Alireza Alavitabar in Conversation with Mashgh-e No: “Egalitarianism, the Market Economy, and Institutionalism”

Mashgh-e No: Despite extensive discussions at academic and media levels, economic schools and concepts, especially in Iran, remain shrouded in ambiguity, and we sometimes witness different intellectual tendencies being easily dismissed and sidelined based on misunderstandings by their proponents and even critics. “Equality” and “egalitarianism” are among these concepts that have been frequently used over the years, yet it seems a precise and correct definition of them is still lacking. In this conversation, Alireza Alavitabar has examined various aspects of this concept.

Mashgh-e No: You have said elsewhere that to recommend and prescribe economic policies, we need two sets of ideas: descriptive and explanatory ideas, and value-based and normative ideas. Moreover, you always emphasize that description and explanation must be carried out in the light of scientific theories. The question is, if we consider equality both desirable and possible, can we utilize the theories of conventional economics (neoclassical microeconomics and Keynesian and post-Keynesian macroeconomics) as a descriptive and explanatory foundation? Is conventional economics compatible with the value of egalitarianism?

Alireza Alavitabar: A precise answer to this question requires a discussion on the philosophy of economic science. In particular, one must speak of the place of values in economic theories and adopt a clear position on it. However, assuming our opportunity to delve into these discussions is limited, I will merely point out that historically, we have had well-known economists who have used this very conventional economics as a support for their egalitarian economic recommendations. Specifically, I want to refer to Ms. Joan Robinson. For example, in her economic discussions, she utilized the neoclassical concept of “diminishing marginal utility” and concluded that income redistribution (taking from the rich and giving to the poor) increases the total utility of society and is therefore completely justified and defensible. Or, for instance, she used another neoclassical concept, “equality of factors’ income with their marginal product value,” to introduce the concept of “monopolistic exploitation.”

Ms. Robinson believed that if a factor of production is employed at a price lower than its marginal product value, it is exploited. That is, not only did she use neoclassical concepts to defend equality, but she even tried to replace the vague and, in her words, mystical and Hegelian concepts of Marxist economists with them. If we accept that the best proof for the possibility of something is its occurrence, we can conclude, yes, neoclassical economics can also be used to justify egalitarian prescriptions.

Mashgh-e No: But a segment of Iranian economists, who are typically egalitarian as well, introduce themselves as advocates of “new institutionalism” and avoid using the concepts of neoclassical microeconomics as much as possible. Shouldn’t their reasons in this regard be considered?

Alavitabar: Here I must emphasize that there is a certain imprecision in this usage that needs to be corrected. Institutionalism, at its inception, sought to break out of the conventional neoclassical framework and even aimed to overthrow it. New institutionalism, by contrast, seeks theoretical innovation within the neoclassical paradigm and aims to enhance the capacity of conventional economics to explain phenomena that were hitherto unintelligible. Hence, new institutionalism cannot be called a rival to neoclassical economics. To clarify the matter, I will point out a few things. In conventional neoclassical economics, the behavior of the state in the economy was assumed to be “exogenous.” That is, they assumed that within the framework of economics, we do not know on the basis of which variables the state’s behavior is determined, or they assumed it is determined on the basis of variables that are not within our economic model. Within the neoclassical economics framework, the existence of perfect competition and the institutions appropriate to it was taken as given. It was assumed that price fluctuations would be met by excess demand and excess supply, and equilibrium would be established. Due to the inadequacies arising from these assumptions, a current gradually grew within the neoclassical paradigm that is referred to as “neoclassical political economy.” This new current sought, firstly, to treat the behavior of the state as “endogenous” and to explain and elucidate the state’s economic policies with the aid of economic concepts and frameworks. Secondly, it sought to explain efforts to prevent the free fluctuation of prices, as well as the collusions and organizations formed to preserve special profits. The effort was to understand the attempts made to create monopoly and collusion and to transform a competitive situation into a monopolistic one, and to set aside the unrealistic assumption of a universal striving to create and maintain perfect competition. Within the neoclassical political economy current, there are, of course, various tendencies: the public choice tendency, the collective choice tendency, and the historical and institutional tendency. New institutionalism, in particular, must be understood with reference to the theories of Douglass North, who sees himself as continuing the neoclassical paradigm and not replacing it. So, given this explanation, the institutionalist-neoclassical duality does not seem to be a precise classification for distinguishing intellectual differences among economists.

Mashgh-e No: So you consider the framework of conventional economics sufficient for an egalitarian economist, as a framework for describing and explaining economic phenomena?

Alavitabar: My view is that for description (stating characteristics) and explanation (stating the why and how of the occurrence of phenomena), if we are dealing with current phenomena (such as fluctuations in relative prices, or unemployment due to insufficient demand, or an imbalance in the foreign balance of payments), conventional economics provides us with the necessary framework for analysis. But if we seek to describe and explain a structural and historical phenomenon (such as the instability of private property, or the formation of the capitalist system, or the emergence of the rentier state), we need a supplementary theoretical framework such as political economy.

Of course, contrary to some economists, in my opinion, political economy should not be limited to just one or a few perspectives, for example, the public choice perspective. I have seen some economists, even when defending political economy, treat it as synonymous with public choice theory (Buchanan). This is like saying sociology means structural-functional theory.

Mashgh-e No: If there is no fundamental difference, or it is not necessary for there to be one, regarding the descriptive and explanatory framework between egalitarian economists and the current opposing them, then where does their disagreement lie?

Alavitabar: It lies in their value and normative orientations. I believe egalitarian economists are distinguished from others based on several important economic orientations. These orientations can be formulated in various ways. For example:

a) Human beings flourish better in a condition of equality than in an unequal and hierarchical condition. Hence, the redistribution of opportunities and material means for the flourishing of humankind is necessary.

b) With the increase in the productive capacity of societies and new possibilities for the fresh organization of collective life, the conditions for realizing ever-increasing equality have been provided.

C) The capitalist economic system (and its former rival, state socialism) has created specific power relations and institutions that prevent the practical achievement of increasing equality.

Regarding developing countries, another clause can be added, which is: D) Comprehensive and sustainable development is unattainable without redistribution and participation.

Mashgh-e No: Based on what you are saying, egalitarian economists should focus their attention on the distribution of national income and only then consider other economic goals and ideals.

Alavitabar: First of all, you must distinguish between two types of income distribution. The first is the "functional distribution" of national income. That is, the distribution of national income between workers (wages and salaries) and capitalists (profit, interest, and rent). At one time in Sweden, the share of wages and salaries from national income was about 75 percent, and the share of capital in its various forms was about 25 percent. At the same time, the share of workers (wages and salaries) in Iran was about 35 percent, and the share of capitalists was about 65 percent. When we think about redistributing this type of (functional) distribution, we are thinking about how to change the percentage share. The other type is the "quantitative distribution" of national income. That is, dividing society into 10 or 100 segments based on average income. For example, comparing the ten percent with the highest income to the ten percent with the lowest income. In Iran, the upper segment has 14 times the income of the lower segment, and in developed countries, this ratio is 5.5 to 6.5 times.

After specifying the type of income distribution, we must, based on credible economic theories and utilizing existing data and information about the Iranian economy, estimate what factors the state of income distribution is a function of, and what factors cause an increase or decrease in income equality.

It is in determining the factors affecting the distribution of national income that the discussion of society's other economic goals and desires also arises. For example, studies have shown that an increase in the inflation rate and the unemployment rate leads to greater inequality in the quantitative distribution of national income, and an increase in the economic growth rate leads to a reduction in inequality in the quantitative distribution of national income. Therefore, efforts to increase employment and reduce inflation are considered a policy aimed at increasing equality, and efforts for greater economic growth (even within our current, deeply flawed economic framework) lead to increased equality. Regarding the functional distribution of national income, we also know that numerous factors are effective in creating inequality in income distribution. One factor is the "structure of markets." Whether markets are competitive or monopolistic plays an important role in distribution. Class inequalities lead to the emergence of certain inequalities, which in turn lead to inequality in income distribution. Class-based inequalities specifically include inequality in the ownership of physical capital, educational inequality, and occupational inequalities. So, another factor is class inequalities. Gender, ethnic, and regional discrimination also affect income distribution, and the set of government economic policies (policies) is also of fundamental importance. Finally, the degree and level of society's development must be mentioned. The level of a society's economic development affects the functional distribution of national income through various mechanisms. Therefore, as you can see, when we consider the distribution of national income as important and central, we are inevitably compelled to think about other economic ideals and desires as well.

Mashgh-e No: Considering these explanations, what do you think is the biggest mistake of egalitarian economists? Why do many observers believe they have no clear solution for Iran's problems? A solution that is both egalitarian and realistic.

Alavitabar: In my opinion, the greatest mistake of egalitarian economists is their disregard for the “market mechanism.” For ideological reasons, they equate the market mechanism with the capitalist system and have therefore ignored its importance and role in shaping societal realities. The market mechanism represents a real and decisive force. The economic behaviors of human beings—including production, consumption, exchange, and distribution—are all influenced by the confrontation of supply and demand. Supply and demand, in turn, are influenced by other factors. What exists as the “market” (in the sense used in economics) contains a great deal of information regarding prices, tastes, inflationary expectations, weather and regional conditions, the state of income distribution, the amount of available factors of production, the income received by factors of production, the level of technology, and so on. Disregarding this information and the reactions that our proposed economic policies create in supply and demand, and ultimately in the market, leads to the failure of many predictions and orientations. The great lesson of the economic collapse of the Eastern Bloc is that no egalitarianism can afford to ignore the decisive force called the market mechanism. On this basis, we can divide our proposed economic policies into two categories: “market-conforming policies” and “market-substituting policies.” If egalitarianism is to lead to a set of sustainable solutions, it must, as much as possible, strive to propose market-conforming policies. I emphasize that I do not mean the traditional bazaar, but the economic concept of the market, meaning a situation where suppliers and demanders confront one another and bargain over price and quantity of exchange. Of course, I must add that pro-market economists also make a fatal mistake, which is extending the market mechanism to areas that, in economic terminology, are considered cases of “market failure.” Everyone knows that cases such as the production and supply of public goods and services, or significant ones, social justice, stabilization of macroeconomic variables, determining the optimal rate of exploitation of exhaustible resources, and cases where economic activities (production and consumption) have positive and negative externalities for others, are instances of market failure. That is, either the market mechanism is incapable of solving them, or it is incapable of solving them optimally.

Mashgh-e No: Can a general guide be proposed for leftist economists after the collapse, for organizing the economy and designing economic policies?

Alavitabar: In a limited time, one can only point to some guiding rules for policymaking, and no more. I will mention a few rules here. The first rule is that egalitarian economic policies should, as much as possible, be designed in conformity with the market mechanism, and the use of centralized command planning and market-substituting mechanisms should be limited to the extent necessary. For example, increasing workers’ productivity to raise their wages is a market-conforming policy, but setting a minimum wage and controlling wages is a market-substituting policy.

The second rule is that the government must differentiate between people’s “basic needs,” “ordinary needs,” and “preferences.” Meeting people’s basic needs (food, clothing, housing, medical care and health, and education) should be financed based on the “ability to pay” principle. Whoever has more income and wealth should play a greater role in meeting the basic needs of society and be more responsible for financing them. However, meeting people’s ordinary needs and preferences can be financed based on the “fee-for-service” principle. If individuals use a service or good, they should pay its cost. For example, the government does not need to subsidize the use of airplanes for ordinary travel; each ordinary passenger should cover the cost of their air travel. If meeting people’s basic needs is not possible through market-conforming policies, it should be provided through market-substituting policies (e.g., food stamps). However, meeting ordinary needs and preferences can be left to the market mechanism.

The third rule is that different sectors of society must be empowered to defend their own interests. For example, employees should be allowed to have their own trade unions and, through organization, defend their collective interests. In areas where there is a conflict of interest, creating a “countervailing power” is considered a fundamental solution. Conflict of interest is a reality that should not be denied, but rather managed. For this management to be fair, the parties to these interests must be given the possibility of organization and association.

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Alireza Alavitabar in Conversation with Mashgh-e No

Egalitarianism, the Market Economy, and Institutionalism

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