The Rich Get Richer

Inequality is immoral and unjust: Review of "The Anatomy of Inequality: Its Social and Economic Origins- and Solutions", by Per Molander

Second only to global warming and our vast debt to the future of the biosphere, inequality is the most pressing issue of the day. The two issues incidentally interact, since the slide towards inequality has correlated with a glaring lack of care and empathy by the upper classes, not only towards their fellow citizens and humans, but towards all other life on the planet.

This book is the third of a powerful triumvarate of recent analyses of economic inequality, and of them perhaps the most profound. Its point is very simple- that inequality is absolutely intrinsic to our socio-economic relations, and proceeds naturally to extreme levels unless stopped by special political or social interventions. Inequality is not fair, it is not reasonable, just, or virtuous, but rather is a mechanistic and inexorable consequence of game theory, by which, as the title and the saying have it, the rich get richer.

Life is full of negotiations- with family members, with sellers of products, with employers. Not all negotiations are obvious, but when we are faced with a difficult choice, there is probably some kind of negotiation at the heart of it, influenced by other people. A paradigmatic negotiation is for a job. A seeker has labor to offer, and an employer has money to offer in return. What is the employer's need for labor vs the seeker's need for money? Already one can see a deep asymmetry at work. Add selective secrecy that hides the pay of other employees, an entire department of people devoted to getting the best deal for the company, and a social hierarchy based on seniority, and the result is clear- a lot of underpaid employees.

In negotiations, the more powerful / richer party is substantially advantaged. The employer may not only have the advantages above, but also have political influence to engineer other non-market advantages, from H1B visas to union-busting legislation and regulation (or non-regulation). This process was far more stark historically, obviously, as kings and other nobles gave themselves ownership of all the land, and made peasants into serfs. The advantages of a strong pre-existing negotiating position are so persistant that, in the natural state of affairs, inequality inexorably goes towards infinity, with the only limit being the dominant party's interest in keeping the whole iniquitous system going. As Molander puts it:

"There is no reason to believe that people in hunter-gatherer cultures have a different constitution or capacity to exert moral pressure that would curb the power of a ruling class. These societies are egalitarian quite simply because there is very little room for inequality when a society is close to the subsitance level. In societies with a larger suplus of goods, what restricts the power imbalance between the affluent and the impoverished is the former's interest in keeping the latter alive and reasonably fit for work."

Herein lies the two-income trap, the stagnation of wages over the last few decades, and the increasing share of wealth and income going to capital in the US. It is a mechanism analogous to natural selection, both of which amplify the smallest differences (or vagaries of fate and luck) into existential propositions. In any negotiation about economic issues, the person with a bigger cushion of money is better off, even when all other aspects are identical. Who needs the money more and will give in first? Clearly the person with less of it. Who is better able to take investment risks, and get higher long-term returns, even at the expense of volatility? Again, the one with more money. Having money, whatever its source, is like having the wind at your back, giving rise in turn to more money, higher status, more opportunities, and better bargaining positions vs others, and thus widening inequality.

While we in this new gilded age are nowhere near medieval serfdom, we hardly exist in a fair system, either. Take the example of Bill Gates. Smarter and more productive than your average person? Yes. But 80 billion times more? Probably not. His (borrowed) operating system was, even at the time, hardly the best available. But he parlayed a lucky industry paradigm and a strong but bumbling partner- IBM- into the world's biggest fortune.

Now, for all the money he is giving away, he can't help but make billions more each year from investments. Can you or I stand back and have billions come in the door? Probably not. Such passive income, derived not from investment risk (given the wealth backing him up, there is zero risk to practically any financial action) or from accumen (which can be purchased), is almost purely parasitic on the labors of everyone else in society. Add in the ability to bequeath this horde to his children, (think Paris Hilton, and the Republican obsession to eliminate estate taxes entirely), or to use it to derange our political and social system (think Kochs, or Mercers) and the corrosive nature of this concentrated and unearned wealth is obvious.

Historically, there have been several solutions to this ratchet of inquality. Catastrophes, such as plagues and wars, have been great levelers. Our own Depression, World War, and Cold War era was when many large fortunes dissolved and the stage set for several decades of low inequality and general prosperity. But in normal times, the ratchet of wealth accumulation runs inexorably and unfairly. Molander mentions the Jewish tradition of a debt Jubilee, which reset land ownership and debt bondage in Israel every 50 years. Outright revolution is another method, such as experienced in France and Russia, or the various democratic / demagogic episodes in Greek history. Or on a more modest scale, land reform, which shares out what was previously held by large landowners.

Molander notes that constitutions and social constracts are of limited help against this natural process of differentiation, which in his engineering terms is a positive feedback. We need more dynamic, negative feedback social mechanisms to resolve this fundamental economic and social injustice. The end of his book is taken up with peans to the social democracy of his native Scandinavia. But one problem is that social cohesiveness is both a product of, and a precondition for, substantial economic equality. We can not wait around for the number of social democrats in our national instutions to exceed one. As previously discussed, we in the US used to have, around our founding, the conditions of rough equality, which led in large part to the enlightened consitution and unwritten institutions we cherish and have benifitted by so much.

But now we don't, and our conditions, barring some unwelcome catastrophe, are trending strongly in the wrong direction. We need a new institutional structure that fights systematically against the natural ratchet of unequality. This would be something like the Federal Reserve, which has numerical targets that it is structured to hit in its management of the macroeconomy. For the Fed, this is the interest rate, of 2%, plus other goals of financial stability and (a very distant third) high employment. The Department of Economic Justice would target a basket of goals, including the Gini index (about 0.3), and employment (an unemplyment rate of nor more than 4%, or 10% in broad measures), and wealth distribution (no quintile owning more than the twice the next-lower quintile).

There are many tools that can be used to hit these targets. But it is significant at the outset that explicit, ambitious, and sustaintable targets be set. Some inequality is a good thing, fostering human development, work, and innovation. But too much degrades economic prosperity, and far more importantly, our social and political environment. The Department of Economic Justice may not have direct powers, perhaps only to report on conditions and propose legislation and regulation. Or it may have regulatory powers, such as for antitrust and fee or tax-based regulation of the financial industry. There are many available tools, from the obvious like taxing high incomes and taxing wealth directly, to financial transaction taxes, raising minimum wages, dramatically increasing public goods and infrastructure, and providing a job guarantee, which help raise the floor of economic conditions.

Molander provides a crucial service in reframing the inequality phenomenon as one that is natural and inexorable, but also mindless and unjust. The Galts of the world have very rarely invented the steel on which their fortunes rest, let alone the fortunes which their fortunes in turn make on a passive basis. We do not have to collectively put up with it.

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