The American Economic Association’s Richard T. Ely Lecture of 1999 was titled “In Defense of Inequality.” Its author, Finis Welch, was simple and direct in approaching his subject: “I believe inequality is an economic ‘good’ that has received too much bad press.”1 But Welch’s assertion was not meant to generate controversy. Indeed, it became painfully obvious by the end of the twentieth century that the ascendancy of the market in American society has been accepted at the expense of broader political aims and goals. Whereas the Progressive and New Deal Eras sought to privilege politics over the workings and effects of the economy in order to realize more substantial political conceptions of democracy and human liberty, the contemporary consensus has decidedly shifted toward a hostility to state intervention and, I would argue, away from the very goals of economic equality itself. Not only are market processes regarded as the fundamentals of modern economic and social life, but market outcomes are tolerated as final. Contemporary views on inequality have been shaped by the curious mixture of liberalism and capitalism that has been at the heart of American political culture. Indeed, the liberal-capitalist consensus that was forged during the 1930s and 1940s was not something imposed from without; it was simply the reconciling of liberal ideas of “fairness” and “opportunity,” which were inherent in American political conceptions of individual liberty, with the economic conditions of the time. Confronting economic inequality in any radical way therefore requires insight into the mechanisms of inequality, into the various ways in which inequality is generated. But it also requires that a conception of political rights that goes beyond a liberal framework be adopted. It is the entrenchment of liberalism—and its elective affinity with modern capitalism—that has produced the broad acceptance of economic inequality as a just aspect of modern American social organization.
A crucial aspect of the importance of political ideas lies in their ability to legitimize institutions and ways of social and economic life. An important dimension of the underlying ideology of American political culture has been its economic liberalism: the emphasis on the importance of hedonic individualism and property. Although there were variations on this theme, the overwhelming force of the liberal economic ethic in American life has resulted in a skepticism of the state and an emphasis on equality of opportunity. The radical link that was made during the few decades before the Civil War between equality of opportunity and equality of condition was slowly drowned out as the evolution and spread of capitalism made the possibilities of such a link less realizable. The formation of new markets for labor as industrial capitalism developed transformed the discourse of economic inequality in America by breaking apart the smaller economic communities of the early nineteenth century, and with them the associational ideals of equality that were advocated by the radicals of the time. The aftermath of the Civil War saw the ascendancy of industrial capitalism, rapid economic development, the nationalization of the economy, mass urbanization, and massive economic disparity. The ascendancy of wage labor formed a new economic context wherein the ideas of economic equality would shift from equality of condition to equality of opportunity and from a political ideology that was specifically anticapitalist to one that sought reform and a reconciliation between capital and labor. This change was made necessary by the new economic context of wage labor and the erosion of the smaller, self-sufficient economic communities that had predominated in the late eighteenth and early nineteenth centuries. The enemies of the radical critics of the 1820s through the 1850s—such as wage labor and the evolving legal rights that corporations or “combines” were winning—gave way to newer economic foes such as monopolization and an economic aristocracy that possessed the capacity to choke off economic opportunity. Even at their most radical, Americans rarely moved away from their liberal economic ethic and the emphasis on individual labor as the sole criterion for the accumulation of property.
The economic and social crises of the late nineteenth and early twentieth centuries, such as the economic depressions that spread massive unemployment and social strife, made reform a major issue and prompted a reorientation of intellectual and political life. Franklin Roosevelt’s claim in his second inaugural address that “we refuse to leave the problems of our common welfare to be solved by the winds of chance and the hurricanes of disaster” was evidence of the extent to which a new conception of the market and its relation to society and the state was in bloom. Antipathy toward the “free,” or unregulated, market was generated by the massive economic inequalities of industrial capitalism and the social crises that resulted from them. But despite the gains of the labor movement in pushing labor into more parity with capital, the vision of the New Deal went into crisis in the late 1970s, and its deeper vision for remaking American economy and society was derailed. Although state assistance in recovering from the Depression was welcomed by an overwhelming majority of Americans, there was a clear limit to the extent to which they would tolerate the concentration of state power.2 The crisis of a “socialized democracy” was therefore the result of the skepticism of the state that a liberal American society had always harbored, and the implications this would have for economic inequality would not take long to manifest themselves.
By 1980, the conservative forces in American society and politics had acquired new legitimacy and power. Their ideas were formed by a new intellectual and ideological orientation that blended populist ideas of economic liberty, as well as the identity of American economic life, with liberal capitalism opposed to the collectivism and state-centered economies of communist countries and the social democratic countries in Europe. What Bruce Schulman has referred to as the “southernization” of American politics and society began in the 1970s with the crumbling of the old Northeastern industrial belt and the rise of the “sunbelt” economies of the South and Southwest.3 Kevin Phillips’s argument that this new economic Sunbelt would serve as the foundation for a political and cultural split in American politics and society proved to be correct, and with this divide came a deeper attack on the state and a renewed emphasis on economic liberalism and deregulation.4 A return to the individual in political and economic discourse was therefore a crucial turning away from the kind of social integration that the Progressive and New Deal thinkers had been developing, away from public institutions and toward a renewed skepticism of the state and its institutions and programs. The “new democracy” that thinkers in the first few decades of the twentieth century, such as Herbert Croly, Walter Weyl, and John Dewey, had seen emerging, with its emphasis on a socialized democracy, a shift away from the autonomy of the market and laissez-faire individualism in economy and society, and the investing of the state with a new, common purpose, was withering.
The empirical nature of economic inequality would also become something qualitatively different in nature. Whereas capitalist development in American history was an explicitly exploitive process that made class identification easy and class differences highly acute, the new inequality does not wear such obvious trappings. The postindustrial, service-oriented economy has bred anew the older forms of economic exploitation that were characteristic of the nineteenth century. The crucial question is no longer whether inequality exists, but why, even as it continues to grow in scope and magnitude, it has become more tolerated and, to a certain degree, accepted. Even though American political thought has always had its apologists for economic inequality and class hierarchy—whether through naïveté or through sheer ideology—there was always an egalitarian discourse that saw America’s republican traditions at risk as long as inequalities in wealth were in existence. The fact that this egalitarian tradition has receded to the background in contemporary American politics is therefore an important concern that requires investigation.
The most salient aspect of the change in political and social thought in the last several decades in America has been the slow ascendancy economic society over political society. The liberal economic ethic that at one time was a force against stubborn feudal institutions and precapitalist economic relations has been reduced to a kind of “chaotic individualism,” to borrow Croly’s phrase from the early twentieth century. The decline of civic engagement, the erosion of political life, and the shattering of a once vibrant public sphere has been the result of a possessive individualism that has also come to legitimize economic inequality as the result of what are seen to be the “natural” processes of the market. The various thinkers and their ideas in this chapter were largely responsible for this intellectual reorientation; of course, it has intellectual roots that go back to the beginning of the twentieth century and the renewed attempt, in the midst of the Progressive Era and during the New Deal, to give a renewed legitimacy to laissez-faire and to the kind of capitalism that the reformists of the time sought to overcome.
The long and embattled discourse on economic inequality in American thought shows that there was a constant unease about replacing political ideas of democracy and equality with market-based ones of individualism and hierarchy. But the erosion of political society and a vibrant and democratic public sphere allowed for a shift in this orientation. John Kenneth Galbraith saw the shift coming as early as 1967 when he argued, “If we continue to believe that the goals of the industrial system … are coordinate with life, then all of our lives will be in the service of these goals…. Our wants will be managed in accordance with the needs of the industrial system; the policies of the state will be subject to similar influence; education will be adapted to industrial need; the disciplines required by the industrial system will be the conventional morality of the community.”5 The revival of laissez-faire and what the older theorists and critics of the Progressive Era termed “individualistic capitalism,” as well as the shift to economic society, has meant the acceptance of the market and its consequences. It has resulted in the embracing of a culture of consumption and a dependency on new social relations that have deemphasized class as a category of social identity and solidarity. It has undergirded a newer, deeper conception of individualism that has reified market relations in contemporary society even to the extent that it opposes the most immediate material and political interests of an overwhelming majority of the actors involved.
The retrenchment of economic equality and the renaissance of anomic market liberalism was therefore not merely the result of an ascendant capitalism in the post–World War II context; it was also aided by an intellectual shift that put emphasis on a conception of the market that was fused to ideas of liberal individualism and political freedom. Over time, this new market ideology has come to legitimize economic inequality as a necessary byproduct of capitalism. Just as Thomas Paine lamented the need for government among a society of free individuals in “Common Sense,” the idea of economic inequality as a necessary function of modern economics has become akin to gospel. But this has also been reinforced by a distinct cultural dynamic, one that has—through the reification of the market—allowed for the emergence of what Lizabeth Cohen has called the “consumer/citizen/taxpayer/voter[s],” who view “government policies like other market transactions, judging them by how well served they feel personally.”6 In the midst of rising affluence in the postwar years, the ascendancy of the market was coupled with a renewed skepticism of the state. Depoliticization, increased consumption, and inequality have gone hand in hand, and, since 1980, all have increased in intensity. What Paul Krugman has referred to as “permissive capitalism,” or the expansion and inflation of the compensation of business elites, has led to a substantial shift in inequality.7 The cultural component is important to understand since it is the key factor in seeing how economic inequality has become legitimized and why elites and their theories of a renewed laissez-faire have been so successful in their project of reworking American democracy.
Both the economic and the cultural shifts are important when understanding the rise and mass acceptance of economic inequality. These shifts were not simply a matter of a change in economic structure; they were also attributable to the political and cultural change that occurred during the final decades of the twentieth century.8 The retreat from political life and the erosion of the public sphere that has marked the past quarter century in America is a symptom of this change. In American history, as I have shown in preceding pages, economic inequality has always been critiqued, fought against, and denounced from the sphere of politics, but this was a politics of equality premised on equality not as an end in itself but as a quality of freedom, the annihilation of hierarchy, privilege, and servitude. This political vision held that the economy was a set of power relations and was therefore political. The emphasis on economic equality was therefore the outgrowth of the insight that any economy and society marked by social atomism, individualism, and inequality would constitute a movement away from the ideals of political and individual freedom that had always been seen as the heart of America’s republican project. The rise of a consumer society and the erosion of political participation and the public sphere more broadly therefore constitute a cultural component that has found an elective affinity with certain structural elements of the modern American economy. The move of capital away from its traditional mass-industrial base in the North and Northeast to the South and Southwest meant a move toward states with weaker or even nonexistent unionization. Thus eagerness for economic development developed, even at the expense of workers’ rights.
The egalitarian tradition in American political thought had always critiqued the effects as well as the workings of the emerging capitalist system. Thinkers in this tradition saw that property was unequally distributed, but they also peered into the mechanisms of how this was systemically reproduced. From Byllseby to Pickering and Brownson to George, Lloyd, and Croly, there was always some understanding of the ways that capitalism worked. They may not have been correct in all of their analyses, but the need to see how inequality was produced was always an essential dimension of their egalitarian project. They did not put emphasis on “economic democracy” because the term itself would have been viewed as absurd: democracy was a way of organizing social life as well as a way of organizing political institutions, and the economy was simply seen as the material domain of that process. Economic equality—albeit a rough approximation of it—would be simple to maintain once each individual was liberated to keep the fruits of his labor. This liberal economic ethic did come into conflict with economic modernity, but amid the rubble of the interventionist state in the late twentieth century, the acceptance of capitalism as a way of organizing society has replaced the older egalitarian ideas upon which American political thought and culture had rested for almost two centuries.
THE MERGER OF LIBERTY AND MARKETS
Throughout its development, the inegalitarian tradition in American political thought was constrained by a crucial flaw in the way it communicated its political ideas. It was one thing to argue that economic development would always require class divisions and inequalities, as Hamilton had; or to argue that human nature itself required that inequalities would present themselves as Calhoun had; or that such “natural inequalities” were, in effect, beneficial to human progress and should, on those grounds alone, be embraced rather than critiqued by an out-dated moralism as in Sumner. What the modern conception of inegalitarianism emphasized was the liberty that markets unleashed, the way that individuals would be freed from the fetters of any trace of authoritarian control. For these thinkers, laissez-faire was indeed a theory of economic individualism. Even though some of the staunchest proponents of free market economics—such as Friedrich Hayek—did maintain that the state ought to step in where the market obviously fails (such as for health insurance and a minimal safety net for the poor), the central premise of modern laissez-faire economics was the emphasis on a split between economy, society, and state. Margaret Thatcher’s remark that “there is no such thing as society; there are only individual men and women and there are families,” was an extreme formulation of this view. Gone was the discourse that had dominated American political thought on the topic of economic inequality since the economy began to develop along capitalist lines. In its place would rise a new form of liberalism, the foundations of which were not the political imperatives of old but the economistic reductionism of a capitalism reborn.
The defense of inequality that has emerged in the late twentieth century was unique in another way: it was able to root itself within the political culture of America. Although thinkers like Sumner and Carnegie articulated a thorough doctrine defending economic inequality not only for the interests of an elite class but for the entirety of society as well, they were never able obtain any kind of popular support. When Matthew Arnold named the “religion of inequality” in the late nineteenth century, he referred to a climate of intellectual opinion. What American political culture has now accepted is the populist variant of this ideology, which has been able to embrace the most disparate classes in American politics by finding affinities with traditional American cultural and political understandings of individualism, liberty, and economic life. The turn toward libertarian conservative ideas was begun during the 1960s. The major intellectual forces behind this movement—Hayek and Milton Friedman, among others—were still an intellectual minority, and their ideas had yet to filter into the formulation of policy or into ideas of public life.
The origins of the contemporary assault on the ideas and political traditions that emphasized economic egalitarianism in America are complex, but they are grounded in the critical turn in economic thought that sought to invent new arguments for economic laissez-faire. In Europe, during the late nineteenth and early twentieth centuries, an anti-Marxist discourse began to emerge around thinkers like Hayek and Ludwig von Mises; this reasoning emphasized the liberalizing character of free markets and the fundamental irrationalism of and a moral revulsion toward state intervention in the economy. The tropes of classical mechanics once again came to influence economic theory: the ideas of neoclassical economics are still replete with the ideas of “friction” caused by state institutions and vertical as opposed to horizontal institutions. But at the heart of the ideas behind the new laissez-faire was a political and ethical theory that put primacy on the market as the only means to satisfy want and reward labor, and this would become core of the new intellectual reorientation that would redefine the discourse on economic inequality.
Upon closer examination, the intellectual and philosophical roots of the return to laissez-faire and the legitimation of economic inequality possess a fair amount of intellectual sophistication, delving into the epistemological as well as ethical concerns of individual knowledge and conduct. Well before the ideas of thinkers like Friedman and Hayek were to have influence, the ideas of economists like John Bates Clark and Frank Knight were laying a groundwork for what would become a libertarian economic and ethical framework that would overturn the legacy of the political ideas of a “socialized democracy.” For Clark, the key insight was that each factor of production—be it capital or labor—would, under the conditions of an unregulated and freely operating market, receive the proper and just returns to its input. Beneath what looked like a chaotic marketplace lurked a hidden logic that, when allowed to work unfettered of regulation and monopolistic distortions, would work “naturally” to produce efficiency and the just distribution of the fruits of difference kinds of “labor.” The ideas of the neoclassical economists would therefore seek to invest the market with an autonomous status with its own laws of operation and development.
In the early 1920s, in Risk, Uncertainty, and Profit, Knight put forth a comprehensive theory of laissez-faire with the business entrepreneur at its center. Knight held that individuals in society are unable to have absolute knowledge and information about the world and, therefore, about economic processes. Knight’s epistemological assumptions about subjective knowledge were central to his ethical justification for laissez-faire, and they allowed the doctrine as a whole to regain ascendancy in American economics and, in time, in political and social thought as well. Knight saw that the crucial flaw in the arguments for political intervention in the economy revolved around the concern with uncertainty. Progressive and, in time, New Deal thinkers were arguing for the socialized management of the economy in order to limit what they saw as the excesses and inefficiencies of the market. But for Knight, their policies were plagued by what he viewed as their unscientific and, therefore, potentially damaging nature, namely their idea of the relation between society and individual.
The very nature of human subjective experience was chaotic and in flux. Reaching back to the Hobbesian (materialist) and Lockean (empiricist) roots of epistemology, Knight began his analysis from the root of experience and knowledge itself. Human knowledge was grounded in the individual, in subjectivity, and in the interaction between individual consciousness and nature. But since individuals could only ever know their own experience, it was always only partial and could never obtain objective knowledge about universals—whether about nature itself or about society. Uncertainty was the essential condition of knowledge, but it was most acute in modern industrialized societies. Possessed of a complex division of labor and a massive, nationalized market, producers were constantly faced with uncertainty with respect to what and how much to actually produce.9 For Knight, the solution to this problem of uncertainty was the entrepreneur, the individual who faces risk and does so because of the possibility of reward but in the process is able to close the information gap by responding to market pressures and their consequences. It is the entrepreneur who can hold economic organization together, ensure efficiency in the use of resources, and, in the end, promote social progress. Despite the fact that Knight himself was skeptical of the market’s ability to lessen inequalities and the fact that his ethical beliefs were against economic inequality, the basic building blocks for a renewal of the attack on economic egalitarianism was already in the making.
In Knight’s work, the central premise of a new economic outlook was being born. Since the social world—which for Knight was defined as a collection of individuals and not an entity in itself—could be coordinated by the market, it was an inherently more efficient system that socialism or any form of state capitalism. But the ethical basis for Knight’s system was not Sumnerian in any way. What he sought to do was overcome the epistemological and sociological problem of the interaction between individuals in a state of advanced industrialism. Advanced capitalism was a fact not to be justified but rather a phenomenon to be explained. For Knight, competitive societies did not rest on firm ethical foundations; in fact, he was skeptical of the ability of laissez-faire economics to distribute wealth justly (from an ethical point of view, he was a critic of economic inequality), but his philosophical ideas about the nature of society, mind, and “uncertainty” led him to privilege economic laissez-faire over socialism and other state- and social-interventionist models of the economy.
Knight’s ideas were reflected in Europe with the rise in Vienna of the Austrian School of marginal utility. Thinkers like Carl Menger, August Böhm-Bawerk, Mises, and Hayek would be the most important names to emerge from this school, and their theoretical emphasis on a neo-Kantian conception of the individual—with consequences not all that different from what Knight had pointed out, such as uncertainty, risk, and re-ward—were instrumental in constructing a new theoretical approach not only to the economy but to philosophy and politics as well. With their emphasis on the “subjective theory of value” and the centrality of marginal utility, these thinkers would come to have a deep influence on economic discourse in the English-speaking world after fleeing Europe and taking up residence in England and America. Their dual emphasis on the market and on the primacy of the individual would shape the American discourse on economic inequality, pushing the hegemony of Keynesian economics and state intervention to the periphery and creating, with thinkers like Milton Friedman and numerous others, a new libertarian social theory that would mark the intellectual climate of the late twentieth and early twenty-first centuries.
The American tradition of laissez-faire had been deeply discredited by the historical excesses and failures of capitalism from the late nineteenth century through the Great Depression. The reality of economic laissez-faire had given way to a moral and political discourse about the nature of American democracy during the Progressive Era, in large part because of the problem of economic inequality and the inability of intellectuals and ideologues of the time to bring together the realities of inequality and the social atomization that resulted from it with the ideas of democratic equality that were inherent in American political culture. The turn away from economic individualism was therefore a response to the growing problem that class society posed to American political thought. But the resurrection of laissez-faire found support as a response to the rise a fascism in Europe and the solidification of the Soviet Union in the decades after the war. The Austrian School was instrumental in this regard; its approach to economic theory was extended by social and political ideas that rested on a radical understanding of liberal individualism.10
But it was the emphasis on a new synthesis, that of liberalism and unrestrained capitalism, that would make the ideas of thinkers like Mises and Hayek so tempting to Americans and come to change the trajectory of American political thought on the subject of economic inequality in the late twentieth century. It was Mises who, writing as early as 1927 in his book Liberalismus, made one of the first arguments for collapsing liberalism and capitalism into a unified system:
A society in which liberal principles are put into effect is usually called a capitalist society, and the condition of that society, capitalism…. [O]ne is altogether justified in calling our age the age of capitalism, because all that has created the wealth of our time can be traced back to capitalist institutions. It is thanks to those liberal ideas that still remain alive in our society, to what yet survives in it of the capitalist system, that the great mass of contemporaries can enjoy a standard of living far above that which just a few generations ago was possible only to the rich and especially privileged.11
This would become the standard argument in America decades later. Capitalism and liberalism were one because, as Mises, Hayek, and others in their circle perceived, both worked on the principle of free individualism, which was, by definition, opposed to the rank and privilege of preliberal societies. But for Mises, capitalism was not a component of liberalism; it was the concrete application of liberal ideas and principles—where liberalism was truly put into practice, there you would find private property, a minimal state, and unrestrained markets. This would be the beginnings of the later neoliberal ideology in the United States. In this sense, classical liberalism’s approach to the problem of equality was simple enough to understand: individuals were only equal insofar as they had the right to pursue the exercise of their own free labor—it was nothing more than a condemnation of involuntary servitude.
Classical liberalism—as opposed to what Mises saw as the distortion of liberal doctrines of equality that existed at the time, what he ironically termed “neoliberalism”—was therefore at one with capitalism since capitalism was simply the economic system that resulted from free labor, markets, and private property. The illusion of equality outside of the legalistic conception of the individual and his right to property and free labor was not only an absurdity in terms of empirical fact, it was also economically regressive. Mises’s argument in defense of economic inequality would become the standard credo, one that continues to dominate what we today refer to as “neoliberalism” in quite a different context. For Mises, inequality was a social good specifically because it created a dynamic, productive, and creative society:
Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.12
Capitalism—the application of true liberalism as the embodiment of individual liberty, choice, and action—was the very engine of human prosperity and the real guarantor of human freedom. The concept of capitalism that began to emerge with the renewal of economic liberalism was that the market, capital, and wage labor, the entirety of the system, should be interpreted as a manifold, dynamic system of freedom and progress. The problems that capitalism had actually caused—whether political society violently divided by class strife or violent business cycles that caused unemployment and recession—were not of concern because such things were the result of the ignorance of what liberalism and capitalism actually were. Even the aristocratic wealth seen during the Gilded Age was also to be praised. “The luxury of today is the necessity of tomorrow,” and although it might seem ethically intuitive to despise the rich idler who does nothing for his wealth, “he sets an example of luxury that awakens in the multitude a consciousness of new needs and gives industry the incentive to fulfill them.”13 Inequality was now being reinterpreted as a social good by redefining the classic examples of economic injustice as in the best interests of the public and of social progress.
It must be admitted that Mises’s book was radical for its time. The justification of economic inequality was not capable of generating a serious audience, but it used ideas and arguments that would prove remarkably resilient, as indicated by the fact that they would continue to be advocated and have influence decades later in the ideas of Hayek and Friedman, among other, more contemporary conservative thinkers.14 Indeed, while the course of economic thought as well as social policy was moving toward Keynesianism for moderates and for radicals, socialism was still the politics of hundreds of thousands of workers. This was the reason for Mises’s overstating his case. But when Liberalismus was finally translated into English in 1962, Mises and his ideas were already gaining considerable ground intellectually, and, in time, they would be part of a comprehensive new conservative economic doctrine that would come to influence both social policy and political culture. Even more influential than Mises would be his younger colleague from Vienna, Hayek, who would make a firmer and more complex case for liberal capitalism and its logical and ethical primacy over all other forms of economic and social organization. In so doing, he would also shore up the case for economic inequality under capitalism as a social virtue and an attribute of social justice and of social progress.
For Hayek, just as for Knight before him, the argument for laissez-faire and the need to reintroduce a cleaner, more precise conception of liberalism was undergirded by the uncertainty of human knowledge and its fundamental inability to obtain anything more than partial truth. Hayek and Mises took socialism as their common enemy, and they sought to prop up arguments for libertarian capitalism that would be grounded in the nature of human psychology and provide the most advanced system for an efficient, free form of social organization. Socialism rested on the false assumption that economic planning by a bureaucratic elite could have access to the totality of economic knowledge. Socialism was therefore plagued from an epistemological point of view, and this political and economic critique of socialism emphasized the case for radical liberal economic individualism. The Austrian School had been characterized by, among other things, its emphasis on the subjective theory of value, which argued that economic values were not assigned objectively—as in the labor theory of value—but by subjective preferences and the value that individuals placed on a particular good. It was an extension of methodological individualism, and, as Menger himself said, “value does not exist outside of the consciousness of men.”15
This was at the heart of Hayek’s economic theory and his social philosophy as well. Just as Mises had argued in Liberalismus, Hayek saw that “true” liberalism needed to be recovered, and this meant, first and foremost, a recovery of the idea of the individual, or what Hayek would refer to as “true” individualism. By politicizing the economic sphere, the “social liberals” and social democrats—let alone socialists and communists—of the 1930s and 1940s had made exaggerated assumptions about the power of human reason and its ability to guide social institutions.16 Hayek’s claims therefore would take Knight’s ideas about uncertainty and use them to justify a more comprehensive laissez-faire doctrine. In his reading of Western thought, Hayek wanted to show that thinkers such as Adam Smith, Bernard Mandeville, and David Hume constituted an intellectual tradition that emphasized an essential truth of liberal individualism, namely, that there exists “a constitutional limitation of man’s knowledge and interests, the fact that he cannot know more than a tiny part of the whole of society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere he knows.”17 This would serve as the philosophical, ethical, and psychological basis for the market. Since “society,” in this view, is little more than the assemblage of individuals, the random actions of this collection of individuals would create a spontaneous order, one that functions “without a designing and directing mind” and that rests on the sociological insight that “the spontaneous collaboration of free men often creates things which are greater than their individual minds can ever fully comprehend.”18
This philosophical assault on the economic and social policies of the age would not gain ground for some time, but it would prove to be a rigid critique of egalitarianism. In the style of classical liberalism, Hayek sought to limit the scope of the state and to unleash the powers of the market. Drawing the line between economy and the state more deliberately than previous thinkers, Hayek did not simply resort to an ethical argument for laissez-faire or a set of class interests or, as in Sumner, an outdated conception of social progress (e.g., social Darwinism). Instead, his argument was grounded in the foundations of logical positivism and a liberalism that spoke to all as political equals. At the time this served as a counterargument to calls for socialism and communism based on the intellectual grounds of methodological individualism and classical liberalism. But it would also serve as the bedrock of a new assault on the evolving ideas of the welfare state and the new philosophy of social liberalism that had been emerging in the early twentieth century, something that Hayek referred to as “unlimited democracy.” For Hayek, the distinction between equality before the law and other forms of equality—specifically economic or material equality—was the key to understanding how to move beyond, and more specifically against, the ascendancy and dominance of the welfare state. His arguments would not only become a new defense of inequality, they would also serve as a highly persuasive way of preserving a form of liberal political equality while simultaneously guarding against claims for social justice.
Hayek’s ideas about the market and its relation to state and society therefore shored up his notions about inequality and the ethics of distribution. Inequality was disparaged not simply because of the epistemological arguments that Hayek and Knight had put forth; there was an ethical argument that set the foundation for their ideas as well: namely, that human freedom was equated with the absence of coercion. This would resonate with the libertarian strain in American economic thought, and it would allow Hayek’s work to become highly influential. His book The Constitution of Liberty would obtain manifesto-like status, and it would become the intellectual touchstone for modern conservatism. His discussion of liberty and economic equality would also set the stage for contemporary understandings of the phenomenon—both popular and, in many cases, academic and professional as well. The argument was not particularly original: since there was no way to argue for the “factual” equality between different individuals, any other form of equality outside of equality before the law was not only immoral and nonsensical but also dangerous to the concept of liberty.
From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with another; and we can achieve either one or the other, but not both at the same time. The equality before the law which freedom requires leads to material inequality. Our argument will be that, though where the state must use coercion for other reasons, it should treat all people alike, the desire of making more people alike in their condition cannot be accepted in a free society as a justification for further and discriminatory coercion.19
The opposition between economic equality and liberty was necessary for Hayek because he thought that inequalities were generated by differences in ability and talent. It was a conception of inequality that ignored institutions and was both antisociological and ahistorical. Achieving economic equality—of even the most weak variety—would always entail coercion since it would always be necessary to take from those who have achieved and accumulated wealth and property and give it to others. Economic equality was the result of envy, not a genuine political or ethical imperative for social justice. The desire for economic equality was the result of “factual” inequalities between individuals, and it was the fact that all people were different and hence unequal. As a result, in countries with a liberal political framework guaranteeing equality before the law, economic inequality would be seen wherever true liberty existed. And the emphasis on liberty was not an end in itself. Rather, the emphasis for Hayek—unlike thinkers of a similar vein such as Friedman—was on the implications it would have in liberating knowledge and the aggregate social benefit that would accrue to all members of society, serving as a mechanism for social progress.20
Hayek examined what he saw to be the basis for the drive for economic justice. It was essential for him to point out that there was no objective mechanism that created inequality, only natural differences among skills, talents, and rewards. Thus, the drive for equality was cast as a function of envy. Inequality was natural, and a truly free, liberal society would therefore need not only to tolerate inequalities in wealth and income but also to accept them as socially beneficial and an expression of a free society. But still, Hayek knew that drives for equality would persist, and part of his project was to explain this phenomenon. The problem, he argued, was in the perception of how merit was rewarded. There existed a moral objection “not to the bare fact of inequality but to the fact that the differences in reward do not correspond to any recognizable differences in the merits of those who receive them.”21 But this was merely an error in perception. Reward and merit should not be seen in terms of what people have objectively done; they were the result of how another’s talents and skills were valued by others. The impulse for social justice, for equality in material and economic terms, was therefore the result of not comprehending the real way that market society worked. It required that people understand that the market was not only a guiding force, but also unpredictable. In a free society there would be no injustice in the outcomes of market forces since all desired and valued skills and talents would be properly remunerated; and proper remuneration was a subjective, not an objective, phenomenon.
Hayek’s discussion of inequality and the mechanisms that produce it was therefore able to shift significantly the debate on economic and political affairs. With his emphasis on the subjective notion of value, Hayek was able to see economic inequality as the product of “factual” inequalities, or real differences, between individuals. Differences in income and wealth are the result of subjective preferences, not institutions. The concept of “justice” itself can only apply to actions, never to systems or institutions. But by exempting institutions and processes from his analysis, Hayek’s ideas become blind to the actual mechanisms of inequality that had been identified by, and were the primary focus of, the critiques of inequality that had developed in American political thought. Looking back to the first radical critics of inequality—figures such as Langton Byllesby, Thomas Skidmore, Orestes Brownson, and others—the initial insight that drove the most robust critiques of economic inequality in American thought was that inequality was generated not simply by market relationships but specifically by the new economic system itself and the way it shaped, indeed, distorted previous market relationships. The problem was—as Marx would later identify it—institutional in nature; inequality was generated by the production process itself and not simply by differences in skill and ability.
By taking institutions out of his analysis of how inequality is generated, Hayek sidesteps the problem of how capitalism generates economic inequality. Indeed, it is important to point out that Hayek’s discussion of inequality does not mention capital at all or even wages. Instead, he investigates inequality ahistorically. By specifically avoiding the Marxian critique of the production process and the mechanisms of inequality that it generates, Hayek confined himself to “natural” differences among individuals and their subjective preferences, which themselves turned into values and prices. In further contrast to earlier critics of inequality, Hayek was able to extricate the economy from politics, sealing off each sphere from the other. The argument for economic equality had always derived from the political principles of equality that had been articulated after the American Revolution. It had a firm basis in an anti-aristocratic and anti-hierarchical conception of society that was being threatened by new forms of economic life and class differentiation. The character of such claims did not diminish as time went on, but with the renewal of the laissez-faire project, the economy would not only be seen as separate from politics, it would also be theorized as the very source of liberty itself. Whereas, in the past, political ideas of equality and justice were seen as penetrating all dimensions of social life, the economy began to be seen as the source of liberty. Hayek was not alone in making this transition, but his ideas were central and influential in effecting a major intellectual shift in the ways that inequality would be viewed and how the economic sphere would be privileged as the source of human freedom.
Although Hayek’s influence would, in time, be without dispute, Milton Friedman’s libertarian reinterpretation of liberalism, politics, and economics would have a much more pervasive effect and much deeper influence. With his renewed defense of capitalism and his staunch advocacy of laissez-faire, Friedman would transform the discourse on economic inequality, pushing politics and economics further apart. Friedman was successful in integrating the laissez-faire ideas that had been developing in American and Austrian economic thought and merging them with what he set out as traditional American understandings of equality, fairness, and justice. In so doing, he would be one of the next great defenders of economic inequality, helping to pave the way for the intellectual and popular acceptance of economic hierarchy in modern American thought and culture. At the heart of Friedman’s analysis is the idea that the redistribution of incomes and wealth or property constitutes political coercion. What informs his analysis is the same basic argument that had been used by advocates of laissez-faire throughout American political and social thought: that liberating markets will serve rather than undermine the public interest and individual freedom. For Friedman, this view was informed by the notion that markets inherently disaggregate social power. Free markets in the context of competitive capitalism did not, as the critics of capitalism had always asserted, lead to an uneven distribution of social power. Rather, free markets dispersed power, and, as a result, the connection between capitalism and freedom was clear. Free markets, capitalism, dispersed social power and they were therefore the foundation for the free individual and a free society.
By placing emphasis on the connection between liberty and markets while at the same time chastising the state for its intervention in economic affairs, Friedman was able to revive the radical dimensions of a new form of liberalism inspired by libertarianism. Just as Thomas Paine had focused on the division between society and government and the necessity of that separation for the purposes of individual liberty as a call for political liberty and political revolution, Friedman’s ideas worked out a theory of society that would not only tolerate economic inequalities but would also further marginalize the critique of capitalism as a system responsible for generating inequalities. In place of concerns for democracy and the public interest, Friedman’s ideas grounded themselves in a utilitarian conception of the individual, reviving the kind of atomistic understanding of society that was at the heart of liberal philosophy from Hobbes to Locke. And just as Knight, Hayek, and Mises had emphasized the notion of uncertainty and the subjective theory of value, Friedman would bring this perspective to a new level of intensity. Attempts by the state to redistribute income and fight inequality rested on the false assumption that the state could even know what ethical categories such as “fairness” actually were; state policies would therefore always work against their own intentions and, in the process, continue to erode liberty.
“Fairness,” like “needs,” is in the eye of the beholder. If all are to have “fair shares,” someone or some group of people must decide what shares are fair—and they must be able to impose their decisions on others, taking from those who have more than their “fair” share and giving to those who have less. Are those who make and impose such decisions equal to those for whom they decide? Are we not in George Orwell’s Animal Farm where “all animals are equal, but some animals are more equal than others”?22
Friedman’s ideas were not new; they were synthesized out of the laissez-faire liberalism that had been emerging throughout the early twentieth century. By linking government to coercion, the assault on what Walter Weyl had referred to as America’s “socialized democracy” was being put into place. Friedman reinterpreted social life and saw—as thinkers such as Locke and Paine had to a certain extent as well—the market and private property as the foundation for individual liberty. Markets are noncoercive and cooperative at the same time. They reward individual labor and allow for the expansion of free choice. Free markets can and do produce inequalities, but the reasons for inequality are not to be found in what Friedman castigated as the “Marxist syllogism” where value and capital were seen as embodied labor. Inequalities were generated by the fact that different individuals have different preferences and make different choices in the face of risk, Friedman’s extension of Knight’s category of uncertainty.
Underpinning Friedman’s analysis was the idea that distribution takes place “according to product.” Since the “central principle of a market economy is co-operation through voluntary exchange,” the market did not distribute goods and services; it allocated them based on how much each individual produced, how productive each individual was. It was not a question of “fairness” or justice since these were invariably political concepts that were applied to the market; the normative ideal was not equality of resources but the efficiency of allocation. “Payment in accordance with product is therefore necessary in order that resources be used most effectively.”23 Payment in accordance with product was, for Friedman, “ethically fair” because it was reward or remuneration for activity, for production, mental or physical. In classical liberal style, Friedman saw that only through the voluntary exchange of the products of individual labor can there be any semblance of political freedom. Capitalism unhinged from the interventionist state would therefore become the key philosophical and policy goal of this new brand of conservatism, one that would provide a broad justification for inequality as well as its effects.24
The justification for inequality was also based on the notion that inequality under capitalism was of a fundamentally different nature than that of non- or precapitalist societies. Just as Cooley had argued in the early years of the twentieth century that classes in American society constituted a fluid, dynamic social order, Friedman argued that the kind of inequality produced by free-enterprise capitalism was not based on status or social rigidity. Social mobility was part of the essence of capitalism, and this mobility was part of the overall argument for the linking of capitalism and freedom. Freedom was the result of the wide distribution of economic opportunity that market capitalism fostered. Inequality in noncapitalist, nonmarket societies “tends to be permanent, whereas capitalism undermines status and introduces social mobility.”25 Equality of opportunity was essential in this regard. Just as late-nineteenth-century thinkers saw the importance of equality of opportunity—something they saw threatened by monopolization and the massive inequalities bred by industrialism—Friedman’s argument was well situated in the liberal tradition. Since his conception of freedom was so narrowly stated as the freedom to pursue one’s ends in market transactions, he could easily make his case that “government measures that promote personal equality or equality of opportunity enhance liberty; government measures to achieve ‘fair shares for all’ reduce liberty.”26 They reduce liberty because they act as frictive barriers on the free play of individuals to pursue their own ends, while at the same time coercing others to distribute the reward of their product.
Inequality was also the price of efficiency. One of the key elements of the libertarian defense of markets was that although inequality was a product of actual differences among people with different skills and abilities who competed freely in a marketplace, the generation of inequality ought not to be the central concern. Just as Sumner had chastised the moralism of focusing on social inequality, casting it out into the abyss of historical irrelevance in a modern scientific and rational age, the new defense of inequality put forth by the libertarian vision rested on the idea that economic efficiency, in the long run, would relieve inequalities. Interpreting the long history of American economic development, to them, was enough to prove their theories correct empirically. Long-run economic growth via capitalism had produced an affluent society. This emphasis on market efficiency would become a key component of the contemporary inegalitarian tradition. By placing inequality in a subordinate position to other economic concerns such as efficiency and vesting markets with an autonomous logic not unlike a vast automaton, inequality ceased to be a direct result of the system of production and was relegated back to the more archaic discourse of “natural inequality.”
Friedman’s defense of social and economic inequality under capitalism was a vigorous assault on the social democratic tradition that was emerging in America in the early part of the twentieth century. By emphasizing the idea of “distribution according to product” Friedman was able to reconnect the liberal notion of economic individualism that was predominant in the early republic with a libertarian economic framework, and it is here that the attack on the “social liberalism” of the Progressive and New Deal Eras was most clear. Indeed, one of the core insights of figures such as Herbert Croly, Walter Weyl, Thurman Arnold, and John Dewey, among so many others of the period, was that capitalism was an inherently imperfect economic system that was not in accord with the new philosophical understanding of political freedom emerging at the time nor with the tenets of what they interpreted modern democracy. The “social liberalism” that Dewey had advocated thirty years before Friedman’s most influential writings were published emphasized that the democratic ideal did not consist of naïve, egoistic forms of liberalism but insisted on the need to see political democracy as encompassing a form of economic democracy as well. Dewey and thinkers like him saw that capitalism created inequalities not only in wealth and material well-being but in power relations as well. They saw that economic constraint was a key factor in limiting the advancement of democracy and in realizing a more just social order that was in accordance to what Croly had referred to as the “promise of American life.”
But the libertarian ideas of Friedman, Hayek, and their various colleagues and disciples would radically reverse this reinterpretation of liberalism and reintroduce a more basic understanding of a liberal society structured by market relationships and atomistic individualism. Economic constraint was now seen as a fiction since workers and employers simply entered into contracts that were mutually voluntarily. They would introduce, to borrow a phrase from Arnold, a renewed “folklore of capitalism” that would legitimize inequality and put pressure on the state to recede from economic affairs, reinvigorating and redefining liberalism not as “social liberalism” but as the need to reduce the concentration of power.
A liberal is fundamentally fearful of concentrated power. His objective is to preserve the maximum degree of freedom for each individual separately that is compatible with one man’s freedom not interfering with another man’s freedom. He believes that this objective requires that this power be dispersed. He is suspicious of assigning to government any functions that can be performed through the market, both because this substitutes coercion for voluntary co-operation in the area in question and because, by giving government an increased role, it threatens freedom in other areas.27
This emphasis on individual liberty and the skepticism toward the state would soon become an entrenched ideology, one that would dominate large segments of American political culture and transform the understanding of the politics of inequality.
The ideas of Friedman, Hayek, and their numerous followers were the product of a prolonged reaction to the emergence of the welfare state and the radical turn in American institutions that it set in motion. Understanding the state as anathema to human liberty, they saw in the oppressive Soviet state and in the modern welfare state as well the very antithesis of democracy, liberty, and progress. The extension of state into the economic realm was, in this sense, one of the key transgressions that classical liberalism specifically denounced. The extension of political claims into the economic sphere would therefore become the very issue at debate as the twentieth century progressed. The older ideas that inequality arose out of the system of wage labor, which made equality of condition impossible, and that equality of opportunity became impossible as monopoly capitalism evolved with industrialism gave way to an altogether different explanation for inequality. Both Hayek and Friedman saw interpersonal differences in skills, talents, and, at times, mere luck as the mechanism of inequality. They saw natural—or as Hayek termed it, “factual”—differences among individuals as the groundwork for inequality in economic rewards and outcomes. But they succeeded in taking the emphasis off of the institution of capital, the unequal exchange between worker and capitalist, and returning the argument to one about the efficacy of markets and not the economic constraints that capitalism as a system had always created.
These ideas become even more important in the light of older American ideas about inequality. When viewed in the context of the long history of the egalitarian tradition in American political and social thought, it is clear that the move away from an immanent critique of capitalism as a system of production—rather than as a system of distribution—was the central pivot on which the recent shift toward justifying inequality turned. It was one thing to reject the Marxian-inspired critiques of capitalism, but it was quite another to move understandings of inequality away from the production process itself, as the egalitarian critics of capitalism had done as early as the 1820s. The critique of inequality of the Jacksonian period had always emphasized the fact that the relation between wage earner and owner produced inequality. Independent of, and in most case quite prior to, Marx’s work, these critiques did not locate the market as the producer of disparities of economic power. Rather, they diagnosed the evolving division between ownership and the working class. The modernization of economic life—the birth of modern capitalism—was their object of inquiry and critique. Inequalities in material terms would simply reproduce themselves, causing a process of cumulative causation from which individuals would be unable to escape, a road to serfdom of a very different kind.
Although the critiques of capitalism and inequality had always been vibrant in American thought, the arguments in defense of capitalism, laissez-faire, and inequality itself had rested on the notion that progress had to come at the expense of equality, and it was this emphasis on a sterile notion of progress that held the various arguments—from Hamilton through Sumner—together. The libertarian attack on the incipient social democratic tradition and institutions that had emerged with the New Deal and the expansion of the welfare state cast its argument in a very different guise. Now it was freedom itself that embracing inequality offered. Class divisions were simply a mythology because inequality had to be viewed on an interpersonal basis and not as a function of asymmetrical power divisions. Inequality in economic terms was no longer seen to have political implications. The market had to be depoliticized, and this had become the task of the intellectual defenders of capitalism and freedom. The older anti-aristocratic discourse that had been vibrant throughout the nineteenth century—and that had slowly taken the form of a radical movement against class inequality by the early twentieth century—had dissolved into a radical vision to liberate the market from the shackles of state intervention and, in so doing, liberate individuals as well.
Redefining the idea of economic inequality and the mechanisms of its growth was also dependent on reconceptualizing the relationship between freedom and economic life that thinkers of the Progressive and New Deal Eras had advocated. The central insight of the advocates for state intervention in the economy was that corporate capitalism produced excesses of inequality—of economic condition, opportunity, and political power. They saw that only the state could steer economic activity toward the national interest and away from the plutocratic tendencies of the late decades of the nineteenth century. Implicit in this was the notion that the freedom of individuals, which they saw to be the political and ethical project of American politics, rested not simply on what we know as “negative liberty”—as classical liberalism had essentially held—but on positive liberty as well. This idea followed from the realization that political equality and individual freedom rested not simply on the removal of what Hayek referred to as the “coercion of some by others,”—that is, on the arbitrary external restraints placed on the individual and his actions and decisions—but on the context in which that individual was placed.28 Friedman also emphasized that a transformation of the liberal discourse—from its classical to its social form—had taken effect since “the catchwords became welfare and equality rather than freedom. The nineteenth-century liberal regarded an extension of freedom as the most effective way to promote welfare and equality; the twentieth-century liberal regards welfare and equality as either prerequisites of or alternatives to freedom.”29
Of course, the social liberalism of the early twentieth century had emphasized welfare, security, and equality not as moral ends in and of themselves but as means to a more complex, more nuanced conception of human freedom and agency. The experience of laissez-faire capitalism had shattered the confidence in the naïve assumptions of classical liberalism. The realities of capitalism and the ravaging effects of industrialism in the nineteenth century had shown that the doctrines of laissez-faire did not benefit prevailing notions of the public good and instead caused class antagonism and social fragmentation. The workers’ movement of the late nineteenth and early twentieth centuries had sought to deal not only with issues of wages and economic interest but also with despotic working conditions.30 Bringing the state in to regulate economic affairs was therefore more than a concern with wages and economic distribution; it was also a matter of the way everyday life had become structured by capitalism and industrialism. By replacing the assumptions of classical liberalism—a political doctrine that had largely matured before the evolution of modern capitalism—Hayek and Friedman put forth a notion of liberty or freedom that had effectively shed the 1930s idea that a certain degree of material equality was needed for democracy.
This new face of the inegalitarian tradition in American political and social thought resurrected the spirit of thinkers as diverse as Hamilton, Calhoun, and Sumner. But even though the intellectual ideas of laissez-faire and libertarianism were gaining ascendancy during the Cold War years, it would not be until the 1980s and 1990s that a new conception of inequality in American political thought would firmly take hold. There is little question that these ideas that redeemed capitalism and brought its mythic status back to life were also deeply concerned with differentiating the Western, but more specifically American, economic system from communist command economies. If the economic egalitarian tradition in American politics culminated in the formation of the welfare state, it must be remembered that it also spawned a liberal-capitalist consensus that preserved capitalism as an economic system, but with serious political safeguards on its excesses.
REDEFINING AND REORIENTING AMERICAN DEMOCRACY
This renewed ideological orientation merging liberty with markets would have a profound political and cultural impact on American democracy. The reorientation and redefinition of American democracy consisted of the turn away from what John Dewey had referred to as the “social liberalism” that was required for the modern age and back toward the individualistic liberalism that had become intellectually and morally suspect through the Progressive and New Deal Eras. But the new intellectual apparatus that was constructed over the course of the postwar period in the universities would find an elective affinity with the economic and geographical shifts that were overtaking the nation. The intellectual apparatus that had been slowly but definitively forming in the work of Knight, Mises, Hayek, Friedman, and many others soon would come to dominate almost every domain of social-policy debate. It would emerge also as a reified understanding of the American economy, its culture, and its self-consciousness. The reorientation of American democracy away from the expanded conception that was put in place with the New Deal and the social-welfare state and the redefinition of American democracy away from the ideals of economic citizenship and toward a reliance on market processes and the celebration of capitalism would come to pass.
The intellectual ideas developed by those supporting laissez-faire and libertarian economics remained on the periphery of policymaking in the United States until the last two decades of the twentieth century. How these ideas—which were, in effect, highly theoretical and essentially out of step with the culture of the liberal-capitalist consensus that had dominated American political and economic life since the beginning of the New Deal—came to gain primacy and hegemony is one thing; how they nested themselves in the cultural fabric of American politics and political culture is something else. The broad-based support for an ideology of inequality in contemporary America begins with this strand of economic and social thought, and its legacy has been a reorientation of American democracy and political life. The notion that ideas alone were responsible for the various shifts in the discourse on economic inequality throughout American history is patently untrue. New forms of consciousness and political culture arise from changes in institutional arrangements and shifts in economic life. Of course, ideas inform and legitimate these aspects of social and political life, but it is only when a hegemonic system of ideas is melded with new forms of material life that a decisive change in political thought and culture occurs. Ideology is important, but ideas still need to have some kind of material base for them to achieve dominance and influence the direction of social and political life as well as institutions.
With this in mind, it is important to investigate how the transformation of capitalism affected the evolving discourse of economic inequality in American political thought and political culture. With the sudden shocks of deindustrialization in the 1970s, the upward mobility of the traditional, white working class, and the emergence of postindustrial forms of working life, the very culture of work was dissolving traditional forms of class identity. Labor-market segmentation, the explosion of suburbanization, the weakening of labor unions and labor’s power to bargain for more equal pay, and the loss of any kind of political control over the market and the workplace, as well as a growing acceptance of consumerism and the depoliticization of the American electorate, all contributed to a general acceptance of economic inequality and its effects. In addition to this, class dissent had also been largely muted because of the rise of the administrative welfare state, which regulated the dissenting interests of the poor and working poor, steering their interests away from political demands for radical social, political, and economic changes.31
Indeed, after 1980 the doctrine of economic inequality would become a major feature of American political and social thought as well as American popular consciousness. But this was not the result only of a changed ideological course. The New Deal and social democratic projects that were set in motion in the 1930s and early 1940s were under attack from their inception. Also, thinkers like Mises, Hayek, Friedman, and others saw themselves as part of an intellectual tradition of “philosophical radicalism” that had its beginnings in thinkers such as Bentham, Smith, and Hume, as well as the democrats, classical liberals, and utilitarians in the eighteenth century.32 More important, they saw their ideas as resting collectively on scientific research into human psychology, market processes, and what they viewed as the pernicious result of collectivism and state intervention. Little was mentioned about the impact that economic inequality had on social cohesion, political democracy, or quality of life. Even less was mentioned about the ways that interests—something that is wholly lacking in the discourse of the defenders of inequality—would affect politics and the distribution of power. And even though the empirical evidence has been clear for decades, the orthodoxy of the libertarian position stubbornly persists even as inequality worsens when economic growth surges.33
In another sense, the rise of the new doctrine can be seen as the result of the shift from political to economic preoccupations. Mainstream economics had become, with its methodological modernization and its turn toward a new degree of scientific rigor, a discipline that was no longer concerned with how economic systems distributed power. The economic egalitarian tradition in American political thought had always linked economic power with political power, and it was one of the crucial moves of thinkers such as Mises, Friedman, and Hayek that they shifted discussion of power back onto the state and its monopoly on power and coercion. Perhaps even more remarkable was the way in which they seemingly ignored the growing concentration of monopoly capital as American capitalism continued to centralize and make competition in many industries—such as technology, chemicals, and heavy production—increasingly scarce.34 But libertarian ideas began to take on ethical primacy while at the same time becoming economic orthodoxy, and this would prove to be a crucial turn in the evolution of the American confrontation with economic inequality.
Shifts in American society, economy, and culture had much to do with forming fertile soil for these intellectual ideas, allowing them to develop into a new variant of the politics of inequality. The economic improvement that American working people experienced during the first two decades after World War II was significant in alleviating the older class antagonisms. Union power was at its peak during those years, and working people were able to extract higher wage rates from capital. The class antagonisms that had plagued American society throughout the previous fifty years began to erode. Inequality was diminishing, and an “affluent society,” characterized by consumerism and overall secular economic growth, began to emerge. But despite this, it was becoming painfully clear that urban poverty was a serious social problem and that the inequality between racial groups was acute. This gave rise to new ideological arguments about social mobility. But empirically, it was becoming evident that inequality was more complex than had been previously believed. Differences in skill sets, or human capital, it was said, were key to understanding why certain groups were unable to escape certain income brackets, which led to “dual” or “segmented” labor markets.35
In addition, as urbanization trends reversed and suburbs began to expand, the economic and racial divide between urban and suburban regions began to grow.36 Inequality therefore began to take on spatial and racial overtones. Whereas social stratification throughout the industrial era was fixed and centered largely in urban and industrial centers, today inequality between suburbs—themselves of very different economic resources—and inner-city areas that are, by and large, in economic decline, has created what Douglas Rae calls a “segmented democracy,” wherein spatial, racial, and class differences reinforce one another.37 This in turn has led to what Ian Shapiro calls “physical gulfs” between income groups, where the “segregation of the have-nots from the haves in capitalist democracies is real and increasing.”38 Deindustrialization would have a major impact on the formation of classes in America and transform the way that economic life was perceived by its participants.39 As industrial society moved toward postindustrialism, breaking down older class and occupational structures and replacing them with high-tech, information, and service jobs, the idea of fluid social mobility looked ever more persuasive.40
But even as the actual power that working people had within their places of work began to erode throughout the 1970s and 1980s and economic inequality began to surge, it has remained largely absent from American political discourse. The intellectual project that libertarian thinkers such as Mises, Hayek, and Friedman had set in motion was now fast becoming an acceptable explanation of the trends of American economic life. Their explanations of inequality were, however, deeply flawed. Although it has always been difficult, if not impossible, to deny interpersonal differences, what had actually caused inequalities was a combination of the weakening of labor’s power in the market accompanied by the shift from industrial to postindustrial forms of economic organization. The weakening of labor unions and the lack of new forms of worker organization to fill the resulting gap was paramount in giving employers more power to set wages. As industrial jobs dried up and moved overseas, the service-sector jobs that came to take their place were less generous in their wages as well. These were, indeed, the structural elements that led to the new material context for the acceptance of the liberal economic theories laid out during the Cold War.
What the libertarian ideas of the twentieth century did achieve, however, was not only the decontestation of the market as an institution but the decontestation and depoliticization of work and economic life more broadly. And it is here that we can see an important shift in the politics of inequality in American political thought and political culture. The concern with economic inequality in American history did not originate simply with its abstract political implications—as in the discussions of Adams, Hamilton, Madison, and Jefferson, among others—but also with the way that real economic life—how each individual lived everyday life and had to make his living—was a lived experience, a political experience of power relations. The labor radicals of the Jacksonian era who launched the egalitarian critique of capitalism, such as Byllseby and Skidmore, among so many others, saw the problem as—in addition to the older fear of the creation of a new aristocracy—the loss of equality in everyday life, that is, in the workplace itself.41 The emergence of the system of wage labor in the antebellum period created the foundations for a new kind of relationship between those who worked and those who owned, and this was seen as eroding the political ideas that underpinned America’s republican democracy. In fact, throughout the nineteenth century all the critics of inequality saw that inequality was overturning the values of liberty and leading to social dissolution and fragmentation.
These are dimensions of inequality that have been lost from view as economic liberalism has rooted itself within contemporary American political culture. The ideological arguments of laissez-faire capitalism and the libertarian link between free markets and political freedom have meshed with the transformation of American capitalism to provide a new, broad-based justification for economic inequality, severing the links that the long discourse on economic inequality in American political thought had always asserted among inequality, freedom, and democracy itself. Studies focusing on American attitudes toward inequality show a broad consensus even as they differ on details.42 Inequality is accepted and tolerated largely because of a dominant liberal ideology that has been able to justify the notion that inequality of outcomes is still a result of a fair distribution of opportunity.43 And the transformation of American capitalism from an industrial to a postindustrial context has seemed to justify this. This has been called the “logic of opportunity syllogism,” which states that an inequality of economic outcomes is acceptable since it is broadly perceived that “opportunity for economic advancement based on hard work is plentiful.” This dominant ideology—one framed and made more enduring by the intellectual ideas that have linked markets with democracy and justified the logic of markets as inherently fair based on the liberal principle of equality of opportunity—has also made the majority of Americans skeptical of redistributive programs that “are perceived as unnecessary because the stratification system currently presents ample opportunity to better oneself by individual efforts.”44
The ideology of liberalism therefore succeeded—within the new economic context of postindustrial, service-oriented capitalism—in cementing the notion that equality of opportunity is the only kind of equality that was “fair” in economic terms. Elites who had previously been skeptical of the ability of capitalism and market institutions to create equal conditions and equal opportunities—as in the shadow of the Great Depression and the Keynesian revolution that followed—gave way to a new generation of intellectuals and policymakers who openly embraced more liberal and even libertarian economic ideas.45 Confidence in markets and capitalism itself were renewed, along with the acceptance and proliferation among the intellectual defenders of inequality of the subjectivist notion of economic individualism put forth by neoclassical economics generally and more forcefully by thinkers such as Mises, Hayek, and Friedman. This perspective relativizes the material importance of wealth by arguing that there is no way to compare the interpersonal utility of wealth, for example, or inequities of income or property. Since no one can actually know, let alone measure, the differential in utility between two individuals of unequal wealth, redistribution becomes even less valid on moral, political, and legal grounds, as Richard Epstein argues in his defense of inequality, “Against Redress”:
Clearly no social ruler (pun intended) lets us know with certainty that wealth is worth more in the hands of a poor person than in the hands of rich person, so the determined economist can shipwreck the case for wealth transfers from the start by denying the possibilities of interpersonal comparisons of utility. I can assert that wealth is worth more to the poor person than to the rich person; you can deny that proposition. The rich person might use the next dollar to complete work on an invention that will improve the lives of others. The poor person might squander it on a drinking binge. We have no way of knowing if wealth is more useful to a poor than a rich person.46
Inequality has therefore become a permanent and largely accepted feature of the social topography of modern American political and social life. Through the ideological changes in the ideas Americans have had about economic inequality, its sheer existence and magnitude, its causes and its implications, the liberal economic ethic that had dominated American beliefs about equality has been transformed into a justification for inequalities of outcomes. It may be that Americans know that inequality has worsened and that it is, in fact, a bad thing; and they may indeed also be opposed to the idea that the wealthy pay less than their “fair” share of the tax burden. But in the end their alienation from broader issues of public policy and public concerns and material interests—resulting from an atomized liberalism that emphasizes narrow, misinformed self-interest—tends to weaken political awareness of regressive public policies that increase inequality.47 Whereas the notion of an equality of opportunity was the basis of the liberal economic ethic in the eighteenth century, it had always been seen that equalities of opportunity would translate into a rough equality of condition. Differences among skill sets and abilities would have different economic outcomes, but still it was assumed that equality of opportunity would lead to roughly equal outcomes. It was only with the emergence of capitalism and economic modernity—the decline of autonomous producers and the rise of wage labor and factory production in the early nineteenth century—that it would become clear that equality of opportunity in the face of wage labor and capital would be impossible.
But in modern American economic life, the myth of equality of opportunity has once again made a resurgence. It has changed attitudes toward inequality, making it not only more acceptable overall but legitimizing it as the result of the fair operation of markets. The reaffirmation of a liberal society has also meant the devaluation of the public sphere and the notion of the public or social nature of the individual. Markets can have effects only for individuals; they no longer affect communities. Costs are seen in terms of the individual, not society. Poverty is rarely seen as the result of cumulative causation, but of paucity of effort or laziness. Many Progressive and New Deal theorists and policymakers of the early twentieth century saw that a modern conception of democracy required a transformation of the older, classical liberal theories about society and individualism. This reorientation of democracy moved previous understandings of liberal individualism toward a richer conception of democracy, one that incorporated the economic sphere as an aspect of full democratic citizenship. The return to the framework of classical liberalism in the late twentieth century and the entire program known today as “neoliberalism” have therefore created a barrier to glimpsing the political dimensions of economic inequality.
This renewal of the ethos of classical and libertarian liberalism has been at the core of the redirection of American democracy. Since the degeneration of social liberalism in the 1970s, spurred on by the intellectual project of thinkers such as Hayek and Friedman, American democracy has reverted back to an atomistic conception of liberalism that has decontested the market and led to an overall acceptance, indeed, in many cases a justification of economic inequalities. Indeed, the complexities of economic inequality in America—from its racial or spatial correlates to its effects on quality of life and educational attainment—require attention.48 The critics of economic inequality, from various political orientations and historical periods, were consistent in linking inequality of economic outcomes with the demise of democratic life and politics; they were consistent in their emphasis on the connection between material inequality and political equality. These notions have been radically reversed. The toleration and acceptance of economic inequality in contemporary America—something that has baffled many political analysts—has been the result of both the persistence of a liberal economic ethic, which has placed emphasis on individual effort and opportunity over structural concerns, and the actual mechanisms of inequality and its transformation. The political dimensions of economic inequality have been masked by this transformation of liberalism. For an aversion to economic inequality to once again enter into the mindset of American politics, its political consequences will need to be made clear. Only by looking back through the egalitarian tradition that was so deeply rooted in American political thought will this new critique ever become possible.