Inequality, Debt and Public Equity

By   /   December 6, 2013  /   6 Comments

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We avoid financial Armageddon by maintaining the fiction that debts should be repayable but never repaid. It’s our Faustian bargain. It’s a dangerous path to affluence, but to some extent unavoidable. Whatever the faults of capitalism, most of us would rather live in South Korea than North Korea.

capitalism

The eighteenth century was one of the most unequal ever, at least in the European west. Further, it was very much a century of capitalism; albeit commercial and agricultural capitalism (rather than the industrial capitalism that came in the nineteenth century). Adam Smith, in his Theory of Moral Sentiments (1759), noted this inequality, and presented what might be interpreted as the first formulation of the trickle-down theory:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose for the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants. … When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces.

We should note firstly that Smith, and the other founding fathers of the liberal project (and indeed of all philosophical projects) were storytellers rather than historians. Providence did not, of course, divide the earth among a small number of very privileged people. However that division of resources has been the reality of many epochs, including Smith’s own.

Smith is ambivalent. Is he talking about the distribution of the basic necessities only? His argument seems more comprehensive than that, however. What is clear is that Smith is saying that the capitalist distribution of goods and services is very much less unequal than the distribution of capitalist entitlements.

A broad appreciation of Smith’s thought is that he has an underlying theory of growth, rather than theories of debt or redistribution. The word “improvements” indicates that he sees the wealthy as having to invest large portions of their incomes because there are limits on their capacity to consume goods and services. It means that, in reality, large portions of food and other necessities are advanced to workers, who notionally repay through the proceeds of economic growth. However, because the rich are already satiated, the growth dividend is continuously recycled back to the poor.

In today’s context, the rich prefer to lend entitlements to the relatively poor rather than pay adequate wages or adequate taxes. (We should understand this lending as being akin to paying insurance premiums; collectively, the creditor-interest only wants to be repaid in the event of their own impoverishment.) Thus the distribution of goods and services is much as it would be if wages and/or taxes were much higher.

A relatively equitable distribution of consumer goods and services is an absolutely essential requirement of industrial capitalism, and is probably a requirement of all forms of capitalism. Industrial capitalism requires the mass production of wage goods (ie goods that the relatively poor buy; equivalent to Smith’s “necessaries of life”). That means there must be mass consumption of wage goods. If the capitalists don’t pay enough for workers and the other relatively poor to buy wage goods, then they must lend them the equivalent of those wages.

The difference between the distribution of income and the distribution of expenditure is debt. The relatively poor get stuff (regardless of earnings) and the rich get what they call ‘assets’. The debt of the poor (or whoever the indebted are) is the financial wealth of the rich.

Thus the creation of debt yields a win-win outcome; tantamount to Smith’s “invisible hand”. The poor get what they need and the rich get appreciating financial portfolios. The economic wealth of the rich is consumed by the poor.

We also note that the repayment of debt – in the aggregate – represents a lose-lose outcome; a nightmare financial and economic scenario where the poor become economically much poorer and the rich become financially much poorer. (In the last 25 years one political leader ran a successful policy to repay his country’s – Romania’s – public debt. The Romanian people were utterly impoverished as a result; he, Nicolae Ceausescu, and his wife Elena were arrested and shot, on Christmas Day 1989).

We avoid financial Armageddon by maintaining the fiction that debts should be repayable but never repaid. It’s our Faustian bargain. It’s a dangerous path to affluence, but to some extent unavoidable. Whatever the faults of capitalism, most of us would rather live in South Korea than North Korea.

How do we mitigate the problem, by ensuring that stuff is distributed equitably, and that entitlements are also distributed equitably? I don’t argue that there should be no difference in the distribution of income compared to the distribution of consumption. But a much smaller difference than we have today (and that we had in Smith’s day) would substantially reduce our Faustian precariousness.

In the thirty years after World War 2, the capitalist world enjoyed unusually equal income distributions, and hence much more financial stability. This was enhanced by the massive write-offs of financial assets during the events of 1914 to 1945; it was as if the financial ‘reset’ button was finally pressed, in 1945. The post-1945 years were a period of low inherited debt, and relatively slow accumulation of new debt. Those years that post-war baby-boomers assumed to be normal, were quite atypical in the world’s economic history.

One of the drivers of income equality from 1945 to 1975 was the high bargaining power of workers, facilitated by full employment and low labour force participation rates. These conditions cannot (and should not) be recreated by today’s policymakers.

There must be – and there is – another way to achieve equitable income distribution in contemporary capitalism. It’s not through the labour market. It’s through the rediscovery of ‘the sovereign’ as a third interest (in addition to labour and private capital).

The sovereign was effectively banished as an interest by the founders of the liberal project; founders such as John Locke and Adam Smith. To some extent, with good reason. Today, however, we live in an era of democracy. The sovereign is us, in our public personae.

When we properly account for a public share of national income, we are all entitled to equal dividends from the public share. Indeed, just as equities – property rights – are an essential basis for the distribution of capitalist profit, so equity in public property provides a philosophical basis for social distribution. We need to assert our public property rights in more transparent ways.

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6 Comments

  1. Countryboy says:

    Ah ? I’m slightly confused . I’m not that bright sadly .
    You say ;

    ” One of the drivers of income equality from 1945 to 1975 was the high bargaining power of workers, facilitated by full employment and low labour force participation rates. These conditions cannot (and should not) be recreated by today’s policymakers.”

    And then you said ;

    ” …Indeed, just as equities – property rights – are an essential basis for the distribution of capitalist profit, so equity in public property provides a philosophical basis for social distribution. We need to assert our public property rights in more transparent ways. ”

    Do you not directly contradict yourself ?

    You say in so many words ; the Human working person must not , should not and I assume you mean Unionize to protect themselves against the natural born predator that is the capitalist ?

    Then you say ; ” We need to assert our public rights … ”
    Well then , how ? How do you propose we do that ? [We] are not more than a toothless , hog tied poodle at the Gang Banger dog fight so just how do you propose we make our voices heard over the rustle of OUR money being lodged in Swiss Banks Accounts then ?

    And to compare Western or Industrial Capitalism with North Korea is logically erroneous . It’s like a bear thanking it’s lucky stars it isn’t a Zebra when it finds itself surrounded by Lions . It’s logic I’ve heard before . I’ve heard lying , thieving , coning , swindling , cheating , dirty , filthy scum bag politicians FROM the post mid 1970’s saying just that . When they started moving in on our assets . ‘ Be thankful we’re only ripping off the public purse and not shooting people in their homes . ‘ Remember Pig ? Arch Kleptocrat Pig Muldoon ?

    You’ve detailed a script within which those liars and traitors lurk .

    I say Power back to us Humans . I prefer the tyranny of the Masses to the tyranny of the rich any day of the 40 hour week but thanks for the Post . Very interesting .

    ( After re read ) Oh ? Did you mean that we Kiwis should keep our public assets and not allow then to be sold so as to give us a fulcrum with which to bargain and to be as a mantlepiece we can lean against during times of financial hardship ? See , I’m not that bright .

  2. Andrea says:

    Sounds like ‘usury’ to me. There used to be laws against it for just the reasons you’ve outlined: the enslavement of toiling people.

    Seems that we haven’t gone too far from the old ‘company store’ after all.

    No wonder large subsets of the commercial world are against Islamic banking! Riba and haraam sound like very useful concepts, if followed honorably. (Honorable banking??? …and the pigs are fed and ready to fly.)

  3. Draco T Bastard says:

    The best way to get rid of debt is to remove the ability of the private banks to create money and charge interest on it. Have it so that only the government can create money and that they must spend it into the economy and then that money is destroyed by taxes. This gets rid of government debt.

    Then we can have the government make 0% interest loans available for mortgages and businesses. Private debt would still exist but, as it no longer carries interest, would actually be repayable. This gets rid of the ability of the rich to exponentially accumulate ever more money.

    Finally, there should be a Universal Income paid to every man, woman and child which is the social distribution.

  4. Marc says:

    It was the blunt fear of another major war, that led the “capitalists” to operate on somewhat fairer terms in the decades up to the 1980s, after the last Great War. Naturally reconstruction itself, overseen by state governments, forced the capitalists, to pay for the labour that was needed. There was little unemployment then, for certain reasons. It was also the fear of the people joining the other side of the fence during the Cold War, that kept them in check. The student revolts in Europe, the Anti Vietnam and other demonstrations in the US and Canada, same in more moderate terms in Australia and here in New Zealand, that worried the capitalists.

    But since the Iron Curtain came down, the remaining (although in hindsight not so formidable) competition “gone”, the capitalists smelled the temptation of regaining near absolute power and control. So they pushed ahead, the corporations first of all, to dictate again, their terms. They also could exploit collapsed societies in the East, to take advantage of well educated, trained and still cheap labour, so that was a “god send” to them.

    So we had the outsourcing and offshoring taking place at a large scale. The populations in the “developed” nations were kept calm, by promises that they will gain, that they will simply have to take on “service sector jobs”, and all would be fine.

    But in the end, the debt cycle took another course, people did not gain, did not earn as much as before, more casual and temporary work became the norm for many, so we had the development of the working poor. The states were facing more demand on social support systems, but that cost was not what they wanted to carry, so again, the capitalists manipulated the also increasingly privatised media and broadcasting sector, as well as the political agenda, to blame the ones not wanting or bothering to make efforts to work for economic ills.

    We are just there in another cycle here in NZ, where all good promises are made, and we should only now lash out at those “lazy” sick and disabled, those that “dare” to live off sole parent support, and get them working, and all will turn out better, under an “investment approach” in welfare.

    Hey, where does all this end, I may ask, are we going to re-invent Auschwitz and Dachau soon, to make those not up to it pay for the treatment they deserve? Are we going to allow capitalists to push governments to introduce forced labour. By the way, this is already happening, at least for the prison population. They are now building components for Housing NZ and the rebuild in Christchurch, and more is happening elsewhere.

    I say this again, most in the public are either asleep at the wheel, or they are even complicit in all this, condoning what goes on.

    It is time to call it quits, enough is enough, and do not let the evil start, even, as it did in Nazi Germany once, same as in some other countries.

    Bring back collective agreements, decent welfare, a living wage and a society that is worth living in, that is not divided and dumbed down, where everybody truly has a fair chance.

    Amen

    • Gosman says:

      Your historical analysis is wrong. Neo-Liberalism developed and gained ground after the breakdown of the Keynesian consensus in the late 1960’s and 1970’s. The ideas behind it started being implemented during the 1980’s. This was at the height of the Cold War. If anything the post cold war world in the West was dominated by ‘Third way’ economics of Clinton and Blair.

      • Marc says:

        Gosman –

        “If anything the post cold war world in the West was dominated by ‘Third way’ economics of Clinton and Blair.”

        You seem to be conveniently forgetting that during the “height of the cold war” it was Reagan and Thatcher taking over the government in the US and the UK. Clinton and Blair came later, a fair bit later, and they came when the “cold war” was over. And the “third way” is nothing much but a “softened” version of neo liberal economics. That “third way” was adopted by the Labour Party in the UK and the Democrats in the US, meaning a shift to the right in their philosophies and policies.

        If the “Keysian consensus” was ever questioned, it was towards the end of the 1970s and during the 1980s. But with the US pushing for more missiles to be stationed in Europe, they felt that the cold war was nearly won by them, under Reagan and Thatcher (in the UK).

        Yes, since the 1980s things shifted firmly to the right in socio-economics, and we have not recovered from that since, with larger income and wealth gaps all over the place (in many developed countries), than there were for the decades before.