And there are enough real-life instances of this segregation (gated communities etc) actually happening to make it all sounds rather plausible. But, in my modest opinion, such a situation is not actually "the best" the rich can hope for, even from a purely selfish point of view.
In this blog-post, I will try explain that belief to address a comment James made earlier: "Your views seem to differ from those of most left-wingers in that you view socialism as a vehicle for advancing middle-class interests. Clearly, you are not alone in this belief: I remember reading an article by a left-wing columnist (it might have been Robert Reich), in which he lamented the left’s failure to persuade the middle-classes that their interests would be best served by siding with the poor against the rich".
Now, I could (and will, in another post) quibble with the word 'socialism' (I don't necessarily believe in the collectivisation of the means of production) but my main point here is that, though James is correct in that I think the middle class interests are best served by siding with the poor against the rich, I view this as a sub-optimal result due to the politics of our present situation.
In reality, it is my contention that the rich's interests are ALSO best served by more aggressive redistribution or pre-distribution policies than the ones we have now.
For this argument to make sense, one has to agree about the purpose of wealth.
If the purpose of wealth is to allow its owner to humiliate, degrade and mistreat those without, then I am actually wrong and liberal policies will not serve the wealthy's interests. There's been enough research linking material success and sociopathy that I felt the need to precise that I would start by assuming that the richest among us are not actual psychopaths, needing to see others suffer to feel happy. Even if we established that the rich were likely to be more competitive, more selfish, more manipulative and more indifferent to the suffering of others, it would not change that assumption and thus my conclusions.
I would say that the purpose of wealth is the one traditionally given to it by economists: To increase one's level of satisfaction via greater consumer utility. I would separate or add that wealth also increase one's satisfaction via greater material safety for oneself and for one's descendants against the vagaries of life and general misfortune (i.e. wealth act as an insurance). It is possible to see inter-generational insurance as being just another kind of good or service but I wanted to highlight it because James rightly points out that "It’s natural and inevitable that parents will try to give their children every possible advantage in life" and this sentiment, natural enough, does have consequences when a fraction of people can bestow not a few assets here and there but actual industrial empires, lock, stock and barrel.
So... how does the already-rich, who are benefiting immensely from the status-quo, would benefit even more from a more egalitarian, more socially mobile society?
In two words: Technological advances.
I am sure it was just as awesome to be at the top of the social pyramid in the past as it is now. Indeed, you could argue it must have been even better given that, in the past, power was more unfettered than it is now.
Yet, if I was given the choice between being Cardinal Richelieu [relevant extract: For many years he had suffered from recurrent fevers (possibly malaria), strangury (from the gonorrhoea he had caught as a teenager), intestinal tuberculosis with fistula, and migraine. (...) [H]is right arm was suppurating with tubercular osteitis, and he coughed blood (after his death, his lungs were found to have extensive cavities and caseous necrosis)] and, say, Bill Clinton [relevant extract: Former President Bill Clinton was taken to a New York hospital today after experiencing chest pains, and underwent a heart procedure, his office said. Doctors inserted two stents into his native coronary artery after one of the bypass grafts from an operation five years ago became obstructed. President Clinton is in good spirits and will continue to focus on the work of his foundation], I would choose Bill Clinton. The ability to get and survive a quadruple coronary artery bypass trumps the rest.
Now this might seem obvious and the real question is why do I link technological progress with a more socially mobile society and a strong and large middle class?
I will admit upfront that I do not have statistically proven evidence of this link but I think there are interesting clues lying around.
Taking the 19th century as a starting point, I think the unionising of the workforce in the late 19th century was fundamental to the spreading of wealth and technological progress experienced in the early 20th century. The late 19th century was no more favourable to wealth redistribution than today's environment: international competition was rife, labour was plentiful etc. Yet, because the working conditions for so many were so atrocious, unionisation was successful, despite an intense and violent opposition from the capital owners and the more conservative elements of society.
And what was the consequence of a great many more people getting a greater income? Well, new revenue opportunities for every firms, of course!
Said differently, firms then may have had to accept a (temporary?) drop in their profitability as their labour costs rose but the consequence of that rise was an expansion of their potential customer base. This is the basis of Fordism, "the (...) manufacturing system designed to spew out standardized, low-cost goods and afford its workers decent enough wages to buy them".
It could be argued that, even if what I just said is true, it does not mean that a strong middle class encourages technological progress per se but merely growth - i.e. greater incomes for workers generate more customers for existing companies' products but it does not mean that it creates the conditions for or relates to new products being invented.
Again, I would be hard-pressed to make a water-tight case for this. But it is my belief that, as customers' needs are always evolving and mutating, an environment in which private consumer demand is the driver of economic growth is more naturally competitive than the one where gargantuan heavy industrial conglomerates cooperate with the state to maintain a military status-quo/feed imperialist dreams.
And, in time, this technological progress benefits the wealthy just as much as (or even more so!) it benefits everyone else, even if they had to relinquish control of some of their wealth along the way to get there.
With regards to the purpose of wealth, I also mentioned James' comment about parents wanting the best for their children. I believe that one of the best way to redistribute wealth across generations (i.e. reset the race to the top) is punitive inheritance taxes. My philosophy on this is similar to Buffett's. It is natural for parents to want to take care of their children. And the handful of rich people at the top of the pyramid should be allowed to satisfy this natural urge by being allowed to bequeath to their children "enough to do anything they want, but not so much that they can do nothing" but no more.
It might be a hard pill to swallow if you've build (or inherited, or stolen) a business empire to let most of it go. But, ultimately, wouldn't even super-wealthy parents prefer their children to live like Buffett's than like Louis XVI's (both Louis XVI's sons died of disease while still children)?
So... how does the already-rich, who are benefiting immensely from the status-quo, would benefit even more from a more egalitarian, more socially mobile society?
In two words: Technological advances.
I am sure it was just as awesome to be at the top of the social pyramid in the past as it is now. Indeed, you could argue it must have been even better given that, in the past, power was more unfettered than it is now.
Yet, if I was given the choice between being Cardinal Richelieu [relevant extract: For many years he had suffered from recurrent fevers (possibly malaria), strangury (from the gonorrhoea he had caught as a teenager), intestinal tuberculosis with fistula, and migraine. (...) [H]is right arm was suppurating with tubercular osteitis, and he coughed blood (after his death, his lungs were found to have extensive cavities and caseous necrosis)] and, say, Bill Clinton [relevant extract: Former President Bill Clinton was taken to a New York hospital today after experiencing chest pains, and underwent a heart procedure, his office said. Doctors inserted two stents into his native coronary artery after one of the bypass grafts from an operation five years ago became obstructed. President Clinton is in good spirits and will continue to focus on the work of his foundation], I would choose Bill Clinton. The ability to get and survive a quadruple coronary artery bypass trumps the rest.
Now this might seem obvious and the real question is why do I link technological progress with a more socially mobile society and a strong and large middle class?
I will admit upfront that I do not have statistically proven evidence of this link but I think there are interesting clues lying around.
Taking the 19th century as a starting point, I think the unionising of the workforce in the late 19th century was fundamental to the spreading of wealth and technological progress experienced in the early 20th century. The late 19th century was no more favourable to wealth redistribution than today's environment: international competition was rife, labour was plentiful etc. Yet, because the working conditions for so many were so atrocious, unionisation was successful, despite an intense and violent opposition from the capital owners and the more conservative elements of society.
And what was the consequence of a great many more people getting a greater income? Well, new revenue opportunities for every firms, of course!
Said differently, firms then may have had to accept a (temporary?) drop in their profitability as their labour costs rose but the consequence of that rise was an expansion of their potential customer base. This is the basis of Fordism, "the (...) manufacturing system designed to spew out standardized, low-cost goods and afford its workers decent enough wages to buy them".
It could be argued that, even if what I just said is true, it does not mean that a strong middle class encourages technological progress per se but merely growth - i.e. greater incomes for workers generate more customers for existing companies' products but it does not mean that it creates the conditions for or relates to new products being invented.
Again, I would be hard-pressed to make a water-tight case for this. But it is my belief that, as customers' needs are always evolving and mutating, an environment in which private consumer demand is the driver of economic growth is more naturally competitive than the one where gargantuan heavy industrial conglomerates cooperate with the state to maintain a military status-quo/feed imperialist dreams.
And, in time, this technological progress benefits the wealthy just as much as (or even more so!) it benefits everyone else, even if they had to relinquish control of some of their wealth along the way to get there.
With regards to the purpose of wealth, I also mentioned James' comment about parents wanting the best for their children. I believe that one of the best way to redistribute wealth across generations (i.e. reset the race to the top) is punitive inheritance taxes. My philosophy on this is similar to Buffett's. It is natural for parents to want to take care of their children. And the handful of rich people at the top of the pyramid should be allowed to satisfy this natural urge by being allowed to bequeath to their children "enough to do anything they want, but not so much that they can do nothing" but no more.
It might be a hard pill to swallow if you've build (or inherited, or stolen) a business empire to let most of it go. But, ultimately, wouldn't even super-wealthy parents prefer their children to live like Buffett's than like Louis XVI's (both Louis XVI's sons died of disease while still children)?
This is interesting. So, you’re saying that collectivisation would benefit even the richest members of society, and that they’re sabotaging their own interests by refusing to get with the programme?
ReplyDeleteLet’s not forget that Cardinal Richelieu and Bill Clinton were separated by centuries of scientific development. Without delving too far into the realm of counter-factual history, we’ve no reason to believe that this process of advancement wouldn’t have taken place without the rise of socialism. (That said, socialism was such a defining force in shaping 19th and 20th century European history that it’s difficult to imagine how things would have gone without it, and what might have taken its place.)
You are, of course, right that innovation in the pharmaceutical industry, as in other aspects of the medical field, is primarily driven by private companies. These companies require a return on their investment to continue developing new drugs and treatments, which in turn requires the existence of buyers who can afford their goods.
Where we disagree is that you seem to believe either that the current economic model either isn’t providing people with the disposable income which will need to buy those goods and services, or that it will fail to do so in the near future and that we will therefore see a protracted decline in middle-class living standards. (This sounds very similar to Marx’s “crisis theory”.)
I don’t see that happening.
One of the great things about our current economic model (and about capitalism in general) is that, even in the immediate wake of the worst economic crisis since the 1930s, it still provides us with sufficient disposable income to support a thriving restaurant and entertainment industry. This is without precedent in the course of human history: when economies have failed (or, in the case of agrarian societies, when crops have failed) people have generally starved... and they haven't had our standard of disposable income even when things were going well.
Notwithstanding rising food prices (and rising housing prices in South-East England), conditions are expected to further improve as we come out of recession.
I’m finding it a bit disconcerting that your prediction, as an economist, is that we’re heading the other way. Insofar as it’s possible to generalise, is this a view which most other economists share?
We also disagree over whether introducing punitive rates of taxation on the wealthiest individuals and on international companies would increase middle-class prosperity, or whether this would instead destroy investor confidence in one’s economy. But that’s a conversation which is probably best saved for another blog post.
James,
ReplyDeleteSorry for the belated reply. Monday was bank holiday in Ukraine so I was without internet access at my in-laws.
Anyhow, yes, my key contention is that technological progress works best when they are masses of potential customers for its applications.
As I said, it's not something I can prove beyond contention and, sure, some technological progress would have taken place anyhow but note that a discovery is not the same thing as having it transforming the lives of people via technical applications. Electricity was relatively well understood and mastered in the early 1800s. We would have to wait till, what, the 1920s or 30s to see mass electrification?
You also have the contention that the Black Death, by killing between 30-70% of the people (depending on locations) lead to greater labour mobility (weakening of feudal ties), greater wages demands and, eventually, greater pay for the surviving workers. This increase in wealth per capita, in turn, is meant to have been an influential trigger for the Renaissance (along with a reduction/transformation of the Church, which suffered from having been shown unable to placate God and from having lost a lot of its personnel - monks and priests often tended to the Plague victims and thus became victims themselves in disproportionate numbers).
As to whether the current situation is sustainable, we shall see. I note that wages have stagnated for most people for a long time. I note that labour participation is falling. You've mentioned several times the restaurant industry as if going to the restaurant demonstrated some kind of wealth. It doesn't, particularly. It is simply the outsourcing of (family) cooking, just as the fact that we're buying our clothes in a shop represents a jump from self-made clothes to industrial production techniques.
I'll reply more fully to your other objections as part of my reply to your guest blog-post.
Best,
Frederic
Fredric:
ReplyDeleteMay I recast your post at Angry Bear Blog?
This:
"Anyhow, yes, my key contention is that technological progress works best when they are masses of potential customers for its applications."
I agree with immensely.
When Labor does not gain its share of productivity gains in wages, it becomes harder to sell the benefits of technological change as no one can afford them.
By all means, it would be a pleasure to see this post on 'Angry Bear' as this is one of the eco-blog on my bookmark list!
DeleteAnd, yes, I of course agree with your comment. 'Some' technological change does trickle down (I suspect technological improvements trickle down better than wealth, actually) but nowhere near what greater purchasing power for the middle classes would do.
As an asides, Tyler Cowen sees the Great Stagnation starting in the 70s with the end of cheap oil. But it's also and maybe not coincidentally the time Labour started losing ground in terms of getting its share of productivity gains...