How much inequality?

What is the optimal setting for economic inequality in a society?

Many utopias have foundered on the dream of egalitarianism. Communism promised equality, yet delivered the ultimate inequality- despotism. Nevertheless, we keep dreaming of egalitarian systems, because we originated in substantially egalitarian societies of the family, band, and tribe that predated the unimaginably vast forms of wealth and power possible today. People owned little more than they could carry, and relied on social networks within a very small hierarchy for insurance against their various reverses and calamities.

In the primitive setting, some social hierarchy is natural, though quite variable. Some cultures practiced matriarchy, and few could (or wished to) support chiefs or kings in any kind of lavish style. In Afghanistan today, the rural Pashtun culture carries on the typical practices of tribe / small-group leadership, which break up and coalesce continuously, along with exemplary hospitality, strong codes of honor, intense male domination, and uniformly impoverished conditions.

So our natural setting seems to be some relatively modest degree of inequality, little of which was economic, rather taking political and social forms. The diversity of primitive power systems is an indication of the various human temperaments and psychologies that will have great difficulty agreeing on a single optimal system in a huge culture such as our own. Thus we have constant debate, if not warfare, over visions of how much hierarchy, how much differentiation of power, how much inequality, is best.

The advent of democracy, equality before the law, human rights, and similar ideas dramatically curtailed the scope of raw social/political power. This enlightenment complex of ideas has been an enormous step up in our level of civilization, (if one favors egalitarianism), and perhaps in some way back towards our native state, as expressed in the formulation of "natural" rights. One wonders sometimes why libertarians, tea partiers, and other denizens of the far right don't frankly fight as much for inequality and freedom on the legal and political planes as they do so vociferously on the economic plane. For a return, in essence, to the Darwinian struggle in all its bloody dimensions.

The economic dimension remains the main battlefield of class and power, with inequality possible to levels undreamed of in any other aspect of social relations, outside the few remaining political dictatorships. Concentrations of economic power have grown immeasurably with the advent of storable wealth, with individuals amassing wealth equivalent to the GDP of small countries.

In primitive societies, great wealth creates obligations to share and distribute, it being generally perishable. In our society, wealth can be held indefinitely and compounded infinitely. Our current crisis is characterized by an unwillingness to spend, despite the  availability of veritable oceans of money (in corporations, in banks, and amongst the wealthy). The poor and middle class have lost spending power as they have lost income, employment, and credit, so this crisis, (if one views high unemployment and stagnant economic activity as a crisis), is fundamentally related to the unequal distribution of wealth and income.

Left to its own devices, the capitalist system creates ever greater inequality. Outside of boom times, such as during World War 2, there is always an army of unemployed that lowers wages. As living standards at the bottom are maintained at a minimal level to forestall riots, the political system is engineered to preserve the position of property and wealth, and the corporate system is turned into a club of cronies. This story has been repeated in countries all over the world, as the gains from technology and economic development have flowed into the pockets of the few.

This process is generally corrosive. Do the rich in the US sponsor great philanthropies and public works? The short answer is no- the greatest concentrations of wealth are captured by the financial elite who are the most psychopathically immoral and greedy of all. The accumulation of wealth has finally, in our specialized and advanced age, been severed from practically any human or civic virtue, so that its benefits lie sterile, behind gated compounds and in the clutches of people whose greatest ambition is to cheat the government of a few more pennies.

If they fail to invest their wealth in new enterprises- in the grand cycle of capitalism- then we may wait a very long time indeed for deliverance if we rely on the the invisible hand alone, in the current crisis.

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Yet inequality remains the engine of capitalism, from the basic market proposition of finding the best deal, to the channelling of labor into the most productuve pursuits and the destruction of poorly run companies. Hayek was certainly correct that market mechanisms process some economic information far more efficiently and subtly than any explicit control mechanism could hope to. Inequality, even greed, is the invisible hand behind a good deal of what we see as excellence, efficiency and innovation.

But how much is enough? It is in some ways a psychological question- how much and what kinds of motivation do the various participants need to create that vibrant economy? I think psychology tells us that much less motivation in the form of money would suffice. Does a CEO need millions in compensation if she already has the reward of having scaled the ladder of success and gathered enormous corporate power? Not really. Only in the crony-ridden closet of executive compensation is it necessary (and possible) to embezzle vast sums from the shareholders in order to satisfy one's status aspirations vs the other CEOs on the block.

Other cultures have shown the way, such as Japan, the Scandinavian countries, and indeed the US of the 50's and 60's. In each case, either social norms or government policies such as high taxation keeps economic inequality much lower than it is in the US. Since social norms in the US are hopelessly out of whack, we need changes elsewhere to reign in economic inequality, and particularly to encourage accumulated wealth back into circulation where it can create jobs and generate income in a more egalitarian society.

For instance, I have suggested 100% estate taxation, and would also recommend a wide-spread financial transaction tax, in addition to more progressive taxation of income and reform of private retirement systems. The point is not to penalize anyone, but to counteract the corrosive wealth-concentrating effects of laissez-faire- one more effect among its many, many other defects that need to be regulated for the common good. For example, the financial industry generates diminishing, indeed negative, returns to general economic wellbeing the larger it gets, and especially the more "innovative" it gets. It needs to be reigned in substantially.

What about the bottom of the ladder? How much monetary motivation and thus inequality is required there? Clearly, economic motivation is essential to drive most people to take jobs and perform whatever services society deems useful. Left to their own devices, most people would pursue other interests of perhaps more cultural significance, (blogging?), but rarely of economic significance. The communists substituted, for the lash of economic necessity, raw state power, which turned out not to be much of an advance.

So conservatives are certainly correct that there is a risk to excessive egalitarianism / socialism which grants benefits to all without some mechanism of bending each person to common duties (i.e. the risk of free-riding). But there are significant caveats. First is to those who are not productive in any case, like the young. In a well-run society, children would be generously supported with public goods like health care, parks, day care, cultural enrichment, and free education to the highest levels. The point would be to work with parents to develop the most well-educated citizens, workers, artists ... persons, without reference to family income and class.

A second important caveat is that running the macro-economic system properly is a central job of the state. It is pointless as well as cruel to apply the lash of unemployment and poverty when there are no jobs to be had. Keynes and his school showed (and continue to show, in the economies cited above) that unemployment is a political matter that the state can remedy when it wishes. The fact that we have fallen into a period of learned helplessness in the US speaks to how thoroughly our putative democracy has been taken over by a callous ideology of capital at the expense of workers.

Specifically, in order to restore overall economic activity and thus jobs, the state needs to direct money from its various inert forms (savings, bank reserves, the Federal power to create money) to the lower end of the economic ladder, by whatever means necessary- conservation corps, public works, payroll tax holidays, helicopter drops, whatever.

In the end, both economic efficiency and morality argue for greater economic equality than we observe in the US today, though certainly not perfect equality. The most sclerotic economies around the world are the most unequal, with small coteries of the powerful feathering their own nests while the majority beg for crumbs. The most vibrant economies, like those of Northern Europe, are far more egalitarian, with high living standards across the board, high cultural attainment, and high happiness into the bargain.

We can do it. This is not rocket science. We can turn another page in humanity's ascent from Darwinism to civilization. We can find and maintain a middle way- a prosperous and humane way- between communism and plutocracy.

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