The following is a slightly revised version of my presentation at the faculty workshop on “Christianity and the Marketplace,” held in August 2017, at the Offutt School of Business, Concordia College. I was given the topic “Ethics of Inequality,” but I ended up talking mostly about the nature and logic of capitalism, which is what my audience needed to hear.
Part I: The Two Faces of Inequality
When someone uses the term “inequality” these days, it’s normally assumed that the speaker is referring to income inequality. We see that, for example, in the demand for increasing the minimum wage. This is an important issue, but it doesn’t give the full picture on its own. It’s critical that we broaden our understanding of inequality by considering not only the disparity of income but also the disparity of wealth. So, inequalities of income and wealth, taken together, is what we can call “economic inequality.” But that still constitutes only one side the problem. The other side of the problem is “political inequality,” which is just as important, and just as nefarious, as “economic inequality.” In fact, these two are so intimately intertwined that it is often difficult to ascertain where one ends and the other begins.
Economic inequality occurs when most of a society’s wealth becomes concentrated in a tiny segment of the population, which leaves only a small amount to be divided among the majority. Political inequality occurs when most of the political power becomes concentrated in a tiny segment of the population, which leaves only a small amount to be divided among the majority. The two inequalities are closely tied because wealth and power are closely tied. Concentration of wealth produces concentration of power. As power becomes concentrated in the hands of a minority, that minority uses its power to further enrich itself. It’s a positive feedback loop, a vicious cycle, with negative consequences all around.
Why does it happen? The wealthy spend their wealth to buy political influence, and they use that political influence just as you would expect: to advance the kind of policies that help them further increase their wealth. Conversely, people who lack the financial resources to organize themselves politically, to contribute large sums to political parties and candidates, to lobby members of the Congress, and so on, are unable to exercise the same level of political influence, which means that they’re unable to advance the kind of policies that would serve their economic interests.
Economic inequality and political inequality are not two different problems. These are two faces of the same problem. In fact, there is an emerging school of thought, led by Jonathan Nitzan and Shimshon Bichler, whose research is based on the idea of “capital as power.” According to this theory, it’s not just that economic and political spheres interact and influence each other, but that capital itself is best approached not as piles of money, not as land or factories, but as a mode of power. So just as electricity and heat are forms of energy, capital is best understood as a form of power.
Even if you don’t subscribe to this approach, you can still appreciate that there is a sort of continuity between wealth and power, like the two sides of a Möbius strip. This is precisely why eighteenth and nineteenth century thinkers like Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, etc., all believed that they were studying something called “political economy.” They were not “economists” in the contemporary sense of the word, but “political economists.” It was only in the late nineteenth century that “Economics” emerged as an academic discipline by asserting its independence from Sociology, from History, and from Political Science. Since then, we’ve had an artificial fence separating Economics from other social (and natural) sciences, as well as from the humanities. This separation is not simply a matter of specialization, but it’s something that very often serves to obscure the structures that maintain and legitimize social disparity. But once we recognize the obvious fact that the economic and political spheres are continuous with each other in the real world, then it becomes easy to see that economic inequality and political inequality are inseparable.
We can measure economic inequality by looking at wealth and income data, but how do we measure political inequality?
Let’s begin with theory. In a democracy, government policy is supposed to reflect the collective will of the people. So, for example, if 90% of the population want the government to adopt a particular policy, then the probability of that policy being enacted should be very, very high. But if only 10% of the population is in favor, then the chances of that policy being adopted should be very low. That’s what democracy is supposed to look like—in theory.
In a democracy, we would expect the probability of a policy being adopted to be directly proportional—more or less, doesn’t have to be exact—to the percentage of population that is in favor of that policy. This red line is a proxy for political equality.
Do we have empirical data to test our theory? Yes. We do. The relevant research has been done by Princeton political scientist Martin Gilens, and has been documented in his book Affluence & Influence: Economic Inequality and Political Power in America, which came out in 2012. It’s a dry, academic book, that will probably put you to sleep. Thankfully, Gilens also published a paper, co-authored with Benjamin Page from Northwestern, in 2014, which has the virtue of readability, not to mention brevity. Gilens and his army of graduate students spent ten years collecting and analyzing data about public opinion on government policies going back to the 1980s, and in some cases to 1960s. In doing so, they distinguished between the policy preferences of ordinary citizens and those of the affluent, which Gilens likes to call “economic elites.”
Here’s the question that Gilens asked: What happens when the economic elites want the government to adopt a particular policy proposal? What are the chances that the proposal they prefer would actually become government policy? Here’s the answer.
On the horizontal axis is the percentage of the affluent class, or the economic elites, that favors a policy change, and the vertical axis on the left is the probability that the policy change they want will be enacted. The vertical axis on the right is the percentage of relevant cases.
As you can see, if you go from left to right on the horizontal axis, the percentage of affluent people who want a particular policy change increases from 0 to 100, and, along with that, the thick black line indicates that the probability that the government would actually adopt that policy change also increases. The relationship is more or less directly proportional, but only up to 0.6. This means that the American political system has a strong status quo bias, which makes it hard to make major changes. But overall, the graph shows that the economic elites do have a significant impact on changing government policy, and their chances of getting the desired policy increase as the percentage of those favoring that policy goes up.
So far so good.
But now we’d like to know what happens when average American citizens want the government to adopt a particular policy change? What are their chances? Here’s the graph for that.
It’s basically a flat-line. The probability that the policy preferences of average American citizens would be enacted is stuck at 0.3, regardless of how many people want that policy. Whether the number of people wanting a particular policy change is 10% or 50% or 90%, that figure has no effect on the chances that the desired policy would be adopted.
When this paper by Martin Gilens and Benjamin Page was published in 2014, it received considerable media attention, producing headlines like these.
While correlation does not prove causation, in this case I think we can safely assume that the political influence that our economic elites enjoy is mostly the result of their wealth; and the average citizens’ lack of political impact is mostly due to the fact that they do not possess that kind of wealth. And this does raise the question of whether we can still consider the United States to be a functioning democracy.
Here’s my first point:
Economic inequality and political inequality
are mutually reinforcing phenomenon.
Part II: The Logic of Capitalism
Next, I’d like to talk about capitalism. I want to describe capitalism as a system, but that requires me to take a detour and spend a few minutes talking about the broader concept of systems.
Here’s the technical definition: A system is a group of elements organized in a coherent structure that produces a characteristic set of behaviors. The behaviors produced by a system are collectively referred to as the goal of that system.
Here’s an example. An automobile is a system; but if you take it apart and put all of its individual parts in one big pile, that pile can no longer be called a system. It’s not just the parts that make a system; it’s also their mutual relationships, their organization in a coherent structure, and the rules that determine how these parts interact with each other. A system is more than the sum of its parts.
What is the goal of an automobile? It’s to transport people. But consider the function of each of the individual parts. Every part has some goal, but the goal of the automobile cannot be predicted simply by knowing the goals of its individual parts. In other words, the goal of a system is an emergent property; the goal of a system is not necessarily the same as the goal of any of its various parts.
“System” is a versatile concept; it’s very flexible, and can be applied in a wide range of circumstances. For example, we can imagine society as one big system. We can also analyze a society in terms of its various sub-systems. These are called social systems. A society is made up of numerous overlapping and interacted social systems.
A social system is obviously a type of system, so we can expect it to have all the characteristics that define a system; but what makes a social system different from other systems is that it includes people. A college is a social system; a family is a social system; this room, right now, with all the people in it, is also a social system, albeit a temporary one.
The most fascinating characteristic of a social system is the bilateral relationship between the system, considered as a whole, and the human individuals who participate in it. As individuals, we make these systems real—we bring them into existence and help maintain them over time—by means of our collective participation in those systems. The social systems, in turn, create paths of least resistance, i.e., patterns of thinking, feeling, and acting that are expected and approved by other people.
Recall that the goal of a system is an emergent property, which means you can’t always predict the behavior of a system just by looking at the behavior of its individual parts. This is true of any social system as well, which is why it is possible for a social system to produce consequences that aren’t intended by most—or even all—of its individual participants. A group of individuals may want to achieve a particular outcome, but if they’re part of a social system that is designed to achieve something else, and so it imposes a certain order on these individuals by requiring them to follow certain rules and interact in certain ways, then it is entirely possible that the system will channel the efforts of these individuals in a direction that’s different from what these individuals had intended. It may even be the exact opposite.
Let me give you an example. Currently, the world is going through anthropogenic climate change, and the projected scenario are scary as hell. Who among the billions of people alive today want this outcome? Whose plan is it to trash the planet, to make it uninhabitable, to destroy the future of civilization? Do you know anyone who is working with this goal in mind? None of us wants it, and yet we are causing it, simply by doing our daily chores, by participating in the existing social systems.
The functioning of any social system depends on the participation of human agents, but in many ways it is exists independent of what any of these individuals wants or desires. It’s the structure of the systems, its relationships and rules, that determines the outcome.
Once it becomes established, a social system can keep going for a long time, like the Energizer Bunny, in accordance with its own internal logic and in pursuit of its own goals. A social system operates in and through society’s dominant beliefs, attitudes, customs, norms, hierarchies, and institutions, which are very hard to change even under favorable circumstances. In other words, a social system is often characterized by a tremendous amount of inertia and change resistance.
Now that I’ve introduced the concept of system, and said a few things about social systems, I am ready to tackle the question of capitalism.
The title of this faculty workshop uses the word “Marketplace,” but I prefer the term “capitalism.” I think the concept of a “market economy” can be misleading because it focuses our attention on the economy while excluding everything else from the picture. It gives the impression that the economy is a separate or distinct sphere that can be studied, analyzed, and described without reference to other aspects of society. Most importantly, the term ignores the role of power.
Just as we have created an artificial separation between politics and the economy, there is also an artificial separation in our minds between the economy and the natural environment, between the economy and history, and between the economy and culture. Culture is relevant here because political and economic institutions cannot function without a widespread faith in their legitimacy. Regardless of how a society organizes its political and economic affairs, there has to be some degree of consent from the population, or the system would just fall apart. To find out why a population consents to a particular arrangement of its political and economic affairs, or exactly how does it perceive that arrangement to be fair or acceptable, we have to look at culture.
The term “market economy” puts the limelight on economic factors, while keeping politics and culture out of sight, thereby giving us a truncated view. By ignoring history, it makes us think that the status quo is timeless and therefore perfectly “natural.” By not recognizing that the economy is entirely dependent on the biophysical environment, it encourages magical thinking while making harmful externalities irrelevant.
So, the advantage of using the term “capitalism” is that it represents a broader and more inclusive concept than does the term “market economy.” When I use the word “capitalism,” I know that I am not restricting my focus too narrowly on matters that are strictly “economic.” Rather, every time I use the term “capitalism,” I am reminded that what I am referring to is a set of complex and dynamic social process that are definitely “economic” but are also “cultural” and “political” and “historical” at the same time and to the same degree. The term “capitalism” reminds me that what I have in mind is not just a way of organizing the economy, but something far more comprehensive—it’s a way of organizing every aspect of our individual and collective lives, all the way down to our psyches.
If you find that my explanation isn’t convincing enough, there is a second reason for using the term “capitalism” instead of “market economy.” Even if we consider capitalism as essentially an economic system, in the narrow sense of the word, we must recognize that it has two primary dimensions. The first dimension has to do with the way in which economic coordination takes place under capitalism, while the second dimension has to do with the manner in which class relations function under capitalism. To understand capitalism as an economic system, even without referring to politics or culture, we have to take into account both of these dimensions.
How does economic coordination occur under capitalism? What determines the prices and quantities of the goods and services being produced? The answer is that this happens through decentralized voluntary exchanges between privately contracting parties, otherwise known as “markets.”
How do class relations function under capitalism? Who makes the most important decisions and what determines the distribution of resources? The answer is that the means of production are privately owned and are controlled by the owners or their surrogates, and workers provide their labor in exchange for wages.
In the United States, the term class often makes people feel uncomfortable, just as the word race makes some folks very nervous. We are supposed to be living in the post-racial era, and we are not supposed to have classes in this country because we’re all one big happy family. Right. But the term class refers to a real social phenomenon. Whether or not classes exist is not a matter of feeling or opinion. Regardless of your political or ideological affiliation, there is no escaping the fact that under capitalism, class relations are asymmetrical in terms of ownership and control. The system requires two classes, a dominant class and a subordinate class, those who own the means of production (let’s call them capitalists) and those who do not own such means of production (let’s call them workers). The capitalists, by virtue of their ownership, get to decide how the means of production are used, while the workers who contribute their labor in exchange for wages have no such control.
In other words, under capitalism we have those who own, but don’t have to work; and then there are those who must work, but do not own. There are those who give orders, and there are those who must obey. It may be uncomfortable to talk about this point, but its factuality isn’t controversial.
So, my second reason for using “capitalism” is that when we employ the term “market economy,” we’re referring to only one of the two primary dimensions of capitalism; specifically, we are only referring to the mechanism of economic coordination. But the other dimension, the nature of class relations under capitalism, is just as significant and just as relevant for understanding the system. Our view of capitalism, even in its narrowly economic sense, will remain deficient and incomplete unless we give equal attention to both of its primary dimensions: economic coordination as well as the asymmetry of class relations.
Next, I would like to say a few things about models.
On the left is a picture of a model airplane and right next to it is a picture of a real one. A good model should be a close approximation of the original, but it can never be identical to the real thing in every respect. This is because a model, by definition, is a simplified representation of some aspect of the real world.
When we think of capitalism in terms of its two primary dimensions—economic coordination through markets and asymmetric class relations—we are using a theoretical model that represents, conceptually, certain aspects of social reality in a highly simplified form. This point is important because not all modern societies are equally capitalist. A given society can be less capitalist or more capitalist, relative to other societies, depending on the degree to which it approximates the theoretical model. Moreover, a given society may become less capitalist or more capitalist, with the passage of time, depending on whether it moves closer to the theoretical model or away from it.
For this reason, we have to maintain a clear distinction between capitalism, considered as a theoretical model, on the one hand, and any particular capitalist society as it actually exists at given moment in time, on the other hand. The model can help us understand the social reality that it is supposed to represent, even though that reality will always be more complex and more dynamic than the model.
Capitalism is a system; more specifically, it is a social system—or a system of social relations—that has been exceptionally successful in spreading throughout the world, as well as in shaping the economic, political, and cultural processes of any society in which it has taken root. It has even changed the chemistry of the oceans and the atmosphere, but that’s another story.
For modern societies, there is no doubt that capitalism is the most powerful of all social forces. We acknowledge its worldwide reach every time we use the term “global capitalism.”
If we agree that capitalism is a system, we have to ask the question: What is its goal? One of the most important things we would want to know about any system is its goal; once we know the goal of a system, we can figure out a great deal about what it does, how it works, what makes it go faster or slower, how to tell if it’s functioning properly or breaking down, and so on. Knowing the goal of a system is critical because it sheds light on virtually all aspects of that system.
When we inquire into the goal of capitalism, what is it exactly that we’d like to know? We are basically saying: What is the single most important outcome that capitalism is designed to produce? What is the outcome that capitalism produces in the most consistent way?
The goal of capitalism can be simply stated as the accumulation of capital.
This would explain all the features of capitalism with which we are familiar. It would explain the competitive drive for profits; it would explain why there is constant technological innovation; it would explain why there is a need to lower the cost of production; it would explain the endless quest for increasing worker productivity; it would explain why capitalist societies tend to experience rapid social change.
When I say that the goal of capitalism is the accumulation of capital, I do not mean to imply that nothing can be pursued in a capitalist society besides the accumulation of capital, nor that capitalism cannot generate other outcomes in addition to capital accumulation. More importantly, I am not suggesting that the ultimate goal of every individual who participates in capitalism must be the same as the goal of the capitalist system itself. Remember that when it comes to social systems, it is we who make them real by participating in them, but as participants in capitalism we are subject to the rules of that system over which we have very little control, if any; the system functions according to its own internal logic, in pursuit of its own goals, independently of the will or desires or intentions of the individuals who make it happen through their participation.
To say that the goal of capitalism is the accumulation of capital is to recognize that under capitalism we may be able to pursue our personal or social goals to some extent, but that those goals are necessarily subordinated and subservient to the system’s overall goal of capital accumulation.
Consider the “Triple Bottom Line.” Suppose you want to create a socially conscious and environmentally responsible business. Would capitalism allow you to pursue three different goals at the same time? Yes, but only so long as there is no actual conflict among these goals. But sooner or later you will run into a situation where you have to choose between two of your three bottom lines. For instance, the choice is between an eco-friendly option, which is expensive, and a cheaper option that is bad for the environment but won’t hurt your profits. You may consider yourself a caretaker of God’s creation, but if you choose the eco-friendly option too many times the Market will punish you and reward your competitors who care only about profit. Capitalism demands total dedication. You cannot serve two masters, let alone three; there can be only one bottom line.
Exactly how does capitalism seek to achieve its goal of capital accumulation? To answer this question, I will present another simplified model, based on the distinction between two types of value. The use value of a thing has to do with its utility or usefulness for people, that is, its capacity to meet some human want or need. In contrast, the exchange value of something is the exchange equivalent by which it is compared to other objects in the market, and this function is typically served by money.
In a pre-capitalist economy, the primary purpose of production is consumption, either directly or indirectly. If I grow some vegetables, I would either eat them myself or sell them for money, which I would then use to buy something else that I want to consume. In such an economy, use value dominates. The end is to obtain a particular commodity because of its use value, and money is merely the means to achieve that end. In a capitalist economy, however, it’s the exchange value that dominates; the primary purpose of production is not to consume, but to earn profit, that is to say, to have more exchange value at the end of the day than at the beginning. The production of the commodity is merely the means to achieve that end.
Since the goal of the system is capital accumulation, there is an inherent need for the system to expand, both in terms of total production and profits and in terms of geographical reach. That’s why capitalist societies are so dynamic: they must find—or if they can’t find, they must create—new products, new demands, new markets. Even as an individual entrepreneur, you can’t just earn a hefty profit and call it a day. The system requires that you re-invest that profit back into the production process, and keep doing it over and over, in a continuous spiral. If you don’t grow your enterprise by re-investing your profit, or if your enterprise fails to grow for a prolonged period, there is a real risk that it may be taken over or replaced by another enterprise that is more successful than yours. Generally speaking, an expanding enterprise will almost always beat a static or stagnant one. In fact, expansion or growth is how the Market measures success.
But this endless accumulation of capital is the goal of the system; it doesn’t have to be your goal. You, as an entrepreneur, may decide at some point that you’ve earned enough and retire; or you may experience a spiritual breakthrough, give up everything, and become a monk. Neither of these scenarios is going to have any effect on the system’s appetite for capital. Steve Jobs accumulated a lot of capital in his life-time, but then he passed away and had to leave everything on this side of death. Yet, the company he founded, called Apple, continued to accumulate even more capital.
The point is that individual entrepreneurs as well as companies—and sometimes even entire industries—can come and go, but the system as a whole is driven by its very logic to accumulate capital, forever and ever. There is a natural end to an individual’s life; it’s called death. But from the viewpoint of the capitalist system, there is absolutely no point in the future when the accumulation of capital comes to an end. There is nothing within the logic of capitalism itself that would allow the system to contemplate its own mortality. Its goal remains the same, regardless of how much capital has already been accumulated, and regardless of any harm that this process might cause to people or to the planet. The system is set up in such a way that if the rate of capital accumulation falls, the result is a recession or a depression, which is basically a “crisis” for the entire society.
We can now construct a definition of capitalism, and that’s my second point:
Capitalism is a social system, based on markets and asymmetric class relations, whose goal is the endless accumulation of capital.
Part III: A Match Made in Hell
So far, I have argued that economic inequality and political inequality are mutually reinforcing phenomena, and I have described capitalism in terms of a theoretical model as a system of social relations aimed at the accumulation of capital. The next step is to put these two points together by exploring the relationship between capitalism and inequality.
Think of an actually existing capitalist society and imagine that you’re trying to determine the degree to which that society is putting the tenets of capitalism into practice.
Suppose that this spectrum represents the entire range of possibilities in terms of how closely a society follows the capitalist model. A society that gets a score of 0% is one that has absolutely nothing in common with the capitalist model, while a society that gets a score of 100% is one that’s a complete and total manifestation of the capitalist model.
Now, it so happens that no modern society is going to fall at either end of the spectrum. There is no society in the world today that does not follow the capitalist model to at least some extent, but there is also no society that is a perfect and complete manifestation of that model. This means that when we compare any modern society to our theoretical model of capitalism, the score will be neither zero nor hundred; rather, it will be somewhere in between these two extremes.
Why is it that no society can ever reach 100%? The answer is that any actually existing modern society not only contains capitalist institutions but also counter-capitalist institutions.
I am using the word institution in a broad sense, and so I would define a capitalist institution as any force or tendency in a society—whether it’s political, economic, or cultural—that has the effect of moving the society closer to the capitalist model. On the other hand, any force or tendency that has the effect of moving the society in the opposite direction, away from capitalism, would constitute a counter-capitalist institution.
Based on how I have defined capitalism, counter-capitalist institutions are easy to identify: I would say that the family is one such institution, but so are all those nonprofit or voluntary organizations that pursue socially beneficial goals as well as worker-owned co-ops, labor unions, public schools, public libraries, highways, the Environmental Protection Agency, the Securities and Exchange Commission, the Glass-Steagall Act, Social Security, that vegetable garden in your backyard, progressive taxation. I would also include in this list friendship and other forms of community, the human potential for altruism and solidarity, our ability to empathize, our willingness to be generous towards each other, sharing our possessions or skills, giving without asking anything in return, any belief we might have that life has a transcendent purpose. These are all counter-capitalist institutions.
A society that is 100% capitalist would lack all of these things by definition; as a result, it would be too ugly, too repulsive, too intolerable for human beings to live in. The reason that such a society can never exist is that human nature would not allow it to exist. Ironically, what allows societies to be capitalist—to any degree—is precisely the existence of counter-capitalist institutions.
Since a society contains both capitalist and counter-capitalist institutions, the degree to which it approximates the capitalist model will depend on the relative strengths of these two types of institutions at any particular point in time. We can also assume that the capitalist and counter-capitalist institutions are always in a state of tension, competing against each other, given their diametrically opposite goals, and also that their relative strengths would be subject to change over time.
With this background in mind, we are now ready to explore the relationship between capitalism and inequality. I am going to put it in the form of a question: If a given society is fairly capitalist, say 60%, what would happen to inequality in that society if, for some reason, the score increases from 60% to 80%? Would inequality increase or decrease?
The standard answer to this question is based on the theory that economic growth makes everyone better off. “a rising tide lifts all boats.” Any problems that might appear under a capitalist regime—such as inequality—can be effectively remedied only through more capitalism. This argument can take different rhetorical forms, but it seems to be ultimately rooted in a paper published by the economist Simon Kuznets in 1955, which popularized the so-called Kuznets Curve. It looks like an inverted-U.
The idea is that when a society starts developing along the path of capitalism, we can expect a rise in inequality, but that’s only a temporary effect. As the society moves further along in the direction of capitalism, it will experience increasing levels of economic development and industrialization, which would translate into economic growth, which means that the society as a whole will become more and more prosperous. That’s the rising tide. The rich will spend more money than they used to, and they will also invest in new business ventures, thereby creating more jobs and stimulating demand as well as supply. The rising tide will then lift all boats, not just the big ones. The new wealth will spread throughout society, and while the rich will get richer, the poor will also get richer, and so everyone will be better off than they were before. As a result, economic inequality may increase in the short-run but it will decline significantly in the long-run.
To be fair, these are not the sort of arguments that Kuznets himself made. He was cautious and nuanced in his evaluation of the available data; he also knew that he did not have good data. But over the years his hypothesis has been used by various politicians, policy makers, and economists to justify particular economic policies, such as tax cuts for the rich.
However, during the last 15 years or so, Kuznets Curve has come under a serious challenge, for two reasons. First, a new generation of economists has been able to compile a large amount of American and European income data from the nineteenth and twentieth centuries, data that was unavailable to Kuznets. Second, economic inequality in advanced capitalist countries has been increasing since the 1970s, which is not what Kuznets would have expected. The new picture that’s emerging is therefore much broader, and more detailed, and it tells a very different story.
Two economists who have done some of the most important and groundbreaking research on wealth and income distribution are Thomas Piketty and Emmanuel Saez. But back in 2003, they published a paper on income inequality in the United States during the twentieth century that attracted a great deal of attention at the time.
Their paper included one particular graph that I’d like you to see. Below is the updated version from 2012.
The horizontal axis represents time, from 1917 through 2012. The vertical axis represents the pre-tax income of the richest 10% of Americans as a percentage of national income, which is a proxy for income inequality.
The left side of the graph can be used to argue that Kuznets was correct. The high levels of inequality of the 20s and 30s came tumbling down in the 40s, leading to relative equality from the end of WWII all the way to the 70s. You can see the inverted-U, followed by a period of several decades during which economic growth was high and it was benefiting most segments of society, not just the top 10%.
So far, so good. There was a rising tide, and it was lifting most of the boats.
Bu notice what happened starting in the late 70s. Income inequality started to climb again, until it became as high as it was in the late 1920s. What is evident is that this part of the curve is also U-shaped—not an upside-down U, but one that is right-side up. Kuznets obviously did not see this coming. It is this relatively recent wave of rising income inequality, over the last 40 years or so, that is causing all the commotion today.
Here’s another graph, showing the rise in income inequality in the United States in recent decades. This graph was published last week (Monday, August 7, 2017) by the New York Times; it also comes from Piketty and his colleagues.
The horizontal axis shows the income percentiles, from the lowest to the highest, and the vertical axis shows income growth. The graph is based on data from 1980 (the grey line) and 2014 (the red line). In 1980, the largest increase in income share went to those in the 5th percentile, the poorest segment. In 2014, the largest increase in income share went to the very, very rich, those in the 99.999th percentile. The contrast is rather stark.
So, we know that Kuznets Curve is seriously flawed and it doesn’t match reality. What, then, is causing this growing inequality in United States and other advanced capitalist societies? As you could very well expect, there are numerous theories floating around; different experts would give you different explanations, and I am sure they are all worth exploring.
For me, however, the big question is this: Over the last 40 years, has the United States—along with other advanced capitalist societies—moved closer to the capitalist model or moved away from it?
Certain specific economic trends have been observed over this period; they include deregulation, financialization, trade liberalization, lowering of the effective corporate taxes, continuing increase in worker productivity accompanied by stagnation of hourly wages, decline in union memberships, and the gradual dismantling of the welfare state. All of these trends have contributed to the rising inequality that we are witnessing, and all of them have been the result of changes in government policy.
It is well known that changing a government policy is very hard in the United States, given that inertia is built into the Constitution; but it is equally well known that the affluent classes, or the economic elites, have a tremendous amount of influence in shaping government policy.
The United States is well ahead of other advanced capitalist countries in adopting policies that have supported these trends, which is probably why the rise in inequality is worse here than in other comparable countries.
The economic trends we have witnessed over the last 40 years did not come about by accident, nor did they happen due to historical forces beyond human control. A great deal of these changes occurred as a result of deliberate and planned attacks on counter-capitalist institutions. Starting in the early 1970s, well-coordinated efforts were already underway to use economic and financial resources in order to gain political influence, and to use that political influence to shape everything from culture, media, and education to the basic processes of elections and legislation, with the ultimate goal of increasing the concentration of wealth in fewer and fewer hands. That history is no longer a secret; it has been very well documented in a whole series of recent scholarly books.
Speaking of books, it seems like these days everyone is reading Piketty’s Capital in the Twenty-First Century.
I have here a few short passages from Piketty’s book, which summarizes his argument. I think these passages are pretty devastating in terms of establishing the relationship between capitalism and inequality. They are from his concluding chapter, from the section titled “The Central Contradiction of Capitalism.”
The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based. The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.Thomas Piketty, Capital in the Twenty-First Century
Piketty is saying that capitalism can reduce inequality insofar it makes it easier for people to acquire the knowledge and skills they need to get ahead, but at the same time capitalism is also capable of increasing inequality.
So the question is: Which of these two tendencies will be dominant at any given point? I would suggest that this depends on the relative strengths of capitalist and counter-capitalist institutions, and government policy can make a great deal of difference in this regard. Governments can keep inequality under control by strengthening counter-capitalist institutions, which is what they did in the United States starting with the New Deal. The problem, however, is that economic inequality and political inequality are mutually reinforcing processes. This means that capitalist institutions can become too powerful due to concentration of wealth, in which case they would colonize and dominate the political sphere, undermine democracy, and neutralize the effectiveness of counter-capitalist institutions. That, I think, has been the overall trend over the last 40 years.
Piketty says that rising inequality poses a potential threat to democracy, which is true. But I would suggest that this is not just a potential, for rising inequality indicates that a coup has already occurred, that democracy has already been compromised. Extreme economic inequality cannot happen without extreme political inequality, which is incompatible with democracy.
The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.Thomas Piketty, Capital in the Twenty-First Century
This, of course, is Piketty’s main thesis. Conventional wisdom suggests that the solution to the problem of inequality is to stimulate economic growth; as the total economic output increases, wages and salaries will also increase and inequality will decline. But then Piketty comes along and ruins everything by telling us, you know, wait a minute—there is another factor that you’re forgetting, and that’s capital—more specifically, it’s the concentrated ownership of capital. For Piketty, capital is anything that can be owned and that yields income as part of the rights associated with private property. The concentrated ownership of capital provides a type of advantage similar to that of using anabolic steroids in sports—you will always have an edge over everyone else. So, while economic growth may lead to increase in wages and salaries, this routinely falls short of the rate of return on capital. The return on capital in the form of dividends, interest, and rent is virtually guaranteed to remain at a much higher level than wages and salaries, regardless of economic growth.
In effect, you will always earn a lot more money through your ownership of capital than you can ever hope to earn through your labor, notwithstanding how hard you work. Such an outcome is to be expected, given the asymmetric class relations under capitalism.
Piketty adds to the bad news by bringing in the role of inheritance.
The inequality r>g implies that wealth accumulated in the past grows more rapidly than output and wages.Thomas Piketty, Capital in the Twenty-First Century
Accumulated wealth is transferred from one generation to the next through inheritance, which ensures that a minority of population will always have a tremendous economic advantage, not because of any special contribution that they make to society but simply because they were born in a wealthy family.
This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.Thomas Piketty, Capital in the Twenty-First Century
That is “the central contradiction of capitalism.” Wealth accumulated in the past has a permanent advantage over any economic success that anyone might achieve today or in the future. Ownership of capital, especially when it is accumulated over two or more generations, is therefore bound to further increase the political inequality that is already inherent in capitalism due to asymmetric class relations.
The consequences for the long-term dynamics of wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale.Thomas Piketty, Capital in the Twenty-First Century
The increase in wealth that occurs through ownership of capital is exponential, which means that if you start with a large inherited fortune then you’re going to accumulate additional wealth at a faster rate than someone who inherited a relatively smaller fortune.
Piketty thinks that this trend will make things increasingly worse in the long-term, the consequences of which are “potentially terrifying.”
I am not sure if Piketty himself puts it this way, or if he would put it this way, but his research seems to confirm the suspicion that many people have had for a long time. That is, increase in economic and political inequality is not an unfortunate side-effect of government mismanagement or intrusion in the market. It is, rather, an expected outcome of the internal logic of capitalism.
Capitalism is the most powerful mechanism for converting nature and community into capital, and under the rules of capitalism the ownership of capital is the most efficient way of increasing one’s wealth. Potentially, anyone can become rich, but your chances are exponentially high if you are already rich, and they are incredibly low if you’re poor. Increasing concentrations of capital in fewer and fewer hands is therefore inevitable over time. In Piketty’s terms, divergence is a far stronger tendency of capitalism than is convergence. And his data shows that this is exactly what has been happening since the beginning of the nineteenth century, and will continue happening in the foreseeable future.
But what about the period of relative equality that lasted from 1945 to 1975? Piketty argues that this period was an exception in the history of capitalism; it was an atypical episode, a deviation from the usual course of capitalism. During that period, there was exceptionally high economic growth in advanced industrial countries, as well as a relatively egalitarian distribution of this newly generated wealth. But that period has long ended. It’s a serious mistake to take that exceptional period and to generalize it by claiming that it represents the outcome that capitalism will always produce anywhere in the world. For Piketty, that golden age of high growth and low inequality did not happen because of anything intrinsic to capitalism. Rather, the credit goes to the large-scale upheavals caused by two world wars, the Great Depression, and decolonization, followed by welfare state measures. If capitalism is left to its own devices, we should only expect increasing divergence.
Piketty’s solution to this whole problem is a global wealth tax, which he thinks is necessary but not very likely. So, he is rather pessimistic in this regard. But notice that his proposed solution is a form of progressive taxation, which is a counter-capitalist institution. This leads me to suspect that Piketty has not found anything within the logic of capitalism itself that could be harnessed to address inequality. He clearly does not believe that the market is self-correcting, or that everything will work out just fine if we only allow the invisible hand to do its magic. Instead, he is saying that only counter-capitalist forces can make a dent in the rising inequality.
Piketty’s work is a major indictment of capitalism. Numerous comparisons have been made between Piketty and Karl Marx. Personally, I feel that Piketty’s critique of capitalism is much more devastating than that of Marx, and I say this not after comparing the merits of their respective arguments but based solely on who these two men are. First of all, Marx was vehemently anti-capitalism from the beginning, while Piketty has always been pro-capitalism. Unlike Marx, Piketty did not begin his research for the purpose of attacking capitalism, as he says in the book. Secondly, Marx was trained as a philosopher, and he came to the study of political economy as a middle-aged man. Marx was always an outsider due to his political views, and so he never became part of any academic establishment. In sharp contrast, Piketty is very much an insider; he was trained as an economist at the London School of Economics; he speaks from within the mainstream of economic thought, and uses the standard neoclassical concepts and models.
So, what makes Piketty’s work so devastating is precisely the fact that he has no axes to grind, and yet he is forced by the sheer weight of the evidence to acknowledge that capitalism suffers from a serious contradiction for which the remedy must come from somewhere else.
So, this is my third and final point.
Inequality is not a bug in the capitalist system;
it’s one of its main features.