Monthly Proposal No.4: transparency about income, wealth and its source

In comparison to other countries Austria seems to be very egalitarian. Nevertheless it is hard to find young pupils and students, who would define our income and wealth distribution as fair. It is not even close to fair.

However, I’m tired of talking about redistribution. I also put little hope in discussions between well-paid union officials, prosperous politicians and the lap-dogs of even richer ones. Instead I propose to stop protectionism and let everyone talk, discuss, claim and justify for its own. Let’s play market economy according to the underlying and arguing assumption: complete and symmetric information.

Provide transparency about income, wealth and its source. If all your money is earned fairly and squarely and all your property is built up on proportional individual effort, you do not have to fear the envy of other people. So do not shy away from your beloved competition, but proof your incredible talents which make you five, ten or even hundred times more productive than other ones. Do not hide behind some grey eminences, but explain your important role in our society and why you have deserved to enjoy the fruits sown by others. Be a grown up, stand up for your beliefs and argue them by your own facts and figures.

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13 thoughts on “Monthly Proposal No.4: transparency about income, wealth and its source

  1. Wow. I didn’t know Timon is a libertarian. His post seems to imply that he is willing to accept even a very unequal income distribution provided that everyone earned his income “fairly and squarely and all (his) property is built up on proportional individual effort”. That is a libertarian principle. One of its important implications is that you cannot judge the fairness of a society merely by looking at how equal or unequal its wealth is distributed. You have to look at how the distribution came about. Did it come about by voluntary exchange in a competitive environment (market transactions) or by involuntary transfers between people (theft)? That is an interesting way of looking at income distribution and it leads to some provocative conclusions. For instance: My income, such as the income of virtually all university employees, most school teachers, many doctors and lawyers, is paid exclusively out of taxes, that is, from involuntary transfers. Hence a major part of our society (myself included) is living on theft. Just saying.

  2. I really doubt, that if all of our income would be generated by “voluntary exchange in a competitive environment” and everyone would judge the generation as well as the outcome “fair and square”, you could discover a very unequal distribution. To this effect I do not see an urgent need to answer your imputation.
    Instead I want emphasize the complexity of the mentioned concepts:
    1) When you talk about voluntary exchange in a capitalistic market economy, you have to consider the difference between free will and free to choose. The latter concept implies a set of options given and restricted by someone else – maybe the market. To this effect, even slaves are free to choose. They just have not that much choices. So as long as one would determine himself as a slave of a dominating system, any voluntariness can be challenged. Even demoratically legitimated taxes were just called an involuntary transfer by your self.
    2) Fairness is a normative concept. In a democracy therefor we have to develop some eqaully shared common sense or at least judge collectively about it. But to be able to judge about something, you preveously have to know about it – for example about other people’s income, wealth and its source.

    • This is getting really interesting. If I understand you correctly, you are saying that if all income would be earned by voluntary exchange in competitive markets, the resulting distribution of income would not be very unequal. Why do you believe that? Do you have a model that says so? Do you have evidence? If so, please let me know, because I really would like to believe your proposition.

      As for freedom to choose and slavery: obviously, voluntary exchange cannot include those “transactions” in which someone is providing his labor in “exchange” for not being beaten to death by his master. That said, there have been in the past, as there are today, forms of voluntary slavery. For instance, during the 18th century, it was a common way for poor immigrants to pay the cost of travel from Europe to America: the immigrant agreed to do unpaid work for the captain for a certain period of time after his arrival (http://en.wikipedia.org/wiki/Indentured_servant).

      • Let me introduce you to the logical AND … in a sentence: “…if all of our income would be generated by voluntary exchange in a competitive environment AND everyone would judge the generation as well as the outcome fair and square…” …So no, I did and do not claim, that competitive markets are the universal solution!

  3. Stearing the discussion in a little bit of a different direction: there is actually real example for the disclosure and transparency you are calling for: It is called Scandinavia. And I was slightly shocked when I found out that you can go on the internet and find out ANYBODY’s salary, taxes… and a bunch of other things I’m not sure I want everyone to know. This has nothing to do with me wanting to hide what I earn because it was illegitimately earned. There are just some things in life that are private. What these things are will depend a lot on the cultural context, but in most parts of Europe I’m pretty sure your income is one of them. For me, this discussion would be about weighing the benefits of doing this (which are, in my opinion, negligible) versus the costs, namely a huge infringement of the personal freedom to decide what you want to disclose about yourself to the rest of society.

    • Somewhat related to your point (which I agree with): there is some evidence that making salaries more transparent can actually increase inequality. This paper (http://www.fma.org/Luxembourg/Papers/SCHMIDT_Transparency_Executive_Compensation.pdf)for instance finds that after German firms were required to disclose their CEO compensation packages starting in 2000, CEO salaries increased significantly. One explanation for this is a sort of Catching Up With The Joneses effect: managers learn what other managers get paid, get envious and demand higher pay, which makes the others demand higher pay too and so on.

      • Taking CEOs as representatives and refering to market failure to argue against the provision of information? … no further questions, your honor.

    • There definitely is a cultural context. Luckily for us, culture is not a intertemporal constant. So if someone prefers a more equal income distribution, he or she could decide to vote for such a change … or maybe move to Scandinavia 😉

      • Timon, you are just claiming that transparency would lead to less inequality. If you want us to believe this claim you should provide a clear mechanism how inequality is affected by transparency as well as empirical evidence that supports your claim. I presented both evidence and a mechanism how transparency could actually increase inequality. So, at the moment, I have zero reasons to believe your proposition and some reason to believe the opposite proposition.

        As for the logical AND, I just chose to ignore it because I think it makes little sense. How could you ever know whether or not “everyone judges the generation as well as the outcome” to be fair? Different people hold wildly diverging views on what is and is not fair. All we can do is arguing about what “fair” means in this context. The libertarian position is that “fair” means “generated by voluntary transactions in a competitive environment”. Your post seemed to me to support that view. But I probably just read my own views into your post. If so, I am sorry. But if you don’t agree with the libertarian position, what is yours? How do you judge whether the distribution is fair or not? Inquiring minds want to know.

  4. If you read all my statements above carefully, you will recognize, that I never claimed, that transparency is a sufficient condition for less inequality. Nevertheless, I confess that I intuitively believe there would be a positive impact and the mentioned example of Scandinavia rather supports my believe.
    Keepin’ it short and simple: If you have to share a cake, your behaviour probably depends on whether the others can observe how many equally sized pieces you take or took. If you now really want to claim, that less observation would lead to more cooperative and social behaviour, you would take some important assumptions and implications of institutional economics and game theory in question.
    To this effect I do not see, why I have to proof the importance of complete and symmetric information to an educated economist. Leaves me with your question about how I would judge whether a distribution is fair or not? As you already said, different people have different opinions. That is, why in the first instance I would delegate the discussion about redistribution to the individuals. So how would I optimally judge about fairness: Probably by democratic voting of enlightened people.

    • Okay, I don’t get the pie analogy at all here. Are you saying the reason why the 1% get such a large share of the pie is that people don’t know how large that share is? Do you think CEOs would say “please cut my salary because I don’t want to look greedy when people find out about my salary”? That just sounds highly dubious to me.
      On Scandinavia: It’s true that Scandinavia has always had a more egalitarian society than most other countries. But for the past 20 years their inequality has actually been increasing faster than the OECD average (http://www.oecd.org/els/soc/49499779.pdf). So I don’t think this is good evidence for your hypothesis.

  5. On the pie analogy: I think, that well informed voters probably would concentrate and restrict their envy and other related negative feelings and resulting claims on those people, who earn and own an “unreasonable” amount. “Unreasonable” in the above mentioned context means that these people are not able to argue the height of their income, wealth and its source in a satisfying way towards the previously mentioned critical voters. So there are at least two possible mechanisms: First, financial transparent people fear the justified reservations against “unreasonable” and “unfair” remuneration and possession. Therefore, they maybe have more incentives to consider the social implications of their market activity and decissions. Secondly, voters would have the information whether they are affected by specific political measures of redistribution and who is indeed. We know, that people still underestimate inequality. In addition we know, that poor people overestimate their position within the distribution while rich people tend to underestimate their share. To this effect we could expect different votings on measures like income or property tax, if we would just provide the information about income, wealth and its source as a neccessary condition for a functioning political market.

    On Scandinavia: That is why I would not mention Scandinavia in the first place. I just pointed out, that Katharinas example does RATHER supports my proposal than contradicts it. However, there are so many other probably more important causations and effects about distribution and its trend than transparency.

    • Look, you have two arguments for the benefits: (a) that people underestimate inequality now, because they lack information and that giving them this information would increase their ability to support redistribution/ fairness. Howevever, there IS plenty of information on the income distribution, for instance on statistik austria. It is not information on the income of individuals, but there is loads of information on medians, averages and percentiles that tells you pretty exactly what the distribution looks like, if you would care to look it up. So, essentially, the only thing your proposal changes, is that you can look up what particular individuals earn and pay in taxes, and I do not believe that this information required by the public, instead…
      (b) you claim that having their income displayed will have an effect on the people with “unreasonable” remunerations to change their attitudes because they can’t justify their incomes. Well, so what? Firstly, who says that they actually believe that their incomes are not justified and, secondly, people compare themselves mostly to their peers (which is why I think that Max’ CEO example was actually quite good and translates to many other layers of society). There will be no direct social pressure from poor on rich, because there is little direct interaction between these groups and I don’t think the indirect social pressure will change very much in response to your proposal. Everyone hates bankers already. It’s not going to change much if you know how much every single one of them earns. I think people will compare themselves more to their peers and that this comparison is unhealthy and is a negative side-effect.
      The reason this side-effect is not present much in the Nordic countries, is, in my opinion, because people are raised not to compare themselves to others in such a competitive way as in other societies (i.e. in many areas of study you don’t even get GRADES here).

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