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We need to recognise that stable and sustainable capitalist development can only be built upon a broader, more equal, social base
One of the few positive developments since the crisis has been the increased political salience of the question of pervasive inequality. Once the almost exclusive preoccupation of critics of contemporary capitalism, it has more recently emerged as a no less central concern of its staunchest defenders. The Economist magazine, always alert to the future prospects of the free market, ran a special feature on the inequality debate in October 2012. Then, in December 2013, President Barack Obama declared that the growing gap between rich and poor in the United States posed ‘a fundamental threat to the American dream, our way of life and what we stand for around the globe’ – so much so that reversing it had now become ‘the defining challenge of our time’. Most recently, in January in the run-up to its latest gathering in Davos, the World Economic Forum reported that its elite business members judged rising inequality to be the biggest threat to global prosperity over the next few years.
All of this is very revealing, because, for a long time, for far too long in fact, advocates of the Anglo-liberal growth model were generally content to ignore the evidence of the growing inequality that was piling up around them. The rich got hugely and flagrantly richer. The middle was ‘squeezed’ as their incomes stagnated in real terms over a period of decades and the consumerist life-style on which the growth model relied was maintained by their growing dependence on debt. As Joseph Stiglitz put it so well, continuing growth became ‘reliant on the bottom 80 percent consuming about 110 percent of their income’. At the bottom the poor struggled and many dropped out of society. In general, very few mainstream analysts worried about what the picture as a whole looked like and it was widely conceded that inequality as a political issue just didn’t get off the ground.
That was then. Post-crisis, we surely ought to think differently. The latest Oxfam briefing paper, released just last month, shows in crisp fashion just how bad things have got globally in terms of inequality. We quote:
Almost half of the world’s wealth is now owned by just one percent of the population.
The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.
The bottom half of the world’s population owns the same as the richest 85 people in the world.
Seven out of ten people live in countries where economic inequality has increased in the last 30 years.
The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1908 and 2012.
What’s more, the situation has worsened extraordinarily since the crisis. Oxfam also reports on new research carried out by Emmanuel Saez of the University of California, Berkeley, which shows that, ‘in the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer’. This is social and political dynamite, or at least it ought to be.
However, there is another - possibly even more important - point to be made here. Inequality is not just the unfortunate outcome of a flawed growth model or even the consequence of the failure of a flawed growth model. It was actually one of the defining features of that model, one of the core characteristics that fuelled it in its hey-day and ultimately rendered it unbalanced and unstable. By allowing the rich to escape previously existing social constraints, by squeezing the middle and by further impoverishing the poor, inequality played an important role - along with other factors - in creating the very economic mess the crisis exposed and from which we have still to extricate ourselves.
What, then, does such an analysis mean for the citizens that we have placed at the heart of our attempt to delineate a new model of civic capitalism? Three quick and simple points immediately follow: that this level of inequality is morally offensive to our collective sense of humanity; that it is socially destructive, eroding trust, increasing mental and physical ill-health and restricting social mobility; and that it is politically pernicious in the way it facilitates the ‘political capture’ of states by concentrations of wealth and corporate interests. These are crucial things to say. But, above all, we want in this post to make, and work through, a fourth, perhaps more complicated, point that is grounded fully in political economy.
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.
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