality came on top of an already rising inequality in distribution of income and wealth, the result of economic expansion and urbanization [before] 1700 […] due to the concentration of land ownership and mercantile wealth” (Pamuk, van Zanden 2010:232).
Figure 2: Historical Data on Income Distribution in the United Kingdom
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Source: Lindert (2000) [white] and OECD (2017c) [grey line]
The first period from 1780 to 1885 is named “age of laissez-fair and state intervention” (Fraser 2009:14) which is determined by “free market liberalism that was hostile to state action” (ibid). However, the English Poor Laws are such example of action. Due to some failed harvests (aggressive potato disease), “public works were [1846] commenced [by the government] on a large scale, giving employment to some five hundred thousand persons. The poor law acted with unparalleled vigour, to the extent that in July 1847 as many as three million persons were actually receiving separate rations” (Levi 1872:297-98). Second period, the “emergence of a social service state” (Fraser 2009:14), ended in 1939 and is characterized by the realization that “the free market, attenuated by specific limitations imposed by state social policy, and supplemented by voluntary charity activity, was not able to solve the social problem which persisted despite the wealth created by the IR” (ibid:14-5). A proof that the dogmatic theory of the classical economists failed. Third period, the “classic Welfare State” (ibid.:15), was created while and in the wake of World War Two and had reduced the inequality. The “government implemented a ‘cradle-to-grave’ Welfare State, which provided for the first time in the world universal free access to health care […]; [almost] thirty years […] was a social democratic political consensus which sustained the Welfare State, which involved full employment, Keynesian economic policy, growing affluence and active state intervention” (ibid.). Fourth one, the “Welfare State of Thatcher and Blair” had widely ended British social security since the 1970s by re-implementing neoliberal policies with the result of increasing inequality.
However, Britain had already in earlier times some different features in comparison to other European states, which have led in the 17th century and before to the special relevance of capital since in that “society the lines of social stratification […] [were] drawn, not, as in most parts of the Continent, by birth and legal privilege, but by the gradations of wealth” (Tawney 1941:3). Nowadays, wealth distribution is on the first sight in favour of a much more equal condition but while the Top 5% households had lost some wealth, the trend for the Top 10% is still growing. In 2014, almost half of Britain's private wealth was owned by 10% (ONS 2017). Capital is continuously owned by just a few rich families while the increasing income inequality has widened the gap between rich and the poor.
Figure 3: Historical Data on Wealth Distribution in the United Kingdom
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Source: Lindert (2000) [white line] and Office for National Statistics (ONS 2017)
Conclusively, “everything we have learned so far about a capitalist economy suggests that it fosters inequalities of income and wealth. Indeed, such inequalities follow directly from the basic principle of capitalism that income depends on property and thus livelihood on exchange. Each […] owns different property. Some own labor, some capital. Among those who labor, some get more in exchange for it than others” (Levine 1995:77). As the history shows, the “Victorian Britain was a land of laissez-faire capitalism and self-reliance. Government regulation was minimal and welfare was almost left to charity. With little tax burden and low labour costs, industrialisation turned Britain into the workshop of the world and created a thriving middle class” (Stanley 2011), but this could not enable the participation of all social groups which resulted into social unrest in the 19th century. Both, Keynes and the economists around Walther Eucken (Freiburg School) opposed laissez-faire. Hence, they called for an essential re-orientation of economic policy, but with different approaches. The state, as Ordoliberals argued, should form an economic/political order instead of direct manipulation as proposed by Keynes. The ordoliberal idea of a Social Market Economy is often seen as a progressive alternative beyond left and right; a ‘third way’ between Socialism and pure Liberalism. But what makes the German concept so special? – It is the ability to adapt the system to favored degrees of individual freedom, social justice, and economic efficiency by maintaining stability. More importantly, that economic system does put humanity and fairness in the center of all.
3 Inequality levels in regions with diverse economic systems
The extent of inequality is perceived as rising in developed countries but one could say that governments and the better-offs shouldn’t be concerned about inequality as long as everyone is above the subsistence level (for ethical reasons) since it might be a result of their laziness and missing self-discipline. However, this view is essentially wrong since “the political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy. If democracy is compromised, there is a direct loss of wellbeing because people have good reason to value their ability to participate in political life, and the loss of that ability is instrumental in threatening other harm. The very wealthy have little need for state-provided education or health care; they have every reason to support cuts in Medicare and to fight any increase in taxes” (Deaton 2013:213). Therefore, middle classes should care about the rising inequality if they don’t want to be governed by the lobbyism practices of the wealthy ones, or by populism as answer from the left-behinds.
What are the levels and origins of inequality in Japan, Germany, and the USA with their different interpretations of a capitalistic market economy as well as of welfare aspects ?
This chapter is meant to provide some historical as well as contemporary facts about inequality and its reasons. For this purpose, three major regions across the globe (Japan, Germany, and the United States) with different attitudes towards private businesses and government interventionism will be compared. A more proper example might be the Soviet Union since the proclaimed communism is a much better antithesis to the American meritocracy (and GER as the ‘third way’). However, the communistic system in the USSR was just a “partially centralized economy” (Harrison 2002:404). Furthermore, a comparison is difficult to conduct as available data on different inequalities in the Soviet Union (and Russia today) is rather insufficient and unreliable. Moreover, some research, for instance Slay (2009), suggests that despite of the socialism principles, poverty had been a serious concern in some regions of the former Soviet Union. Therefore, Japan is used, because the planned economy had a strong influence on the country’s development.
The level of equality in societies is implicitly measured by the extent of inequality. The goal of justice is ‘relative’ equality, while the research is concerned with inequality which has become an increasing threat for all areas of human life and is defined as “the unfair difference between groups of people in society, when some have more wealth, status or opportunities than others” (Oxford Dictionaries 2017a). Furthermore, “the issue of inequality is very close related, both in fact and analyses, to other very important economic and social phenomena such as poverty, polarization, segmentation, clusters, class or caste structure, exclusion, isolation, elitism, envy, status, and so on” (Kolm 2009:274).
The reasons for income and wealth inequality in developed countries are plentiful; however, the major assumptions can be briefly summarized (Dabla-Norris et al. 2015:18-22):
- Technological Change: has strongly improved productivity and general well-being, but has also increased the skill premium which is resulting in higher income inequality and is, therefore, one of the main reasons for the gap widening in the OECD countries.
- Globalization: labor-saving technologies as well as offshoring of production have led to a decline of employment in the manufacturing sector and have also reduced wages for unskilled workers (beside positive effects like specifications, trade increase, etc.)
- Financial Deepening: rising financial flows, FDIs and portfolio investments (financial globalization), have increased top incomes in the financial sector and allow capitalists to seize global opportunities due to higher returns on capital for their ‘existing’ wealth.
- Insufficient Policies: changes in labor market institutions (wage dispersion and higher share of part-time jobs), redistributive policies (rich-favored tax and transfer systems) and declined social mobility (e.g. due to unaffordable access to higher education).
These points, published by the International Monetary Fund, provide some hints on the general creation of inequalities and have (globally) some different impacts on countries.
Nevertheless, to get some impressions on the level of inequality in the set of states that is covered in this paper, the following indicators[8] were chosen and also briefly explained:
- Public Social Expenditure describes the provision by public authorities/institutions of benefits to individuals and households to offer support during situations which adversely affect their welfare (in percentage of total general government expenditure).
- Human Development Index is a measure of economic development and welfare that examines the criteria life expectancy, education, as well as income levels, and creates an overall score (from 0 to 1), where 1 represents the highest possible development. The inequality-adjusted HDI shows the loss of human development due to inequality.
- Gini Coefficient is a standard measure of income inequality of a country's residents. That number ranges from 0, which means that everybody has identical incomes, to 1, which means that all income is distributed to only one person within the entire society.
- Youth Unemployment Rate is the amount of unemployed people in the age between 15 to 24 expressed as a percentage of the youth labor force. It includes those, who reported to be without work, available for work, and who have taken active steps to find a job. Reasons for high figures might be structural issues and strict labor laws.
3.1 Japan: Transition from planned development to free market economy
The State of Japan is characterized by an industrialized (Free) Market Economy with some elements of a planned economy which are almost entirely leftovers of its historical development. However, last decades were coined by deregulation efforts as well as privatization of some former state-owned conglomerates and corporations. (cp. Witt 2014)
The economy of Japan had to recover after World War Two: the country was severely devastated. Most large cities, industrial sites, and the infrastructure were damaged. Additionally, the population had to struggle with food shortages for several years. Wondrously, Japan could benefit from the political chaos which its armed forces left behind in Korea (by long occupation): the Korean War as a watershed which turned the Japanese economy from depression to recovery: local companies became suppliers of US and United Nations troops. After the war, the Japanese government decided to intervene and instead of “waiting for the market to determine the most ‘efficient’ allocation of available economic resources, Japanese policy-makers made a judgement about precisely which industries and economic sectors they considered to be strategically the most important, and set about encouraging their long-term development” (Beeson 2007:125). Rapid growth in 1960s and 1970s established Japan’s rise to one of the major economies.
There seem to be some differences between the Japanese model of capitalism (East Asian model: state-sponsored capitalism) and the capitalistic approach in other regions. Odagiri (2012:527) distinguishes between four different aspects of the Asian economic systems. Firstly, Korea, Taiwan, and Japan (mainly until WWII) were coined by business groups and main banks which were deeply connected with the government, politicians, and the military. But the chains are on the wane in recent time and competition has gotten a higher meaning. Secondly, there has also occurred a change in corporate governance – from 1990s onwards, shareholder influence is increasing and the traditional (close and lifelong) relationship between companies and their employees altered to a more professional awareness. Thirdly, the supplier-assembler relationships are also more tightly and are long-established (in comparison to typical western business relationships which are more profit-oriented). Fourthly, the importance of the government might be crucial for the success of the economic development after WWII, but it is not so different to other countries which have also supported their new industries. However, the public-sponsored “technological catch-up was more successful than in other regions of the world” (ibid:528). Generally, there is no cold and variable business atmosphere, what makes business relationships more reliable. Government interventions as well as central-planning measures and the state ownership of key industries in their beginning were important but the “successful Japanese entrepreneurs in these, as well as other industries, were able to build powerful companies that benefited the entire economy” (Ellington 2004).
The Japanese economy is the third-largest in the world by nominal GDP and the fourth-largest exporter of goods and services. The country is the world's largest creditor nation and has the highest ratio of public debt to GDP. Output increase has been slowed by a fall in demand from Asian countries (esp. China) and by some lower private consumption. Growth is expected to be between 1.0% in 2017 and 0.8% in 2018; fiscal consolidation is pausing, labour and capacity shortages as well as high corporate profits backing business investments, employment and, hence, wages (OECD 2016c). The economic development in last three decades is best described as sluggish with some deflation tendency.
The economic conditions look passable but the economy is rather stagnating since two decades and the public debt ratio is the highest in the developed world. However, the GINI Coefficient for income does almost stagnate after some bigger rise in the 1990s. Responsible for this development are increasing social security (public social expenditures) and higher taxation. Though, capital inequality looks different to most of the developed world (is even smaller) and does not reflect “Piketty’s main assertion that the leading driver of increased inequality […] is the accumulation of wealth by those who are already wealthy, driven by a rate of return on capital that consistently exceeds the rate of GDP growth” (Koike 2015). One explanation might be that it has a “low pre-tax income inequality because pay […] is very regulated through company norms and seniority pay scales” (Schlesinger 2015). Furthermore, Japan has a high income-tax rate for the rich (45%), and inheritance tax rate recently was raised to 55%. This makes it difficult to accumulate [massive] capital over generations” (Koike 2015). Still, “there are large income gaps between regular and non-regular workers” (OECD 2015:33) but the level of youth unemployment could be reduced; however, social upward mobility is a problem.
Figure 4: Data on Inequality-related Indicators in Japan
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Source: OECD (2017b) and United Nations (2017a)
Government social responsibility is special from a Western view since “the Japanese society is marked by some kind of ingrained stoicism and the country is frequently called the “world’s most successful communist country” (Kristof, WuDunn 2001:268). It “has a universal insurance system whereby everybody residing in Japan must, in principle, take part in the public health (medical) insurance and pension insurance system” (JETRO 2017). As the new budget plan proposes, “social security costs, including pensions and medical expenses, will increase […], accounting for roughly a third of total government spending” (Kyodo 2017). Japan struggles also with a growing population of elderly people since birth rates are very low. Moreover, the rate of poor people increases. “Japan’s relative rate of poverty has risen over the past three decades to 16.3% [and] 3.5 million children [~ 17%] are from households classed as experiencing relative poverty (McCurry 2017). Therefore, “Japan’s public welfare system is closer to America’s than it is to Europe’s. Citizens do not have a right to be supported by the government” (Brasor 2011).
Corporate social responsibility is becoming an important topic in Japan (even because of international pressure) but “there are three main differences between Japanese approaches to CSR and western approaches to CSR. They are (1) group membership (help within-group/out-of-group discrimination), (2) the Confucian sense of duty to those who have relationship (e.g. family or employees) [instead of altruism] and (3) strong emphasis on the value of loyalty” (Eweje, Sakaki 2015:681). The country “has a long tradition, albeit domestically focused, of putting people before profits” (Owens 2016) as Matsushita Electric (today’s Panasonic) proves. Already in 1929, the philosophy of this company was: “We will strive for the development of the nation’s industry and the betterment of society with a firm commitment to harmony between business profits and social justice” (Fukao 2016). However, “people in Japan have tended to think of it mainly as the government’s job to deal with matters like the environment, human rights, women’s advancement, and poverty [-] but now the situation has become more complex [because] there are limits on the capability of government organs to deal with the public issues that we face” (Tokyo Foundation 2014). Nevertheless, “companies have not yet been able to build a shared awareness of what CSR is [but] efforts are being made by many Japanese companies to integrate their core corporate activities and sustainability initiatives” (Kamei 2016).
Conclusively, economic progress is stagnating and the country is facing steadily rising public debt while the fraction of poor people is getting up. The family is still the most important network for welfare but the system doesn’t work when poverty is increasing even among whole families. Interestingly, the traditional philosophy of Japanese companies is called Sanpo-yoshi which means a three-way satisfaction: benefits to the seller, to the buyer, and to the local community. However, public scope of action is still shrinking and private businesses should support society as this traditional slogan already states.
3.2 Germany: Social market order as consequence of ordoliberal thinking
The German economic system is based on the concept of the Social Market Economy, which is characterized by government’s attempts to foster fair play between management and labor as well as to regulate the relationship between capitalist market participants, predominantly regarding competition and monopolies. However, the economy is not solely regulated by the federal government: plurality of agencies care for its observance. The Ordoliberalism laid down the theoretical foundations, on which the establishment of the Social Market Economy in West Germany after WWII was created. (cf. Siebert 2005)
As already described in chapter 2 and to emphasize it again, the essence of the Ordoliberalism is directly founded on its belief in a liberal and competitive economic order that establishes the constitutional framework for the business activities within a market, without interfering in the market activities itself. The political system is expected to establish a structure that allows businesses to act freely within a clear regulated framework (constituent principles). A strong government with some appropriate administrative bodies has the important obligation to act against malfunctions, power accumulations, and failures of the market by the adjustment of that framework (regulatory principles). However, some sectors, products as well as services, just as education, common goods, and other necessities, which are essential to uphold the social, political, and economic order, are not intended to be ruled by market forces with the aim to guarantee adequate quality as well as affordable and unrestricted access. The key objective is the enablement of the citizens to ensure a fairly-liberal and skilled workforce that is also beneficial for the whole market economy and the society at large. The aim is simply a society with a high level of well-being and a state that is able to cope with international challenges. (cf. Ptak 2004)
West Germany experienced a so called ‘economic miracle’ (Wirtschaftswunder) after World War Two. The conventional explanations for this progressive economic recovery are founded on the US aid program (Marshall Plan), the currency reform and monetary reform, new liberal economic institutions, international (re-)integration of the market [change from inter-war autarky to post-war free trade due to Bretton Woods system and GATT], as well as the migration of labor from the former Eastern parts. However, Temin (2002) concluded by his research that the “golden age of growth” (ibid.:3) was caused by the Reconstruction Effect in the early period, the Sectoral Disequilibrium (previous ‘arrested industrialization’ prompted fast re-allocation of resources and thus strong productivity growth) until 1965, and continued by the conditional convergence (catch-up effect). The golden age ended as the market equilibrium (steady state) was achieved. However, the ordoliberal philosophy was a crucial prerequisite for the German recovery since it allowed that every family could benefit and achieve prosperity by hard work. This concept has created an atmosphere of reliability for businesses and foreign investments.
Germany is the largest economy in Europe and the fourth-largest by nominal GDP in the world. Importantly, the country is the third largest exporter in the world and, hence, has globally the highest trade surplus. Moreover, the economic growth is expected to remain solid since the robustness of labour market and a mildly expansionary fiscal stance will facilitate consumption. Furthermore, the low interest rates and the housing needs as well as refugee lodgings rise construction. Business investment will also slightly increase since capacity utilization and employment increases. Demand for German exports in emerging markets and Eurozone countries might slightly increase. (OECD 2016b)
The economic conditions look quite well in opposition to recent developments in equality issues. The indicators, shown in figure 5, especially the increasing GINI Coefficient for income inequality, are indicating a rising gap between the rich and the poor. The inequality in Germany is in a global perspective very high, much higher as it is perceived; this conclusion is made by Fratzscher (2016). More detailed, the income before taxation is as unequal as in the United States since average wages have been stuck in the previous decades; moreover, real wages have decreased. Just the costly redistribution policies level up the equality which could be regarded as hidden subsidies for private enterprises because low wages are supporting exports. However, wealth inequality is even worse and children are fixed in the social classes they were born into. Lowering social upward mobility has become a major existential threat (cp. Spannagel 2015:11ff). The welfare state is in Germany on the wane since Schröder’s Agenda 2010 was implemented by lowering taxes, reducing unemployment benefits, and streamlining labor laws. However, it proved as an economic boost but did also rise inequality, and recent actions to reverse the trend have failed (e.g. introduction of minimum wage) (cp. Rudzio 2016).
Figure 5: Data on Inequality-related Indicators Germany
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Source: OECD (2017b) and United Nations (2017a)
Government social responsibility has an immense meaning in Germany that is concluded in a strong welfare state. It includes a national pension plan, public healthcare and nursing care, unemployment benefits, work-related accident insurance, as well as welfare aid. “In contrast to some other industrialized countries, the core social security […] is financed collectively by means of a process of redistribution and current costs (for pensioners, sick people or those in need of nursing care, and unemployed people) are paid directly from contributions by employees and employers” (GTAI 2017). Nevertheless, the poverty rate in Germany has risen to its historical height of 15,7% which means that almost 13 million citizens are regarded as poor as the recent poverty report reveals (Der Paritätische 2017). Although, there are already plenty as well as firmly established private charity and charitable organizations, they will become even more important; both for internal and foreign contributions. But “Germany is not a classic volunteering nation [in terms of welfare], such as the Netherlands, United Kingdom or the USA [since] the development of the German civil society infrastructure has only taken place in the last decade” (Mathou 2010:1) because of the actual dense web of state insurances and welfare aid that protects the citizens against existential risks. The welfare state has also to struggle with the growing age of its population. A comprehensive adaption to current necessities happened already with the Agenda 2010 as “benefit cutbacks and ultimately comprehensive reforms of the pension and unemployment insurance became inevitable, [since] the rapidly increasing social insurance contributions were widely perceived to place pressure on competitiveness of German companies” (Seeleib-Kaiser 2016:235).
Corporate social responsibility: According to the Federal Ministry of Labour and Social Affairs (2017) “along with political action and civil society activism, [CSR] is above all responsible businesses with activities in their home country and abroad which make crucial contributions to resolving social problems”. Moreover, “the Federal Government adopted the CSR Action Plan in 2010” (ibid.) to cope with “global challenges like climate change, the fight against poverty or the protection of human rights” (ibid.). However, the German market is strongly regulated in comparison to other liberal economies. Hence, what is understood in countries outside the core European Union as CSR, is in Germany almost determined by law, just as high environmental and labor protection regulations. Nevertheless, European companies do also practice CSR concepts as marketing instruments to demonstrate their commitments to sustainability and fair trade (outside of EU).
Conclusively, Germany is in comparison to most of the other developed countries better-off in terms of inequality figures but the gap between poor and rich classes is strictly widening while equality of opportunity is getting worse, just as social upward mobility does. However, the basic setup does at least maintain people alongside the subsistence level but not more. Relative poverty is becoming a major threat to the future development.
3.3 USA: Meritocracy formed by an almost pure capitalist economic system
The economic system of the United States of America is a Free Market Economy[9] even if some sources depict “the American economy […] as a ‘mixed’ economy, with government playing an important role along with private enterprise” (U.S. Department of State 2016b). Nevertheless, there are convincing reasons “why the USA is so often regarded as the clearest example [of a free market capitalism]. The contemporary US economy includes limited regulation and minimalist welfare state, weak unions, strong managerial prerogative, and powerful anti-trust legislation. Recent decades have seen major processes of liberalization and privatization of the US economy” (McCann 2014:52).
The foundations of the modern U.S. industrial economy were laid by the end of the Civil War (1861-1865), as many new findings and some inventions took place. These developments were accompanied by the discovery of huge oil, coal, and other resources which are crucial for the industry sector. The first huge enterprises had been established (e.g. J.P. Morgan's U.S. Steel and John D. Rockefeller's Standard Oil) and became also important for the global market. But in opposite of usual thinking, “the U.S. economy is by no means dominated by giant corporations. Fully 99 percent of all independent enterprises in the country employ fewer than 500 people. These small enterprises account for 52 percent of all U.S. workers” (U.S. Department of State 2016a). However, the rise of the American economy as the global benchmark was realized after World War II and the US Dollar had become globally the most important currency. (Walton, Rockoff 2014)
After the war, the European nations had a massive necessity of resources (e.g. coal) and machinery for reconstruction. The USA left as the only supplier since the ‘containment policy’ regarding the Soviet Union by Western states (mainly driven by US) established the foundations of the Cold War. The Marshall-Plan (1947) and the beginning of the GATT (1948) after the Agreement of Bretton-Woods (1944) increased the position of the USA as the leading power in the ‘Western world’. Especially the GATT could solve a “terms of trade driven Prisoner’s Dilemma” (Bagwell, Staiger 1999). Therefore, these trade agreements could reduce the average tariff levels (over several years). These events set the stage for a long period of robust growth and increasing prosperity which was ended by the Oil Crisis (1973). It changed the economic school of thought from somewhat like Keynesianism (Nixon (1971): "I am now a Keynesian in economics" to the Monetarism (see Friedman’s Counter-Revolution 1970) due to the high inflation[10] in that time as free market policies and rising deregulation became much more attractive, rather than the mixed economy which requires a significant role for government intervention.
The United States of America are the world's largest national economy in nominal GDP and the second largest exporter in the world. Additionally, the USA are the world's second largest manufacturer and representing ~20% of global manufacturing production. The projections for the next two years are expecting that the output of the economy remains on a moderate growth path (2,5 in 2017 and 2,9 in 2018) due to an assumed fiscal stimulus but the economic policy has become less predictable because of the presidency of Donald Trump. Stable job gains have decreased the unemployment rate (labour force has risen). Moreover, there is a solid domestic demand growth supported by pick-up of wages but counteracted by rather low gains in external demand. (OECD 2016d)
The economic conditions look quite well in opposition to recent developments in equality issues. The indicators, shown in figure 6, especially the increasing and already very high GINI Coefficient for income, demonstrates that the situation gets even worst. As Yates (2016) shows by some data, the inequality in the USA is steadily increasing since income and wealth distribution are mainly attracted by a small proportion of the population. The author highlights that “the top 20 percent of U.S. households own more than 84 percent of the wealth, and the bottom 40 percent combine for a paltry 0.3 percent” (Ibid:21). These ratios will get even worse since “the richest 20 percent of all households received 51 percent of total household money income” (ibid:23). The recent debates and protests on ObamaCare have demonstrated that a huge portion of the American citizen regard government interventions in their private decisions as harmful and do widely reject such measures. However, some efforts (e.g. tax changes, supported initiatives) by the Obama administration have reduced poverty and increased social welfare (cp. Kasperkevic 2015) but these political actions were still not enough to change the trend in a sustainable way.
Figure 6: Data on Inequality-related Indicators United States of America
illustration not visible in this excerpt
Source: OECD (2017b) and United Nations (2017a)
Government social responsibility mainly consists in the USA of retirement, survivors, and disability insurance programs (social security) and a welfare system that is, “contrary to conventional wisdom, […] quite large (Rector 2015:1). But it “differs widely from the systems in the other advanced industrial nations [since] social welfare spending draws on both public and private resources; in Europe, government mainly controls the resources and benefits” (ibid:2). Hence, “combined, social welfare absorbs around one-third of U.S. GDP” (ibid:1). In detail, “about 59.0 million persons received Social Security benefits for December 2014 [among them] 71% were retired workers and their spouses and children, 10% were survivors of deceased workers, and 19% were disabled workers and their spouses and children” (SSA 2016). Private charity is vital in the US. Thus, there is “a broad spectrum of private charities and voluntary organizations […] available” (U.S. State Department 2010). Furthermore, “volunteerism is on the rise especially among retired persons [and] it is estimated that almost 50 percent of Americans over age 18 do volunteer work, and nearly 75 percent of U.S. households contribute money to charity” (ibid.).
Corporate social responsibility has a growing standing in the USA but “companies are split on the importance of CSR” (Graham 2013). A survey among US CFOs concluded that the “concern about CSR has undoubtedly increased in the U.S. during the past decade [but the] results indicate that these objectives have not permeated the entire corporate sector” (ibid.). However, in September 2014, the US government committed to create a National Action Plan with the aim to promote and incentivize responsible business conduct. Hence, US companies should “take seriously their responsibility to follow the rule of law, uphold human and labor rights, and strengthen the communities in which they operate” (Kerry 2016). Almost each major US-based company has some information about its CSR activities on the webpages. Among these ones are, for example, Microsoft that states their “mission is to empower every person and every organization on the planet to achieve more [and] also [to] care deeply about how we achieve that mission and our lasting impact on the world and the communities where we operate” (Nadella 2017). An aspiration that is ambitious. Another example is Starbucks who claims that its corporate “Foundation [is] working to connect young people to the skills and training they need to succeed in a rapidly changing global economy” (Starbucks 2017). However, at the same time, Starbucks (and other globally-acting companies) are evading taxes (cp. Barford, Holt 2013). These payments would much more help to promote young people in the countries they are operating. CSR (in USA) is visibly incapable as a “report shows [since] multinational companies failing on CSR goals” (Confino 2013).
Conclusively, the USA have strong charity organisations and voluntary commitments but economic growth and the high profits of US corporations do not trickle-down to ordinary Americans. Inequality is rising and the American Dream of opportunities is almost done.
3.4 Failure of the (welfare) state and its potential harmful consequences
Most of the developed and capitalistic countries struggle with two different economic and political issues: economic growth and the containment of social inequality. However, there is no sure formula for success since “the way a nation’s capitalism is organized and behaves is embedded in its social relations and historical background and, accordingly, differs across countries and development stages. To discuss capitalism as a universal regime is a gross simplification and may lead one to misunderstand countries’ economic system” (Odagiri 2012:528). Therefore, a universal concept to enable equality is not feasible since every economic system has its special features and every society has its special attitude as well as mindset on the degree of government interventions.
The question which was not finally answered so far is ‘why does inequality actually matter’? Krugman (2013) argues that “inequality probably played an important role in creating our economic mess [social unrest, populism, right-wing ideas], and has played a crucial role in our failure to clean it up”. The benefits as well as incentives of average citizens to try hard to achieve their goals and to enhance the ‘economic landscape’ (human capital, innovations, etc.) are decreasing as the “bottom 90 percent of [American] families [have suffered an] impoverishment [which] reflects both a shrinking economic pie and a declining share of that pie” (ibid). Furthermore, the reduced income of the middle classes has resulted in their indebtedness which is one cause for the financial crisis in 2007/08. Less income does also lead to lower aggregated demand which will provoke a reduction in economic growth (etc.). Direct effects on political and economic affairs, which will also harm the upper classes as history does show by different revolutions, are almost obviously but are still an underestimated threat. The Economist asked already in 2014 “Why aren’t the poor storming the barricades?”- opposing reasons are on the wane as seen.
Conclusively, the level of inequality between the examined states is different in relative terms, but almost equal in propensity. However, Japan’s GINI is almost stagnating while the other two are increasing. The USA is one of the richest states, but also one of the most unequal ones. The inequality-adjusted HDI, that shows the loss to human development due to inequality, is in the USA 17,0% and in Japan 12,4%, but just 6,9% in Germany (United Nations 2017b). Each of these countries has a different set-up regarding economic and social values, but they do also have something in common: issues of decreasing equality of opportunity for younger ages that has resulted in (relative) fewer capabilities and inadequate abilities to adapt to changes in the labor market as a result of technological change. People who were before dedicated to the middle class require now more than one job to hardly maintain their living standard and to care for the children. This process of reduced income is resulting in a shrinking middle class and declining social upward mobility that results in decreasing equality of opportunity - a vicious cycle.
4 The most appealing philosophies of justice and (in)equality
Once upon a time, there has come up the ideal of a liberal as well as just and human society without subjugation and social obstacles, aiming at an adequate as well as fairly-distributed economic well-being. One of the famous precursor of modernity was Martin Luther who said that “the prosperity of a country depends, not on the abundance of its revenues, nor on the strength of its fortifications, nor on the beauty of its public buildings; but it consists in the number of its cultivated citizens. In its men of education, enlightenment, and character; here are to be found its true interest, its chief strength, its real power" (Luther 1524:11). Motivated by the steadily escalating hardship and the ground-breaking thoughts of the Enlightenment, mankind rose to overthrow the suppressing political system by fighting for equality, liberty, and fraternity – the French Revolution has unsettled the deeply-rooted world order and unshackled the freethinking across Europe; a dramatic leap of faith has awakened the potential of the human beings and has facilitated the modern age of ingenuity associated with huge progress. The debates about justice have become vibrant and liberalism has questioned government interferences.
What are the most eminent justice concepts and what do these ones state about the ownership of social responsibility – is it a public duty or a private voluntary agreement ?
To answer this question, it is reasonable to pin down the holders of such kind of social responsibility within a society, or to localize who to blame for nowadays inequalities. The Social Responsibility Theory[11] (Siebert et al. 1956) may provide some hints. A general concept about social responsibility will be introduced at the end of this chapter by the equality matrix. However, the term itself describes the moral philosophy (i.e. ethics: concepts of right and wrong conduct) that guide any action and measure, either for individuals or organizations, which put an obligation towards environment, society, culture as well as economy. That definition is applicable to the topic of inequality because it demonstrates the need of social interactions as well as indicates the tensions between liberty and regulations. The conflict and trade-off, respectively, between liberty and equality is also crucial and has been a challenging subject of debate in different fields until today (cf. Steiner 2016). Amartya Sen argues, “those [which are] diagnosed as egalitarian thinkers (e.g. […] Meade) may appear to be less concerned with liberty precisely because they are seen as being wedded to the demands of equality” (Sen 1992:21) but “this way of seeing the relationship between equality and liberty is altogether faulty” since “libertarians must think it [is] important that people should have liberty” (ibid.:22). Hence, “questions would immediately arise regarding: who, how much, how distributed, how equal?” (ibid.). Therefore, “the issue of equality immediately arises as supplement to the assertion of the importance of liberty” (ibid.). The issues of liberty, equality, and public interference are connected and cannot be solved without relating them. People are just able to enjoy deep liberty if others have less rights. Therefore, regulations are required to balance liberty. Each attempt to create equality leads inevitably to a limitation of liberty. Hence, it is reasonable to ask what level of inequality is acceptable and when does inequality start doing more harm than good; the answer depends on a nation-wide consent. However, Social responsibility is usually divided into two spheres: on the one hand, there is Corporate Social Responsibility, and on the other one State Social Responsibility. Introduced by Social Responsibilities of the Businessman (Bowen 1953), the term CSR became popular in the 1990s as a German pharmaceutical company successfully used the concept to increase their profits which symbolizes already the key issue: it is obviously more relevant as a marketing device than a sustainable self-regulative and welfare tool. The key objective of a capitalistic entity is the maximization of its profits and is, therefore, a major constraint to sustainable and reliable welfare realization. Recently, the second part of the story, namely State Social Responsibility (Lombardo, D’Orio 2012), was added to the academia as well as business circles. This is an approach to complete the responsibility, in other words ‘burden’, for social matters and justice accountability. However, the measures for each holder of responsibility will be introduced in chapter 5.
Before focusing on justice and equality considerations, it is required to state a satisfactory definition of both terms and to put them into one context, to establish the nature of their correlation. Justice is a moral as well as political standard and is defined as “the quality of being fair and reasonable [by] just behaviour or treatment” (Oxford Dictionaries 2016). It is the enduring process or struggle, respectively, to provide each person with the same set of rights and to ensure their fair application in an equal way. Hence, equality, in terms of just and reasonable provision and distribution, is the overarching goal of justice since equality describes the “state of being equal, especially in status, rights, or opportunities” (Oxford Dictionaries 2017a). The connectedness of these two terms is marked by mutual dependence since justice cannot be realized without equality and equality cannot exist without justice. There is a huge number of other definitions[12] and contributions which are rather theoretical and complicated as well as almost not applicable to real world situations. A comprehensible and utilizable one is crucial to overcome these hypothetical debates. For simplification: justice is the set of norms and the underlying process to create equal (fair and reasonable) starting conditions to allow all human beings a self-determined development in a fair-liberal as well as social market economy.
4.1 Political equality – Justice of equal rights and political participation
“All men are created equal [and] that they are endowed by their Creator with certain unalienable Rights” (Jefferson 1776) as it is incorporated in the US Declaration of Independence, has never been realized since different groups of people have always been discriminated by the white and mostly richer majority of the people. This has changed in some way. Nowadays, not the European descent is important to proceed in the USA, but the amount of capital as, for example, the ability to run for president demonstrates. Prosperity becomes even more important to participate and intervene in political processes for individuals, as it is already for corporations and associations by far-reaching lobbyism.
Political equality is intended as the basic outcome of justice but justice is an abstract term and there are several attempts to generally characterize and define it which seems to be almost impossible since the perception of justice, as well as equality, depends on values and norms (cultural background) which are globally different (cf. Rüthers 2009). However, in Kant’s opinion, the requirements for a state and its organization must be created on the fact that it would be “even for a race of devils” (Kant 1795:61) possible to establish a state of justice. Therefore, it might not be sufficient to produce several bookshelves filled with theoretical theories of justice that incorporate all possible circumstances or provide principles for all contingencies. The general ability to comprehensively applicate such concept to real-world conditions might be the solution. The confinement of a justice concept to the ecosystem (which are composed of individuals, politics, and economy), to the precision of behavior, and to the handling of resources will determine human progress. Every citizen needs to understand that concept for the ability to participate in political, economic, and social processes. Such concept requires straightforwardness in multiplicity, limitation to characteristic uses, persistence of reasonable norms and values, as well as the inclusion of all subjects (entities), as e.g. the Bauhaus ideals by simplification and concentration proved (cp. Gropius 1923). Whereby, the agenda of debates about justice and equality should comprise issues like wealth accumulation as well as wage gaps between men and women, but not on constructed inequality topics which are (e.g.) provided by gender studies. Political equality needs to respect minorities but the adoption to widely accepted standards is simply reasonable and democratic. Equality should not aim at equalization of natural dissimilarities but enforce societal consensus.
To commence with Aristotle[13] and to integrate his thinking to some degree, the concept of Distributive and Corrective Justice may be helpful to distinguish between economic and political justice, whereby DJ means “how much of a good each individual should get” and CJ regulates “commercial transactions and crimes against persons and property” (Stirk, Weigall 1995). Distributive Justice is, therefore, the lever to achieve economic equality through fair allocation of capital and resources by regulating business conduct. In contrast, Corrective Justice is the possibility to control and penalize economic forces by government authorities to bring these market forces in alignment with equality issues. However, his concept unconsciously introduced some important questions: (e.g.) which are the criteria for distribution (capability or needs) and how is the allocation of tasks between individuals, businesses, and the public sector defined? At least since Plato’s Republic, the idea of justice has been a central concern of political thought. He describes justice as the quality of individuals which focuses on the individual mind and can be understood by studying the essence of human beings, its functions, qualities, or virtues. Plato suggests that justice is the virtue or quality of mind. It is neither strong nor self-seeking; although it cannot be equated with success, the society itself can only prosper and be happy if justice is implemented (cp. Reeve 2009). Unfortunately, the subsequent centuries and its political theorist have almost forgotten the wisdom of ancient Greek philosophers, otherwise is it not understandable that the ideas of the Libertarians [14] became so successful in economics. Liberty does virtually always harm the poor ones who cannot enjoy such liberal rights since a high degree of individual freedom leads to suppression and inflicts damage to the weaker ones (law of the strongest). Moreover, who cares about the poor if everyone can do whatever he/she wants (e.g. to pay no taxes). However, this kind of political philosophy made the fast progress of human beings in recent centuries possible, but its irregulated forces are rather dangerous for the society as the financial crisis in 2007/08[15] has shown. Their key interest is in free markets (laissez-faire economics) and strong property rights. Its proponents regard government interventions as harmful since libertarians believe in government’s inability to effectively manage economic concerns (law of unintended consequences [16] ). Additionally, they pursue to maximize autonomy from state and freedom of choice; stressing political freedom, voluntary association, and primacy of individual judgment. Yet, something has changed in recent decades and modern liberals as well as social democrats are tending to be in favor of interventionism in terms of promoting greater income equality and social welfare. Nevertheless, range of concepts within this philosophy is sweeping. (cp. Johnston 2007)
On contrast, as the social consequences (e.g. working poor) of the Industrial Revolution became visible, another school of political and economic thought commenced a new way of thinking. Marxists regard free market, especially unshackled capitalism, as destructive and are in favor of government welfare programs which might interfere in it with the goal of overthrowing capitalism and replacing it with socialism. This is a social and economic doctrine that seeks for public rather than private ownership or control of property and natural resources (social ownership of means of production, distribution based on one's contribution). It is a post-commodity economic system which means that production is carried out to produce use-value (direct satisfaction of human needs, or economic demands) as opposed to production with the aim to generate profit. Society should own, or at least control, property for the benefit of all its members with the goal to create a state without poverty, inequality, and exploitation (final stage: communism) (cf. Cafruny 2007). The concepts of Marx, Engels, and other socialist are far reaching. The approach to equalize human beings, as it was tried in the former East-Germany (GDR), didn’t work out since, for example, a planned economy and an almost pre-determined life is against the human nature. It is, as always, the best decision to steer the middle course to find the balance between liberty and equality. Such approach is, for example, the Liberal Egalitarianism that recommends establishing fundamental values and rights for all citizens to realize equality in respect of equality of opportunity. Furthermore, that concept proposes the reduction of inequalities, which do exist due to natural or social conditions, by redistribution of capital. Government interference is therefore important and even necessary. Liberty is rather seen as a mean to achieve equality, and not as the final condition. Some of the major advocates of that concept were the American philosophers John Rawls and Ronald Dworkin. They discussed “the idea that distributive institutions should ensure that we share fairly in each other’s fortunes and misfortunes” (Williams 2008:488). Notably, Jean-Jacque Rousseau and Immanuel Kant had already developed the core ideas. However, there are many critiques just as the Liberal Egalitarian Paradox (Cappelen, Tungodden 2006) but the central intention is a valuable consideration of justice.
Conclusively, political equality is in this paper considered as the equal treatment of citizens (equal rights) and the possibility to take part in the political process (fair participation) without relevance of economic status which may lead to corruption and discriminating lobbyism. Therefore, equality of opportunity must be in place from the start of each person’s life. Hence, political inequality occurs when, on the one hand, individuals or groups have a greater influence on the decision-making than others, and on the other hand, direct participation in political processes is not accessible for all citizens, e.g. due to low income or social status. The central ideal of democracy is threatened by developments which can be seen in the strong influence of lobbyism or the US presidential election where own funds are needed to get in. This results in the exclusion of most social classes and ends up in less political interest as well as in the higher influence of rich people (so that minority’s interests govern the life of the majority). So does political distress of the poorer classes lead to the distortion of voting results (cf. Lawrence 2015).
4.2 Economic equality – Justice of the distribution of income and wealth
The economic considerations on justice are merely adequate to solve the issue of inequality since the credo of most economists is ‘prosperity for all’ by increasing economic performance rather than ‘justice for all’ by some fair distribution and market regulation. However, the thought of enduring growth is misleading since social coherence, which drives our civil society (see chapter 4.3) is widely neglected; it ‘cannot be dissolved by widening the pie’ as Milton Friedman argues. Furthermore, he states that social responsibility is not a matter of concern for corporations, their objective is to maximize profits; hence, such behavior would instead be highly subversive to the Free Market Economy (cp. Friedman 1962:119ff). “Distributive justice is often considered not to belong to the scope of economics, but [there still exists] a variety of economic theories and approaches [which] provide many insights in these matters, [just as] the theory of inequality and poverty measurement, welfare economics, the theory of social choice, the theory of bargaining and of cooperative games, and the theory of fair allocation” (Fleurbaey 2016).
Economic justice is defined as a concern “which touches the individual person as well as the social order, and encompasses the moral principles which guide us in designing our economic institutions. These institutions determine how each person earns a living, enters into contracts, exchanges goods and services with others and produces an independent material foundation for his or her economic sustenance. The ultimate purpose of economic justice is to free each person to engage creatively in the unlimited work beyond economics, that of the mind and the spirit” (CESJ 2017). The purpose in this quotation is written with a liberal focus. The key objective should rather be a fair distribution of prosperity. The economist Louis Kelso and philosopher Mortimer Adler (1958:64-99) have contributed three essential and interdependent principles to the sphere of economic justice which are called Participative Justice (input principle), Distributive Justice (out-take principle), and Social Justice (feedback and corrective principle). Their Capitalist Manifesto provides some equality division (also concluded here) but misses e.g. “to explore the relationship between economic and political freedom” (Blake 1959:676).
The historical development of equality ideas has already commenced in ancient Greek times with the Aristotelian Concept of Justice, an ethical-normative approach to establish a fair society, continued via the medieval idea of a Fair Price Concept, which is arguing against usury, and accelerated with the Discourse on the Origin of Inequality by Jean-Jacques Rousseau in 1755. The outstanding French philosopher located the rise of inequality in the perception of property, which is right in thinking, but such rights are crucial for political as well as economic freedom. However, basic reforms are required to limit property to a certain level. The Classical Theory has no attention to public actions for social security and is arguing in favor of private charity. Also, the classical economists are strictly opposing interventions in the market and simply accepting inequality and the existence of poor people - which is in my opinion the ‘original sin’ (Pobuda 2016) of the impoverishment during the Industrial Revolution and the reason of missing redistribution and unfair allocation of capital in the society since these ideas are the core of almost all major succeeding economic theories. Later, something changed: John M. Keynes realized that free market forces are rather harmful and that “the commitment to social justice has more than normative significance. By encouraging reduction in wealth inequalities, the concern for social justice itself functions as a factor to reduce unemployment and to increase economic growth (and thereby further to reduce inequality and hence foster greater social justice)” (Elliott, Clark 1987). In the following decades, Welfarist Theories (use individual welfare as the basis for judging the condition of society) were discussed, just as Utilitarianism (considers general utility or social welfare ultimately as the sole ethical value or good which needs to be maximized) and Welfare Economics (uses microeconomic techniques to evaluate well-being at the aggregated level). These ones have some deep moral intention but are rather used as ‘mathematical playing fields’ which do not have a sufficient impact on real-world inequalities. A less quantitative and more qualitative theory is widely disregarded, but is a proper solution: the Ordoliberalism.
Published in 1964, James Meade’s Efficiency, Equality and the Ownership of Property provides a remarkable vision of an egalitarian society. Furthermore, he describes also measures to achieve such state. His considerations about that topic have been almost ignored until the economists Thomas Piketty and Anthony Atkinson have continued his way. Meade was quite pessimistic as well as concerned about the long-term prospects of the development of capital. He argues in his book that the technological progress and the accumulated distribution of ownership of means of production will inevitably increase the returns to capital while the returns to workforce will decrease. Meade also explains that there is another process which will lead in the future to more inequality: the divergent returns of large and small investors. For different reasons, investors with a greater amount of invested money can achieve relatively higher profits than investors with less capital. After the description of the situation of that time, Meade points out mandatory actions and measures with the aim to combat the gloomy prospects of an unequal economy and society. He, therefore, establishes four different levels, in his words “possible lines of attack” (Meade 1993:38), to replace the “Brave New Capitalist’s Paradise” (ibid.). (1) “A Trade Union State” (ibid.): Strengthening trade unions and imposing a minimum wage will increase the power of the workforce and will decrease the above-mentioned gap between raising returns of capital and stagnating wages in an automated economy. (2) “A Welfare State” (ibid.): Reducing the income inequality through redistribution, higher taxation of incomes of rich classes to benefit the poorer people by direct or indirect sub-sidizing their incomes; nonetheless, this cannot settle the inequality by huge ownerships. (3) “A Property-Owning Democracy” (ibid.): Redistributing the property ownership nearly equally over all citizens in a society will lead to the fact that work is even not the only source of income for ordinary people and will also reduce unequal distribution of power. (4) “A Socialist State” (ibid.): Establishing a national wealth fund with the aim to create a tremendous amount of democratically-controlled public financial means that would be used to support basic income of citizens by defining something like a basic pay level. Empirical studies, elaborated by, for instance, Anthony B. Atkinson (2015) and Thomas Piketty (2015) have shown that Meade’s assumptions regarding the shift in economic returns from labor towards capital and the trend towards divergent capital returns in subject of the size of investments are true. Piketty further shows that the concentration of wealth occurs when the rate of return on capital is higher than the rate of economic growth over the long-run and, therefore, will cause social and economic instability (ibid.).
Economic inequality is exposed by people’s different positions within the distribution arrangement – relating income, pay, and wealth, which are the three main kinds of such type of inequality. The most important one and the key reason for the steady increase is income inequality which “is the extent to which income is distributed unevenly in a group of people [whereby income is] not just the money received through pay, but all the money received from employment (wages, salaries, bonuses etc.), investments, such as interest on savings accounts and dividends from shares of stock, savings, state benefits, pensions and rent” (The Equality Trust 2016). Pay inequality means the “difference between people’s pay […] within one company or across all pay received” (ibid.) that is widely discussed because of the high gender gap. Wealth inequality “refers to the total amount of assets of an individual or household” (e.g. financial assets, property, and private pension rights) and describes “the unequal distribution of assets in a group of people” (ibid).
[...]
[1] Neoliberalism and its previous theories “played a major role in a remarkable variety of crises: the financial meltdown of 2007‑8, the offshoring of wealth and power, of which the Panama Papers offer us merely a glimpse, the slow collapse of public health and education, resurgent child poverty, the epidemic of loneliness, the collapse of ecosystems, [and the rise of populism]” (Monbiot 2016).
[2] Means the global control of the business cycle; term coined by the former German minister Karl Schiller.
[3] “For many years the social focus of the Moral Sentiments was contrasted with the Wealth of Nations, implying a contradiction (the ‘Adam Smith problem’). Now the consensus among Smith scholars is that the self whose interest Smith studied was a social self, conditioned by social norms” (Dow 2015:45).
[4] The Classical Utilitarians were Jeremy Bentham and John Stuart Mill but this normative theory as an approach to moral evaluation and/or moral decision-making has been revised for several contexts.
[5] The historical data is estimated on basis of the mentioned sources. Figures from 1700 to 1850 refer to England and Wales while the later ones also include the other countries of the United Kingdom. More recent information on Pre-Industrial Inequality was published by Milanovic, Lindert et al. (2011).
[6] Theory that states that the population growth is higher than the agricultural one, hence, there must be a stage at which the food supply is inadequate for feeding the population (refer to Thomas R. Malthus).
[7] Two different explanations for IR: Mokyr (unique institutions) and Allen (special price system).
[8] There are some critiques on these measures; but, those are sufficient for the purpose of this paper and critiques will not be discussed. Some can be reviewed, for example, in the works of Luque et al. 2016 for HDI (e.g. “problem of substitutability between components”, p.713 ) and Cobham et al. 2016 for GINI (e.g. “relatively insensitive at the extremes and over sensitive to changes in the middle”, p.25).
[9] Maybe better described as the Anglo-Saxon Capitalism, which is a capitalist model that emerged in the 1970s (see Chicago School of Economics); low levels of regulation & taxes, fewer public services.
[10] Friedman: excessive expansion of the money supply is inherently inflationary (missing price stability).
[11] Originally introduced as media concept; mostly used by developing countries to promote freedom of press and to abolish censorship. Media content should be regulated by social responsibilities and external controls. But content is also supposed to be filtered through public obligation/interference.
[12] Justice and equality have many different facets and for each individual a differing meaning since it depends usually on one’s own position within a society (see Stanford Encyclopedia of Philosophy).
[13] Aristotle‘s concept of justice in his writings: The Nicomachean Ethics (Book V) written about 350 BCE.
[14] Famous advocates were for example John S. Mill, Ludwig von Mises, Milton Friedman, Robert Nozick.
[15] Due to widespread failures in financial regulation, supervision, corp. government, and risk management.
[16] Defines a set of results that was not intended as an outcome of the strategy/measure (see Six Sigma).