Pre-Distribution of Wealth - More Fair

Predistribution: an unsnappy name for an inspiring idea

How far down the line of engineering markets to create fairer outcomes will Ed Miliband go? It could make him enemies

Wednesday 12 September 2012 04.00

Labour party leader Ed Miliband says 'We need to care about predistribution as well as redistribution.' Photograph: Stefan Rousseau/PA Wire

Ed Miliband has announced that Labour has a "new agenda", a new central big idea that will drive its economic message in the runup to the next general election. It may not have the snappiest name, but the idea of predistribution is a potentially powerful one. Much will depend on the directions in which it is developed, and whether Labour embraces a weak or a radical version of the politics of predistribution.

The core meaning of predistribution is simple to grasp. As the term's progenitor, Yale political scientist Jacob Hacker puts it, the aim of predistribution is "to focus on market reforms that encourage a more equal distribution of economic power and rewards even before government collects taxes or pays out benefits". Instead of equalising unfair market outcomes through tax-and-spend or tax-and-transfer, we instead engineer markets to create fairer outcomes from the beginning.

One could see this approach as the politics of the second-best. Now that the recession has made it impossible to help the disadvantaged by the old strategy of skimming-off a small part of the proceeds of growth, here's a way of doing it on the cheap. Indeed, Hacker sees predistribution as a way for social democrats to accommodate their ambitions to a more hostile world. In a world of weak economies, there is less need to raise revenue; and in a world of scepticism about government spending and hostility to taxation, there is less need for social democrats to change people's minds.

No doubt there is much that governments can do to foster greater equality in market outcomes without spending money. The concrete measures that Miliband has advanced, from capping rail price increases, to legislating for a living wage, from changing government procurement rules to encourage vocational training, to putting workers' representatives on corporate remuneration committees, are all workable, worthwhile policies.

But the real question is how far down this line Labour will be willing to go. As economists Michael Kumhof and Romain Rancière argue, in research published by the IMF, the best way of significantly flattening pre-tax inequalities is to raise the bargaining power of wage-earners. That means the government strengthening trade unions and collective bargaining arrangements. It's a classic predistributive policy. But it's outside the comfort zone of the more uncontroversial forms of predistribution, and shows that the politics of predistribution cannot be an innocuous or uncontroversial.

There is also an older and more radical approach to predistribution in the history of social democracy, even if it once went by another name. The Nobel prize-winning economist James Meade, in his 1964 book Efficiency, Equality and the Ownership of Property, championed the idea of a systematic regime of predistributive policies, which he called a "property-owning democracy". Despite the term's subsequent associations with the right and in particular with Margaret Thatcher's sell-off of council housing, Meade's version of a property-owning democracy was conceived as a stage in the development of social democracy beyond the welfare state.

Meade's property-owning democracy would go beyond the constraints of redistributive policies by looking fundamentally to change individuals' economic power within markets. It would do this by significant redistribution of control over both human and non-human capital. Meade's approach to predistribution thus involved a society where social justice was promoted not only by raising wages through substantial investment in education and training, but also by giving every citizen a capital stake, along the lines of a supercharged version of the baby bond that George Osborne threw onto the scrapheap.

Meade's idea was later taken up and further developed by the political philosopher John Rawls, in work published during the final period of his career. Rawls argued that predistribution in a property-owning democracy wasn't a second-best strategy for creating social justice, but was in fact far superior to traditional forms of welfare-state redistribution.

Predistribution of human capital, through education and training, fosters self-respect and economic agency, while predistribution of capital stakes gives people the kind of independence that comes with being less in thrall to the vagaries of the labour market. Those with a more secure economic position are free to refuse demeaning or badly paid jobs, and this in turn bids-up wages and reduces inequality.

Meade and Rawls, the two outstanding theorists of predistribution, conjure a vision not just of tinkering at the edges of current market outcomes, but of fundamentally changing the distribution of economic power in society. While both look to reduce the month-to-month taxation and redistribution of incomes, they nevertheless agree that real predistribution involves the aggressive taxation of wealth, through taxes on capital holdings and transfers, and especially on inheritance. Real, radical forms of predistribution do not so much allow governments to tax less in absolute terms; rather, they require a fundamental shift in the focus of taxation from income to wealth.

In its more radical forms, predistribution is a potentially inspiring project for social democrats who have come to see the limitations of the old ways of doing things. It's a project that promises a strategy to deliver abundantly on values of social justice, economic freedom, and equality of opportunity. But it's a project that involves going head-to-head with entrenched interests, breaking up existing concentrations of wealth and economic power. The politics of predistribution, if taken seriously, simply cannot be a politics without enemies.

What is ‘pre-distribution’?

A new buzzword is being whispered in the corridors of parliament and the inner sanctums of progressive think-tanks.


That word is ‘pre-distribution’, and those who utter it suggest it could not only win Labour the 2015 election, but build the elusive ‘moral capitalism’ that all parties seem to crave.

The idea behind ‘pre-distribution’ is that the government takes action to arrange how the market allocates its rewards. In essence, it simply relocates the focus of government intervention. Instead of redistributing the wealth of the economy after it has been generated, governments would act to channel it in a more equitable way in the first place.

According to the Smith Institute, ‘pre-distribution’ has a proud history. In the post-war period, trade unions, collective bargaining, and corporate governance arrangements all acted as agencies of ‘pre-distribution’, ensuring that the wealth of the free market was fairly shared out.

These agencies died out in the wake of deregulation and legislation that robbed unions of their economic power. Today, ‘pre-distribution’ is seen as something that the government should take responsibility for, through effective law-making and the careful regulation of business.

The Policy Network describes “policies governing financial markets, the rights of unions and the pay of top executives” as areas in which a ‘pre-distributive’ approach could reap dividends.

Abolishing banker’s bonus and linking the salaries paid to executives to those paid to the lowest earners within companies are two simple ways in which the wealth generated by the market can be channelled away from the pockets of the already super-rich and spread more fairly across the labour force.

A radical overhaul of banking regulation based on ‘pre-distributive’ principles could also have a long-term impact on how the financial powerhouses allocate their capital. Current proposals recommend that the ‘big four’ banks in the UK separate their high-street retail banking services from their investment banking activities. However, these reforms do not incentivise banks to invest in small and medium-sized enterprises (SMEs), or into those struggling areas of the economy- like the green sector- that desperately need a boost of finance capital to capture market share.

This could be remedied if banks were mandated to use a percentage of their profits to create regional ‘mini-investment banks’ to furnish struggling local businesses with the loans they need to tackle the current economic turbulence. Such services could be set up very quickly- each bank could choose to convert a single high-street branch in each town it has a presence into a ‘mini-investment bank’ for one weekend a month, until more permanent arrangements can be made.

The virtue of ‘pre-distribution’ is that it does not rely on unpopular policy devices like taxation and benefit provision, the standard tools of ‘redistribution’. Yes, Labour has to continue to work to change the culture of resentment that prohibits governments from making the case for higher taxation and an equitable welfare system. Yet at the same time this does not prevent the party from tackling the inherent inequalities of capitalism from a different angle.

A word of caution, however. ‘Pre-distribution’ cannot be held up as the holy grail that modern social democrats have been searching for. Some may believe that championing pre-distributive methods to reallocate wealth is enough to satisfy the short and long-term goals of the Left. However, it cannot distract from the fundamental aim of progressives throughout history- to engineer the transfer of economic and social power from entrenched elites to the public at large.

Louie Woodall is Assistant Editor of the Young Fabians Blog