Saturday, January 13, 2018

Economic Insanity: Chapter 5 (part 2)

Of Course the Rich Are Getting Richer (Part 2)

The Irrelevance of Right and Left
Neither major political orientation offers a viable solution to the growing economic inequality that prevails in modern America. The conservatives insist that the best course is just to leave the beast alone, and everyone will prosper. This strategy is arguable at best. If we leave the beast alone, the gap between rich and poor will widen at an accelerating pace, companies will continue to replace workers with technology in their drive to increase productivity, our ability to consume all that we produce will continue to shrink, disposable income will drop while consumer debt rises, and we shall not prosper. The standard of living for most Americans will slip as the middle class continues to lose weight.
The liberal response, on the other hand, attempts to alter only the effects, and not the functioning, of capitalism, by redistributing income—in essence, to paint stripes on a baboon and then expect it to behave like a zebra. For many reasons, the welfare state has proved itself a major disappointment.
No true liberal, of course, would suggest that everyone be made absolutely equal in economic matters. The true, rational liberal suggests only that we narrow the wide disparity between rich and poor by redistributing money, the fruit of capital ownership, to bring the very poor up to a certain minimum level of consumptive (though not productive) capacity.
Both conservatives and liberals tend to look at economics as a game. Conservatives insist that there must be both winners and losers. If we were to make it so nobody lost, they argue, we would also make it so nobody could win. And then the game would become pointless, like playing tennis without an opponent. The liberals, of course, don’t want to do away with the game—they just want to spot the weaker opponent a few points, possibly a whole set, so that the inevitable losers don’t get trounced so badly. No shutouts allowed in the game of liberal economics.
The principal flaw of income redistribution programs is that they create dependency among the poor and sabotage the motivation and creativity of entrepreneurs and executives. Free handouts never motivated anyone to become a contributing member of society, and taking away the apples from a hard-working fruit farmer’s tree may make him scratch his head and honestly wonder why he’s in the business in the first place.
Is there an alternative, then, to the flawed liberal and conservative economic strategies? Of course there is, and both sides would probably wax indignant over it, because it strikes at the root of the increasing inequality that both sides, in their own way, yearn to preserve. This alternative, however, is both logical and consistent with our American ideals: Instead of fixing the score by redistributing income, the fruit of capitalism, we should instead consider leveling the playing field by redistributing capital, the source of income and the only factor that inspires motivation and creates genuine opportunity.

Finding a Balance
Adam Smith theorized that the inherent self-interest of people would promote the interest of society and create an equalizing effect by benefitting both sides in any economic transaction. This would transpire as if an “invisible hand” were guiding their actions, causing them to “promote an end which was no part of [their] intention.”1 The problem we discover when we try to apply this theory to transactions in our modern economic system is that Smith was talking about a far different society than the one we live in. In Smith’s day, capital ownership was far more limited and widespread. Today, the gargantuan businesses and bureaucracies of modern capitalism have dramatically shifted the balance of power in society, effectively paralyzing Smith’s invisible hand and negating any widespread societal benefit that might accrue through the economic interaction of two self-interested parties.
There is no mutual benefit, for instance, and society as a whole is worse off, when an impersonal organization has so much power that it can use, abuse, fire, or require a dehumanizing conformity from individual employees, whose only real recourse is to quit. In theory, Smith’s invisible hand operated between two parties, neither of which was significantly more powerful than the other. In this circumstance, a balance would arise in terms of benefit, not just power. Equality of opportunity and of outcome would be served. We can realize such equality, of course, only when ownership is both widespread and limited. Democracy and equality are all about ownership. You can’t really have either without it.
Achieving true democracy and functional equality is virtually impossible where opportunities are divided, as Peter Block points out, between a class of executives who are paid as much as possible and a lower class of laborers who are paid as little as possible. This double-standard pay system creates a situation in which workers are, by definition, part of the problem, and not a group that stands to benefit from any of top management’s solutions. Workers are seen as a cost, something that eats away at profit and must be minimized as much as possible.
This schizophrenic wage system illustrates perfectly the gulf in our society between capitalists and noncapitalists. Capitalists, we might well say, are those who are made independent because the system conspires to pay them as much as possible. They can accumulate capital, lend or invest money, and earn interest. Noncapitalists, then, are those who are made dependent by a system that is designed to pay them as little as possible. They accumulate debt, pay interest, and never really own their time, productive energy, or technical skills. For them, the invisible hand is not only invisible, it is nonexistent. No true mutual benefit ensues, because they cannot exchange anything meaningful from a position of equal strength.

The Organizational Society
Widespread and limited ownership of capital is a foreign idea in our modern-day capitalist society. We live in an organizational world, one in which capital is controlled by a few hands and large, impersonal organizations dictate not only the work-lives of millions of Americans, but also our lives away from work: everything from our entertainment to the consumer-based identities we buy off the shelf come from large organizations.
Immense organizations and the rules that govern their ownership and management prevent any true democracy or equality from existing in modern America. These gargantuan businesses and bureaucracies have dramatically shifted the balance of power in our nation, creating a divisive society of haves and have-nots. We have come a long way from the original blueprint.
The historian Paul Johnson points out that the Declaration of Independence “laid down what no other political document in the whole of history had yet claimed, that men were ‘endowed by their Creator’ with the right not only to ‘Life’ and ‘Liberty’ but the pursuit of Happiness. By this last, what the Founding Fathers had in mind was the acquisition of property, which they saw as the precondition of human felicity. Without widely dispersed property, true individual independence, and so a sound Republic, was impossible.”2
This perception that small but universal ownership is necessary in a truly free society soon withered, however, before the rising sun of capitalist conquest, and the focus of those interested in improving the total human picture shifted from equal ownership, which was given up as a practical impossibility, to a vain (and still ongoing) attempt to create a viable substitute for true equality—in short, a counterfeit.
Huge corporations, says Christopher Lasch, as well as the wage system and a more and more intricate subdivision of labor, made it pointless to restore the independence of individual proprietorship. Instead of giving the wage earner a piece of the action (a piece of the capital), “enlightened social policy” would make his job secure, his working conditions tolerable, and his wages equitable. “Hardly anyone asked any more whether freedom was consistent with hired labor. People groped instead, in effect, for a moral and social equivalent of the widespread property ownership once considered indispensable to the success of democracy.” But redistributing income, guaranteeing job security, and turning the working classes into consumers are nothing more than pale substitutes for property ownership; for none of these strategies produce “the kind of active, enterprising citizenry envisioned by nineteenth-century democrats.”3
An “active, enterprising citizenry” is only possible when the citizens own substantial quantities of capital—so that they can be producers. By contrast, a society weighted down by an immense host of practical noncapitalists must be, by definition, a society of subordinate role-players and consumers.
If we do not fully own our time, energy, skills, and, most of all, our production, how can we possibly achieve the American Dream? The ideals that make up that Dream—equality, liberty, democracy, unity, human dignity, justice, even material prosperity—are not fully available to us if we do not own the fundamental building blocks of our lives. The American Dream, as discussed earlier, is not simply an economic wish. It is a much grander ideal that encompasses every aspect of life. And if we are not completely free during a third of our waking hours, then even our lives away from work lose some of their meaning.
What we have not learned in all these years is that you can’t disconnect a person’s political, social, and economic circumstances without damaging all three. A society filled with authoritarian businesses restricts in a very real way a person’s political influence and social development. Hired laborers, regardless of how well compensated they are, will never achieve the levels of independence, community spirit, and equality necessary to make democracy work—either in the nation as a whole or in the organizations where they labor.
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1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannan (New York: Modern Library, [1776] 1937), 423.
2. Paul Johnson, “An Awakened Conscience,” Forbes, September 14, 1992, 183.
3. Christopher Lasch, The True and Only Heaven (New York: Norton, 1991), 207–8, 224–25.

Saturday, January 6, 2018

Economic Insanity: Chapter 5 (part 1)

Of Course the Rich Are Getting Richer (Part 1)

Often there is one pay system for executives, the intent of which
is to pay them as much as possible. There are other pay systems
for managers and core workers. The intent of these is to keep
labor costs as low as possible. . . . It is this class distinction that
results in the incongruence of massive layoffs and record
profits and executive bonuses all in the same year.
—Peter Block, Stewardship

Though capitalists are also consumers, a distinct class difference divides the two groups. That distinction is revealed in the quotation from Peter Block above. A good definition of what it means to be a capitalist is simply that a capitalist is paid as much as possible. Why? Because capitalists control capital, and it is capital that produces income. These people pay themselves as much as possible so that they can accumulate more capital—not to spend on consumer items, but primarily to reinvest in productive capacity, so that they can become even more wealthy and control an even larger piece of the productive pie.
Noncapitalists, by contrast, do not control capital, even when they invest their modest savings in stocks or bonds. Noncapitalists, because they do not control capital, are paid as little as possible (so that the capitalists can minimize costs and maximize profits). What they take home in wages is called disposable income. Why? Because they are supposed to dispose of it through consuming the products they produce. They are not supposed to become more wealthy. As Galbraith points out, their role in the economy is to consume.
The end result of this class division is an ever-widening monetary gap between the capitalists and the consumers. This is not a political phenomenon, nor is it the result of an uncompetitive or misfiring economy. It is simply the logical consequence of the capitalist system. Quite frequently I read articles in the newspaper expressing dismay over the fact that the rich are still getting richer and the poor relatively poorer. The articles always cite the most recent statistics, and the writers are invariably aghast over this continuing trend.
This is an irrational reaction, however, for capitalism is designed at its most fundamental levels to create increasing inequality. Somewhere, I suppose, many of us got the idea that capitalism and equality are compatible. Our reasoning must go something like this: since egalitarianism is part of the American Dream, then American capitalism should produce greater equality. This reasoning may be comfortable, but it is also defective. Which mechanism in the capitalist machine, I would ask, is supposed to equalize wealth? There is none.
Capitalism is genetically predisposed to shift relative wealth from the poor to the rich, or, if you prefer, from the unpropertied to the propertied. It’s simply the nature of the beast. We can’t expect it to act other than it is designed to act. Let’s look at this idea more closely.

The “Leak-Through” Theory
I don’t pretend to know who first came up with the notorious “trickle-down” theory. The term itself can be traced to about 1954, although the concept is at least old enough that William Jennings Bryan railed against it a century ago. Said the Great Commoner: “There are those who believe that if you will legislate to make the well-to-do prosperous, their prosperity will leak through on those below.”1 Bryan’s “leak-through” theory is basically the same as today’s trickle-down theory, which suggests that financial benefits given to the rich will filter on down to lower economic levels. This may be true, but there is nothing in the trickle-down theory to suggest that the lower levels of society will actually increase their relative wealth, and it is relative wealth that we’re talking about here.
When capitalism creates new wealth, greater economic equality can result only if the capitalist class passes on more wealth per capita than it retains. When has this ever happened? Even the most rabid, bleeding-heart, Robin Hood liberal would never dream of taking so much from the rich that the poor actually gain more wealth per capita than their elite counterparts.
If the poorest 20 percent of Americans get a trickle (or leak) of wealth, we can be sure that the rich are receiving a flood. We’ve been told that a rising tide lifts all boats, but today’s society can become more equal only if the rubber rafts and dinghies rise faster than the yachts and cruise ships. Unfortunately, though, the old “rising tide” maxim doesn’t hold water— because some of our individual boats don’t either. The system has punched holes in our hulls, and no matter how high the tide, we’re still going to sink.
There was a time when the poorest levels of society were indeed receiving that infamous trickle of real wealth. They may have been falling further behind the rich, but in real terms they were able to improve their living standard. In recent years, however, both the poor and those in the middle have not only fallen further behind the rich, they have actually moved backwards in terms of real wealth. According to Robert Reich, between 1977 and 1989 “the average after-tax incomes of American families in the bottom fifth of the income ladder fell some 9 percent, the next fifth grew 6.5 percent poorer, and the middle fifth about 4.5 percent poorer. Only the top fifth was spared. In fact, the higher reaches of the top fifth were not only spared, their incomes soared. The incomes of those in the top 1 percent actually doubled.”2
Reich attributes this growing gap, particularly the downward movement of the lower and middle levels, to the loss of manufacturing jobs. Between 1989 and November 1992, he says, 1.3 million manufacturing jobs were lost in the United States. Most of these workers were forced into service jobs that paid only one-half to two-thirds of typical manufacturing wages.
This is trickle-down economics of the 1990s. Economic gains are defying gravity and trickling up. The lower levels are losing ground, not just in a relative sense, but in a very real sense.

Three Types of Workers
The loss in manufacturing jobs is the direct result of new technology that displaces labor and cheap foreign competition that persuades executives to move manufacturing facilities abroad. The rise of the global economy has created, among other effects, a sharp division between various types of labor.
In his book The Work of Nations, Reich identifies three separate categories of American workers that are emerging with the global economy: routine producers, in-person servers, and symbolic analysts. “No longer are Americans rising or falling together, as if in one large national boat. We are, increasingly, in different, smaller boats.”3 Of the three types of boats listed above, only the third is rising with the economic tide. Let’s look briefly at these three groups and how they are faring.
Routine producers are those who perform repetitive tasks in the production of goods. This group includes not only blue-collar manufacturing workers, but also employees involved in white-collar or high-tech work. Data processors and programmers who devise routine coding for computer software come to mind. In-person servers may also perform routine work, but their services must be provided person-to-person. Retail sales workers, waiters and waitresses, custodians, cashiers, house cleaners, hospital attendants, taxi drivers, secretaries, auto mechanics, flight attendants, and security guards are typical of this category. Symbolic analysts, by contrast, engage in problem-identifying, problem-solving, decision-making, or strategy-brokering activities. These workers may be researchers, scientists, designers, engineers, public relations specialists, investment bankers, lawyers, consultants, systems analysts, advertising executives, film editors, art directors, architects, musicians, publishers, television producers, university professors, or seminar presenters, to list just a few.
As discussed in the previous chapter, routine production jobs are being lost continually to both foreign competition and technological advances. The thirty-five hours it took auto workers to assemble a car in 1977, for instance, has now been reduced to eight. Nippon Steel and Inland Steel built a cold-rolling mill near Gary, Indiana, in the late 1980s that cut the time to produce a coil of steel from twelve days to about one hour.4 The masses of workers displaced by technology and those entering the job market who are not qualified for symbolic-analytical work must increasingly compete for low-paying in-person service jobs. There are plenty of these, but intense competition keeps wages low.
The only jobs that show great promise for the future involve data analysis and the manipulation of symbols. Great demand exists in the global economy for scientific researchers, management consultants, advertisers, architects, property developers, public relations experts, civil engineers, political consultants, and even movie stars and other entertainers. “Among the wealthiest symbolic analysts,” says Reich, “are Steven Spielberg, Bill Cosby, Charles Schulz, Eddie Murphy, Sylvester Stallone, Madonna, and other star directors and performers. . . . [And] behind each of these familiar faces is a collection of American problem-solvers, -identifiers, and brokers who train, coach, advise, promote, amplify, direct, groom, represent, and otherwise add value to their talents.”5 These symbolic-analysts may be employees, but their expertise is in such high demand that they enjoy an independence and exert a level of control over their careers and incomes undreamed of by either in-person servers or routine production workers.
Perhaps the most important factor influencing the workforce equation, however, is that there is not unlimited demand for symbolic-analysts. One hundred percent of the employable population cannot find work in these jobs. Only a minority can fit into this one rising boat. The rest of us must compete for jobs in either a dwindling manufacturing sector or an immense, low-paying service sector. The result is an increasingly unequal society, one that can sustain neither economic nor social health. This whole unfolding scenario leads us inevitably to a particularly uncomfortable question: Is it perhaps time to rethink our centuries-old assumptions about the division of labor and come to terms with what those assumptions have done to our society?

Equality
The underlying issue here is equality, which is a concept that in both theory and practice seems to give nearly everyone dyspepsia. If we weren’t concerned about equality, we wouldn’t even have an American Dream or social ideals, and we wouldn’t be troubled by the increasing gap between rich and poor. We wouldn’t even bother trying to justify the natural effects of capitalism. But we are concerned about equality. It’s an integral part of the American psyche and the American Dream. According to Webster’s, the American Dream is a “social ideal that stresses egalitarianism and especially material prosperity.” If the two halves of this definition seem incompatible, well, they are—given our current economic assumptions. In our capitalist system, overall material prosperity comes only at the expense of equality. Can the two ideas be reconciled? We certainly must hope so, for equality is not merely an American ideal and a morally appealing principle; some approximation of it is also necessary for long-term economic health.
Thomas Jefferson declared in the Declaration of Independence that “all men are created equal,” thus planting the idea, as Frost put it, “where it will trouble us a thousand years.”6 Frost was right. Because Jefferson didn’t bother to explain exactly what he meant by “equal,” we have been arguing about it already for more than two hundred years.
For instance, do we mean equality of opportunity or equality of outcome? It’s hard to guarantee equality of outcome without removing people’s freedom entirely, for individuals possess varying levels of intelligence, talent, and motivation. Equality of opportunity is probably nearer the mark, but how do we guarantee everyone an equal opportunity? This is actually the central question of this book, and I shall attempt to answer it more fully in a later chapter, but for now let me merely suggest that neither the liberals nor the conservatives offer a viable solution.
It is also difficult to entirely separate these two types of equality. When we talk about equality of opportunity, we can’t just sweep equality of outcome under the rug, because it is impossible to offer equal opportunity without requiring to some degree an equality of outcome. As the natural mechanism of unbridled capitalism creates a two-tiered society of haves and have-nots, the opportunities of some expand, while the opportunities of the rest diminish. This creates a vicious circle. Diminished opportunities translate directly into diminished outcomes, and diminished outcomes, in turn, further curtail opportunities. We must, therefore, address the complex problem of equal outcomes—not by redistributing wealth, but by ensuring that opportunity is never hoarded by some and withheld from others.
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1. George F. Will, “Kerry Exemplifies Double Dilemma of Democrats in 1996,” Deseret News, December 4, 1994, sec. V, 6.
2. Robert B. Reich, “High-Wage Jobs Needed to Heal Sick Economy,” Deseret News, November 5–6, 1992, sec. A, 15, reprinted from New Perspectives Quarterly.
3. Robert B. Reich, The Work of Nations: Preparing Ourselves for 21st-Century Capitalism (New York: Knopf, 1991), 171.
4. Reich, Work of Nations, 214.
5. Reich, Work of Nations, 220–21.
6. Robert Frost, “The Black Cottage,” in The Poetry of  Robert Frost, ed. E. C. Lathem (New York: Holt, Rinehart & Winston, 1969), 57.