Edmund S. Phelps writes: What is wrong with the economies of the West — and with economics? It depends on whether we are talking about the good or the just.

Many of us in Western Europe and America feel that our economies are far from just, though our views on justice differ somewhat. One band of economists, led for decades by the British economist Anthony Atkinson, sees the West as being in another Gilded Age of inequality in income and wealth. Adopting Jeremy Bentham’s utilitarian view, they would redistribute income from those in high brackets to those farther down—until we reach the highest “sum of utilities.” It is a question, though, whether this doctrine captures intuitive views of what is just.

Philosophers over these same decades have been more interested in the work by the American philosopher John Rawls. His book A Theory of Justice argues for a fundamental shift away from Bentham: economic justice is about the distribution of “utilities,” for him a word usually denoting the satisfactions of consumption and leisure, not the sum of those utilities. It is about the terms on which each participant contributes to the fruit of the society’s economy. For Rawls, justice requires the state to use taxes and subsidies to pull up people with the lowest wages to the highest level possible. That way, the least advantaged get the largest possible portion of the gain from people’s cooperation in the economy.

A struggle persists between these views. The Benthamite view has morphed into the corporatist idea that a nation’s government ought to provide benefits, whether in the form of money or tax advantages, or free services, to interest groups — whether corporations, or unions, or consumers — that voice a need until more benefits would be deemed to cost too much. Meeting these claims of many different interests has left little in the public purse for low-wage workers.

The Rawlsian view has found little support among legislators, it is true. In the US, the Earned Income Tax Credit was passed in 1975. But it mainly supplements the income of low-wage mothers of young children. It does nothing for low-end workers as a whole and, to some extent, it actually reduces paychecks for low-paid work of childless women and single men. In Europe, a few countries spend much more than the US on job subsidies but statistical analyses have not found large effects on wages or unemployment.

With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades — mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia — have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion — access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. In America, black urban teenagers have long been lacking in inclusion. In France there is a comparable lack of inclusion among North Africans. In much of Europe there has been little attempt to include the Roma.

This failing in the West’s economies is also a failing of economics. The classical idea of political economy has been to let wage rates sink to whatever level the market takes them, and then provide everyone with the “safety net” of a “negative income tax,” unemployment insurance, and free food, shelter, clothing, and medical care. This policy, even when humanely carried out, and it often is not, misses the point that, even if we confine our attention to the West since the Renaissance, many people have long felt the desire to do something with their lives besides consuming goods and having leisure. They desire to participate in a community in which they can interact and develop. [Continue reading…]