Good news often falls on deaf ears. In this case, my own. In 2002 I joined a campaign of trade unionists and community activists in Santa Fe, New Mexico, seeking an increase in the minimum wage, which, for the state of New Mexico, then stood at $4.15 an hour, well below the US federal minimum wage. When asked about the discrepancy, a Santa Fe businessman explained that it “sent a good signal to investors.” Less than an hour into my first meeting with members of the so-called living-wage campaign, I found out that I, too, had become an equality pessimist.

The group was seeking an increase to $8.50 an hour. I balked, worried about the hotel room cleaners and restaurant food-choppers in this tourist town who might find themselves out of work. And I doubted whether the well-heeled, politically elite of the city would go for it. Couldn’t we propose an increase to $5.50 and then, if we won, go on from there? A former organizer from the Communications Workers of America vociferously objected: “I’m not going to go out there and demand a wage that would place the worker below the poverty line even if she worked full time all year. I’m not going to sign on to that kind of injustice.”

The claim that high levels of wealth inequality degrade economic performance by precluding what otherwise would be productivity-enhancing solutions to coordination problems sounds abstract. But this is not just blackboard economics.

In the US South prior to the Emancipation Act (1863) it was said that cotton was king. But it was not until after the Civil War that cotton truly ascended to the throne among crops: In the quarter of a century following the demise of slavery, the production of cotton relative to corn (the main food crop) increased by 50 percent (Ransom and Sutch 1977). The intensification of the cotton mono-culture puzzled observers at the time and since, as it coincided with a slight downward trend in the price of cotton relative to corn. Moreover, there were no changes in the technical conditions of production that would have offset the adverse price movement; in fact, the growth of corn yields appears to have outpaced cotton yields during this period. Nor can the shift from corn to cotton be explained by changes in factor supplies. The Cotton South experienced a serious labor shortage following the war, which should have led some farmers to abandon cotton in favor of corn, as the latter was a much less labor-intensive crop.

The modern welfare state is a remarkable human achievement. In Europe and North America, a substantial fraction of total income is regularly transferred from the better-off to the less well-off, and the governments that preside over these transfers are regularly endorsed by publics (Atkinson 1999). The modern welfare state is thus the most significant case in human history of a voluntary egalitarian redistribution of income among total strangers. What accounts for its popular support?

A compelling case can be made that people support the welfare state because they think it is the right thing to do. It conforms to a behavioral schema which we call strong reciprocity. Strong reciprocity is a propensity to co-operate and share with others similarly disposed, even at personal cost, and a willingness to punish those who violate co-operative and other social norms, even when punishing is personally costly and cannot be expected to result in net personal gains in the future. Strong reciprocity goes beyond self-interested forms of co-operation, which include acting tit-for-tat and what biologists call reciprocal altruism (Trivers 1971), which is really just self-interest with a long time horizon. Genuine altruism, in the standard biological sense of the term, is what motivates actors to help others in situations where the actor would increase her payoffs by not helping (Kerr, Godfrey-Smith, and Feldman 2004).

Preface

Radical egalitarianism – the dream of equal freedom – is now the orphan of a defunct socialism. The unruly and abandoned child of the liberal enlightenment had found a home in nineteenth-century democratic socialism. Protected and overshadowed by its new foster parent, radical egalitarianism was relieved of the burden of arguing its own case: as European socialism’s foster child, economic and political equality would be the by-product of an unprecedented post-capitalist order, not something to be defended morally and promoted politically on its own terms in the world as it is.

It thus fell to reformists, be they laborist, social-democratic, Euro-communist or New Deal, to make capitalism livable for workers and the less well-off, a task they accomplished with remarkable success in some of the advanced economies. But in the process, the egalitarian project was purged of its utopian yearnings. Its objectives were narrowed to the pursuit of a more equal distribution of goods and formal equality of political rights. The “world turned upside down” that Gerrard Winstanley had promised as the seventeenth-century Diggers were occupying Saint George’s Hill near London was not to be; workers and farmers would have to settle for a world smoothed out. Over the years even this project has encountered increasingly effective resistance and experienced major political reversals. The century-long decline in the income shares of the very rich in virtually every country on which we have adequate data came to an abrupt halt in the final quarter of the twentieth century (Atkinson, Piketty, and Saez 2011). In many of the world’s largest economies – the US, the UK, India, China, and others – the economic fortunes of the very rich regained much of their lost ground.

Benjamin Disraeli’s “two nations . . . between whom there was no intercourse and no sympathy” were the rich and the poor. It was 1845, the same year that Frederick Engels wrote the explosive The Condition of the Working Class in England. Since then in the advanced economies, a combination of nationalism, representative democracy, and the resulting policies of universal public education and egalitarian redistribution have bridged the cultural and economic gap considerably. The rich and the poor are still with us of course, and on a global scale the economic gap between them is far greater than when Disraeli wrote (Bourguignon and Morrison 2002). But in the richer economies the nations of Disraeli’s world (and Engels’) have been left behind.

Globalization, Ugo Pagano and I maintain, is an extension of nationalism, not its antithesis: it promotes cultural standardization and economic integration across national boundaries. But unlike nationalism, which in many countries had a democratic twin, globalization standardizes and integrates without providing either the international cultural solidarity or governmental institutions capable of supporting egalitarian redistribution and insurance on a global scale, while weakening some of the nation-based institutions for the same. In this respect a globalized world may re-create the social structure of the archetypal ancient agrarian empire: a dominant class of cosmopolitans speaking a common language (once French in many parts of Europe, Persian in Mughal India, Ottoman Turkish in the Ottoman empire, today English everywhere) and presiding over a heterogeneous and provincial underclass speaking a Babel of dialects, with little solidarity across the language groups, and weak nationally based instruments of social insurance and egalitarian redistribution.

Socialism, radical democracy, social democracy, and other egalitarian movements have flourished where they successfully crafted the demands of distributive justice into an economic strategy capable of addressing the problem of scarcity, and thereby promised to improve living standards on the average. Redistributing land to the tiller, social insurance, egalitarian wage policies, central planning, and providing adequate health care and schooling for all have been attractive when they promised to link a more just distribution of economic reward to enhanced performance of the economic system as a whole.

For this reason economic analysis has always been central to the construction of more democratic and egalitarian alternatives to capitalism, as well as to reforms of capitalism itself. Keynesian economics, for example, supported state regulation of the macro economy and also provided a rationale for income redistribution to the less well-off who, by spending a larger portion of their incomes, could be relied upon to generate higher and more reliable levels of demand for consumer goods, and thereby to sustain greater macroeconomic stability and higher levels of employment. Similarly, the model of general competitive exchange was deployed by socialists from Oskar Lange and Enrico Barone in the 1930s to Pranab Bardhan and John Roemer two generations later to demonstrate the possibility and advantages of democratic planning.

The word globalization had not been coined, but John Maynard Keynes sounded an alarm about its consequences that still resonates today:

Few now remember Keynes’ prescient advocacy of local self-determination and policy experimentation; but the tension between global integration and national sovereignty has become a staple of the conventional wisdom, endorsed by scholars and diffused by the media.

For well-known reasons, a reduction of impediments to international flows of goods and factors of production – commonly termed globalization – may enhance allocative efficiency both globally and within national economies, and the associated competition among nation states may contribute to governmental accountability. However, globalization is also thought to raise the economic costs of programs by the nation state to redistribute income to the poor and to provide economic security for their populations. Among the reasons is the fact that the more internationally mobile factors of production – capital and professional labor – tend to be owned by the rich, and a nation-specific tax on a mobile factor induces national-output-reducing relocations of these factors. Similar reasoning demonstrates the high cost of attempting to alter the relative prices of factors of production, for example, by raising the wage relative to the return to capital through trade union bargaining. Even Pareto-improving insurance-based policies are compromised, as cross-border mobility of citizens allows the lucky to escape the tax costs of supporting the unlucky, thereby reintroducing the problem of adverse selection plaguing private insurance, which (mandatory) public insurance was thought to avoid (Sinn 1997).

Though conflicts of interest are central to economic reasoning, they are addressed in an artificial and misleading way in the conventional neoclassical model. This treatment is apparent in the following quote from the distinguished economist Abba Lerner:

Exchanges may be solved political problems where contracts are comprehensive and enforceable at no cost to the exchanging parties. We use the term exogenous claim enforcement to refer to this type of comprehensive and third party (generally state) regulation of contracts; it tends to occur where the transaction is transparent in the sense that the characteristics of the goods or services exchanged are readily determined, and hence contractual transgressions are readily detected and redressed, often by resort to the courts.

Where some aspect of the object of exchange is so complex or difficult to monitor that comprehensive contracts are not feasible or enforceable by a third party, however, exogenous claim enforcement does not obtain, and the exchange is not a solved political problem. By comparison with the transparency of the exogenously enforceable exchange, these exchanges are characterized by opacity: Some aspect of the good or service exchanged is not readily determined. Far from being a special case, the absence of exogenous claim enforcement is quite general; the two critical exchanges of the capitalist economy – the labor and the capital markets – provide, as we will see, the archetypal examples.