Inequality and Capitalism

Capitalism is the dominant system over the entire globe. Such a system is conventionally defined as consisting of legally free labor, private ownership of capital, decentralized coordination and pursuit of profit. One does not need to go far back into the past, or to have a great knowledge of history, to realize how unique and novel this is.

Centrally planned socialism was only recently eliminated as a competitor. And nowhere in the world do we now find un-free labor playing an important economic role, as it did until some 150 years ago. Such is the hegemony of capitalism as a worldwide system that even those who are unhappy with it and with rising inequality, whether locally, nationally or globally, have no realistic alternatives to propose.

Joseph Nye, the former Dean of the John F. Kennedy School of Government at Harvard University strongly argued that, “de-globalization” and a focus on the “local” is meaningless because it would do away with the division of labor, a key factor of economic growth. According to him, forms of state capitalism, as in Russia and China, do exist, but this is capitalism nevertheless in which private profit motive and private companies are dominant.

Joseph Nye noted that increasing inequality of income, however, undercuts some of capitalism’s mainstream ideological dominance by showing its unpleasant sides which, among other things, includes the exclusive focus on materialism, a winner-take-all ideology, and disregard of non-pecuniary motives. But since no ideological alternatives currently exist and even less, political parties or groups to implement them, the hegemony of capitalism looks pretty unassailable. Of course, nothing guarantees that it would look like that to the next generation, for new ideologies can be invented.

Is democratic capitalism sustainable? This is already a different question. Note first that these two words, democracy and capitalism were not often combined in history. Joseph Quinlan, the managing director and chief market strategist at Bank of America Private Wealth Management stated that capitalism in the absence of democracy has been a common feature throughout history. He noted that this was the case not only in Spain under Franco, Chile under Pinochet, or the Congo under Mobutu, but also in Germany, France and Japan. It even occurred in the United States via the exclusion of blacks from the body politic, and in England with its severely limited franchise based on ownership of property at levels sufficient to include only the elite.

Thus, according to Joseph Quinlan, it does not take huge leaps of imagination to see that capitalism and democracy can be decoupled. And inequality can play an important role in that. It already does so by politically empowering the rich to a much greater extent than the middle class and the poor. The rich dictate the political agenda, finance the candidates who protect their interests, and make sure that the laws that are in their interest are voted in.

The American political scientist Larry Bartels finds that United States senators are five to six times more likely to listen to the interests of the rich than to the interests of the middle class. For the poor, “there is no discernible evidence that the views of low-income constituents had any effect on their Senators’ voting behavior.” Both democracy and the middle class are being hollowed out.

In effect, it is not for nothing that since Aristotle, and more recently since Tocqueville, the middle class was seen as the bulwark against nondemocratic forms of government. According to Larry Bartels, it was not by some special moral virtue, embodied among the “middlemen,” that a person who has, for example, ceased to be rich and become middle-class would suddenly prefer democracy. It is simply that the middle class had an interest in limiting the power of the rich so that they would not rule over them and of the poor so that they would not expropriate them.

Large numbers of a middle class also meant that a lot of people shared similar material positions, developed similar tastes and tended to eschew extremism of both the left and the right. Thus, the middle class provided for both democracy and stability. All of this is under attack by rising inequality. The middle class in Western democracies is today both less numerous and economically weaker relative to the rich than it was 20 years ago.

Branko Milanovic, the Presidential Professor at the City University of New York explained that in the United States, where the change is most dramatic, the share of the middle class, defined as people with disposable incomes around the median decreased from one third of the population in 1979 to 27% in 2010. According to Branko Milanovic, this means that approximately one out of every four persons who were in the middle class are no longer there. In 1979, the average income of the United States middle class was practically equal to the overall mean income. Now it has dropped to only three-quarters of the mean.

The combined result of the decline in relative numbers and relative income is a sharp drop in the economic power of the middle class. In 1979, the United States middle class accounted for 32% of total income. Today, it accounts for only 21%. That is a decline of one-third. The political and economic importance of the middle class has accordingly dwindled.

Joseph Quinlan argued that it is not difficult to project into the future the current trends, most vividly seen in the United States. There, financial support from rich individuals and companies ensures political success. While the United States system remains democratic in form because freedom of speech and association is preserved and elections are free, in essence it is becoming a plutocracy.

In Marxist terms, it is “the dictatorship of the propertied class” even if it seems, superficially, to be a democracy. The government is nothing else but in Marx’s famous words, “the committee for managing the common affairs of the bourgeoisie.” And indeed, the gap between the professed ideology and reality will not be anything new to a student of politics and history. Rome seamlessly grew to be an autocratic Empire, while masquerading as a Republic ruled by a Senate.

More recently, a bureaucratic class ruled Eastern Europe, while claiming that both economic and political power was in the hands of the people. Every dictator today argues that he embodies the will of the people, that is, believes himself to be a democrat.

To be continued