Saturday, January 2, 2010

Greed is bad

One would not think it needs saying, but apparently it does. Greed is bad.

One of the most dramatic changes in our culture over the last few decades has been increasing inequality. After the trauma of the Great Depression, New Deal, and World War II, the social contract included steep taxes on the rich and explicit care for the unemployed through fiscal support and monetary Keynesianism.

This led, as Paul Krugman and Robert Reich among others have portrayed it, to a sort of golden age of economic egalitarianism, where the rising tide really did lift all boats, through the staid and productive 50's and the incredibly hopeful 60's, doubling real incomes across the board. In contrast, the last decade's economic growth gave all of its dividends to the rich, with the lower 80% experiencing no increase in real income or living standards, rising debt and declining wealth.

Chapter and verse are given here, and I select a couple of graphs to illustrate:

Hourly production wages, 1960-2004 (left), real GDP per capita (right)


Share of Wealth Owned by Bottom 80% 1979-2003

We rank 95th out of 135 ranked countries in economic equality, measured by a broad statistic called the GINI index.

This is a bad thing. It is a bad thing in simple fairness terms, for it is highly unlikely that only the top 20% of the population has increased its productivity. And it is bad for the long-term health of the economy and the society. The decline of Rome seems to be largely due to extreme inequality, where large landholders (exemplified by Senators) gathered more and more wealth, pushing serfs and slaves deeper into penury, while exempting themselves from taxation through political corruption. The end result was that the Western empire, after hundreds of years of power and cosmopolitan intercourse, sank gradually into poverty and thence into history.

As Keynes pointed out, an economy composed of the rich alone is a poor economy. Luxury spending is fickle, wasteful, and insufficient, compared to spending by a broad middle class. It is all about private goods and fails to support public services like education and infrastructure, except inthe guise of philanthropy, where it is likewise fickle and idiosyncratic, rather than broadly rational. And needless to say, it multiplies human misery. So why have we been tilting the economy strongly towards the rich over the last few decades?

I will leave the religio-politics and ideological economics aside for the moment. It seems that the capitalist system, left to its own devices, tends in the direction of stark inequality. Organized crime is a case on point, where the more organized it is- the better the various resources, like territories and businesses, are shared out among various families- the more equal the results. But the more robust the competition, the fewer families survive to enjoy its dividends.

Free markets tend toward efficiency in many cases, but firstly, market failures are depressingly frequent (medical care being a glaring example, not to mention "high" finance), and secondly, we have long recognized (since at least the institution of the progressive income tax and similar mechanisms) that the public/state has a duty to ameliorate the natural ratchet of the market, both controlling the terms of corporate and market activity, and redistributing wealth to directly counteract its natural concentration in naked capitalism.
"Civil government, insofar as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, and for the defence of those who have property against those who have none." -Adam Smith
In field after field, whether acting, sports, agriculture, law, finance, management, etc., the rich get richer and the rest get poorer with time. Whoever is best in a field can attract a bidding war, while an excess of aspirants generates a corresponding ratchet down in pay for the also-rans.

This is simply the market at work. I am not sure whether it is an iron-clad Malthusian law, or something more contingent on the cultural moment, the corruption of government, etc., but it seems to be the trend of economic history, played out in ancient and modern times. Dramatic exceptions only prove the rule. One example is the period following the black plague in Europe, where, following a depopulation of approximately half, the amount of land did not decrease, leading to high demand for labor and high wages, leading in turn to a weakening of feudalism and other markers of increased power and income among the lower classes.

This also led to general cultural and economic progress. Scarcity of labor has historically been one of the most fertile inducements to economic progress, especially in terms of technology and productivity. Necessity is the mother of invention, and conversely, infinite labor supply is the mother of technological stasis. Today, US farmers claim they couldn't survive without hot and cold running illegal labor. Yet a century ago, they prospered through technological innovation. Innovation continues in agriculture, but the reliance on cheap labor is a very regressive aspect, both for agricultural communities, and for our agricultural practices and for productivity at large.

But this is just a small part of the general corrosiveness of large-scale inequality. As Bill Mitchell says:
"As an example, the most recent literature on economic growth and development is that more equal countries grow faster, other things equal. The strong empirical finding that emerges is that there is a positive relationship between equality and growth. More equal societies generate better educational outcomes and result in higher skill levels than highly unequal societies. The old neo-classical growth models could never conceive of this because they asserted Principles (such as the so-called law of diminishing returns) that denied it as a matter of logic. Never mind looking out the window.
...
The link between equality and growth is also developed in the public health and sociological literature. It is indisputable that poverty drives other social costs including poor health, increased crime, ghettos that create spillovers of disadvantage. Mainstream economists tend to ignore this literature."
So, not only has the last decade been a dead loss (Krugman), but the last several decades have been heading us in the wrong direction. Wrong morally, economically, and culturally. The work of the Obama administration has ironically been to re-feed the monster of finance, hardly attending to more basic dynamics. The political system remains hungover from the Reagan era, when greed was good, markets were king, and public service was spat upon.

For example, the inheritance tax is a prime fixation of the ideological right. The "death tax" is the final indignity administered by the state to the freedom and dignity of its citizens. But you can't take it with you, so a less hysterical representation might be that the tax stands in the way of a durable class structure, i.e. an aristocracy. The question is whether we should give the next generation, differentiated already by their various genetic and cultural endowments, a financially fair start in life, through the generous provision of public goods, or whether personal financial empires built by whatever means, fair or foul, be allowed to turn into enduring family empires.
"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues."

... But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still." -John Maynard Keynes
Another example is the mantra of "motivation"- that executives require superlative pay to properly motivate them to execute the shareholder's interests. This has resulted in those managing the cookie jar helping themselves to cookies in the dark of night while telling others in the household that downsizing is needed since there aren't enough cookies to go around right now.

Needless to say, shareholder (i.e. public) interests are best served by keeping as much money in the jar as possible, rather that giving it to managers to "align" their interests with those of the institution. The agent problem is a difficult one, but such bribery, now exposed in the financial meltdown as more akin to embezzlement than "pay", is a highly dubious way to address it. Psychology tells us that people can be motivated in many ways and by miniscule rewards, so putting that genie back into its bottle, while difficult, is important and manageable.
“Regarded as a means, (the businessman) is tolerable; as an end, he is not so satisfactory.” -John Maynard Keynes
Markets are tools to further the public goods and private freedoms, not embodiments of them. Many goods arise out of corporations and markets, but these institutions are inherently amoral, as well as being fundamentally dependent on the state for existence. Government, in contrast, is our collective moral actor whose role is to control these amoral actors. Countless other organizations act for the common good- nonprofits, foundations, religious communities, and so forth. But only the government has (by common consent) the coercive power, among many others, to control what have become extremely powerful market institutions.

And these institutions have been generating increased inequality with little general good to show for it. So, quite simply, it is time to turn back the clock to a new new deal, where we collectively focus our efforts on taming private markets and providing more public goods. With that, I wish you a tentative happy new year and happy new decade.

Bill Mitchell's Saturday quiz question, 1/1/2010. Please answer True or False:
"As soon as adult individuals adopt social norms and start making decisions together which impact on each person in the group, mainstream economic theory becomes irrelevant and the competitive model of decision making and optimisation loses authority. It is only when individuals behave as psychopaths (according to the clinical diagnosis of psychologists) that the mainstream economic theory of choice has any traction at all."

  • Keynes had it all figured out, really.
  • Another good analysis on the current difficulties. Liquidity isn't enough- the banks remain insolvent.
  • Macro view, same institute.
  • Fascinating, though speculative, column on what's next in the housing implosion.
  • But perhaps the decade has been pretty good, for the rest of the world.
  • Bill Mitchell's cry into the wilderness of loanable funds.
  • Topical, though very long, interview on inequality and class in America with Richard Sennett (esp. part 2).
  • Money and the corrosion of society.
  • Shalizi on what comes after the revolution.
  • What's the word in green this week? Thorium.

5 comments:

  1. Excellent blog.

    So Gordon Gekko was wrong?????

    One conclusion that could be drawn from your post, is that our economics does not need as much fixing as our collective morality.
    Economics is built on self-interest, but perhaps we need to mature in our view of self-interest? How is that accomplished?

    Perhaps we need a type of Confucius to come along, to popularize those small psychological incentives you mention, for no organization - private or public - can last forever without a collective will behind it.

    Do we need to be the change we want to see in the world, and then how does that catch on?

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  2. Hi, Steven-

    Thanks- I am glad you liked this post. One wouldn't think many people would take Gordon Gecko to be a paragon of moral advice, but mainstream economists of today seem to do so. It really is a very deep problem in the economics profession, with Milton Freedman and Friedrich Hayek et al. leading the way towards a celebration of greed and a denigration of public service, public goods, and public decision-making. The Mitchell blog I point to makes the point over and over again- that the dominant textbooks in college economics education take this view and a variety of other thoroughly mistaken approaches to macro-economics.

    It is not that we can eliminate self-interest from human nature, but we can engineer and re-value our institutions so that it is not the prime virtue they reward. That is perhaps the point. I can't find a link now, but a study I ran across once rated professions for ethical tone, and wall street financiers were at the bottom of the list. No surprise, but how much better if they had been deflected to, say, garbage collecting than handling other people's money?

    How to get there? You are right that it is not just a matter of socio-engineering, but of the heart and individual cultivation. I am doing my infinitesimal bit to prod a change in the zeitgeist to get us back to a more moral (and egalitarian!) public ethic, from the hiatus we have had in the last few decades, thanks to fundamentalists, bad economists, political opportunists, and most of all to mediocre education, since good education is the people's only defense against the above ills. That is what makes the particular crisis of California so heart-breaking, where we are regressing in the core educational committment due to the lack of a functional government. That's not going to make things better!

    Best wishes!

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  4. I should never post without checking my grammar. Anyway.....

    What a delicate balance to achieve. Without a decent level of self-interest, markets would not move at all and efficiency would be out the window. Price setting is completely contingent on at least two negotiators seeking to establish a price they can both live with.

    To use Robert Wright's favored terminology - to discover "non-zero sum" situations, with mutual benefits for both parties, we need those parties to be looking after themselves.

    So "free" markets are very beneficial. Yet to see them as perfect is a naturalistic fallacy...at best! At best, because true "free" markets do not exist. If left alone, they will invariably end up in some sort of a fascist, gangster tribalism. There must be a referee - something like the government, public opinion, the media, cultural conditioning (religion, common morals, etc.)

    But the government's strength is also its public relations problem - it is coercive. It can put you in jail. The Red Cross will not put you in jail for not donating. The government will.

    And that's the only way the government can work, of course, but it is still a troubling reality.

    We can only hope for a decent mix of competing, systemic interests - government, media, etc. but I think that true hope starts with individuals. I know it sounds cheesy, but I think we really need wisdom traditions, meditation, "spiritual" growth of a sort.
    And education!!!!

    yeah, it is so backwards to take money out of education. That is sick. It's like running low on money and selling your car, leaving you unable to drive to work.

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  5. I always enjoy reading your blog.

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