What, Me Normative?

Visions of Inequality: From the French Revolution to the End of the Cold War
by Branko Milanovic
Harvard Univerity Press, 2023; 359 pp.

Branko Milanovic’s Visions of Inequality contains one of the most misleading statements I have ever encountered by an author about the contents of his own book. Milanovic, an eminent economist who teaches at the City University of New York and was formerly the lead economist at the World Bank, addresses in this book what a number of economists from the eighteenth century to the end of the twentieth have said about measuring inequality of income and wealth. He is concerned, he tells us, with inequality as a fact, not with its normative implications. Nothing could be further from the truth. The book is a thinly veiled polemic against supporters of the free market, who, according to Milanovic, disguise the reality of class in order to defend the interests of the rich and powerful.

Here is what Milanovic says about his book: “The authors studied here had varying philosophical and ethical opinions regarding income distribution and whether certain sources of income and levels of income inequality were justified—but this book is indifferent to such views. This is a consciously instrumental approach which, while it always adopts the author’s point of view, ignores all normative or quasi-normative statements on income distribution. . . . And I do present political implications of the authors’ views. But I do not engage in normative debate.”

He must hold a narrow view of what constitutes normative debate. Relentlessly assailing the approach to inequality taken by American economists during the Cold War, Milanovic argues that these economists lied about the realities of class dominance. He says: “It is important to realize that the criticism here is not the common one that takes neoclassical (Cold War) economics to task mainly for the lack of realism in its assumptions. The critique here does not deal with the simplification of reality, but with its falsification. The criticism is not that assumptions are unrealistic, but that assumptions are designed to obfuscate reality. . . . It is not a claim of obliviousness to reality; it is a claim that models were chosen to present the reality in a way that agreed with the ideological postulates of the authors.”

This sounds like normative language to me. But much more important than whether Milanovic has accurately characterized his book is his criticism of the free market and its defenders, and in what follows I’ll try to address his most essential point.

Marxists argue that capitalists exploit workers, but defenders of the market deny this, averring that each factor of production tends to earn its marginal product. Each of the factors of production—land, labor, and capital—contributes to output and earns a return. You might have a moral theory that claims workers are entitled to more than this, but you can’t claim that the owners of land and capital are taking from workers what they have produced.

Milanovic says this argument is wrong. Capitalists indeed exploit workers: “The dominant approach of general equilibrium analysis concerned itself with the determination of relative prices of final outputs and factors of production. Incomes of participants in an economy are, according to the neoclassics, by definition equal to the product of factor prices (equal to their marginal products) and the quantities of endowments of capital and labor with which they enter the economic process. . . . This attempt to introduce formal equivalency between the two factors of production—one requiring constant work effort to yield an income and the other demanding no work of its owner to yield a return—was well captured by Milton and Rose Friedman’s quip, ‘to each according to what he and the instruments he owns produce.’ . . . It failed to recognize that the marginal productivity of capital is a technical matter, and that capital yields an income to its owner only when there is a ‘social contract’ or economic system in place that enables owners of tools (including capital) to collect the products of the tools they own.” (Milanovic speaks of two rather than three factors of production because he treats land as a type of capital.)

Milanovic has confused two very different questions. First, we can ask: “How did it come about that the owner of a factor of production came into possession of it?” This is an entirely appropriate inquiry: it’s wrong to take for granted that those in control of land and capital are the legitimate owners of these goods. This is true for labor as well. “Surely, labor endowments did not yield any income to the slave—because the system did not recognize the self-appropriation of the fruits yielded by that endowment.’ We can also ask a second question: “Does the owner of a factor of production,” or ‘endowment,” as Milanovic calls it, contribute to the process of production? This question, in contrast to the first, is trivial, as the answer is obviously yes. Factors of production that aren’t alive do not operate by themselves; someone has to put them to use. Milanovic fails to see this. He says that labor requires “constant work effort to yield an income” in contrast to capital (and land), “which requires no work of its owner to yield a return.” But the owner of the asset determines where it is to be used; this may not require constant (physical) labor but it adds value to the final product nonetheless. To deny this you would have to hold that all value comes from labor, making land and capital factors of production that do not create value at all. And that is absurd.

The absurdity does make sense in Karl Marx’s account of exploitation, about which Milanovic says this: “Marx’s theory of exploitation is an integral part of his theory of distribution. Only in the extreme case when the entire newly created value belongs to labor—that is, when the labor share is 100 percent—does his theory of exploitation (under capitalism) cease to apply. In all other cases, no matter how pro-labor the distribution of net product may be, there is exploitation. The theory of exploitation is based on the assumption that the entire net product is produced by labor. The implication is that means of production—that is the raw material and tools that Marx calls the ‘constant capital’— simply transmit their value to the final product. The higher value of the final product is therefore wholly due to the contribution of labor, with only depreciation of the constant capital entering into the gross value added. . . . Thus, exploitation is an indispensable feature of capitalism.”

It is not clear whether Milanovic himself adopts this account of exploitation in his criticism of the neoclassicals, but if he does, this would explain what he says about them. Marx’s view of exploitation depends on the labor theory of value, which was overthrown by the marginalist revolution of the 1870s, though news of this may not yet have reached Milanovic. It is a great strength of the modern view that it leaves open why people hold entitlements to the factors of production. If Milanovic believes that capitalists exploit workers, he needs to demonstrate this, rather than adopt a faulty theory that makes it true by definition.

The author could with justice complain that I have neglected to discuss the bulk of his book, which is about the treatment of inequality by François Quesnay, Adam Smith, David Ricardo, Karl Marx, Vilfredo Pareto, and several others. I have done this because the issue I have raised is especially important.