Ferdinand Lassalle on the Wages of Abstinence

In his 1864 book “Capital and Labor,” Ferdinand Lassalle wrote on the description of capital income as “wages of abstinence,” i.e. payment for abstaining from consumption. What he had to say is one of the funniest things ever written on the topic:

The profit of capital is the ‘wage of abstinence.’ Happy, even priceless expression! The ascetic millionaires of Europe! Like Indian penitents or pillar saints they stand on one leg, each on his column, with straining arms and pendulous body and pallid looks, holding a plate towards the people to collect the wages of their abstinence. In their midst, towering up above all his fellows, as head penitent and ascetic, the Baron Rothschild! This is the condition of Society! How could I ever so much misunderstand it!

The Meidner Plan for Socialism

Rudolf Meidner was the Swedish economist most responsible for Sweden’s economic model in the 1950s to 1970s. Near the end of his reign and the golden era of Swedish social democracy, he put forward a proposal that became known as the Meidner Plan. If followed, the Meidner Plan would have gradually transferred ownership of Swedish companies to workers by requiring the companies to issue shares to union-controlled wage-earner funds. Below is a simplified rundown of how it would have worked within the Rehn-Meidner model that the Swedish economy was already designed around.

Suppose that we start with a capitalist economy that has a specific wage differential. The wage differential refers to the difference in the hourly wage paid to different kinds of workers. In graphical terms, we can think of it like this, where the top of the bar is the highest wage received and the bottom of the bar the lowest wage received:

m1

From this economy, we forcibly shrink the wage differential through a solidaristic wage policy. One way to do this is by using collective bargaining agreements to lift up the lowest wages and to bring down the highest wages. When you shrink the wage differential in this manner, the result is this (explained below):

m21

Disemployment on the Bottom
Lifting the lowest wages causes low-productivity firms that rely heavily on low-wage labor to fail and shed workers, i.e. it causes disemployment. In US discussions, this is seen as a really terrible thing. Not so for Meidner. Because the Swedish economy so often ran at full employment, it had trouble fighting inflation. The constant disemployment caused by gradually shrinking the wage differential would actually help alleviate inflationary pressures. It would seem cruel of course to fight inflation by brutalizing low-wage workers, but disemployment was not a very brutalizing experience within the Swedish welfare state. Laid off workers would receive very generous unemployment benefits and have access to Sweden’s active labor market policies (training, education, job search assistance, in-work subsidies) to find a new job in a surviving (higher-productivity) firm.

Excess Profits on the Top
Wage restraint for the highest wages would cause high-productivity firms that rely heavily on high-wage labor to generate excess profits. This sounds like a problem, especially for socialists, but it is actually a huge opportunity. If you can capture the excess profits generated by wage restraint, you can use the resulting revenue to socialize ownership of the capital. And that’s what Meidner Plan aimed to do. Under the plan, firms would be required to issue new shares equal in value to a percentage of their profits each year. Those shares would then go into the wage-earner funds. Eventually, the shares held by the wage-earner funds would be equal to more than 50% of the outstanding shares of a company, at which point the wage-earner funds would have a controlling stake.

The mandatory share issuances function like a corporate income tax except that they do not drain anything from corporate cash flows. Instead, they simply dilute out the existing shareholders. There is some concern that announcing a plan to slowly dilute out existing shareholders would harm capital investment going forward because it would reduce the effective return on such investment. But recall that the wage restraint actually causes many firms to generate excess profits. So the drag on share value caused by the mandatory share issuances would be significantly counteracted by the boost in share value caused by the excess profits.

So, in total, the Meidner Plan would utilize solidaristic wage policy to shrink the wage differential. This would intentionally cause some disemployment at the bottom, which would help tamp down on inflation and would be met with generous unemployment benefits and assistance in being placed in new jobs in higher-productivity firms. This would also intentionally cause excess profits at the top, which would be captured through mandatory share issuances to wage-earner funds that would gradually socialize ownership of Swedish companies.

Institutions Matter Except When They Are Socialist

Robert Solow once remarked:

Every discussion among economists of the relatively slow growth of the British economy compared with the Continental economies ends up in a blaze of amateur sociology.

This is the final move of right-wing economists whenever the assumptions of their ideologically-infused policy prescriptions end up contradicted by observed reality. After a few forays into some exotic economic indicators, they eventually propose strange half-assed sociological theories that, quite remarkably, end up concluding that laissez-faire capitalism is still definitely the way to go. As with most things, the conclusions never change, but the rationales radically shift from moment to moment.

Given the more than respectable performance of Nordic economies over the last century and half-century especially, they are now natural targets for the amateur sociology of cynical peddlers of laissez-faire.

The descendants of Scandinavian migrants in the US combine the high living standards of the US with the high levels of equality of Scandinavian countries. Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. This suggests that pre-existing cultural norms are responsible for the low levels of poverty among Scandinavians rather than Nordic welfare states.

What’s funny about this analysis is that it is, in a sense, right. It just seems to totally misunderstand how the causal arrow functions here. The Nordics have long had a very egalitarian cultural tradition. And this is arguably why they opted for social democratic institutions to handle the set of technological shifts related to industrialization. And this opting for social democratic institutions is why they’ve managed to keep things more equal and less impoverished than other countries that responded to industrialization in a more sadistic manner in keeping with their garbage cultures (like the US and the UK).

But crucially, it is the institutions that are doing the proximate work of achieving egalitarianism. The cultural point can help to explain why they went for those institutions when others didn’t, but it doesn’t negate the fact that those institutions are what’s doing the work. This is an identical point as the one about so-called “homogeneity.” Certainly the fact that the white majority in the US hates black people a lot makes it hard for us politically to get good egalitarian institutions, but that doesn’t mean that if we got them, they wouldn’t work. It just means we wont get them because of racism.

Both the racism and cultural egalitarianism point are very good reasons to be skeptical that the US has what it takes to get egalitarian institutions going. But it does nothing to say that those institutions don’t work. It’s a political point not a policy point.

We know, of course, that Nordic-like institutions that non-Nordic countries have do, in fact, work very similarly. The US has a solid old-age pension scheme in Social Security and it has wiped out the vast majority of old-age poverty in the country. The UK, under Blair, dramatically ramped up transfer payments to parents with children and cut child poverty in half in a decade. Because these countries are broadly shit countries, they may very likely unravel these programs. In fact, the Tories are gearing up to unravel the child poverty gains as we speak. There is no doubt a cultural explanation for why a country like the UK is willing to blow up child transfer payments while most Nordic countries aren’t, but it’s the child transfer institutions that’s doing the proximate work of securing low or high child poverty in the various countries.

The Social Democratic Sharing Economy

In a new piece in Democracy Journal, Nick Hanauer and David Rolf argue that, in response to the rise of the sharing economy, we need to transition away from our employer-provided welfare benefit system to a more public system. Jeff Spross had a nearly identical (though considerably shorter) argument in The Week earlier this month. While I obviously am a huge fan of taking welfare benefit delivery out of the employment relationship, the approach outlined by Hanauer and Rolf has a lot of flaws.

As an initial matter, it’s worth noting that Hanauer and Rolf basically just reinvented a social democratic welfare state without seeming to realize that’s what they were doing. This is not a knock against them per se. In fact, it’s very heartening to see people independently reach the same conclusion about how best to run an economic system. However, reinventing social democratic institutions in a vacuum without looking at and borrowing from other social democratic states is bound to lead to oversights. Hanauer and Rolf’s social democratic proposals are first drafts while the social democratic systems that already exist are on their 50th or later version by now.

Flat Taxes and Shared Security Accounts

The first big flaw in Hanauer and Rolf’s plan is that, despite nominally trying to delink welfare benefits from employment, they end up constructing a system that is almost obsessively keyed to earnings.

At the heart of the proposal is a Shared Security Account given to each worker, which is effectively financed by flat taxes on earnings (they call it “prorating” but it’s the same thing). They describe it this way:

The obvious solution to the explosion of part-time work—voluntary or otherwise—is to prorate the accrual of benefits on an hourly or equivalent basis. For example, if Zoe works 30 hours a week at the hotel, she should earn three-quarters of the benefits offered by a full-time 40-hour-a-week job; if she works 20 hours a week, she should earn half the benefits. There is no doubt that many employers push their employees into part-time work in order to avoid the added cost of paying any benefits at all. Proration would eliminate this perverse incentive and the economic distortions and inefficiencies that come with it.

To be clear, proration is not a radical idea. Social Security and Medicare have always been prorated: Zoe’s employer pays half of her 15.3 percent combined Social Security and Medicare tax, regardless of how many hours she works. But all mandatory benefits that normally accrue to full-time employees on a daily basis—sick days, vacation days, health insurance, unemployment insurance, workers’ compensation insurance, retirement matching, Social Security, and Medicare—should also accrue to part-time employees (hourly, salaried, or contract) and sharing-economy providers on a prorated hourly or equivalent basis.

There is a lot wrong and just unnecessary about this. For starters, health insurance is not able to be “prorated” like all of the other stuff: you can’t give someone 50% of health insurance because they have 50% of the earnings of someone else. Health insurance is not really divisible in that way. This is why normal countries guarantee health insurance as a right unrelated to earnings or anything else.

Even for benefits where prorating is practicable, it’s not a good idea. What prorating envisions is a system where, for example, every person pays 3% of their earnings to unemployment insurance taxes and then receives 60% of their earnings in unemployment benefits should they find themselves unemployed.

This might seem like a very clean implementation (same percentages for all people!), but the cleanness is an unnecessary and ultimately unhelpful gimmick. Instead of dedicated prorated taxes, it makes more sense to use general taxes that levy more from higher market incomes where possible. Instead of prorated earnings-related benefits, it makes more sense to have earnings-related benefits with wage replacement rates that taper off for higher earnings (e.g. unemployment benefits that pay out 75% of earnings for first $40,000, 50% of earnings for next $40,000, and 25% of earnings for remaining income). This makes basic functional sense because people with lower earnings need higher replacement rates to be able to avoid hardship and it helps to cut inequality in the process. I use unemployment insurance as the example here, but the analysis equally applies to retirement, worker’s compensation, disability benefits, and other medium to long term job leave.

Missing Benefits

Because Hanauer and Rolf are so honed in on earned prorated welfare benefits, they predictably miss important benefits that don’t really operate that way. Certain benefits like retirement and disability and sick days can easily be fit into the prorated Shared Security Account framework (even if unwise). Other benefits like child care, education subsidies, and child allowances simply cannot. Which is to say: family benefits necessarily get short shrift in this kind of scheme.

For parents of children, flat and equal child benefits (not earnings-related prorated benefits) are the far superior option. It wouldn’t make sense to provide prorated child care benefits because child care costs the same regardless of how much money you make. Similarly, it wouldn’t make sense to pay out a prorated child allowance: clothing, feeding, and housing children costs the same regardless of how much money the parent makes. Education operates the same way.

You could theoretically hive off the benefits that don’t really fit into the prorated Shared Security Account scheme and run them through some separate scheme, but this is inefficient and duplicative. An ideal social democratic system will have one social insurance institution that is able to coordinate all transfer payments. Having some payments run through this Shared Security Account gimmick and others through some other systems creates needless complexity that would also likely recreate certain stigma problems we already have wherein things like Social Security transfer payments are treated as legitimate and good while other transfer payments are seen as shameful and bad.

Decommodify Totally

Finally, the Hanauer and Rolf social democratic proposal is flawed in that it gets off on the wrong philosophical foot, which also contributes to its technical limitations. For Hanauer and Rolf, these welfare benefits are supposed to be essentially job benefits, even though they are administered publicly. This differs from the traditional reason for these benefits, which is to provide for people’s basic material security in a decommodified way that is significantly detached from earnings and jobs.

The decommodified approach says that everyone deserves health care, education, and an adequate minimum income regardless of the market and regardless of their location in the economic system. Building out these welfare benefit structures through dedicated prorated taxes on earnings that fill up dedicated individual social security accounts that pay out dedicated prorated benefits does nothing to delink the benefits from market actions and thus recreates a lot of the same problems employer welfare benefits have (including the inability of employer welfare systems to really provide for lower earners).

Under a decommodification approach, you would never get stuck in all of the needless prorating and account-making mistakes discussed above. Instead, you’d identify basic needs, figure out what welfare institutions would satisfy them, and then establish a tax level high enough to fund them.

The sick and injured need health care, so you provide universal health insurance. Children need care, education, and income (they don’t work), so you provide child care, education, and transfer payments to their parents. Unemployed people need income. So you provide them income, most likely in a way that is related to their prior earnings for smoothing purposes (but not based on some fictional account they have contributed to). Retired people and disabled people also need income and so you also provide that and also do so most likely in an earnings-related way (with wage replacement rates that taper as earnings go up) for smoothing purposes. And so on.

If we are going to transition into a new welfare benefit scheme in light of the rising sharing economy, that scheme should not try to recreate the existing work-pegged system in public form. It should break from that model entirely, focusing instead on creating a universal public scheme aimed specifically at meeting everyone’s needs, not administering “earned” benefits.

Does brand differentiation lower prices?

Over at the Demos dot org slash blog, I discussed this Bernie Sanders quote:

If 99 percent of all the new income goes to the top 1 percent, you could triple it, it wouldn’t matter much to the average middle class person. The whole size of the economy and the GDP doesn’t matter if people continue to work longer hours for low wages and you have 45 million people living in poverty. You can’t just continue growth for the sake of growth in a world in which we are struggling with climate change and all kinds of environmental problems. All right? You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.

The media seemed to have missed the point of the bolded part in which Sanders makes fun of those who say egalitarian policies will cut down on innovation. This was the subject of my Demos post.

In the aftermath of this comment, there was another less important thread that I also want to comment on. Multiple people (again in media) tweeted at me that this market of 23 brands of deodorants competing with each other brings prices down and therefore makes people less poor (adjusted for the cost of deodorant). Like most Econ 101 truisms, this is not exactly right.

If things are working according to design, the way you would get the cheapest possible deodorant prices is by commoditizing deodorant and then having firms compete to provide it in its commoditized form. By commoditize deodorant, I mean make deodorant akin to soybeans and corn, where one train car of deodorant is totally indistinguishable from any other train car of deodorant. In a world with commoditized deodorant, firms competing in the deodorant space will only be able to compete on price because there is no other way to distinguish deodorant units from one another.

The major point of brand differentiation is to fight commoditization. The goal is to make it so that you do distinguish between Speed Stick on the one hand and Old Spice on the other, instead of just categorizing them at Deodorant.jpg. If you can successfully pull off the marketing and branding, you don’t have to compete absolutely on price anymore, and so you can charge more (and make more profit) than if you were dealing with a pure commodity. The teen boy who has seen your slick ads must have Axe, regardless of whether it’s actually physically distinguishable from other deodorants, and so you can score extra margin out of that marketing-induced consumer preference.

So, in fact, extreme brand differentiation of the sort Bernie jokes about is not about driving prices down, but rather driving prices up by getting people to spend more on deodorant for brand premiums. Now, of course, defenders of this would say there must be something of true value in the extra money you can charge for a brand. Don’t they feel better for buying the cool deodorant than otherwise? Is that psychological feeling not real hedonic value? And, maybe it is, maybe it isn’t. However the point is that this sort of thing is not about competition driving down prices, but rather competition pushing innovation to give people different deodorant experiences at different price levels.

Ultimately, I really just could not care less about this whole topic (except insofar as I think its at least somewhat funny to mock “innovation” as inherently good). But if you are going to lose your shit over it and prove how smart you are on the internet about it, pretending as if deodorant brand differentiation is premised upon some vicious price war is not the way to do it.