What is the UBI, why do we want it?

1. The intellectual heritage of capitalist democracies’ protection of dignity, well-being, and self esteem 

The concept of an unconditional basic income (UBI) is not new, it has been around for centuries. It has been advocated by Nobel Laureate, Chicago School economist Professor Milton Friedman from the right of the economic spectrum, as well as fellow Nobel winner and liberal economist Professor James Tobin and Professor JK Galbraith from the political left. [1],[2]It’s been this cross-spectrum support for the UBI that has ensured its longevity in the debates around equity, justice and freedom.

Adam Smith is the doyen of the capitalist economy and originator of concept that it is the power of the “invisible hand” (the market) that most efficiently allocates resources and maximises wealth. Yet Smith – and this aspect of his philosophy and analyses is not acknowledged by the most crude of laissez faire market apologists – also prescribed that everybody in society is entitled unconditionally, to a dignified life.

“Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.”[3]

And further, Adam Smith saw market failure as most likely when oligopoly was allowed to flourish. He saw the intent of oligarchs always being for that situation to be engineered.

“To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers… to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order [business owners], ought always to be listened to with great precaution… It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”[4]

So far from the populist, crude championing of unfettered market power with which he is so often attributed, Adam Smith actually blamed the growing gap in income and wealth on collusion amongst owners of capital. This “father of capitalism” and advocate of the power of the “invisible hand” of markets nevertheless acknowledged the inevitability of imperfect markets and the snowballing effect on inequality that concentration of market power would deliver.

Accordingly, he advocated a role for taxation and redistribution to correct those. He devised plans to address both the causes of widening income distribution (for example, laws to prevent collusion among businesses) and the widening distribution itself (taxes on land and luxuries). The latter represent early examples of economic policies aimed specifically at addressing widening distributions of income and wealth. Note also that the Adam Smith approach had nothing to do with “work-ready” tests or the eligibility criteria imposed by our current day instigators of targeted, “needs-based”, social assistance. Smith and John Stuart Mill, that other philospher so often misquoted as a champion of unfettered markets and the oligopolists supremecy, both actually advocated for the rights of those marginalised by the workings of the imperfect market. They

“…. should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged” [Smith, quoted above]

Note also in these references to Smith’s work there is no distinction necessarily between those who work within the monetised economy and those working outside of it. As is slowly but increasingly recognised by contemporary conventional economics, proper GDP would include all the work done by the voluntary sector – home maintenance, child care, aged care, community work. These contributors too should have such a “share of the produce of their own labour”. Our current conventional “paid work”-centric perspective of value excludes large tracts of the population from consideration.

JS Mill was champion of individual liberty and freedom of choice. His belief was that self-improvement can only come from that freedom. But like Adam Smith, he too recognised the evil of concentrated wealth and so very much his concept of personal liberty was bounded. In particular he had a deep dislike of inheritance, and while he supported proportional (rather than progressive) rates of tax, his view was they should only kick in after a tax-exempt minimum – so not unlike the UBI concept.

“A succession duty is the most unobjectionable mode of [statically and intertemporally redistributing wealth]… because in that way it is confined to hereditary wealth… I certainly do think it fair and reasonable that the general policy of the State should favour the diffusion rather than the concentration of wealth. – Testimony before the Select Committee on Income and Property Tax.”[5]

“The mode of adjusting these inequalities of pressure, which seems to be the most equitable, is that recommended by Bentham, of leaving a certain minimum of income, sufficient to provide the necessaries of life, untaxed… to be sufficient to provide for the number of persons ordinarily supported from a single income, with the requisites of life and health, and with the protection against habitual bodily suffering. This then should be made the minimum, and incomes exceeding it should pay taxes upon not the whole amount, but upon the surplus.” [6]

So here we have the intellectual fathers of capitalism, together with a cross section of the post-war intellectual economists all espousing the evil of concentrated wealth, the virtue of underwriting some economic base of every individual in society, and the importance of providing everybody the opportunity for self-improvement.

2. Equality of Opportunity – a foundation of civilised democracy, now faltering

From across the spectrum of economic thought, the conventional wisdom has been that inequality is always a necessary incentive for productivity and economic efficiency. Keynes argued

“..the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished [the Gilded Age] from all others”[7]

Milton Friedman too (and from the neo-classical end of the profession) held that that greater inequality would spur people to work hard

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” {find quote}[8]

Yet Friedman’s concern for widening inequality was well known as well and his main prescriptions to address it were the negative income tax (effectively the UBI plus flat tax rate) and universal school vouchers. Equality of opportunity was central to his definition of freedom. 

Over recent decades two types of inequality have been differentiated in the economics literature – those that arise as the consequence of merit-based economic success, and those that come from market inefficiencies and rent-seeking.  The former is the type that traditionally economists have lauded as a necessary outcome from efficient markets, the latter obviously arises from market distortions. So in effect we cannot – without having first determined what type of inequality we’re dealing with – conclude that the inequality we observe is benign (and in the end will be competed away) or is chronic.

What we can say is that inefficient-sourced inequality should be addressed by ensuring all participants have equality of opportunity. The availability of this in education has been mentioned above and it’s to be noted that the trend is for educational opportunities becoming more skewed.

“… recent experience from China to America suggests that high and growing levels of income inequality can translate into growing inequality of opportunity for the next generation and hence declining social mobility. That link seems strongest in countries with low levels of public services and decentralised funding of education. Bigger gaps in opportunity, in turn, mean fewer people with skills and hence slower growth in the future.” [The Economist Magazine, October 13th 2012, http://www.economist.com/node/21564421 ]

Indeed declining social mobility with its entrenching of class lies at the centre of the “inefficient” inequality that impedes economic growth. “The Great Gadsby Curve” concocted by Canadian economist Miles Corak, shows the relationship between intergenerational social mobility and income distribution. The more inequality the greater the degree to which it is passed on, the lower the earnings mobility across generations.[9] 

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The conclusion that inequality arises because of merit, which underscores the acceptance of inequality as a necessary element of competitive economies (to which both Keynes and Friedman ascribed), does rely on the assumption that government intervention does ensure that all citizens are provided the basic services to be able to participate. There’s the rub. As Amartya Sen concluded, that is far from the case too often. Under his capability approach – an alternative ethical approach to those like utilitariansim or resourcism, there’s a moral significance in individuals’ capability of achieving the kinds of lives they value – in other words fulfilling their (reasonable) aspirations.[10]

For Sen, ‘poverty’ is more than the narrowly defined GDP per capita, it is deprivation in the capability to live a good life – far more meaningful than the narrowly-defined economics metric around GDP. In his book Development as Freedom he cites development of ensuring 3 freedoms – political, opportunity (including access to credit), and protection from abject poverty. Poverty in his definition, includes lack of at least one of these freedoms.[11]

And as the OECD has also concluded,

“Intergenerational earnings mobility is low in countries with high inequality ….The resulting inequality of opportunity will inevitably impact economic performance as a whole, even if the relationship is not straightforward.”[12]

So as well as State-funded access to education (including pre-school education and re-training) and healthcare, the UBI should be seen as a tool for citizens to best prepare themselves to enable fulfilment of their (reasonable) aspirations. Vitally, the public sector role needs to be unconditional – because each individual’s aspirations are different and no government agency, no matter how well resourced can possibly determine those aspirations better than the individual.

3. The UBI versus needs-based, targeted welfare regimes

Yet despite this backdrop, the inexorable rise of oligopoly market and political power, justification of concentrated wealth by post-Thatcher economics orthodoxy, and work-ready testing for eligibility for State assistance has exploded in unfettered fashion over the last 30 years. Unsurprisingly it is intermediaries and arbitragers from the banking and finance industries that have most benefited from the concentration and persistently champion its acceleration. These are the oligarchs Western democracies have spawned and promotion of their self-interest, disguised as national interest, has been pervasive.

Robert Reich, US Secretary of Labour under President Bill Clinton, summed up the thesis of what has driven the fall in labour’s share of income in his 2015 book.[13]

Reich concludes that our markets are so far from “free” in the economist’s sense of free entry and exit, that the concentration of income that has emerged has led to greater concentration of wealth, and political power. The feedback from that is then more income, wealth and political power for the elites.

It is this cycle Reich argues - rather than technological change and globalisation – that is screwing the middle and working classes more and more. It explains the rise of Donald Trump with his promises and appeals to all the prejudices of those who feel they’re being screwed - blame someone else. There’s more than a touch of irony afoot when the reality of a Trump in power would be an even greater increase in concentration.

The UBI (Unconditional Basic Income) reduces significantly the role for the needs-based machinery of the social welfare system, replacing it with universal access to an unconditional income. The amount is the level that society deems as the underwriting of a dignified life. The UBI makes government intervention simpler and more equitable.

4. Underwriting Dignity, Providing Equality of Opportunity but not Undermining Paid Work

The concept of a UBI or alternatively a negative income tax then is to provide a base for all members of society to be sure of and from which to pursue their aspirations for self-fulfilment. The concept is rooted in philosophy of human and political rights as well as economics – economies cannot be expected to be sustainable if tracts of the population are excluded, in time the society breaks down with non-market means of redistribution being inevitable. Of course this doesn’t tell us where the optimal “underwrite” for individuals should lie – that is a continual tussle or “conversation”. But the essence of the argument is that all should have equal say in that discussion – the one person, one vote policy.

But the long heritage to the perspective that it is a human right that a dignified life should be underwritten unconditionally by civilised society, has faded in parallel with the rise of the oligarchic influence on politics and policy. That influence has led to a strong tightening of criteria for assistance or entitlement to anyone who is not in paid work. This combination has naturally fuelled the polarisation of income and wealth as equality of opportunity has faded as a bottom line for democratic, civilised society.

Yet enabling people to pursue opportunities that fulfil their aspiration should not be a condition of paid work but – as the intellectual heritage attests – should arise from acknowledging that all members of society contribute – whether via paid or non-paid endeavour.

More pragmatically as a society becomes richer and richer there should be a rising floor beneath which no member of society should be let fall. This is the rationale for the UBI. It is the rationale for State welfare generally, albeit that the shape of that guarantee has over recent decades become defined by a requirement that “paid work” be the objective for all recipients (so long as they are able) no matter what the remuneration for that may be (so long as above the minimum wage). The problems with this popular but narrow definition include it ignoring the contribution to society from all those who produce goods and services that are not purchased, and eschewing the entitlement of equal opportunity for all. So all voluntary work is ignored in that framework, all work that is investment in an asset (Van Gogh who relied on charity, would be regarded today as a failure by our welfare regime), the concept of a person’s well-being as opposed to their material income, is ignored, and entitlement has been narrowed down to the rights of older people to support irrespective of need (NZ Super).

So the UBI underpins individual freedom to a greater extent than the current system ensures. Individual freedom is an essential element of a capitalist democracy and in itself therefore has value to society. Conditional welfare benefits have impeded and even excluded citizens from exercising that human right. 

The UBI is not a living wage, it must be set at a level high enough to be a credible income base to enable people to have and exercise choices about the extent of paid work or other activity they want, but not high enough to be a substitute for paid work. During these times when paid work is arguably no longer delivering a living wage for some, the role of the UBI to top up or supplement income from casualised or low paid work, becomes even more relevant.

 


[2] Friedman, Milton (1987). Leube, Kurt, ed. "The Case for the Negative Income Tax". The Essence of Friedman (Hoover Institution Press): 57–68.

[3] Bladen, W. 1974. ‘From Adam Smith to Maynard Keynes’. University of Toronto Press, p. 38

[4] Smith, Adam. 1776. ‘An inquiry in the nature and causes of the wealth of nations, Book I Chpt XI’. (Conclusion of the chapter). The text of the book is available in full at http://www.econlib.org/library/Smith/smWN.html [Accessed April 2011].

[5] Mill, J.S. Testimony before the Select Committee on Income and Property Tax. As quoted in: Ekelund, Robert B. and Walker, Douglas M. 1996. ‘J.S. Mill on the income tax exemption and inheritance taxes: the evidence reconsidered’. History of Political Economy 1996 Vol 28 (4), pp. 559-581. 

[6] Mill, John Stuart. 1848. ‘Principles of political economy with some of their applications to social philosophy’. Book V, Vol III, Part II, ‘On the general principles of taxation’. As viewed at Online Library of Liberty. http://oll.libertyfund.org [Accessed March 2011].

[9] Miles Corak (2013), “Inequality from Generation to Generation:  The United States in Comparison,” in Robert Rycroft (editor), The Economics of Inequality, Poverty, and Discrimination in the 21st Century, ABC-CLIO. 

[10] Sen, Amartya (1985). Commodities and capabilities. Amsterdam New York New York, N.Y., U.S.A: North-Holland Sole distributors for the U.S.A. and Canada, Elsevier Science Pub. Co. ISBN 9780444877307.

[11] Sen, Amartya 1999 “Development as Freedom” Oxford

[12] OECD, 2011 “Divided We Stand: Why Inequality Keeps Rising”, OECD Publishing

[13] Reich, Robert B. 2015, “Saving Capitalism: For the Many, Not the Few”. Knopf