Tyler Cowen The Inequality That Matters
Capitalism has delivered an increased standard of living to those it exploits, which explains its longevity. Although Bill Gates is far, far wealthier than the average joe this in itself will not create a huge problem for the system, provided average joe feels that his or her lot is improving as well. Tyler Cowen’s article compares living standards today with 1911 and concludes correctly that most people feel that capitalism has delivered more prosperity over time.
At the same time, social inequality has increased. But people may put up with increasing inequality as long as their standard of living is not threatened. Once again the statistical facts are clear on increasing inequality and the social fact is clear that overall people put up with it, they don’t take it as sufficient reason to rebel. In practice the moral outrage argument put forward by free market anarchist Kevin Carson (1) (Damning Corporate Capitalism With Faint Praise) is not sufficient for most people to change their outlook. As long as the system delivers for most it is safe.
However, finally, it is the inability of capitalism to avoid economic crisis that is its real achilles heel. Tyler Cowen concludes on a pessimistic note:
“We probably don’t have any solution to the hazards created by our financial sector, not because plutocrats are preventing our political system from adopting appropriate remedies, but because we don’t know what those remedies are … Is the overall picture a shame? Yes. … Will it again bring our economy to its knees? Probably”
So, after arguing that increasing inequality doesn’t really create a threat to the system, Tyler Cowen concludes that the system is still under threat simply because we don’t understand how it works. Indeed, we don’t yet understand how it works …
(1) See Carson’s Mutualist blog for his own perspectives. In his homebrew manifesto Carson argues that big is bad and advocates resilient neighbourhood, backyard, desktop technologies as a progressive substitute. He has also published a significant study of political economy (Studies in Mutualist Political Economy) Many of Carson’s articles are published at Center for a Stateless Society. I noticed an article there attacking political environmentalism (Green Rising: The Dangers of Political Environmentalism) because extreme Greens value the earth more than humans. Carson and the free market anarchists deserve an extended footnote because these sorts of positions are well worth further discussion.
The achilles heal is not inexplicable and extreme fluctuations of the business cycle. The reasons for the fluctuations are not difficult to understand. Take a step back from the crash and look at why it occurred. The real issue is how to stop unthinking, feel good lefties implementing badly thought out policies that deliver short term feel good results and long term disaster and mayhem to the average punter. Sound familiar? Think wind farms, solar schemes,no nuclear, no dams etc etc delivering high power costs to Australians and making our industry uncompetitive in the process.
In the US consider the refusal to submit Freddy Mac to proper financial scrutiny by the Pelosi led majority in the name of “defending the rights of the oppressed”. That was a great idea, given Freddy was the first domino to subsequently fall. Had it been required to publish its financial result in the same format as a publicly listed company (and in the absence of undetected fraud) we could have perhaps avoided this disaster. But no, Freddy could not possibly be subject to scrutiny. It had to be allowed to spin out as many high LVR non recourse loans as the Democrats needed to woo their constituencies in the Democrat heartland. Freddy did not have to account for what it did and Freddy fell into a terrible mess. Once again, short term feel good policy that delivers long term pain for the working man. Sounds like our own bold feel good labor lefties doesn’t it. They are the achilles heel. Focus on them.
They are the real destroyers of the income and the employment of the average punter.
Fatso,
Capitalism will never be fully transparent but if it was then could those “inexplicable and extreme fluctuations of the business cycle” be avoided?
My working hypothesis is that capitalism by its own nature is an unstable system, that economic crisis cannot be avoided. If all the Greens and Democrats disappeared off the planet then we would still not avoid periodic economic crises. More analysis needs to be done along those lines.
Fatso, I think that you have a point but not the whole picture. Fanny and Freddy were part of the problem but not the whole of the problem and yes Fanny and Freddy’s role was in part due to politicians currying favour with certain voters by promoting home ownership to the poor. The GFC was caused not by a particular institution or by a particular political act but by speculative activity.
Once the Fed had set interest rates at close to zero anyone with access to finance could buy a house at no real cost. The cost of a house being its price plus interest payments minus its resale price.
The next step is for banks to start falling over each other in an effort to put money into peoples hands. Hence we get the loans made to people with no ability to repay and derivatives which were the banks trying to convince themselves that high risk loans could be turned into low risk bundles.
Once these elements are in place people start to speculate so that houses are built not for use of the owner by for the owners gambling interest.
A housing bubble is not hard to identify and not hard to treat (you just have to raise interest rates) but at this point politics becomes important as neither Republicans or Democrats were willing to spoil the party. Everyone seems to be a winner, it would be a brave politician to say that poor people cant buy homes and that home owners will have to pay more. Collecivly we are better at picking up the pieces of a disaster than we are at preventing our own follies.
One reason that we wont prevent our own follies is that speculation plays an important role in developing capitalism whilst at the same time it tripps capitalism up. The trick for the Capitalists seems to be in being able to both promote and restrict speculation.
steve,
Houses are never built by capitalist for use of the owners. They are built to realise surplus value for the capitalist. Houses are useful for their owners, which is why they want to buy them, but that is not why they are built by capitalists.
There is always the possibility arising that a house built may not be sold. If that were not true, if all houses built were sold, then capitalism would never enter crisis.
You don’t go into the reasons why the Fed dropped interest rates, that it was becoming hard to sell stuff. What you claim to be unnecessary speculation and lack of foresight is more like the natural path capitalism would go down when its overproducing / overcapacity / overaccumulating. Of course, everyone is wise after the event.
Bill I take your point that production is linked to the need to realise surplus value however I think that there are important differences in the way this is done between different sectors of the economy and the housing market has some features that are idiosincratic.
As to why the Fed dropped the rates, well the USA had just completed it longest sustained period of uninterupted growth ever. Then came the bursting of the dot com bubble and US authorities fearing a recession dropped rates. If it hadn’t been for September 11 their plan would have worked and the USA would have come out of the bubble without a recession. Curse you Osama.
Bill, thanks for the comment.
Difficult to argue that capitalism does not have a business cycle. The basis of the system is the pursuit of individual self interest. Any system based on the self motivated desires of individuals must exhibit some of the range of emotions of the individuals driving the system; fear = bear market, greed = bull market etc.
The issue is whether the amplitude and duration of the cycle is exacerbated by poorly planned and implemented social policy based on short term feel good tinkering. If you look at every cycle since 1890 its difficult to find one that was not made worse by the intervention of well intended, or politically appealing measures.
Bill,
Achilles was killed with one arrow to his heal. The US economy has been hit by 46 events of recession or worse since 1800.
World Capitalism is now stronger and more productive than ever before. Marxists have been searching and hoping for the Achilles heal of capitalism for a long time and I expect them to go on searching and hoping for a long time to come.
Even the Great Depression where those in charge did every thing wrong, Capitalism just wouldn’t die like the very vulnerable Achilles.
Jesus, US Capitalism even survived George Bush but only just.
Steve,
You have a beaut car but every time you enter heavy traffic it stalls. You take it to 46 different mechanics and none of them can say what is wrong. You really believe that a better model is not possible?
Fatso,
You want to say that the 46 mechanics are all incompetent. But they have been trained in the best universities that capitalism can build and they are paid top salaries. You will find it hard to find someone who will bet that another crisis won’t happen somewhere soon. Just another stuff up or an endemic feature of the system?
Simon Clarke argues a strong case that crisis is a necessary part of capitalism – unavoidable. Here is his paper: The Marxist Theory of Overaccumulation and Crisis (22pp pdf). To argue the case does take a few words.
Bill,
Greenspan warned about the sovereign risk presented by the structure of Freddie and the inadequate reporting requirement that it was required to comply with. Legislation to alter its structure and reporting were put to the House. Pelosi and the team used their majority, and a lot of high blown rhetoric about defending the rights of the oppressed, to reject the changes. Its all on the record but history is written by the victors so you don’t read a lot about it. So to use your analogy the mechanics told the owner about the problem, the owner considered the issue and decided to take no action. Is the car the problem?
Socialism has one great advantage over capitalism. After seventy odd years of field testing we can see that it is not at all subject to the anything like the fluctuations or volatility in levels of production as capitalism. It remains in recession at all times. Preferable?
Bill
You miss understand me, I do think that a better system is possible.
150 years ago Marx made a mistake. He thought that crisis was the Achilles heal of Capitalism. Since his death we have lots more experience to draw from and can improve on Marx’s cutting edge (at the time) analysis or we can just repeat his mistakes. The choice is ours.
Economics is just human activity, we can study any human activity and work out better ways of doing things, of course a better system is possible.
Fatso,
You say that Pelosi and the team used their majority to reject changes to the administration of Freddie along the lines that Greenspan had advised.
Now my reading of US politics is that the Republicans had a house majority from 1995 to 2007 when it passed to the democrats and the evil one Pelosi.
Now if Im right and the Republicans had a 12 year house majority and an 8 year hold on the oval office why didnt they make the necessarry changes?
Maybe they were too busy watering down the restrictions on banking that had been put in place during the depression?
Maybe they were too busy running up huge budget deficits at the exact time that they should have been running up surpluses?
Steve
See http://en.wikipedia.org/wiki/United_States_elections,_2006 for correct numbers.
If Pelosi is “evil” what is Bob Brown?
The banking restrictions I was refering to was the Glass-Steagall Act
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
Fasto I dont get your point. Your post links to the 2006 elections. The newly elected people dont take up their seats until the following year just like I said, the democrats became the majority party in 2007 when they took up their seats.
I don’t particuarly like a lot of what Pelosi stands for but because shes a politician in a foreign country I dont follow her very closely.
Bob Brown is a Green and I tend to agree with him on human rights stuff but not much more.
Fatso,
Greenspan was also partly self critical for his opposition to regulation of derivatives
http://en.wikipedia.org/wiki/Alan_Greenspan#Late_2000s_recession
My position is that we have to dig deeper into how the economy really works – to go beyond the Republicans versus Democrats blame game.
The way you depict the record of socialism as always in recession is not accurate. In fact the 1957 Sputnik event created such a shock in the USA that its education and research system was revolutionised in response. Nevertheless, most people do share your view that it has been tried and failed. That would be the end of the story except for one thing: capitalism cannot avoid serious crisis. And so we have to keep exploring alternatives.
Tyler Cohen, the author of the original article under discussion here, has also authored The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better, which is available as a low price ebook special on the Kindle through amazon.
He blames the recession on a slow down in job creating scientific / technological development, a POV which fails to look at the reasons behind the slow down. New technology and R&D to fund it only happens under capitalism if it promises an increase in the rate of surplus value.
However, from this review of The Great Stagnation it might be worth buying and reading for its discussion of how measuring various activities that produce revenue is not the same thing as measuring value.
The Boom: Australians dramatically misperceive wealth inequality
Presents figures to show that Australians underestimate the wealth disparity in our society.
Reality: The richest 20% own 61% of total household wealth and the poorest 20% of Australians collectively own 1% of total household wealth.
What people think: That the wealthiest Australians had about 40% (1/3rd less than they do) of the wealth and thought the poorest Australians had about 10% (10 times more than they do).
bill; the heel is universal
Published on Sunday, July 10, 2011 by Al Jazeera
The Evils of Unregulated Capitalism
by Joseph E. Stiglitz http://www.commondreams.org/view/2011/07/10-5
Just a few years ago, a powerful ideology – the belief in free and unfettered markets – brought the world to the brink of ruin. Even in its hey-day, from the early 1980s until 2007, US-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world.
Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.
Stretch your imagination beyond breaking point for a moment and imagine that Bill Gates made a decision to move the entire headquarters of Microsoft to Adelaide. All the senior execs, programmers etcetera relocated within two years. The city of churches is awash with baggy arsed and bearded programmers earning billions every year.
House prices go through the roof and income and wealth inequality across the city “deteriorates” dramatically. Social researchers squeal that the city’s “happiness index” as measure by the latest UN approved index of social happiness has deteriorated alarmingly.
What else will happen? Microsoft will need a constant supply of new people. They will need training and education. Adelaide will need new colleges and universities. There is a new pool of taxable bodies that will be paying income, and company taxes as well as the usual sway of state levies and charges. Mike Rann will be awash with money for all sorts of worthy social programs none of which need involve finding work for unemployed because they will all have jobs.
Microsoft will need massive amounts of new equipment each year, execs will buy new cars, take taxi’s go to restaurants, support the Crows. Okay, maybe the last bit is a step too far. The average crow eater will now see massive new employment opportunities, new careers that did not exist before as money floods through the support industries in the cities. They will need new intellectual property lawyers and some one will have to start a new business to supply donuts for the canteen. On and on the impacts will reverberate across the city. From builder’s laborers on new homes, to taxi drivers and waiters in staff canteens, they will all notice a huge and positive impact on their incomes, assets and career options.
All of this will occur as the income equality has declined rapidly and will most certainly remain in a state of inequality.
Was it a bad thing? And what if Adelaide had passed a law that limited income inequality by whatever the chosen means was from the predictable panoply of weapons of the envious left, eg death taxes, high marginal tax rates and non competitive corporate tax rates. Bill Gates wouldn’t go there. It’s that simple. He would run the business in a city that valued income inequality as the driver of income, wealth, prosperity and opportunity that it truly is. And Adelaide will remain the sleepy backwater where any one with talent leaves as soon as they get to the age of eighteen. Mike Rann will still go begging to the Feds for more subsidies and tariffs so that his rust bucket state can remain in its present state of economic stupor with high levels of unemployment and predictable social problems associated with it. The UN researchers will be happier.
So what’s wrong with income inequality?
If you think Bill gates should run the world because you don’t want the responsibilty or you think you don’t have the ability and you are happy to live with the trickle down effect then you will get what is coming.
It’s not just about the money honey it’s about freedom. Freedom to take control of one’s life freedom to grow and develop and with this comes the responsibilty you don’t seem to want to take.
If the ship is going down then I am not satisfied to sit back accept my fate and blame Bill Gates
Fatso,
The reason that Bill Gates set up his third research centre in Beijing in 1998, given that there was by then sufficient infrastructure in place, was that the Chinese were prepared to work 15 to 18 hours a day, come in on weekends and work through their holidays (source: The World is Flat by Thomas Friedman, p.267). Those pesky workers in Adelaide shoot themselves in the foot through their strange belief that they have a right to a life outside of work. btw Bill Gates has moved on to saving the poor of the world on the condition that they don’t use open source software 😉
Thanks for the comment Bill. I have enjoyed your comments, they are thoughtful and considered but I am not sure where you are taking me with this one. Are you saying that the sole reason for offshoring is lower labor costs. If so I am in agreement that labor costs are a major factor, but that’s hardly the point I was making.
Let’s not be led off track by the Gates name either. Call it any large international company. Company X if you like. The issue is that Adelaide is far better off with the increased in income inequality. The problem people have with this is that they don’t like income inequality. It just offends them. Look at some of the less considered posts I have provoked and you will see what I mean. But we need to ask ourselves, if income inequality delivers positive outcome for everyone should we just get over the fact that is seems to offend a cherished egalitarian sentiment that probably causes more harm than good?
Fatso you are correct that increasing inequality will raise total output. Both Lenin and Castro changed their economic policies for just that reason. They raised individual incentives ie inequality to raise total output.
The question however is does this general rule hold for all occations?
Another question is does just increasing output satisfy other objectives that we may hold?
Galbraith the elder used the example of comic books. Production of comic books are much more profitable than the production of public schools. Should we there for redirect every public education dollar to the production of comic books? I fear you may say yes.
PS Adelaide used to be the HQ of NewsCorp, anyone heard of them lately.
Your thought experiment about Adelaide doesn’t challenge the initial assertions of my post:
1) Capitalism delivers rising living standards for everyone (as a general trend over time)
2) Capitalism delivers increasing inequality, the gap b/w rich and poor increases
3) Capitalism delivers periodic crises.
From my perspective points 2 and 3 indicate that we need a better system.