Saturday, 28 April 2018

Inequality and democracy: Can they coexist?

Equality (or, at least, fairness) and democracy are closely related. But the first has declined. Can the second survive? And if not, what will the endgame be? Thoughts on inequality, complexity, and collapse

The 1930s Slump. A march in Toronto
Inequality has been increasing. Few people have explained this process so well as Robert Reich, author of the 2010 book Aftershock: The Next Economy and America's Future.

Reich was Labor Secretary in Bill Clinton’s first administration and is now Chancellor’s Professor of Public Policy at Berkeley. His diagnosis, as set out in Aftershock, is simple; it is that the concentration of wealth in the hands of a few will make everyone poorer, because the rich don’t spend anything like enough to generate employment – that needs a mass market, in which wealth is distributed through the workforce so that everyone can participate in the consumer economy. However, a process of wealth concentration has been going on for years. “The wages of the typical American hardly increased in the three decades leading up to the Crash of 2008, considering inflation. In the 2000s, they actually dropped,” says Reich, and goes on to explain that the economy has grown so much over that period that, had the benefits been divided equally, the typical person would be 60% better off.

If that’s the case, how come that, for 30 years, no-one seemed to notice this upward redistribution was happening? Reich argues that the relative decline in income for most people was masked by longer hours, which meant their overall income did not always decline – so that although their income per hour did, they didn’t always notice. He also notes the participation of women as well as men in the workforce, generating dual incomes so that people did not, subjectively, feel poorer (he does not use this as an argument that women should not be in the workforce). And, most dangerously, the decline in real incomes has been compensated for by an explosion of credit. A quick look at house prices over the last 30 years suggests where much of that credit went. When the property bubble burst, the game, indeed, stopped.

Britain is scarcely better in terms of income distribution. Inequality is often measured using the Gini coefficient, which measures variation through frequency distribution. The coefficient is expressed as a value between zero and one, where zero represents perfect equality and one represents the concentration of all wealth in one individual. According to the OECD, individual countries’ Gini coefficients range from roughly 0.24 to 0.7. That of the US in 2013 was 0.396 and Britain’s was not much better, at 0.358. These figures are high for developed countries; for comparison, France’s and Germany’s were 0.294 and 0.292 respectively. This suggests that if Reich is right and the US has a problem with income inequality, then Britain has one too.

The numbers seem to bear this out; according to the Equality Trust, households in the bottom 10% of the British population have an average net income of £9,277 while the top 10% have net incomes over nine times that (£83,897). The poorest 50% of all households own just 8.7% of the wealth; the richest 10% of households hold 45%. True, the Trust has an angle; its mission is to encourage greater equality. However, the figures have been drawn from Britain’s Office of National Statistics. The Trust adds that poorer children can expect 52 years of healthy life against richer ones’ 71. One could add that even the lower figure is far better than in lower-income countries. Nonetheless, the evidence of inequality in Britain is striking.

Inequality is not good for democracy. Reich warns that, if we’re unlucky, Americans will at last say “Hell, we were screwed”, but then draw quite the wrong conclusion from that, electing a right-wing, isolationist, populist and frightening President. He is wise enough to make this a fictional character (though she slightly resembles a sort of Palin-Thatcher cross.) It is an intriguing premise, given that Aftershock was written many months before the Trump campaign began to gain traction. It is not surprising.  Losers of rigged games, as Reich rightly says, tend to get angry. An alternative scenario that Reich does not consider is that Americans, and Brits, will vote for governments who see the need for greater equality, but that those governments will be hamstrung by markets, trade treaties and, in the US, legislative stasis. In that case people will, quietly first and then in greater numbers, drift away from the system, and society will lose its cohesion; government will become ineffective; and the Western world will decay into irrelevance.

A historical relationship
But the link between equality and democracy is not a new one. Without the former, the latter could not have taken root.

A functioning democracy requires a measure of equality – yet a certain equality is needed to attain democracy. The Industrial Revolution was, in effect, a breaking of that vicious circle. Between 1700 and 1900, Britain broke the cycle of poor nutrition, low output, low income, low consumption and poor nutrition. J.D. Chambers, in his elegant 1972 summary Population, Economy And Society In Pre-Industrial England, credits a fortuitous break in cycles of disease, but also says: “One aspect of the Industrial Revolution… is that the labour force was not only very much larger but that it was worked very much harder.” This needed better nutrition. In a 1990 paper, the future Nobel prizewinner Robert Fogel pointed to “the exceeding[ly] low level of work capacity permitted by the [18th century] food supply… The increase in the amount of calories available for work over the past 200 years… increased the labour-force participation rate by bringing [in] the bottom 20% of the consuming units… [who had had] only enough energy… for a few hours of strolling each day – about the amount needed for a career in begging.” (The Conquest of High Mortality and Hunger in Europe and America: Timing and Mechanisms, 1990.) He concluded that improvements in nutrition and health had accounted for perhaps 30% of the growth in per capita income in Europe between 1790 and 1980.

So the vicious circle had been broken. But those who controlled food and wages did not permit this out of altruism, or because they had read Fogel. Chambers cites the way in which 18th-century labour combined to obtain better wages. Or as the filmmaker Michael Moore put it in his 1996 polemic, Downsize This!, “When the early unionists stood up to the companies, it resulted in a higher standard of living for all of us… Thanks to labor unions, we have… wages that allow even the most unskilled worker to purchase many products – which, in turn, gives more people jobs.” This process of collective bargaining could not have happened under an all-powerful oligarchy. In effect, one type of human right secured another. In 19th-century Britain, freedom – albeit imperfect, the beginnings of liberal democracy – became more than its own reward.

Free debate was central to this process. Brian Inglis’s absorbing account of the social reforms of the 19th century, Poverty and the Industrial Revolution (1971), describes how in 1832 MP Michael Sadler fielded a Bill to regulate abuse of labour in factories;  the evidence collected by the Bill’s Committee proved, as the Leicester Mercury put it, that “cruel over-working [of children] has in many places been practised… It is horrible, and an outrage on humanity, and decency…” The uproar forced the new government to pass its own 1833 Factory Act, which for the first time created an independent inspectorate.  Britain never became a workers’ paradise, but that is not the point; rather, it is that democracy and the free circulation of information allowed the vicious circle of malnutrition to be broken and real growth to begin. It is an argument also stated, in a rather different form, by Amartya Sen, chiefly in his much-read book Development as Freedom (1999). Crudely put, a democracy is a society in which people may empower themselves; to Sen, famously, famines do not happen in a democracy. The development of capitalism and democracy, and the synthesis between the two, in the 19th century seems to demonstrate the same argument.

This is of course an imperfect thesis. Technological change also fed people in the 19th century: tinned goods; the introduction of refrigeration, enabling the transport of meat from Argentina and the Commonwealth; the process of enclosures, which slung people off the land but also created cheaper food; then building of the railways deep into the Great Plains of the US, which brought cheaper grain and in so doing caused an agricultural depression in Britain but also fed people – all of this mattered, and it is dangerous to say that there would have been no rise in living standards without democracy. Yet it is hard to see how ordinary people would have claimed their share without the freedom to organize and to be represented.

Today, however, as Reich has explained, the rich have reacted, and grabbed back a bigger share of the cake.  This reaction has been happening for a while, and it has already destabilized our world.  Consider the following from Reich’s Aftershock. It is a very good summary of what happened in 2008:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth... Instead of achieving that kind of distribution, a giant suction pump had... drawn into a few hands an increasing portion of currently produced wealth. ...In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

Except that it isn’t Reich himself and it isn’t about 2008. Reich is quoting long-ago Fed chairman Marriner Eccles. And Eccles was writing not about 2008 but about 1929 and the Great Depression that followed. Yet this is not so different to what happened after 2008, as the British and US governments bailed out the banks that were too big to fail, and ordinary people paid for it through a regime of austerity. After 1929, and again in 2008, it wasn’t the wealthy that paid for their folly.

So why not?

Anti-austerity demonstation in Valencia (Fito Senabre/Wikimedia Commons)
Rousseau is alleged to have said in a speech, “When the people shall have nothing more to eat, they will eat the rich.” Actually the rich are quite good at making the poor eat each other instead. One can see this in the carefully whipped-up rhetoric against “scroungers” and the “workshy”; those of limited means are encouraged to blame their troubles on those less, rather than more, fortunate than themselves. Meanwhile the rich have helped themselves to the country’s assets. Anyone who doubts that this is what has taken place in Britain should read Owen Jones’s excellent The Establishment and How they Get away With It, or James Meek’s shrewd take on privatisation, Private Island.

This is part of a process by which wealth will become more and more concentrated. At some point, the consumer economy and the mass-markets it supports will go into decline. It will not be for the first time. Some have argued that this was the fate of Mayan society; it all became too much and the great mass of people stopped supporting their priestly class, and simply dissolved back into the jungle. (The American anthropologist Joseph Tainter has seen this process slightly differently, as one of societies collapsing because they support too much complexity; more on this below.) Is that what will happen to us – that the system will simply decay, leaving our societies to decline into illiberalism and superstition; a repeat of the end of the Roman Empire? That is somewhat apocalyptic, but as the philosopher John Gray has pointed out, the idea that history is, by its nature, progressive has little to support it.

But the threat to democracy in a society doesn’t just come from the inequalities within it. It comes also from inequality between societies – global inequality.

Global inequality
There is a rising tide of xenophobia in some European societies that is at least in part the result of a broader dimension of economic inequality that is threatening European democracy – global inequality and the refugee crisis. In 2015-2016, we saw the arrival, in Europe, of large numbers of refugees and illegal economic migrants (we should be careful about this distinction; one may be a refugee from poverty). This gave rise to a liberal and decent reaction in some quarters, but has also been of use to the radical right.

As Slavoj Žižek puts it (in Against the Double Blackmail, published in 2016), after the terrorist outrages in Paris in November 2015, these liberal impulses were drowned out by the rhetoric of the war on terror. It is, he writes, “easy to imagine what will follow ...The greatest victims of the Paris attacks will be the refugees themselves, and the true winners ...will be simply the partisans of total war on both sides.” Žižek’s answer to this is a global solidarity that attacks the causes of conflict and migration – global inequalities – at their root. In fact, there is sometimes more at issue than that; the specific problems of Syria and Eritrea are not solely about north-south inequalities. In principle, however, Žižek is right. Global, as well as internal, inequalities are threats to democracy.

Moreover, the two types of inequality are related, for those who feel themselves disadvantaged will always be vulnerable to the siren call from those who would have them believe that their enemy is not the rich, but those who have nothing. In such a mood, no-one will be disposed to listen to the reasoned arguments that tell them refugees and the poorest are not the cause of their problems. We saw a process of this type in the 2016 Brexit referendum in Britain, where millions trooped to the polls to vote “Leave”, convinced that the tide of migrants from Europe was making them poorer. In fact, the evidence suggests the exact opposite. What will happen when, too late, people find that their standard of living is not rising but dropping? Again, as Reich suggests in the case of the US, they may decide that democracy is not the answer.

So what is to be done?
Robert Reich’s book is lucid and enjoyable (as is the film based on the book). But although it’s great on diagnosis, I’m not so sure he has solutions. He suggests a number of measures to address inequality. One is a “reverse income tax” that will subsidize the middle class (why does the US not appear to have a working class, one wonders?). The money would be funded by a carbon tax, and would be added to paychecks. This reminds one of the system of poor relief devised by magistrates at Speenhamland in Berkshire at the end of the 18th century. “Speenhamland” was, when I was young, always taught as an example of the road to hell being paved with good intentions. It simply allowed employers to lower wages, thus accumulating wealth for themselves while making the public pay their wage bill. In fact, recent research has suggested that Speenhamland’s outcomes were not so clear-cut. Still, with many lower-paid workers in Western countries now drawing welfare to supplement their wages, one wonders whether we already have Speenhamland writ large. In any case, this is tinkering around the edges. Wouldn’t we be better off having a much higher, and strongly enforced, minimum wage? Far from bankrupting employers, it’ll make us all richer in the end. 

Even more important, we could address the whole question of governance. Reich does suggest measures to get money out of politics, but what he does not discuss is the weakness of electoral systems that give voters a limited choice between at most two candidates. You want to throw the bums out? Give us a system that lets us choose a better government. But in any case, suppose we did get one; it might not be able to do much about inequality, and that might make things worse. Progressive rates of taxation are one answer. In Britain, however, a modern government would find it very difficult to return to the rates of supertax that applied before 1970; neither is it entirely clear that it should, as it would be hard to collect and might not, in the end, make much difference. Other forms of taxation change are possible, with a move back towards the social-democratic model. But at the moment there seems little prospect of it.

I suspect the answer lies in some major shift in economic life. This may be something like automation, which we have seen coming, but for which we have done little to prepare. But it is not really clear what the consequences will be; many may find themselves without jobs, but they may be the people least able, as a class, to effect change. If so they will simply suffer.

But perhaps leadership is not the answer to this anyway. Joseph Tainter, mentioned briefly earlier, would not think so. Complex societies, he says, “do not evolve on the whims of individuals.”

The collapse of complexity?
Tainter’s 1988 book The Collapse of Complex Societies posits that social systems evolve by meeting challenges through the development of complex structures, both social and technical. This is not hard to believe; as the population rises, innovations such as (for example) public irrigation systems will be needed to grow their food, and roads to carry it to them. To run these systems demands complexity, with a growing number of people in roles that are removed from primary production. At some point, the marginal rate of return on this complexity will fall to a point where it can no longer justify its cost, and the complex society will collapse. Tainter presents a number of examples to support this theory; the Mayans are one, the Western Roman Empire another. The latter’s collapse, says Tainter, is seen as a lapse into darkness; actually it may have been a logical response to an overly complex system that could no longer justify its existence, and it ceasing to support it, the population made a rational economic decision.

One must not oversimplify Tainter’s argument. He does not, for example, see collapse as occurring in societies that have stronger neighbours. They will simply get taken over. Moreover he sees a society’s resources in terms of energy; if it can expand those resources, through conquest or technological change, it may be able to sustain complexity. Given that we may be on the verge of an energy revolution, this is interesting. Nonetheless Tainter’s vision is compelling; of a society splitting into multiple specialized sectors as it evolves, and acquiring more and more functions that are removed from primary production, until at some point the whole shebang simply cannot pay its way. Oddly, the group closest to this argument, for me, may be the 18th-century Physiocrats, who believed all wealth derived, in the end, from the land; they would have understood Tainter perfectly.

Tainter is not talking about inequality. He is talking of the costs of complexity. But it seems axiomatic that these would fall hardest on the poor. Tainter does comment that, as the rate of return on complexity drops, “parts of a society perceive increasing advantage to a policy of separation or disintegration. ...Various segments increase passive or active resistance, or overtly attempt to break away.” So can we apply his theory to our own situation? Is growing inequality in the UK and USA a symptom of excessive complexity? If so, Tainter may have shown us the exact mechanism through which inequality will destroy democracy and, if we are unlucky, much else besides.

Droning monks
One can even guess which area of complexity will be the first to exhaust everyone’s patience. Earlier, I quoted Mariner Eccles’s diagnosis of what happened in 1929 and suggested that 2008 had not been so very different. In these cases, the part of society that went wrong was the financial sector. This sector adds to complexity. But it is not a luxury; it grew up in order to finance productive enterprises, including infrastructure – a cursory dip into the history of the railways, shipping and other industries will confirm this. Thus, if Tainter is right, the marginal rate of return on this aspect of complexity should be adequate. But in both 1929 and 2008, it showed itself not to be, as it had acquired functions that served its own existence rather than the needs of society as a whole – for example, through the “securitization”, or packaging, and sale of mortgages that should really have remained with the original lender. 

The resulting losses fell not simply upon society as a whole but on those parts of it that could least afford it. The results, in the 1930s, were catastrophic for democracy, and 2008 seems to have had a similar (if so far milder) effect.

If my analysis is correct, then, we can both attack inequality and preserve democracy by removing layers of complexity, rather than, as in Tainter’s prognosis, collapsing or being swallowed up by neighbours. And the interesting thing is that in England, at least, we have been here before.

I have lately been ploughing through a mighty tome called The England of Elizabeth. It has 533 close-set pages (excluding index) and this was just the first volume. The book was the crowning achievement of the historian A. L. Rowse, who died in 1997 at the age of 94. It is packed with detail – too much, perhaps; yet it is a magisterial picture of a country in an age of self-discovery, facing multiple dangers from within and without, guided to safety by a monarch of extraordinary ability. I’ll be returning to this in a future post. But what is striking in this context is Rowse’s take on the Dissolution of the Monasteries, which took place not many years before Elizabeth’s accession; looking back, we see this as a political event, but profoundly affected the economy. According to Rowse, it threw:

“one-sixth of the whole cultivable area of the country upon the market ...the settling in of numerous hard-headed, hard-fisted families to screw the utmost return out of the land in innumerable places where idle monks had droned away their lives [means] there must have been a considerable increase in productivity...”

Dissolved: Whitby Abbey (Ackers72/Wikimedia Commons)
There surely was. But more relevant here, perhaps, is the fact that the monastic structure must have made huge demands on the resources of the society that supported it. We are back with Tainter; there was a burden of complexity that could not justify itself economically. But instead of collapsing, this complex society laid a part of that burden down. To be sure, it did not do so solely for that reason. The Dissolution was a political act. Yet it both released the burden on resources, and increased them. In so doing it was part of the roots of the Industrial Revolution.

So what will our Dissolution be? And will it throw Tainter’s process into reverse, as the Dissolution appears to have done? If not, the weaknesses caused by inequality will be laid bare, and democracy will find it harder and harder to justify its existence.

But what if none of this is inevitable? Maybe Tainter has shown us how things might end, but a complex society in which everyone does have an interest in the level of complexity may prove resilient; why not? Of course, if its level of complexity continues to rise without delivering sufficient benefits, it will collapse. In this, Tainter is surely right. But if those benefits are more fairly shared, the burden of complexity will be tolerated for longer. It is this challenge that we face now. Ask someone on the conventional left, and they may argue that it can be met through progressive taxation and through State ownership of key sectors. They may be part-right. But to me, only a more fundamental reform of democracy will enable it to meet the challenge of inequality, just as it did in the 19th century.

A couple of years ago I wrote in these pages about the way the political agenda in the US and especially the UK is distorted by the electoral system, making it open to manipulation (Don't like anchovies? Don't bother voting, then, July 2016). There is no need to restate the arguments in detail here. But in a nutshell, the current systems allow vested interests to target a very small number and homogenous type of electors in order to swing the result. A few months later, the US Presidential election showed how horribly right this was. The extent to which that very small number of floating voters in swing states actually were targeted and their minds changed, by outside interests remains open to dispute. However, the implication is that the agenda can be distorted. Thus the decline in real wages for (say) socioeconomic groups C3, D1 and D2 may be the main concern for millions of people, but the election will be fought instead on some matter that only really exercises a few hundred thousand – say inheritance tax on homes worth more than £325,000, although few people outside South-East England really own them (in fact the average house price in the UK in February 2018 was £225,047). Thus the costs of maintaining a complex society are shifted onto the shoulders of those less able to bear it, and at some point, they may decide not to do so.

The danger at that point is that they will set about some droning monks. My guess is that it their victim would be the financial services industry. In a way they will be right. Many of its activities are superfluous and damaging, as we found out in both 1929 and 2008. But it provides over a million jobs and generates a trade surplus of £60 billion. And as stated earlier, it does have productive functions. What if the baby gets thrown out with the bathwater?  And what about other “non-essential” sectors – foreign aid, the arts? Would they survive?

In a sense, this has already happened. Disenfranchised in general elections, millions of people trooped into the polling booths in 2016 to vote to dismantle one aspect of complexity: Britain’s membership of the European Union, with its tangled skein of rights and obligations, its notorious (though overstated) bureaucracy – and its net benefits, which were just too hard for people to envisage. Maybe the Brexit vote was the collapse of complexity in action. And maybe the rapid reform of our democracy is the only way to halt this process, tackle inequality and prevent everyone melting, like the Maya, into the jungle. As Tainter points out, for some, to abandon the Western Roman Empire was a rational decision. But we should remember what came next – the Dark Ages.

was published in December 2016 and is available from Amazon and other online retailers, or through bookshops
(ISBN  978-0-9978815-0-9, ebook; ISBN 978-0-9978815-1-6, paperback)

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1 comment:

  1. A very thought-provoking and enlightening narrative of what might happen in near future. We are witnessing this phenomenon in India where the glaring inequality between the haves and the have-nots is threatening to escalate into an uncontrollable situation almost threatening to destroy the very fibre of our society. A civil apprising cannot be ruled out if the worsening situation is not arrested in time.