Irving Fisher and inequality

from Peter Radford

“The real scientific study of the distribution of wealth has, we must confess, scarcely begun. The conventional academic study of the so-called theory of distribution into rent, interest, wages, and profits is only remotely related to the subject. This subject, the causes and cures for the actual distribution of capital and income among real persons, is one of the many now in need of our best efforts as scientific students of society.”  Irving Fisher, President’s address to the American Economic Association, 1919

Later in that same speech he gave us his opinion of patrimonial capitalism:

“I believe that it is very bad public policy for the living to allow the dead so large and unregulated an influence over us.”

That sentiment has now reappeared as Piketty’s call not to allow the past to devour the future.

With respect to the “right” to create inheritances via wills Fisher points us to Chief Justice Coleridge of England:

“The right of inheritance, a purely artificial right, has been at different times and in different countries very variously dealt with. The institution of private property rests only upon the general advantage.”

Later in the same vein Fisher quotes Justice McKenna of the US Supreme Court:

” The right to take property by devise or descent is the creature of the law and not a natural right – a privilege, and therefore the authority which confers it may impose conditions upon it.”

Presumably amongst those conditions would be an estate tax to diminish the flow forward of patrimonial capital.

Back to Fisher himself later in his address:

“While government enterprise has glaring defects, the present system of private profit is also defective … Two unfortunate consequences follow. One is that in this great game of chance the lottery winnings make multimillionaires out of millionaires, which is inconsistent with democratic ideals and democratic progress … “

And, finally, one more quote from Fisher himself:

“Our society will always remain an unstable and explosive compound as long as political power is vested in the masses and economic power in the classes. In the end one of these powers will rule. Either the plutocracy will buy up the democracy, or the democracy will vote away the plutocracy.”

Remember this was all in 1919.

Fisher was talking in the afterglow of World War I when many of the social changes that altered society during the twentieth century were getting underway. Taken as a whole his speech a call to the economics profession to commit to understanding the causes and effects of inequality and to devise remedies so as to preserve democracy. It was a call that has been, by and large, ignored.

It was only a few years later that economics, like the economies it purports to study, was swept up by the Great Depression, and riven through by schismatic theoretical divides, Then World War II and the Cold War allowed, consciously or not, economics to suppress its connection with reality. It was subsequently rebuilt as a lesser more confined field that ignored the political and social domains altogether. So the conflict between capitalism and democracy was simply assumed away and the social conditions necessary for capitalism – in its text book “free” market guise – were taken for granted as the basis upon which the economic domain existed. In particular, as the Cold War perverted scientific judgment even further, and as the post-war years brought what we now know to be an aberration in growth, most economists forgot or ignored the lessons of history as irrelevant to the pursuit of their neo-Platonic ideal: the stylized market place that can do no wrong.

That markets exist, indeed can only ever exist, inside a broader sociopolitical context disappeared altogether from mainstream economic thought. The consequence being, as I have said far too many times before, is that economists ended up studying only economics and not actual economies. Their models, large or small, formal or ad hoc, mathematical or narrative, all overlooked the sociopolitical impact subsequent policy advice derived from them might have. In this way economics became “performative” in that policy advice and the lessons learned in the classroom all had the effect of trying to bend society to conform to the ideal, rather than bending the ideal to conform with reality.

Economics became a massive social experiment. Economists began tinkering with society even while being oblivious to the fact that they were tinkering. Innocent or not – and I still believe that some economists knew full well they what they were doing – the mainstream drew to itself a massive ethical responsibility that it has never to this day recognized. Namely that if your advice is based upon some theory that assumes away most if not all social reality, and that it then has the effect of altering the reality it presumes to model, you had better be damned sure both theory and advice do no harm. Hiding behind idealized theoretical constructs is not acceptable. When you seek to bend real social relations to mimic those of your theory you had better be prepared to be called to task for any consequences society might not like. The loss of democracy being high on that list.

Or is it that many mainstream economists simply have a contempt for democracy because it muddies their pristine theoretical waters?