‘Civic Capitalism’: a shared commitment to reduce inequality

Tony Payne & Colin Hay - Directors of SPERI

In a nutshell, we contend that, in addition, extreme inequality is economically damaging and actually undermines the stability and sustainability of capitalist development.  A new model needs to be built upon a broader, more equal, social base in which the middle is not squeezed, but instead ‘settled’, perhaps even ‘satisfied’ (in a bow to those like the Skidelskys who have recently and tellingly invited everyone to think about ‘how much is enough’). 

Importantly, too, because of the central role it played in the generation of the crisis, inequality cannot be left on the back burner until growth is safely resumed.  This would be to fall back again into the familiar economic argument that the question of efficiency has to be separated from considerations of equity.  The idea here is that the size of the cake has to be expanded to the maximum before we think about how to share it, the worry being that any attempt to bring about redistribution is likely to affect growth negatively by interfering with incentives.  We don’t accept this, taking the contrary view that alleviating inequality and promoting sustainable growth, far from being antithetical, are actually deeply intertwined and completely complementary.

In effect, political economy needs to reflect again on the question of the degree to which inequality is a precondition of economic innovation and development.  Our intuitive answer is that some inequality is probably necessary to ensure that there are sufficient incentives to invest, produce and work, but that anything like the kind of inequality we have become accustomed to living with in fact threatens the broad social base on which sound economic development depends.  This argument was in fact grasped for most of the twentieth century by those farsighted business leaders who understood that their workers needed sufficient remuneration for their labour to be able to buy the goods and services they were making.  Put differently, they knew that you couldn’t build successful capitalist development solely around the production and sale of yachts, expensive cars and luxury homes!

This insight was deployed to good effect by Joseph Stiglitz in early 1993 when he argued in The New York Times that there were four major reasons why inequality was ‘squelching’ the recovery (link 8).  First, the middle class was ‘too weak to support the consumer spending that has historically driven our economic growth’; second, the ‘hollowing out of the middle class since the 1970s’ meant that they could no longer afford to invest in their future; third, the loss of this middle income was ‘holding back tax receipts’, especially since those at the top were so adroit in avoiding taxes; and, fourth, inequality was associated with ‘more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable’.  This piece was much debated, and disagreed with even by fellow Keynesians.  But Stiglitz was surely right to insist on the truthfulness and continuing relevance of a key element of Keynes’s own economic theorising, which was that middle and lower income citizens have a much higher marginal propensity to consume than the rich and very rich who he considered to be more likely to save than spend their enormous earnings.

In sum, we need to rebuild as swiftly as possible the broader spending base on which capitalism used to sit prior to the crazed rush towards the extreme inequality racked up over the past several decades in most advanced countries.  What’s more, we know how to do it, because we have done it before - from the late 1930s onwards and into the post-1945 era.  The methods are: progressive taxation of income and wealth; the serious pursuit of corporate tax avoidance on a coordinated, global basis; the enactment of proper policies to require the payment of living wages; the public provision of universal healthcare, education and social protection to citizens; and the defence of the rights of workers within the law to organise themselves inside trade unions.  

Can it be done again in hard times post-crisis?  That will depend in the end on politics and the courage and vision of political leaders.  We have shown, however, that the political economy of a broader, more equal, social base would increase growth, generate more taxes, reduce welfare spending, free up resources to devote to public investments and, generally, create a virtuous circle of civic capitalist development.  What’s not to like if you are not a member of the 1% that has benefited so much from the neoliberalism of the past several decades?  It’s sound political economy, and it’s a better morality play than the one we have been participating in.