Lost Balance: Were Is The Anger?

With the steady increase in activity that seems to be characterizing the US economy currently the early frenzy of placing the blame for our crisis is ebbing. Already we are being treated to “year end” articles calling people such as myself, those who view things a little more skeptically, unnecessary naysayers. The improvement in the general economic numbers now being reported is being used as a vehicle to justify yet another round of optimism and good news stories. The market, we are told, is poised for a banner year. With profits on the up, and Wall Street back on its feet, 2011 has all the makings of a good year. So, apparently the skeptics were wrong, and their mediocre forecasts failed to take into sufficient account the remarkable resiliency of the great American money machine. Our problems, we are told, are now more those of mopping up the mess, rather than worrying about sinking under its weight.

Well, I don’t care much about profits. Not unless they are put to good use. Corporate profits have seen banner times in America for over a decade. Shareholders may have been buffeted in the downdraft of 2008, but they have either been bailed out directly by the government or they have benefitted from benign government policies ever since. They can have no gripes at all. Cash is piling up in corporate coffers. Profits are back with a vengeance.

So what?

I care about the general economy, and about rusty boring details like wage and job growth. I care about opportunity. I care about balance. In that context the economy is still festering. Indeed without endless government support there is little evidence that it would yet have recovered much at all. But above all else I fear that the great recession will simply reinforce the pre-existing trends dividing the country between those who have an advantage and those who are left behind. That divide shows up in the enormous income and wealth inequalities that now bedevil society, and the huge discrepancies in expectations now reasonable for the mass of middle and lower class families, and those of the privileged above them.

To this extent I think that the generalized numbers are masking something important. Something we should be angry about, but aren’t. The steady separation of the economy into two distinct economies, one of the rentiers and capitalists and the other of the average workers, is getting more stark every year, and the gap may well have opened even wider with this crisis. Which is really infuriating, to me at least, because it was the folly of financiers that brought the crisis upon us.

I am struck by the constant marginalization of anyone who dares talk about inequality as a core subject for economic discussion. Orthodox economists, or at least the less thoughtful, simply treat inequality as a side product, or after effect, of the workings of capitalism. Periodically the media produces an article or two talking about the income gap that yawns wide nowadays, but they quickly move onto more acceptable mainstream topics like inflation or interest rates, as if the only grown up subjects to discuss are what ails the market.

The New York Times produced such an article recently talking about the pay of “super stars” and how it distorts incentives. Buried in the article, and treated as a minor rather than the main fact, was a revealing statistic. America is less upwardly mobile, in terms of wage earning opportunity, than any other large industrial nation.

Think about that for a moment.

This is the self promoted “land of opportunity”. A very large component of the “American dream” rests squarely on the notion that the US is the place to be if you want to profit from hard work and industrial innovation. Old Europe, in particular, is derided as sclerotic and inept at providing such opportunities. So why is it that a lower wage earning European has a much higher chance of moving upwards than a similarly placed American?

Capitalism.

The more naked the capitalism the more unequal the income. This we all know. What we have ignored is the social corollary: the more naked the capitalism the more rigid the society. Let’s set aside the failed alternatives: we could debate endlessly the merits and demerits of either socialism or communism. I do not intend to, I have a natural distaste for all solutions to problems that rely upon idealistic assumptions about human behavior. There is too much contrary evidence to allow me to view them with anything other than deep mistrust. Capitalism, by contrast has no such flaw: it works exactly the way it comes advertised. It is divisive, abusive, prone to manipulation, and encourages inequality. There is no magic to it: that’s what it is. Unleash capitalism, and that’s what you end up with. Every time.

But human beings may be less rational and messy than utopian economists of either left or right would like to pretend. They, after all, are simply trying to justify their ideologically preferred social arrangement. We, in the middle, know better. We know that there are ways to mitigate capitalism without killing off its energy and wealth production. Our primary weapon is democracy.

As in income redistribution. As in progressive taxation. As in the provision of safety nets. As in affirmative action. As in women’s rights. And so on. We have a whole armory to stop the wealthy from building citadels and extending privilege only to themselves and their kind.

It’s called balance.

All utopian economic systems, from genuine Marxism through to neoclassical economics, make self serving and unreal assumptions about human beings and their behavior. Thus they all produce solutions that need to be enforced against the flow of that behavior. Because they are not based upon real humanity, but upon an idealized version of it – because they are Platonic and not Aristotelian – they also force their advocates to bend society to their wills. Thus they become authoritarian, often despite their advance intentions.

This is the great weakness now breaking the American dream apart.

The dream, such as it was, assumed a balance. It assumed that the lessons of the 1920’s and 1930’s would not be forgotten and that the economy would be managed for the benefit of all. For two or three post-war decades it was. But after the onset of the Reagan illusion and the triumph of neoclassical economic thought, balance was tossed aside as an impediment. Complacency prevented the newly minted middle class from identifying the error in Reaganism and its advocacy of naked capitalism. After all if we can read, as we do, in the introduction to basic economic textbooks that Americans are wealthy because their economy is “market based”, then spotting the error is hard for anyone not grounded in alternative economics to do.

The average American is wealthy not because of free markets, but because those markets were strongly monitored and regulated for decades. Once that monitoring and regulation was re-interpreted as the “dead hand” of government and removed, the path to wealth for the masses dried up.

So why are we not angry about this?

Because we still live within the illusion. We conflate capitalism and democracy. They might both depend on similar core principles, but they are antithetical. The one concentrates power and wealth, the other seeks to diffuse them. They may be symbiotic, but only when we have a clear understanding of their conflict.

It is only when a society enforces itself against the results of naked capitalism, when it makes sure that the elite does not rent seek, and that people like the bankers of 2007/2008 actually pay for their errors, that it can benefit from that capitalism. Every other time, as in the post Reagan decades, including the Clinton years, society will fracture along the lines we are now so aware of. The lower and middle will ossify and lose traction. The upper will scarf up ever more of the rewards.

In this context the contemporary and persistent attack on our safety net seems to me to be an attack on opportunity, and as an attack on the democratic bulwark against the pernicious effects of inequality. So every attempt top enforce austerity in order to assuage markets pains me. The benefit of austerity flows only to the elite while the cost is borne by the less privileged majority. Early industrial nations abandoned classical economics for a reason: it was designed to justify the actions of the new industrial class. In Britain, first Smith then Ricardo attacked the old world in order to foster capitalist growth. A hundred and fifty or so years later Keynes sought to save capitalism from itself by injecting the government into the heart of activity. In between the two, the severity of inequality made it evident that naked capitalism imperiled itself. It was doomed if left unattended. Yet all our current attempts at austerity cut away at what is left of the boundaries of capitalist behavior. Instead of re-estabkishing balance we are deliberately veering further away.

A long time ago I came across models of the economy built by Kaldor. One explicitly encompasses the impact of balance. The more wages take of the fruits of growth the less incentive there is for capitalist innovation, and thus growth slows to everyone’s disadvantage. And, in contrast, when profits take too much, workers become discouraged, unable to maintain advancement, and ultimately impose themselves on capital. In other words society becomes politically unstable at either extreme.

Are we there yet?

I do not know.

But I do know we are headed that way, and that textbook economics is culpable for spreading market myths far enough to help destroy the opportunity it was designed to justify. It ignores balance. It ignores reality.

Let me change my mind. I do care about profits after all. We need less, so that wages can flourish again. We need to get back into balance. Only then will the economic engine hum again.