Thursday, May 8, 2014

Perilous polarisation.

Is global inequality becoming an economic game changer?

Centuries ago, the British writer Samuel Johnson said: “You cannot spend money in luxury without doing good for the poor. Nay, you do more good to them by spending it in luxury, than by giving it; for by spending it in luxury, you make them exert industry, whereas by giving it, you keep them idle.”

Inequalities or disparities even in wealth and incomes play a significant role in shaping economic outcomes – a role that for a large part of our recent history has been viewed as positive and beneficial. It was not all that long ago that the wealthy and affluent were mostly admired and respected. They were often role models, especially when there was a clear link between their contribution to society and the state of their wealth. They were the exemplification of dreams, evidence of opportunity and what could be achieved through hard work and perseverance.

Despite the rallying cry of the French revolution of “Liberty, Equality, Fraternity” in the late 18th century, equality has for the most part remained undefined and perhaps even scorned especially in modern Western economic theory. Like liberty, or freedom, it clearly cannot be an absolute and even in areas where it is actively cherished such as in politics and legal or social justice, it remains largely unattainable.

What has changed? For it clearly has. Today it is more common to find the affluent being spurned, resented and attacked – unless you know them personally and want something from them! What was once a benign feature of our co-existence, proof of the success of Capitalism, and evidence of the failure of Communism or Marxism, has become a critical issue, perhaps the most critical of our time. It is grabbing the attention of thought leaders across the globe, of august organisations such as the World Economic Forum which has ranked it as the most critical global issue for the past three years and economists, theorists, academics, activists, and journalists. More recently, and an event which inspired this article, it landed on the agenda of the International Monetary Fund – an organisation that for decades has been associated with austerity, prudence and monetary discipline.

Anything that threatens conventional paradigms will attract vehement detraction, as reflected in this Reuters article. While they concede a widening gap, they conclude that it is not a serious social threat as long as there is some improvement in the lot of the poorest. This is a rather shaky hypothesis when it reaches unprecedented levels in a very different social environment and a broadening of democracy.

Whatever else, the inequality debate is starting to reflect an awe inspiring possibility – that in the grappling with it, we may challenge and rewrite economic theories that for centuries have dominated our thinking. In that process, many a fundamentalist married to ideological paradigms will be shaken out of their cosy world of certainty.

Inequality in our time could become an economic game changer of the same magnitude as the industrial revolution or the Great depression. Theories can never have the same lasting effect on economic destiny as events do.

It is not surprising that inequality has become a regular feature of public discourse at all levels. It does provide some fascinating headlines, feeding all kinds of beliefs and emotions like envy, conspiracy theories and cold war rhetoric. One statistic that rattled some cages was the recent Credit Suisse research which showed that 85-people in the world have a combined wealth exceeding that of 3-½ billion others.

Another is the startling fact that almost half of the world’s wealth is now owned by just 1% of the population. The Washing Post recently covered some ten similar “did you know” conversation stoppers, and of course, as the Mail and Guardian has again shown, the obscene levels of executive remuneration here and abroad, running into hundreds of millions, is always good fodder for the journalists’ trough. But this is just one aspect that clearly is fuelling inequality, let alone growing social discord underpinned by envy and resentment. The days are long past that John and Joan Doe could see a clear link between this reward and contribution. This is at best and then even only vaguely and dubiously so, restricted to a handful of incorrigible champions of the pursuit of shareholder value and remuneration committees.

What makes the current inequality crisis so different to demand a rethink of conventional theory is not only the level itself – shown by World Bank research to have nearly doubled since the 1820’s – but also its seemingly unstoppable nature, its focus on returns on assets rather than on tangible wealth creation, technology, nano-second speculative trading, short-termism, lack of restrictions on and regulation of capital, and the latter’s unbridled and cavalier behaviour in the past few decades. Fuelling sentiment is the vastly increased distribution of information via amongst many others, the social media.

Inequality is a complex issue with many facets beyond comprehensive treatment in an article such as this. It cannot be restricted to income or material assets, but has to embrace access to services and amenities such as food, water, shelter, and above all education. This puts a substantial part of the blame on governments, not only in tax structures and their regulatory role, but on the way budgets are designed, efficiencies in spending, corruption and the self-gain motives of bureaucrats.

The most destructive feature of the current inequality crisis is what American academics Joseph Stiglitz and Michael Doyle refer to as inequality of opportunity. This effectively puts paid to Samuel Jonson’s postulate above and challenges one of the greatest tenets of Capitalism – the inevitable trickling down of wealth in a free market society. Or, as one of my regular detractors once implied, the wealth of an executive enables the possession of a cell phone by the poorest of the poor. In the same vein, some joker has adjusted Maslow’s hierarchy to rank access to WiFi as the most basic human need.

Trickle down has become trickle up. While there has been some improvement in the lives of many, it is self-evident that the more wealth is concentrated in the hands of a few, the less chance it has of spreading through “spending on luxury” to the many. This inexorable gearing up of the wealth gap has been conclusively demonstrated in ground breaking research by French economist Thomas Pikkety, who has found that capital, and the money that it produces, accumulates faster than economic growth. Pikkety’s work is increasingly being viewed by many of his peers as the game changer in economic thinking.

Inequality thought leaders agree that it is a crisis that cannot be ignored. Stiglitz insists it must be added to the Millennium Development Goals and he is part of a growing consensus that at the very least equality inducing tax structures and regulation of capital are part of the answer.

Those are perhaps complex policy issues that no doubt will be debated at the highest levels of economic and political institutions. What we cannot ignore are those things more directly in control of some of the grass roots institutions who ultimately may have a bigger effect on defusing the crisis. Here I am thinking of companies themselves, more specifically those things that labour and capital could do jointly. The obvious are the de-commoditisation of labour and the pegging down of shareholder expectations to a cost+ benchmark. These are fundamental principles of common purpose and common fate that automatically address perceptions of inequality. Other obvious “equalisers” are the promotion of small business and discouraging big capital formations.

There is an ominous note for South Africa in the Stiglitz article. While there is no conclusive evidence that inequality automatically leads to social unrest and public violence, these become more likely when there is what he terms “horizontal” inequality, or inequality between definable groups within a society – such as ethnic, cultural, religious or geographic groupings.

This may appear to support current South African coercive policies to address past imbalances. But that is simply treating symptoms and not causes. Our obsession with the past and with ethnicity ignores the reality that it is a global phenomenon. Blindly focussing on one symptom without addressing the underlying global virus could be disastrously counter-productive in a country purported to have the highest inequality in the world.

In a blatant re-saddling of my latest hobby horse, reflection makes me wonder whether the French Revolutionaries had more insight than one may have expected for their time. For their three pillared clarion call included fraternity, a concept completely ignored in economic thinking.

Perhaps it should be re-examined. On a human scale it is, after all, the same as empathy.

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