Efficiency, Equality and the Ownership of Property (Routledge Revivals)

James E. Meade

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136258879
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

First published in 1964, this is a study of the extreme inequalities in the ownership of property, in economies across the globe. Professor Meade examines in depth the economic, demographic and social factors which lead to such inequalities. He considers a wide range of remedial policies – educational development, reformed death duties and capital taxes, demographic policies, trade union action, the socialization of property, the development of a property-owning democracy, the expansion of the welfare state.

The argument is expressed in precise analytical terms, but the main exposition is free of mathematics and technical jargon and is designed for the interested layman as well as the economist.

V

A Property-Owning Democracy

Let us suppose that by the wave of some magic wand—the nature of which we will examine later—the ownership of property could be equally distributed over all the citizens in the community. What a wonderful culture could now result from our future automated economy! Imagine a world in which no citizen owns an excessively large or an unduly small proportion of the total of private property. Each citizen will now be receiving a large part of his income from property. For we are assuming that for society as a whole the proportion of income which accrues from earnings has been greatly reduced by automation. Institutions in the capital market would no doubt need to be appropriately developed so that a very large number of moderate private properties could be pooled through insurance companies, investment trusts, and similar intermediaries so that risks were spread and the ultimate investments chosen by specialists on behalf of the man in the street.

The essential feature of this society would be that work had become rather more a matter of personal choice. The unpleasant work that had to be done would have to be very highly paid to attract to it those whose tastes led them to wish to supplement considerably their incomes from property. At the other extreme those who wished to devote themselves to quite uncommercial activities would be able to do so with a reduced standard of living, but without starving in a garret. Above all labour-intensive services would flourish of a kind which (unlike old-fashioned domestic service) might be produced by one man for another man of equal income and status. Play-acting, ballet-dancing, painting, writing, sporting activities and all such ‘unproductive’ work as Adam Smith would have called it would flourish on a semi-professional semi-amateur basis; and those who produced such services would no longer be degraded as the poor sycophants of immoderately rich patrons.

Let us turn our attention therefore to the questions why in the sort of free-enterprise or mixed economy with which we are familiar we end up with such startling inequalities in the ownership of property, what changes in our institutional or tax arrangements would be necessary substantially to equalize ownership, and what disadvantages from the point of view of efficiency these reforms could themselves have.

I shall consider these matters in three stages. First, I shall assume that we are dealing simply with a number of adult citizens who have presumably been born in the past but who do not marry or have children or die or even grow old in the sense of experiencing diminished ability or vigour as time passes. I shall at this first stage examine the effects upon property distribution as these citizens work, save, and accumulate property. I shall assume that the State taxes neither income nor property and does not interfere in any way with this process of private capital accumulation.

At a second stage I shall introduce the demographic factors—births, marriages, deaths—and will examine the way in which they are likely to modify the pattern of ownership that would otherwise be developing.

At the third stage I will introduce the State. At this stage we shall be concerned with the ways in which economic and financial policies might be devised to modify the economic and demographic factors in such a way as to lead to a more equal distribution of property.

For the first stage I will employ a method which has been pioneered for another purpose by my colleague Dr. L. Pasinetti.¹ Consider two personal properties a small one (K₁) and a large one (K₂). Will the small property be growing at a smaller or a larger proportional rate of growth than the large property? If the small property is growing at a greater proportional rate (say, 5 per cent per annum) than the large property (say, 2 per cent per annum), then the ratio of

will be becoming more nearly equal to unity. In this case relative inequality will be diminishing.¹ We are concerned then at this first stage of our enquiry with the factors which will determine the proportional rate of growth of different properties.

These proportional growth rates (which we will call k₁ and k₂) for our two properties may be expressed as

respectively, where E₁ and E₂ represent the earned incomes or wages of the two property owners and V₁ and V₂ represent the two rates of profit earned by the two owners on their properties K₁ and K₂. Thus V₁K₁ and V₂K₂ represent the unearned incomes of the two property owners and E₁ + V₁K₁ and E₂ + V₂K₂ their earned and unearned incomes. If S₁ and S₂ represent the proportions of these incomes which are saved and added to accumulated property, then S₁(E₁ + V₁K₁) and S₂ (E₂ + V₂K₂) are the absolute annual increases in the two properties and these, expressed as a ratio of the two properties measure their proportionate rates of growth.

In these pages I can do little more than enumerate the various influences at work. Some of them, it will be seen, tend to make k₁ > k₂ (these are the equalizing tendencies), and some tend to make k₂ > k₁ (these are the disequalizing tendencies). There is undoubtedly at work a large element of these latter disequalizing tendencies—what Professor Myrdal has called the principle of Circular and Cumulative Causation—the ‘to-him-that-hath-shall-be-given’ principle. On the other hand, trees do not grow up to the skies, and there are some systematic equalizing tendencies. It is the balance between these equalizing and disequalizing factors which results in the end in a given unequal, but not indefinitely unequal, distribution of properties. Let us consider in turn the influences of E, V, and S upon the rate of growth of property k.

(1) The influence of earned incomes, E, must be an equalizing factor so far as two properties at the extreme ranges of the scale of properties are concerned. We can see the point this way. If K₁ were zero, citizen 1 would have only an earned income E₁. If he saved any part of this, his savings would be S₁ E₁ and his proportionate rate of accumulation of property would be

Consider at the other extreme a multi-multi-multi-millionaire. Now earning power, E₁ may well be enhanced by the ownership of property, but not without limit. In the case of our multi-multi-multi-millionaire, E₂ will be negligible relatively to K₂. If

were for practical purposes zero, k₂ would equal

. As between the extreme ranges then, we have k₁ > k₂ and there is bound to be equalization. This is perhaps the basic reason why our measure of relative inequality

can never reach zero or infinity. In the intermediate ranges all we can say is that the higher is

, the more rapid the rate of growth of property k, other things being equal. If earning power were equally distributed among our citizens (with E₁ = E₂), then this factor would be an equalizing one as between any two properties K₁ and K₂.

If S₁ = S₂, E₁ = E₂, and V₁ = V₂, then k₁ > k₂ if K₁ < K₂.

(2) The factor V, on the other hand, is unquestionably disequalizing—at least in the United Kingdom where there is strong evidence that the rate of return on property is much lower for small properties than for large properties.¹ This is so even if one does not take into account capital gains; but, of course, capital gains should be included in the return on capital. Since the wealthy in the United Kingdom at least invest on tax grounds for capital gains rather than for income, the inclusion of capital gains in V₂ and V₁ would make the excess of V₂ over V₁ even more marked; and this is clearly an influence which will raise k₂ above k₁.² It is probable that there will be little difference in the V which is relevant for all properties above a certain range. It is doubtful whether the multi-millionaire can get any higher yield than the millionaire on his property. But as between the really small properties and the large range of big properties, this influence is likely to be disequalizing and to be a factor enabling the whole range of large properties to grow more rapidly than the small.

(3) Finally, what is the influence of S, the proportion of income saved, on k for different sizes of K? Economists have done a great deal of theoretical and statistical work on the factors determining the proportions of income saved and spent. These investigations are of basic importance not only for theories of employment and of growth (i.e. for the determination of the ‘multiplier’ and of the relationships between the rate of profit, the rate of growth, and the capital-output ratio) but also for the determination of the distribution among individuals of the ownership of property.

Let us consider only the implications of two possible features of a probable type of savings function.¹ Let us assume (i) that the proportion of income saved rises with a rise in real income, though not, of course, without limit, since less than 100 per cent of income will be saved however great is income, and (ii) that the proportion of income saved out of any given income falls the larger is the property owned. This second assumption means that a man with £1,000 a year all earned will save more than a man with £1,000 a year which represents the interest on a property of £10,000. For the ability to save will be the same, but the need to accumulate some property will be higher in the first than in the second case.

If the savings function is of this general form, then as between two unequal properties (K₂ > K₁) owned by two persons with the same earning power (E₁ = E₂), we cannot, without more precise information, say which will be growing the more rapidly. The fact that a larger total income will be enjoyed by the man with the larger property will tend to raise the proportion of income which he can save; but, on the other hand, the fact that he already has a larger property will tend to reduce the proportion of income which he will save, and, in addition, the fact that

is low in his case will keep down the rate of growth of his property. (See pp. 43–44 above).

But with the sort of savings function which we are assuming there are two other kinds of comparison which one can make with more definite results. If one compares two citizens with equal incomes but unequal properties, the small property of the man with the high earning power will be growing the more rapidly; he has the same ability to save but a greater need to accumulate; his savings will be greater and his existing property smaller. If one compares two citizens with the same property, but different incomes, the property of the man with the high income (i.e. the high earning power) will be growing the more rapidly; he has a higher ability to save and the same need to accumulate; his savings will be greater and his existing property the same. The result is, of course, that with our assumed savings function there will be exceptionally strong forces at work associating high properties with high earning power. This combination of forces will exaggerate the inequality in the distribution of total personal incomes.¹

Let us pass to the second stage of our examination of the factors determining the distribution of property, namely the demographic factors. Consider two citizens, man and wife, each with a property. The rate of growth of their properties is determined by the economic factors we have just considered—S, E, V, and K. They have children. These children grow up and start to earn and to save—they acquire E's and S's of their own. They start to accumulate properties of their own, at first at indefinitely high proportional rates of growth, since they start with no property. At some time both parents die and leave their properties to their children. The children at some time—it may be before or after their parents’ deaths—choose spouses. And so two citizens and two properties join together in holy matrimony and restart the same process of marriage, birth, and death.

What we want to consider is whether the factors of marriage, birth, and death will lead to a greater or a lesser deg...

Table of contents

• Front Cover
• Routledge Revivals
• Title Page
• Copyright
• Title Page
• Copyright
• PREFACE
• CONTENTS
• LIST OF TABLES
• I Economic Efficiency and Distributional Justice
• II The Present Position in the Developed Countries
• III The Trade Union State
• IV The Welfare State
• V A Property-Owning Democracy
• VI A Socialist State
• VII Conclusion
• Appendix
• Index