What is wrong with the idea of basic income

The left movement is still stuck in a post-Soviet conjuncture. For the last 25 years it has been in an ideological hiatus, lacking any clear conception of what an actual socialist economy would be. The defeat of hitherto existing socialism in Europe obviously paralyzed the communist and social democratic parties. Each abandoned their visions of socialism and one way or another adapted to capitalism.

That fatalism seemed in the 1990s or early 2000s to have history on its side. Then came 2008, discrediting such accommodation in the eyes of a new generation. Such left revivals as have arisen since then Occupy, Podemos, Syriza the left turn in the Labour Party are, if anything, even more disoriented by the continuing post-Soviet ideological conjuncture, than the Blairites were.

Successful politics needs political economy for guidance. The old social democratic movement had Marxist economics, and then from the 40s Keynesian theory. Gordon Brown at least had his post neoclassical endogenous growth theory. What has the contemporary left got?

Academic Marxism has not been much help. Only a minority of them focus on political economy. Within that minority the focus is more on `critique’ than political economy. At best they study contemporary capitalism, but have nothing positive to say about what should replace it.

Instead we either have a series of regressions: back to Keynesianism, to a nostalgic Stalinism, or going even further back to to Trotsky, Kautsky, Marx. Even worse, we see the adoption of Hayekian doctrines like the citizen’s income.

Value form theory

I wrote earlier that academic Marxism has been of little use to the political left since it has concerned itself little with political economy. Whilst empirical economic research has been undertaken, it mainly stays at the level of interpreting the capitalist economy rather than explaining how to change it into a socialist one. If you are going to seek change, you need to study not only the institutions of capitalism but also to try and learn lessons from previous struggles to replace it. It is all well and good to have theories about capitalist price systems and the rate of profit, but if you have no theory of socialist political economy you are restricted to protest politics rather than putting forward programmes for economic change.

There is a relapse into an entirely academic ‘Marxology’, becoming expert in interpreting what Marx meant. By itself this would be a harmless, if useless, pursuit, having no more impact on politics than a life devoted to the study of Hegel or Kant. What makes it postively noxious, is that the interpretations channel as Marx by way of Hayek. The German New Marx Reading, explicitly attempts to wrench Marxist theory from its position as an ideology of the Communist movement. A key part of these positions has been a critique of what they describe as the objectivist interpretation of value, and the theory that there is a general tendency for the rate of profit to fall¹. They argue that value can not exist indepently of money, that there is no value without prices, and that abstract labour is something specific to capitalist society².

They accept on the surface, Marx’s idea that value is abstract labour time, but divorce this from the actual division of labour in production. Instead labour becomes abstract by being represented as money when a commodity is sold. In effect this removes the worker and the labour process from being the cause of value, and makes the market the cause. Abstract social labour is brought into being, in this interpretation, by the act of sale. This has certain logical consequences:

• Labour values can never be known or determined outside of the market.
• There is no abstract labour without a market.
• There is therefore no abstract labour in socialist society.

This is all nice and critical, but critically it leaves value theorists theoretically defenceless if faced with the von Mises critique of socialism. He had argued that without money it was impossible to make any rational economic choices, and, in consequence a socialist economy which abolished money would degenerate into a morass of inefficiency. The only alternative to money he said, was the use of labour time, since, like money, that would allow the relative cost of two alternative ways of making something to be compared.

the labor theory of value is inherently necessary for the supporters of socialist production in a sense other than that usually intended. In the main socialist production might only appear rationally realizable, if it provided an objectively recognizable unit of value, which would permit of economic calculation in an economy where neither money nor exchange were present. And only labor can conceivably be considered as such. (von Mises, [1935] )

But labour time, Mises argued suffered from two fatal defects. On the one hand it fails to take into account natural resources, on the other it faces insuperable problems with reducing complex labour to simple labour. As such Mises rules out labour time as a basis for calculation. Let us for now ignore Mises first argument about natural resources, since we know that in practice the market economy he championed, itself leads to wholesale destruction of natural resources. If we focus on the second we see that leading value form theorists argue that only in market exchange can complex labour be reduced to simple labourHeinrich and Locascio, [2012, page 52]. So the logic of Heinrich’s position too, is that without a commodity market, there is no reduction to a single scalar measure of effort, and thus no rational economic calculation. Even the most eminent Marxist commentator implicitly lines up behind the Thatcher’s old TINA slogan ( There Is No Alternative – to the market).

Citizens income theory

Abandoning the idea of radical change in property relations, some on the left are picking up an old right wing idea that the state should pay everyone a basic survival allowance. When I was an economics student at Manchester University in the early 70s we were taught this doctrine by the monetarist Professor Laidler. The idea was popular with people like Hayek and Friedman. The argument for it was that the existing welfare state, by paying means tested benefits created a disincentive to take up low paid jobs. The answer they said, was to abolish all welfare benefits, abolish free education, and instead pay a small state stipend to everyone to enable them to survive at a bare minimum level. Parents would be given either additional cash or vouchers to pay for educating their children in privatised schools.

As far as I know, the first Marxist to endorse this approach, was another Manchester professor Dianne Elson³ (Elson, [1988,Elson, [2009]). It has subsequently been widely discussed. But from a socialist standpoint basic income is a poor policy. We will start by giving some concrete figures for what a citizen or basic income would involve today in the UK. Then we will go on to look at its effect on the class distribution of income. Finally we will contrast this neo-liberal policy to the historic aim of the socialist movement.

I make the starting assumption that the basic citizen income could not be lower than the state pension. It is proposed to abolish all other benefits including the state pension, so to prevent a deterioration in pensioners living standards this sets a floor of £150 per week. We need to work out what this would imply for tax rates.

Our initial assumption is that for a person on an average salary there should be no change to their take home pay as a result of the citizen income, that what they gained in citizen income they would pay in extra tax, whilst those on below average salary would be better off. We also assume that the threshold of £11,000 at which people start paying income tax does not change, and the £43,000 threshold at which they pay higher rate tax also stays the same.

In addition to paying income tax people have to

		income tax	Nat ins
First estimate		Calc	Calc
Average UK salary in	2016	£27,500.00
threshold		£11,000.00	£8060
high rate threshold		£43,000.00
Taxable		£16,500.00	£19,440.00
Base rate		20%	12%
Current tax or NI paid		£3,300.00	£2,332.80
Citizens income per week		£150.00
	per year	£7,800.00
New pre tax income		£35,300.00
New taxable income		£24,300.00

Assume that average earner just breaks even on the citizens income. They are getting an additional £7,800 and must pay an equivalent in extra tax. We have to work out by how much the income tax rate would have to go up to take an additional £7,800 out of their new taxable pay of £24,000. They currently pay £3,300 income tax, afterwards they will have to pay £11,100.

		Tax	NI
Additional tax		£7,800.00
Total income tax		£11,100.00
New base rate of tax		46%	12%
New higher rate		66%	12%

The base rate of income tax has to go up from 20% to 46%. If we include the effect of national insurance, someone on average wages would be paying a marginal rate of income tax plus national insurance of 58%, if you add in the national average rate of occupational pension deduction of 5% you find that the marginal deduction rate on average pay would be 63%.

But what we have up to now is only a rough estimate. It is an underestimate since it fails to account for those in the working age population who are economically inactive due to child care, sickness or unemployment. I leave out pensioners here, since their £150 a week pension is already being met out of exisiting National Insurance. Currently 21.7% of working age adults are not in employment, 78.3% are in employment. So each working age adult will have to meet the citizens income of [21.7/78.3]=0.28 of an inactive person’s citizen income.

We can scale this down due to the effect of Employment Support Allowance, which is already paid to the ill or disabled, and the Job Seekers Allowance going to the unemployed. Advocates of citizen income assume that these would be abolished. So the average employed person will have to pay the difference between ESA and the new citizen income for these people.

Total employed	31500000
Total on ESA	1320000
Economically inactive	8729885
% inactive on ESA	15.12	%
% inactive who get new money	84.88	%

Adjusting for the effects of ESA and JSA gives us :

		Tax	NI
Inactive per worker		0.28
Fraction that is new money due to ESA		0.2352344463
which is		£1,834.83
% unemployed		0.048
JSA		78
increase for each unemployed		£3,744.00
Number of unemployed per employed		0.061
Cost per employed		£229.52
So total additional tax		£9,864.35
Total tax		£13,164.35
New Tax rate		54.2%	12%
total marginal tax+ni		66.2%
Allowing for 5% occupational pension		71.2%
New upper tax rate		77.2%	12%
New upper marginal rate tax +NI		89.2%
Allowing for 5% occupational pension		94.2%

Using this we can compute the breakeven point for who will gain or loose from the scheme. Anyone with an income above £26,000 would loose.

Note that the upper deduction rate of 94% will cut in at a salary of £35,200.00. This amounts to what is effectively a confiscatory tax rate above £35K. It is clearly not worth calculating the effect of the Additional Rate which is currently at 45% on income over £150K. This would rise to 94.2% and allowing for pension deductions, deduction would be effectively 100% on salary income over £142,200. So a side effect of the citizen income is to introduce a maximum salary of around this level.

This may well be desirable on grounds of equity and social justice. It is the effects on people lower in the class structure that are more significant.

The take home pay now of a single person on average wage is £20,492. After introducing the citizen income the take home pay with citizens income and higher tax will be £17,052; clearly a substantial reduction.

A couple with both partners earning average wages would also loose out by about £6,000 a year. On the other hand, for a husband and wife in a rather traditional family arrangement, with only one partner working, there would be a £4,360 improvement in real income. It is debateable whether an income structure that incentivises women to stay at home would be a good thing.

Whilst the average wage earner will be worse off, the median wage earner will be slightly better off, by £16 a week. Recall that 50% earn below the median wage is the wage; a slight majority of wage earners would be better off.

But the political acceptability of the program is debatable. Consider pensioners first, the largest group currently relying on state benefits. The important point to recognize is the for them the citizen income simply replaces the pension on a £ for £ basis. They may well feel that having contributed National Insurance all their life, they are implicitly loosing out if every adult under retirement age gets the equivalent of their pension. It will do nothing to benefit somebody on the existing state pension, and will disadvantage all those pensioners with an occupational pension above £3,200 who will be paying the new much higher rate of income tax on their pension. Whereas a wage earner on median income £22K would be slightly better off, any pensioner whose state pension plus occupational pension was more than £11K, half median income, would be worse of. So pensioners, a group with very high voter turnout, have no reason to favor it, and a good reason to vote against it.

Next consider the impact on workers in full time employment. With a break even threshold of £26K or £500 a week, we need to see what fraction of employees would benefit and what fraction loose. We know that the median worker will benefit slightly, so that means at least 50% will gain. The latest Annual Earnings Survey for 2016 indicates that 40% of employees earn more than £516 a week, so slightly over 40% of employees will loose out. At best, it would be in the interest of a bare majority of those at work to support the measure.

The group who would clearly stand to gain are those who are of working age, but not employed. They would see a clear improvement in their income. This includes the unemployed, the disabled, and those, in the main women, who are at home looking after children.

There are 9.2 million pensioners who would be against, 9.4 million economically inactive who stand to gain and 33.6 million workers who might split something like 55/45 for versus against. On simple calculations of economic self interest a small majority 27.9 million against 24.3 million would be winners. But if one takes the differences in voter turnout – higher for pensioners than for the economically inactive, higher for the better paid than the lower paid, it is doubtful that the proposers of such a measure could pass it even in a referendum. In June last year, a considerably more generous citizens income proposal of more than £400 a week was overwhelmingly voted down in a Swiss referendum, with only 23% voting yes.

This overwhelming rejection must in part be attributed to the strong moral feeling that most workers feel against people getting something for nothing. Even if they might gain marginally, they will oppose the idea that people who do nothing will gain much more. This is a sentiment that, in the past, the socialist movement cultivated. Socialists argued that it was unjust that a few idle rich shareholders, should be paid out of the work done by others. They argued that there should be special benefits for those in need – child benefits, sickness benefit, free treatment for the sick. These arguments chimed with existing moral sentiments.

The original philosophy behind basic income proposals was the complete reverse. It came from neo-liberal economists who where absolutely fine with people getting unearned income. Their entire system of economics was a justification for unearned interest, profit and rent. They were also dead against people getting needs based benefits. The basic income proposal was a wedge to be used to destroy the existing welfare state, and the moral principles on which it stood. Once it was in place, they would go ahead with charging for all sorts of things which were now distributed according to need, and cancel existing needs based benefits. Give people enough cash to barely survive, and then leave the rest to the magic of the market. Minimum wage legislation would go, as would unemployment benefits. Since people would not loose any benefits by going to work, and since their survival was already largely subsidized by the state they would be willing to take on work for lower wages. It would be the ideal support for the gig economy of micro-jobs.

There would be a downward pressure on the lower end of the labour market. The net effect on the class distribution of income would be that those on slightly above average wages subsidize low wages, whilst low wage employers reap the benefit, something which already happened with Gordon Brown’s tax credit scheme.

There would also be a downward pressure on production, since the very high marginal rate of wage taxation needed to fund the citizen income creates a strong incentive to work shorter hours. People on part time work generally benefit, but a lot of people in full time work loose out, so they are incentivized to work part time. Combine this with economic backwardness and inefficiency that always accompany low pay rates, and you have a structure of incentives that penalizes economic growth and efficiency. Hours worked will fall, whilst productivity stagnates. Remember, it is high wages that incentivize firms to improve labour productivity. Any measure that holds down wages slows down productivity growth.

It may be objected that my entire costing has been based on two assumptions:

1. That the cost of the citizen income must be fully funded by taxation.
2. That the tax will be raised in the form of income tax.

Were the first criterion not met, the result would be seriously inflationary, so that is not controversial. But could the cost not be met, at least in part, out of taxes on companies, or taxes on property?

In principle yes, but in practice no. Taxes are paid by the working class, the middle class and the modestly rich, but not the super-rich. Men like Trump do not pay tax. As the evidence collected by Winters, [2011] and Piketty, [2014] make clear, in a capitalist economy wealth flows to the top, and the oligarchs are able to so write the tax rules that they pay little or no tax. They can afford to hire sufficient tax advisors, accountants and lawyers to avoid any tax net that the state tries to throw over them. Only wars and revolutions threaten their wealth.

There is a striking contrast between the basic income proposal, which aims to retain the capitalist economy, simply streamlining the welfare system, and the traditional aims of socialists:

The liberation of labor demands the transformation of the means of production into the common property of society and the associative regulation of the collective labor with general employment and just distribution of the proceeds of labor.⁴

The private ownership of the means of production, once the means for securing for the producer the ownership of his product, has today become the means for expropriating farmers, artisans, and small merchants, and for putting the non-workers capitalists, large landowners into possession of the product of the workers. Only the transformation of the capitalist private ownership of the means of production land and soil, pits and mines, raw materials, tools, machines, means of transportation into social property and the transformation of the production of goods into socialist production carried on by and for society can cause the large enterprise and the constantly growing productivity of social labor to change for the hitherto exploited classes from a source of misery and oppression into a source of the greatest welfare and universal, harmonious perfection. ⁵

The UK left are all familiar with :

To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.⁶

which expressed, more concisely, basically the same goals as German Socialism. The key goal was the abolition of exploitation by the abolition of the capitalist system of private ownership. Rather than redistributing income within the working classes, they aimed to abolish all property income so that the whole net product would go to the working classes.

References

[Cockshott 2013]

Paul Cockshott. Heinrich’s idea of abstract labour. Critique, 41 (2): 287-297, 2013.

[Elson 1979]

Diane Elson. Value: The Representation of Labour in Capitalim. CSE Books, 1979.

[Elson 1988]

Diane Elson. Market socialism or socialization of the market? New Left Review, (172): 3, 1988.

[Elson 2009]

Diane Elson. Socialized markets, not market socialism. Socialist register, 36 (36), 2009.

[Heinrich and Locascio 2012]

Michael Heinrich and Alex Locascio. An introduction to the three volumes of Karl Marx’s Capital. NYU Press, 2012.

[Piketty 2014]

Thomas Piketty. Capital in the 21st century. 2014.

[von Mises 1935]

L. von Mises. Economic calculation in the socialist commonwealth. In F A Hayek, editor, Collectivist Economic Planning. Routledge and Kegan Paul, London, 1935.

[Winters 2011]

Jeffrey A Winters. Oligarchy. Wiley Online Library, 2011.

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Footnotes:

¹Michael Roberts has a good rebutal of the argument on the rate of profit here : https://critiqueofcrisistheory.wordpress.com/michael-heinrichs-new-reading-of-marx-a-critique-pt-1/

²For an argument against their idea of abstract labour see Cockshott, [2013].

³Also a early value form theorist : Elson, [1979].

⁴Socialist Workers’ Party of Germany, Program,1875.

⁵Minutes of the Party Congress of the Social Democratic Party of Germany,1891.

⁶British Labour Party Constitution, 1918.

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