Book Review: A stake in the heart

The Stakeholder Society
by Bruce Ackerman and Anne Alstott
Yale University Press. £16.95.

In the 1980s, both Communism and democratic socialism succumbed to globalization. There is much about this double defeat which is still mysterious, not least its rough coincidence in time. What is clear is that, from the 1970s onwards, socialism started to recede. It lost its intellectual hegemony, its political support, its technological rationale. The God which was seen to have failed was collectivism – the centralized planning of a society’s future.

Margaret Thatcher in Britain and Ronald Reagan in the United States set out to shrink the role of the State in the economy. They lauded free enterprise and individual responsibility, and denounced the horrors of state socialism. In the Soviet Union, Mikhail Gorbachev, following the example of China’s Paramount Leader Deng Xiao-Ping, started to dismantle the system of central planning. Developing countries became “emerging market economies”. The retreat was followed by a rethink. What had gone wrong with socialism? What might be the scope of the socialist impulse to human betterment in a world of globalized markets and weakened states? After they had recovered from the shock, parties of the Left found the new experience surprisingly liberating. Globalization was both a threat and an opportunity. It put paid to any version of bureaucratic socialism. But at the same time it left, and perhaps even enjoined, a substantial role for governments in equipping their populations to compete effectively in the global marketplace. A new wine of national efficiency might, after all, be poured into the old bottles of socialism. In fact, it is a very old wine which dates from the turn of the twentieth century, which saw globalization’s first coming. In the 1990s, socialism started to adapt itself to the new internationalism.

The “national efficiency” project seems to be at the heart of what is called the Third Way. It explains Tony Blair’s emphasis on “education, education, education”. Its central contention is that a market system fails to invest adequately in human capital. As a result, a sizeable fraction of young people are inadequately skilled for competitive success. Individually, they cannot hope to command wages which will give them a decent standard of living; collectively, any society burdened with excessive numbers of the “new poor” will face an intolerably high burden of taxation to support them. So young people must be trained to be efficient. This tune plays well with many audiences. It might also serve to counter the growing army of protectionists who fear that high-cost economies will be wrecked by competition from cheap Asian labour. The normative argument for socialism enters as a kind of sidewind: efficiency requires more equality, not less. The “stakeholder” society may be seen as one which guarantees all its citizens, not good jobs, but a good education which gives them access to good jobs. But like any investment it costs money, and only the State has the incentive to make educational investments on the scale required, through the taxation system.

This is the right context, I think, in which to place the proposals of Bruce Ackerman and Anne Alstott, two Yale professors, in their intriguing book The Stakeholder Society. To be sure, it is a very American product, with roots in the extreme individualism of American life and in the dream of universal capital ownership which inspired the nineteenth-century Homestead Acts, as well as in the current American preoccupation with growing income dispersion. But their aim of adapting the left-of-centre project to the challenges of globalization, their espousal of the “investment in human capital” approach to redistribution, their fear of an anti-democratic backlash by those “left behind”, their view that “stakeholding” is the “master metaphor” for the next century – these are common threads linking Third Way ideas in many different parts of the world.

Their ideal is a United States in which all children begin life with “first rate educations and roughly equal resources”. As a substantial step towards this, they propose that the Government give every American $80,000 when he or she reaches twenty-one (or eighteen for the specific purpose of financing a college education). This would cost $255 billion, or 3.4 per cent of GDP at 1997 prices, and would be financed by a 2 per cent wealth tax. These stakes, plus interest would have to be paid back, on death, into a “stakeholding fund”. A stake of $80,000 received in 2010 will carry a pay-back obligation of about $250,000, at present prices, in 2070.

This is called a “trusteeship tax”. On the assumption that all the stakeholders will be worth at least $250,000 when they die, the stakeholding fund would replenish itself, enabling the wealth tax to be discontinued after forty or fifty years. In addition, every American would receive a right to a flat-rate retirement pension, to be financed by a “privilege tax” payable by all Americans during their working lives. The privilege tax would be based on the amount of income earned by the parents of the taxpayer when their child was growing up. This would replace the payroll taxes currently funding retirement benefits. Privilege taxes might also be used to finance social security and medicare.

It would be a mistake to pour scorn on these suggestions, though this will be a widespread reaction. They represent a thoughtful, powerfully argued, and, at first sight, attractive attempt to reconcile the liberty to make money with the ideal of equal citizenship. The idea of giving everyone an endowment of resources with which to overcome inherited handicaps is appealing. It promises both more liberty and more equality – and who would quarrel with that? Nevertheless, closer inspection shows that the proposals are wrong in principle, off-target, extremely bureaucratic and anti-family.

To their credit, Ackerman and Alstott start with some principled arguments for redistribution. Moral equality, they say, requires that everyone has a right to a “fair” – by which they mean equal – share of “initial resources”. This is not self-evidently so. It supposes that wealth is an instrument of coercion, like legal or political privilege. But this would be true only if wealth included property rights over persons, as in a slave society. As Hayek has pointed out, wealth lacks coercive power if people are free to change their jobs and there are enough jobs to choose from. In such circumstances, the moral equality of individuals is guaranteed by equal legal and political rights. It does not require equal shares of resources. It is true that the rich are better able than the poor to exploit such rights. But there are better ways of dealing with this than by giving individuals equal cash gifts, for example through legal aid, ceilings on political donations, public funding of political parties (as in Europe) and so on.

The authors’ second argument for redistribution is derived from Karl Marx: wealth is collectively generated, but unjustly appropriated by a minority. So the rich are under an obligation to hand back some of their wealth to support “the very system necessary for their own success”. As it stands, this argument is hot air. Ackerman and Alstott use the Marxist rhetoric, but (prudently) fail to deploy the Marxist argument that employers who cover their costs exploit the workers. To establish their case that wealth accrues unjustly to the minority, they would need to deny that the “factors of production” are paid in proportion to their economic contribution or that the rich pay their “fair share” for the upkeep of society. In the absence of such arguments, no principled case for extra payments is made out.

The most powerful argument for redistribution is not that bosses exploit the workers but that the advantages of wealth are cumulative. The children of the affluent tend to be healthier, better educated, and better placed in the job market than are the children of the poor; and these advantages are passed on to their own children.

But this argument is not conclusive. For one thing, a great deal of spontaneous redistribution goes on the whole time in a free society, through the mismatch between talent and starting positions; the market system itself is an equalizing force of unique power. However, even if the argument that advantages accumulate is conceded, there is a decisive objection to any attempt to equalize starting positions by deliberate policy, namely, that it would involve equalizing all incomes and lifestyles, so that no advantages could be “passed on”. In an economy where people are free to earn what the job market pays, this would mean continuous redistributions to offset inequalities of earning power arising from an unequal distribution of talents. This is incompatible with natural justice, private property, liberty and much else which makes a free society possible.

The Ackerman-Alstott proposals are off-target even in respect of their avowed aims. The two objections to their version of stakeholding are that they give stakes to those who do not need them, and the stakes come too late in life to help those who might benefit from them. Most stakes, it seems reasonable to suppose, would be claimed at eighteen by those who have already qualified for a college education and would be paying for it by other means. Their estates would be burdened by repayments, discounted at the market rate of interest. This would seem to be a rather expensive way of taking out student loans.

But the problem of underskilling, surely, does not lie with this group, but with those who have not qualified for a college education. Ackerman and Alstott argue that the prospect of having their college education paid for will encourage weaker students to work harder at school, stay off drugs, and so on.

This may or may not be so. But any scheme seriously aimed at removing skills deficits would need to kick in much earlier. Windfalls received at twenty-one are unlikely to be able to make up for earlier educational starvation. This consideration affects the financing of the “stake”. On the reasonable assumption that a large proportion of the twenty-one-year-old “stakeholders” will not be in a position to leave $250,000, the “stakeholding fund” will not be revolving but emptying and requiring continuous replenishment from the wealth tax.

Ackerman and Alstott seem never to have heard of bureaucracy. Their new taxes require much more extensive investigation into the personal circumstances of the taxpayers, and interference with their right to dispose of their property than at present. Fifty thousand dollars would be the maximum for tax-free bequests. Current inter-family exchanges would be limited to birthday presents and the like: “one thousand dollars a year should be more than enough to allow moms and dads to show familial affection.” The amounts payable under the “privilege tax” would have to be determined. There are complicated arrangements for securing the payback of the “trusteeship tax”.

Not only will extra tax officials be required to determine obligations which are in addition to existing tax liabilities, or require considerable reorganization of the existing social security system, but the new taxes are bound to set up a whole chain of evasive behaviour. Resources devoted to creating wealth will be channelled into putting it beyond the reach of the tax collector. This will give employment to extra armies of accountants and lawyers and (I would have thought) almost continuous litigation. And the authors barely consider perverse incentives on the effort put into work and saving.

Perhaps the worst of this well-meaning scheme of social engineering is that it is profoundly anti-family. Ackerman and Alstott cut at the root of the normal desire of parents to do their best for their children. The flip-side of non-paternalism is destruction of the family as a nurturing unit. Typical is the statement that stakeholding is “a more democratic and more effective substitute for inheritance”. It was

Tocqueville who famously noted that the extreme individualism of American life bred an extreme egalitarianism. In the urbane prose of the Yale professors, the claims of an equal citizenship override all other claims. There is no recognition that citizenship grows out of community, and community grows out of families. A collection of free-floating individuals – “Joe Six Pack as good as College Joe” – each equipped with an equal pot of gold to pursue fame and fortune seems to be their ideal. Britain and the United States are not the same. Undoubtedly, the “investment in human capital” approach to efficiency and equality resonate powerfully here. But, attractive as in some ways it is, this American scheme is likely to be thought too idiosyncratic for British tastes.