Frank and Earl have each invited me to write something for this blog. I want to introduce two pieces relevant to your conversation. They have a few common features: (1) they are novel proposals — not New Deal nostalgia, nor the ‘capitalism with a conscience’ of fair trade and farmers markets, nor the Labor Party’s ‘Clause IV’ and central planning; (2) they are roughly compatible with the orientation to social theory shared by this blog’s contributors; (3) they are both formulated by unapologetic pro-market economists.
The first piece is Robert Shiller’s proposal for hedging against wage fluctuation — you can read it as a way to address the problem of an alienated social whole standing-against (Vergegenständlichung) individuals. The second is an ebook by Dean Baker, in which he affirms standard leftist goals (egalitarian distribution of wealth, freedom from labor, etc.), but suggests market-based routes to their achievement. Interestingly, aspects of both of these proposals made it into Obama’s jobs proposal.
These are two out of a very small number of innovative programs on offer to leftists. It is unfortunate that the intellectual left, such as it is, has lately neglected creative reform measures. To change this we must build our capacity to understand an unprecedentedly complex economic order. Instead of abdicating the fields of cost-benefit analysis and capital allocation, we should outdo the right-wing economists at identifying unintended consequences; assessing political proposals against our end goals, rather than our historical allegiances; and approaching economic events not as happy confirmation of some crisis theory or law of increasing organic composition of capital, but rather as constant and unremitting challenge to our analytical preconceptions. Absent this, we revert to dogmatic Communist/radical positions, or to tacit endorsement of unworkable moralistic capitalism.
I think that these comments are in the same spirit that led you to start this blog. And it is truly impressive to me that you all try to write about the economy and real politics, rather than just slugging away at your dissertations or playing around with sectarian groups. But with questions about the economy and changing it, we also need a certain humility and attention to detail. It is an interesting thought experiment to ask what kinds of knowledge we would need, and what skills we would need to master, to formulate programs like those below. We hobble ourselves when we reach too quickly for grand theories or radical gestures. At any rate, there’s hope — the bar set by the incumbent set of intellectuals and politicians could hardly be lower.
From the Introduction to Robert Shiller’s 1993 Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks:
Living standards are not fully insurable because of moral-hazard problems: if people or organizations knew that their incomes were guaranteed regardless of the amount of effort that they put in, then there would be a markedly reduced incentive to make efforts to maintain income. The effect of this moral hazard has been discovered in many times and places throughout history. It was discovered when, with the Speenhamland Law of 1795 in Britain, reformers raised workers’ income to a specified level, the difference coming out of public funds. It was discovered again when idealistic socialists under Robert Owen set up communities in the nineteenth century where incomes were pooled. It was discovered again when communists in many countries in the twentieth century made attempts to move society toward the Marxian ideal of distribution, ‘From each according to his abilities, to each according to his needs’. The humanitarian, idealistic, and revolutionary impulses that gave rise to these various social movements came up against a hard reality, the ill effects on incentives; most of these social movements were later abandoned. Moral hazard is not total: people and organizations do continue to function even if their incomes do not depend on it; but the inefficiencies created by such total insurance are so significant that they cannot be ignored.
Changes in living standards that are due to objective and quantifiable causes beyond an individual’s or organization’s control can, however, be covered by insurance policies without exposing the insurance companies to moral hazard from their policyholders. Thus, for example, the random decline in income (in the form of a decline in rents or real estate services) that a person faces because a house burns down is objective and easily measured; the risk of such decline is insurable. The moral hazard that the owner will deliberately burn down the house is small. In practice the objective fact of a fire is mostly not under the control of the homeowner. The decline in income that is caused by disability is similarly insurable; disability due to accident or illness can be objectively measured; most people will not disable themselves to collect on insurance. The decline in disposable income that is caused by medical expenditures due to health problems is also similarly insurable, as is the decline in income that is caused by the death of a family member.
Insurance policies on these objective and verifiable risks of income fluctuations have long been offered by our insurance companies to the advantage of the public. But the insurance industry has not devised policies that insure against many other causes of fluctuations in incomes. It is far more likely that a property will lose economic value owing to changes in economic conditions than that it will burn down. It is far more likely that an individual will face adverse labor-income shifts because of changes in the market for that person’s labor than that that person will suffer a physical disability.
These economic causes of changes in standards of living that should be insurable without moral hazard because they are beyond individual control are still not insurable today because they are not so objective or easy to verify as fires or disabilities. The changes in the outlook for income, and the causes of these changes, are hard to describe. Economic changes may affect income only with long lags; the changes may become apparent only gradually through time, rather than catastrophically as with a fire. Insurance companies cannot verify whether an individual seeking income insurance is doing so because of private information that his or her own future income is likely to decrease; there is no medical exam that will verify that there is no pre-existing condition likely to lead to lower future income. This lack of objective evidence about the outlook for future income creates a problem for writers of insurance policies. But if we could create liquid markets for claims on aggregate income itself, then we could objectify the intangible economic causes of changes in aggregate standards of living, thereby making it possible to insure against adverse changes.
Individuals and organizations could hedge or insure themselves against risks to their standards of living if an array of risk markets — let us call them macro markets — could be established. These would be large international markets, securities, futures, options, swaps or analogous markets, for claims on major components of incomes (including service flows) shared by very many people or organizations. The settlements in these markets could be based on income aggregates, such as national income or components thereof, such as occupational incomes, or prices that value income flows, such as regional real estate prices, which are prices of claims on real estate service flows. Since the individual or organization has virtually no control over these aggregates, there is no moral hazard created by insuring the risks of these incomes.
. . .
Efforts to reduce the inequality of incomes might substantially be furthered by creating such markets to allow insurance against the major risks to income. Such efforts do not involve such politically difficult measures as taxing the rich and subsidizing the poor; it is in everyone’s interest to insure themselves against income risks.
The revolutionary social thinkers described above could not see the fulfillment of their vision for communal sharing of income uncompromised by moral hazard unless there is development of a new community spirit, a new concern among the general public for others. But efforts to create such community spirit in society at large have not been successful enough to make possible the envisioned voluntary sharing. There are some stories of successes of utopian communes that completely pool all incomes, such as the Hutterites of North America, the kibbutzim in Israel, and the Itto-En and Yamagishi-Kai of Japan, but these communes, based on a sense of group feeling and intimacy built from shared experiences, are effectively large families. Usually a commune has no more than a few hundred members. Each commune is too small to allow much of the risk sharing envisioned here. Moreover, many of these utopian communes find that their community spirit declines somewhat through time and that private property becomes more important. Established communes may, for example, allow new members to retain possession of their preexisting wealth.
We should salvage as much of the objectives of these utopian thinkers as can be really achieved on a voluntary and self-interested basis for all of human society. People ought to freely share that component of their incomes still unknown and still to be dictated by forces beyond their control. And there is no other component of income but that which is still uncertain and beyond their control that self-interested people will voluntarily share. If we are to try to introduce as much communal sharing of income as can be achieved on a basis that is completely voluntary at all times then we will have to be, odd as this may seem, merely creating hedging markets for incomes.
Baker’s book, The End of Loser Liberalism: Making Markets Progressive is not behind a pay wall, so I won’t copy it here. If you read the Introduction and Conclusion (both very short), you’ll have a flavor of it.