How Cheating Spoils Capitalism: the true roots of skyrocketing inequality

== What causes wealth disparity to skyrocket? ==

In a cogent analysis, Brookings fellow Jonathan Rothwell appraises varied explanations for why the top 0.01% have taken in such gushers of wealth in recent years. “Three of the standard explanations—capital shares, skills, and technology—are myths. 

"The real cause of elite inequality is the lack of open access and market competition in elite investment and labor markets. To bring the elite down to size, we need to make them compete.”

This has been my own relentless theme.  The rationalizers of rapacious versions of capitalism claim to be promoting Adam Smith’s competitive markets – while doing everything in their power to demolish any chance those markets will be flat-open-fair-creative, or even Hayekian. 

Unintentionally, they are proving Smith right, who denounced conniving oligarchy as the great enemy of creative markets across all recorded history.

Were they sincere, instead of conspiratorial-rentier cheaters, they would know that their own lavish-gusher incomes should – by capitalist theory – attract talent from every other human field, until the price of financial talent would stop rising and actually go down! Supply and demand, it's called. Elsewhere I show how they explain why this never happens … that they are uber-lord-mutant-great managers! Immune to supply and demand, like basketball stars. 

Only the analogy shatters! NBA players are subject to utter scrutiny by relentless, objective metrics -- points, rebounds, assists per game and all that. In contrast, the CEO caste of 5000 golf buddies appoints each other onto their boards aiming to obscure measures of company health, concocting excuses for why a declining balance sheet or fading product line should be rewarded with higher compensation. They bandy reasons why stock buy-backs that eat a company's seed corn are better than investing in new products or services.

Rothwell’s appraisal is cogent and clear. “There is no evidence to support the idea that the top 0.01 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.”  

No, it is strictly and purely a matter of which industry you are in. Aside from the quasi-monopolistic mining and utilities sectors, just being in finance gives you a huge – i.e. parasitical – income multiplier, no matter what the actual outcomes of your work. The financial caste is not facing competition.

 Moreover, tellingly, Rothwell rejects calling this a matter of Left or Right. “The modern left still too often sees the world through a Marxist lens of capitalist owners trying to exploit people who sell their labor for a living. But that doesn’t help explain rising top incomes. On the other hand, many on the modern right wrongly infer that great earnings must only be generated by great people.

“Before Marx, Adam Smith provided a framework for political economy that is especially useful today. Smith warned against local trade associations which were inevitably conspiring “against the public…to raise prices,” and “restraining the competition in some employments to a smaller number than would otherwise…occasion a very important inequality” between occupations.”

== It grows even clearer ==

In Left and Right Share a Common Enemy: Capitalists Who Corrupt Capitalism, perhaps the best and most important essay yet to be posted on the fast-rising Evonomics site, Professor Lawrence Lessig nails so many powerful points about how desperately capitalism needs to be saved from capitalists. 

Lessig, you may recall, briefly ran for president under a single-issue campaign to get the corrupting tsunamis of Big Money out of U.S. politics.  It think he would have made a better - far more modern-with-it - version of Bernie Sanders. (Though Bernie is almost a pure clone of my own dad.) On this occasion Lessig cogently lays down what’s at stake, showing how market economics is not the enemy of justice.  

Rather, our flat-open-fair-creative markets are the top victims of an ongoing attempted oligarchic putsch. 

Indeed, as Larry clearly shows, the all-too human contradictions that lead so many market winners to then cheat and shut down markets, was recognized and called out by the “founder” of modern enterprise capitalism.

Some of us have been urging for way more than a decade that Adam Smith be rediscovered as an archetype and founder — not just of fads like ”neo-liberalism,” but of the much broader notion that we call Liberalism, itself. The Evonomics site now invokes Smith in almost every-other article and I have hopes that this rediscovery movement will overflow into the nation's bitter discourse, as well.

== The rationale of Supply Side or 'trickle down' ==

Joseph Stiglitz, Nobelist in Economics, explains how Supply Side (SS) economic theory - darling of the American right, despite never once sustaining a successful, major prediction -- seemed so alluring, for so long:

"The reason why these ideas justifying inequality have endured is that they have a grain of truth in them. Some of those who have made large amounts of money have contributed greatly to our society, and in some cases what they have appropriated for themselves is but a fraction of what they have contributed to society. 

"But this is only a part of the story: there are other possible causes of inequality. Disparity can result from exploitation, discrimination and exercise of monopoly power. Moreover, in general, inequality is heavily influenced by many institutional and political factors— industrial relations, labour market institutions, welfare and tax systems, for example— which can both work independently of productivity and affect productivity."

Stiglitz explains how legislation that funneled vast advantages into the upper castes was not only the core reason for the American Revolution (and not 'tea party' rage at taxes), but also how Adam Smith denounced the anti- market effects of "rent seeking." 

He adds -- "rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production."

Someone explain how that is flat-fair-competitive capitalism, instead of its opposite. Seriously, after reading Lessig, dive into this wise detailed, and definitive Stiglitz article. For more, see Stiglitz's book, The Price of Inequality: How Today's Divided Society Endangers Our Future.

== The guru of the intelligent right ==

Not only Adam Smith, but Friedrich Hayek, too, can be rediscovered and re-interpreted. While it's true that Hayek despised government-socialist intervention, the reason for his skepticism toward government meddling was actually quite cogent: when too many decisions are made by bureaucrats you reduce economic wisdom by limiting the number of economic players and choosers. 

A fair point, though with complexities the Right chooses to ignore. For example, if 100,000 diverse, accountable and transparent civil servants cannot "allocate" well because they are too few, then isn't the problem even worse when allocation is done by an incestuous, conniving, secretive cabal of only 5,000 CEO-caste golf buddies? Connivers who sully Hayek's name, whenever they mention him?

Which leads us to the Bigger Picture... the one aspect that Lessig, Stiglitz, and apparently everyone else leave out is the great context of large scale history. 

For 6000 years, wherever humans got metals and agriculture, the typical social pattern was a pyramid of inherited hierarchy, loosely called feudalism.  Big men with swords found it appealing to arrange that they would get no competition from those below, and that their sons would inherit ownership of other folk's sons and daughters. 

The pattern, replicated everywhere, reinforced by darwinian reproductive advantage.  And it boiled down to a single, simple word that anyone would understand -- cheating.  Using your high status advantages -- e.g. swords or armies of lobbyists -- to crush any potential competitors from below. The temptation will always be there.

Our brief, 240 year miracle - dating not just from the Declaration of Independence but also the publication of Adam Smith's Wealth of Nations - has been based upon dividing power so that cheating can be limited by competitive accountability. By opponents pointing out and staunching cheats before they get so large that they become self-reinforcing. 

One result has been the world's first Diamond-shaped society, with an empowered middle class that fizzes forth new competitors at rates that should please Smith or Hayek and that delivers real goods. Alas, a diamond is unstable and last year's winners will try to prevent new competition, so they can become next year's lords.

Our parents in the Greatest Generation knew this better than we do, because - like all their ancestors - they knew what class war was. Desperately, with help of fellows like FDR - they sought a solution other than the one most widely offered at the time, Marxian revolution.... choosing instead to empower the working class and flat-fair-creative competition, their Rooseveltean reset was so successful that we boomers grew up imagining “class war” to be quaint, obsolete, a worry to prioritize far below other long-neglected injustices like racism or sexism. 

But human nature hasn't changed and today's wealth disparities are nearing 1930s levels. Some claim the levels of 1789 France. An oligarchic putsch is underway, and Lessig's clarion calls are vital, if we are to perform another moderate, reasonable "reset" that saves and enhances and renews both capitalism and freedom. It will be either that or "tumbrels," which is why all the smart billionaires today - who can look beyond their noses - are democrats.

Larry Lessig's Evonomics missive makes this all very clear (except the history-feudalism part.)  Lessig explores these issues more thoroughly in his book Republic Lost: The Corruption of Equality and the Steps to End It. His quotations are vivid ammo, so copy and use a lot of them! 

But let me add one more, from Will and Ariel Durant's classic The Lessons of History:

“In progressive societies the concentration[of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”

== Why conservative revisionists should give a Hayek ==

Aw heck. Add one more brilliant mind to this mix. David Sloan Wilson, one of the driving forces behind the dynamic and insightful Evonomics site, has been part of the movement to rediscover and revive interest in Adam Smith, one of the chief founders of the modern enlightenment western experiment. 

Wilson has also called for a rediscovery of another complex thinker who was way-oversimplified by the American right: Friedrich Hayek. Yes, he was more explicitly anti-government  than Smith’s anti-oligarchy. Still, he evolved over time. As Wilson puts it:  “not a single prediction made in The Road to Serfdom materialized and Hayek himself modified his own views." 

Even in The Road to Serfdom Hayek wrote: “Nor is the preservation of competition incompatible with an extensive system of social services—so long as the organization of these services is not designed in such a way as to make competition ineffective over wide fields.”