In other words, “well-functioning markets — characterized by mutually beneficial exchange among political equals — lead to egalitarian outcomes with respect to income and well-being.”

As the subtitle indicates, the book defends certain moral and political values, but it is based on an extensive review and analysis of the empirical evidence on inequality. The author, who holds a doctorate in public affairs from Princeton University, is the principal economist at Gallup and a senior fellow at the Brookings Institution.

Income and wealth inequality have been prominent topics in the media and public debates for several years now. It’s commonly said that, in the United States, the top 1% (about two million individuals) in the pre-tax income distribution increased their share of all pre-tax income from 10% to 20% between 1980 and 2014. Several recent studies, reviewed by Rothwell, argue that this estimate exaggerates inequality, but few analysts dispute that it has been increasing. The threshold to get in the one-percenter group is an annual income of $477,500 (or $268,937 if we consider only the top 1% in labor income). Rothwell emphasizes that all these numbers are estimates that are very difficult to calculate not only because data are limited but also by the very nature of complex constructs like income, wealth, and inequality.

Among the ideas debunked by A Republic of Equals is the frequent claim that the growth in inequality has been caused by globalization. Only 16% of one-percenters in the United States work in trade-oriented, goods-producing sectors. In rich countries, most people, including the rich, work in services. In America, two-thirds of the one-percenters work in health care, education, public administration, finance, real estate, and business services. Rothwell also argues that “trade protectionism is immoral from the perspective of justice” — poorer individuals are the people most harmed by protectionism.

Egalitarian market / The first crucial argument in A Republic of Equals is that human inequality is mostly due to environmental factors, not genetics. Rothwell’s review of the statistical and genetic evidence suggests that only 13%–40% of the variation in cognitive ability between individuals is explained by genes. (The 40% figure comes from studies of twins, but more recent genomic studies have revolutionized the field and gravitated to the lower bound.) The so-called Flynn effect — the fact that measured IQ has increased with time — would be unexplainable with a purely genetic explanation of cognitive ability. This is a complex and controversial topic, but many readers will be persuaded by Rothwell’s argument that most human differences are explained by environmental factors such as education, family, or where one lives.

According to the author of A Republic of Equals, education plays a major role in cognitive ability and the acquisition of useful character traits. He cites much evidence that IQ, measured by standard tests, increases with education. Unequal access to education is then viewed as a major impediment to cognitive ability and, thus, to future income and health. (This claim clashes head-on with Bryan Caplan’s thesis in his 2018 book The Case Against Education, which argues that education does not contribute much to increasing intellectual abilities, but only to revealing or signaling them, and that individuals spend too much time in school. See “A Degree Too Far,” Fall 2018.)

Rothwell demonstrates the absence of any significant difference between the cognitive abilities of different racial groups. Jews’ and Asians’ abilities have been exaggerated while blacks’ have been underestimated. Citing tests done at the time, he notes that “Northern black people had higher IQs than recent Jewish immigrants in the 1920s.” It is only during the last half-century that the IQs of Jews and Asians have surpassed those of whites and blacks. Rothwell provides much evidence for this fascinating claim. “No group of people,” he writes, “has persisted in maintaining sustained levels of high status for long enough periods for population genetics to explain their success.”

The individuals who show better results at IQ tests or in life success have simply invested more in education. But why have they done this? Because — if I read Rothwell correctly — their circumstances incited them to and because they did not believe that their futures were genetically predetermined. The children of immigrants, who often overtake the natives, are a case in point.

If individuals have natural abilities that vary only within a narrow range, one would expect that, in a context of free exchange, their productivity would not diverge wildly. This implies that their remuneration also would not vary wildly because economics demonstrates that, in a free market, remuneration follows productivity: more productive persons are paid more because they contribute more to what consumers want. One is paid the “value of his marginal product,” as economics textbooks say. Free markets, Rothwell writes, establish a “merit-based egalitarianism.”

He calculates that the current variations in remuneration are much greater than those in cognitive capacity and personality. Personality is measured by character traits, notably extroversion/​enthusiasm, self-discipline/dependability, and anxiety. Crunching the data from a large Bureau of Labor Statistics survey, he estimates that individual differences in cognitive ability and personality (the combination of which he calls “merit”) explain less than half of the existing level of income inequality.

The second crucial argument of A Republic of Equals, then, is that inequality comes from “barriers to free exchange, put in place by powerful interest groups” — and approved, promoted, and enforced by governments. Without those barriers, “inequality in income would fall by half,” Rothwell claims, and the need for government redistribution would be drastically reduced.

The exploitative state / Rothwell persuasively claims that inequality is mainly caused by the exploitative state (though he does not use that term). Besides such interventions as business subsidies, trade protectionism, and overreaching intellectual property protection, he argues that the state generates inequality in two main ways: zoning laws and the anticompetitive privileges granted to elite professionals. The state blocks market access to many people.

Zoning falls under the jurisdiction of local and state governments. It was introduced in 1916 in New York City as a way to keep immigrants and blacks out of white neighborhoods through restricting construction of apartment houses, the height of buildings, and housing density. Without such coercive laws, it was just too tempting for white residents to rent apartments or sell houses to blacks offering higher prices to compensate for discrimination. The free market is an efficient mechanism against discrimination.

The federal government itself intervened in favor of housing segregation by proposing standard zoning guidelines. It also practiced “red-lining” — that is, assigning poor credit ratings to neighborhoods that did not meet accepted racial and ethnic characteristics. Rothwell could have added that, in the last quarter of a century, the feds have turned 180 degrees and started punishing banks for not lending in poor and minority neighborhoods. Note also that until the civil rights movement, governments offered little protection against the segregationist intimidation and violence often used to keep blacks out of white neighborhoods.

The consequence of these political restrictions to equal housing access are still with us. Blacks are concentrated in poorer neighborhoods with more crime, detrimental influences on children and teenagers, and bad schools. Rothwell cites research to the effect that moving out of a segregated neighborhood before age 13 increases college attendance by 2.5 percentage points.

According to Rothwell, much of the current discrimination against black Americans finds its source in their segregated neighborhoods. Blacks are subject to more searches and more abuse by police. Young, unarmed black men are three to six times more likely than their white counterparts to be shot by police. Blacks are charged with more crimes than whites, even in the categories of crimes that they commit less, such as drug crimes. That’s another fascinating argument in A Republic of Equals: there is apparently no evidence that black males age 18–30 use or sell drugs more than whites of the same age. Yet, Rothwell estimates that the odds of these black men being arrested on drug charges are 3.8 times higher than their white counterparts.

It is not only by repressing the most disadvantaged individuals that governments have contributed to inequality; it is also by protecting the most advantaged, including the one-percenters. The real “evil rich,” as some people would say, may not be the ones who immediately spring to their minds, and not for the reasons they suppose. Consider that “just 25% of total top one-percent income comes from stocks” and that “executives are a small minority of top earners.” On the other hand, elite professionals constitute more than one-fourth of the richest 1% and they benefit from government protection of their markets.

Physicians, surgeons, and dentists constitute 8%–16% of the one-percenters, depending on data sources. They are protected against competition by powerful professional corporations — the equivalent of medieval guilds — such as the American Medical Association and its local affiliates, which have obtained licensure laws restricting the supply of their competitors (be they other doctors, nurses, midwives, or other health practitioners). This cartel also imposes a monopolistic model for the production of doctors’ services: the standard honoraria system and the interdiction of many forms of medical businesses. In the United States, the probability of making it to the top 1% if you are a physician or surgeon is 22%.

A similar analysis applies to lawyers, who are the second most protected category of professionals. The public laws obtained by their professional organizations (the American Bar Association and its state equivalents) guarantee them a monopoly for most legal services, pushing up their fees. As a consequence, lawyers account for more than 7% of the one-percenters in America. (Washington state’s recent creation, after a hard-fought battle, of a limited license for non-lawyers to provide legal counsel and prepare documents in the field of family law has opened a small breach in the lawyers’ monopoly. The results of this policy change suggest that many legal services can be offered for half the price of a full-fledged, cartel-protected lawyer.)

About 10% of American one-percenters work in the securities and investment industries, mostly in investment banks and hedge funds. These people are not protected by specific professional corporations, so they are a different sort of “elite professionals.” But Rothwell believes that the market in which investment banks and hedge funds operate is “fundamentally not competitive.” The reason is that federal regulation prevents individual investors, except very wealthy ones, from investing in hedge funds and forbids the latter to advertise. With pension funds and other institutional investors as their main customers, hedge funds face attenuated competitive pressures, allowing them to charge much higher fees than other investment funds and to enrich their one-percenter owners and traders.

Rothwell could have better developed this argument. The careless or biased reader may get the impression that the lower level of regulation for hedge funds (as the counterpart for keeping ordinary individual investors at bay) is to blame. But Rothwell does identify the real culprit:

The bottom line is that the SEC’s authentic but misplaced concern for ordinary Americans has resulted in the wholesale transfer of trillions of dollars from plumbers, pipefitters, teachers, automakers, and families with retirement accounts to super-elite billionaires. Rich investors, like other elite professionals, are given privileged access to markets.

All in all, considering financial sector managers, professional and other business service managers, health care professionals and managers, as well as legal service providers, Rothwell calculates the increase of their incomes from 1980 to 2015 accounts for 98% of the total income increase of the one-percenters over that period. If this estimate is correct, it is a crucial fact.

Trusting Leviathan / Despite Rothwell’s technical virtuosity and identification of real problems, his analysis and manifesto could — and should — have gone further. After the horrors of government intervention he depicted, he still trusts Leviathan too much. He seems to assume that politicians and government bureaucrats have disinterested intentions, which they dutifully translate into effective policies. Perhaps he thinks the past horrors he described were one-time mistakes.

His trust in the state depends partly on his political philosophy. And therein lies the Achilles heel of Rothwell’s manifesto. As he explains, he follows the philosophy of the late Harvard philosopher John Rawls. “I define a just society,” Rothwell writes, “as one that grants and defends the basic liberties of individuals, while it maximizes the welfare of the least advantaged members under conditions of political equality and provides equitable opportunities for everyone to do the work that naturally suits them.” Such principles of justice (liberty, equality of opportunity, and justice for the least advantaged), he argues, are consistent with what science shows is man’s “innate sense of fairness and reciprocity.”

The danger of this philosophy lies in the conflict between, on one hand, equal liberty and, on the other hand, attack on those who happen to have been favored by birth, good parents, entrepreneurial flair, or just plain luck. Rothwell insists that he is not against making money by serving others in the market, but only against inequality that is not justified by “merit” — that is, by differential cognitive abilities and character traits. But there is more than merit in life. A great entrepreneur or a great singer does not make his fortune, or at least not all of it, by “merit,” but through providing better than others what consumers value most. It is true, however, that Rothwell finds half of current inequality justified, making his criticism more muted, and more reasonable, than others’.

His trust in the state depends partly on his political philosophy. And therein lies the Achilles heel of Rothwell’s manifesto.

James Buchanan’s egalitarian and contractarian theory would provide a solid foundation for Rothwell’s ideas. Buchanan, an economics Nobel laureate, favored a wide margin of “equality of opportunities” and expressed appreciation for Rawls’s theory. But contrary to the Harvard philosopher, Buchanan understood the ever-present danger of Leviathan. Moreover, instead of looking for some “just society,” as philosophers have been doing for two and a half millennia without a resolution in sight, Buchanan took individual consent as the foundational moral-political value. (See Buchanan’s 1975 book The Limits of Liberty: Between Liberty and Leviathan.) As political philosopher Anthony de Jasay would say, this approach makes a lesser demand on our moral credulity.

On the more radical side, de Jasay provides an important perspective that is missing from Rothwell’s philosophical reflections: how slippery the concept of equality is. Equality in one dimension — say, “merit” — implies inequality in another — say, the liberty to leave one’s money to one’s children or offer consumers what they want. (See “The Valium of the People,” Spring 2016.) Many analysts believe that the decline in marriage among the non-rich explains part — perhaps most — of the increase in inequality during the past half century. An equal right to marry or equality of “merit” — will the real equality please stand up? Equality is more difficult to identify than Rothwell seems to believe.

It is worth noting that the argument for classical liberalism or libertarianism does not require the sort of natural equality or quasi-equality defended by Rothwell. Formal, legal equality is what matters.

Another question that needs clarification is, what are these “public goods” that must be “provided to all through public funding and on an equitable basis” (assuming we know what “an equitable basis” means)? Rothwell’s list includes security (the usual suspect), education, and “the infrastructure of commerce and production (e.g., roads, bridges, ports, environmental resources, telecommunications).” Granted, Buchanan’s concept of public goods is also wide, but Rothwell’s looks even wider when he adds “protection from injury or disease through healthcare, and relief from poverty, job displacement, and disability.” Buchanan’s theory incorporates built-in features that are more effective at preventing an indefinite expansion of public goods.

And what is “society”? It does not think, speak, or act in any meaningful (non-metaphorical) sense. It cannot grant anything. Nor is it “a just society” that “protects its most vulnerable members by drawing from the resources of its strongest”; it is the state, which is not the same thing. Perhaps one can conceive of the state as created by a social contract, à la Buchanan or Rawls, but much prudence is required — a lesson from Buchanan’s work. We may wonder what a “just society” or “the justice of a society” means. An individual can be just, but can a society?

There is no big social pot from which money — that is, resources — can be freely taken. Takings always come from specific individuals. The challenge is to justify them. I suggest that Rothwell is prisoner of a philosophical approach that does not really provide such justification. And if there is no justification for takings, politics is just a choregraphed combat to grab resources, where the most powerful win at the expense of the others.

Regulatory failures / Regulation,” Rothwell writes, “should be designed to make markets function optimally.” Yes, but how do we know it will do this? Among the examples of Rothwell’s tolerance for “smart” regulation, he seems to blame a lack of it for mortgage lenders targeting minorities before the Great Recession. He does not mention that, under the Community Reinvestment Act, the federal government was pushing banks to lend to poor and minority neighborhoods. It’s first and foremost the federal government that, in the name of “social justice,” was pushing mortgages on potential homebuyers who could not afford them.

Another example is Rothwell’s apparent tolerance for licensure of hair braiders, manicurists, cosmetologists, nail technicians, plumbers, midwives, and a host of other occupations under weak justifications concerning public health and safety. An occupational license often requires an unblemished criminal record, which as Rothwell himself acknowledges is not easy to maintain in some disadvantaged groups. He cites a sociologist apparently claiming that this low-level licensing, instead of preventing disadvantaged people from trying their hand at the market, actually helps women and blacks “because it clarifies the skills, credentials, and pathway needed to gain entry.” Come on! Leviathan bans people from working, and we should applaud with gratitude when it provides a narrow pathway to work that it has otherwise blocked?

I also find Rothwell’s discussion of certain “restrictive covenants” disappointing. He specifically writes of contracts whereby homeowners of a given neighborhood contractually obligated themselves to not sell their houses to non-whites. Rothwell equates those contracts to mob violence against blacks or to government-organized segregation. As appalling as the contracts were, his equivalence goes too far. The restrictive covenants were private contracts over private property. The homeowners who signed them were not obliged to do so. The contracts were declared unconstitutional in 1948, but they had probably already been, or were being, superseded by government-imposed zoning, which is a much more efficient way of restricting who can live where.

In this matter as in others (think of free speech), one must distinguish the private domain from the public domain. Rothwell should understand this. Governments have continued to use zoning to segregate neighborhoods, directly or indirectly (through density restrictions), intentionally or not.

Who are the real enemies of free market exchange? His analysis often shows that they are governments. For example:

In 1936 the [Federal Housing Administration] created a manual that advised how mortgage appraisers should evaluate homes. It explicitly stated that restrictive covenants, combined with exclusionary zoning to prohibit multifamily housing, offered the best protection of a home’s value and should get the highest appraisal.

It is tempting to believe that this sort of interventionism cannot be espoused by democratic governments. Obviously, it can be, and it often is. Majoritarian governments often amplify, instead of smothering, the mob’s prejudices. Zoning is more local and more democratic (that is, majoritarian) in the United States than in Europe (as Rothwell notes), and for that reason it is more responsive to local property owners who want to reduce the supply of housing and boost the price of their own properties.

Nudging Rothwell forward / Why should we trust government with the power to coercively impose the latest fad in social engineering? Even if one specific fad happens to look just, the next one may not be. Rothwell reminds us of the horrible eugenics fad that started in the Progressive Era and didn’t subside in some states until well into the second part of the 20th century. It led to the coercive sterilization of more than 60,000 Americans that good bureaucrats, empowered by good politicians, deemed to be feeble-minded, defective, or socially inadequate. (See “Progressivism’s Tainted Label,” Summer 2016.) Even assuming that government potentially amplifies the amount of goodness in the world, it also certainly amplifies the consequences of errors.

The best solution is to let individuals be free to make their own private choices, even when, to some of us, they appear unwise or bigoted. The only clear restriction should be that private actions not cause direct harm to others — “harm” being taken in a restrictive, perhaps only physical, sense. There is much of this enlightened approach in Rothwell’s interesting book. Many people who don’t understand the benefits of free markets, and even some who do, can learn much from A Republic of Equals.

My criticism is meant to nudge Rothwell and his ideological companions forward. Don’t grant the state new glorious missions; on the contrary, humble it! Don’t extend government powers, limit them! Don’t grant government the power to discriminate among citizens! A Republic of Equals offers plenty of examples of the harm that government coercion has done.