Inequality and the future of capitalism

Inequality and the future of capitalism


I think as at no other
time in my lifetime, people are very troubled by inequality. Let me give you some quotes. In 2016, Theresa May, in her
first speech as Prime Minister, said, quote, “We believe in a union “not just between the
nations of the United Kingdom “but between all of our
citizens, every one of us, “whoever we are and wherever we’re from. “That means fighting against
the burning injustice that, “if you’re born poor,
you will die on average “nine years earlier than others.” Jeremy Corbyn has called
for a new economics to address what he called
Britain’s grotesque inequality. On the other side of the Atlantic, President Obama said that he believed that the defining challenge of our time is to make sure that the US economy works for every American. Across the rich world,
and not only in America, large groups of people
are currently questioning whether their economies
are working for them. The same can be said of politics. Two thirds of Americans
without a college degree believe there is no point in voting, because elections are rigged in favour of big business and the rich. Britain is divided as never
before and, once again, many believe that their
voice doesn’t count either in Brussels or
indeed in Westminster. And one of the greatest
miracles of the 20th century, the miracle of falling
mortality and rising lifespans, is no longer delivering for everyone, and is now faltering or reversing. Yet when people say that they’re
worried about inequality, it’s frequently unclear what
they mean or why they care. Economists think they know what they mean when they talk about inequality, and they produce charts
of Gini coefficients of income and of wealth, and when other social scientists say that they have wider concerns, economists, among whom
I have counted myself, have often been too ready to tell them that they don’t know what
they’re talking about. What we would like to do in this review, even with its large quota of economists, is to get a better understanding
of exactly what it is that bothers people about inequality. We will also think about how we might address
concerns about inequality and indeed, which concerns
need to be addressed. If the concern with
inequality is simply envy, as is often claimed by the right, it is perhaps better
to address the concern than to address the inequality. If the inequality comes from incentives that work for a few but benefit many, then we may wanna do a better job of documenting the need for incentives and what they do for
the economy as a whole. If working people are losing out because corporate governance is set up to favour
shareholders over workers, or because the decline in unions has favoured capital over labour and is undermining the wages of workers at the expense of shareholders
and corporate executives, then we need to change the rules. Why are the myriad differences
between men and women so persistent and so difficult to erase? Given that we’re just starting, it is perhaps presumptuous of me to say anything substantive at this point. But what I’m gonna say
is what I myself think, or at least what I think today, and I look forward to
changing my mind as we go, I wouldn’t be chairing this review if I didn’t expect that to
happen in a very serious way. I’m also perhaps too much
influenced by my own work, particularly my recent work
with my colleague, Anne Case, and this work is primarily
about the United States, though we have been doing
quite a bit of thinking over the last six months about
how it applies to Britain. At the risk of grandiosity, I think that today’s inequalities are signs that democratic
capitalism is under threat, not only in the US, where
the storm clouds are darkest, but in much of the rich world, where one or more of politics, economics, and health are changing in worrisome ways. I don’t believe that democratic
capitalism is beyond repair nor that it should be replaced. I’m a great believer in
what capitalism has done, not only to the oft cited billions who have been pulled out of poverty in the last half century around the world, but to all the rest of us
who have also escaped poverty and deprivation over the
last two and a half centuries. It also provides our jobs and the cornucopia of goods and services that we take for granted. And Milton Friedman, whose
starry-eyed view of capitalism has much to answer for,
was not entirely wrong when he extolled the freedom
that free markets can bring. Though history has not
been kind to his view that equality would be guaranteed by using the market to pursue freedom. But we need to think about repairs for democratic capitalism, either by fixing what is broken, or by making changes to
head off the threats. Indeed, I believe that those of us who believe in social
democratic capitalism should be leading the
charge to make repairs. As it is, capitalism is not delivering to large fractions of the population. In the US, where the
inequalities are starkest, real wages for men without
a four-year college degree have fallen for half a century, even at a time when per
capita GDP has robustly risen. Mortality rates are rising
for the less-educated group at ages 25 through 64, and by enough that life expectancy for the entire American population has fallen for three years in a row, the first time such a
reversal has happened since the end of the First World War and the great influenza epidemic. And just let me say that again. Three years in a row, life
expectancy has fallen, and that has not happened
for a hundred years. And we’re not talking
about a narrow group. We’re talking about
life expectancy at birth for the whole American population, rich and poor, taken together. Less educated Americans are
dying by their own hands, from suicide, from
alcoholic liver disease, and from drug overdoses. Morbidity is rising too,
and they are also suffering from an epidemic of chronic pain that for many, makes a
misery of daily life. In Britain, these
inequalities are not so stark, at least not yet. But median real wages in Britain have not risen for more than a decade. One decade is much
better than five decades, but we surely do not
want to wait to find out whether the American experience
will be replicated here. There have also been prolonged period of real wage stagnation in recent years in Italy and in Germany. In those countries too, increasing overall prosperity
is not reaching everyone. And as I noted above,
democracy too does not seem to be working for everyone. The sense of being left behind, of not being represented at Westminster, is much the same as the sense of not being represented in Washington. In Clement Attlee’s 1945 cabinet, the cabinet that implemented
the Beveridge Report and built the first modern welfare state, there were seven men who had
begun their working lives at the coal face. When labour MPs from
Glasgow set off to London, local bands and choirs
came to the train station to see them off as if
they were going to war, which indeed they were. Only 3% of MPs elected in 2015
were ever manual labourers, compared with 16% as recently as 1979. The union movement, which
once produced talents like those in Attlee’s cabinet, has been gutted by the success
of postwar meritocracy. Attlee’s warriors would
today have gone to university and become professionals. They would never have been down the pit, nor in a union hall. Meritocracy has many virtues, but as predicted by Michael Young in 1958, it has deprived those who
didn’t pass the exams, not only of social status and of the higher incomes
that degrees bring, but even of the kind of
political representation that comes from having people
like themselves in parliament. Young wrote, quote, “The bargaining over the distribution “of national expenditure
is a battle of wits, “and defeat is bound to go “to those who lost their
clever children to the enemy.” He referred to the less
educated group as the populists who in turn, refer to the
elite as the hypocrisy. A very splendid term. What does history tell us? Not surprisingly, we’ve been here before. There have been several episodes where capitalism seemed
broken, but was repaired, either on its own, or
by deliberate policy, or by some combination of the two. In Britain at the beginning
of the 19th century, inequality was vast compared with today. The hereditary landowners
not only were rich, but also controlled parliament through a severely limited franchise. After 1815, the notorious Corn Laws prohibited imports of wheat until the local price was so high that people were at risk of starving. High prices of wheat, even
if they hurt ordinary people, were very much in the interests of the land-owning aristocracy,
who lived off the rents supported by the restriction on imports. The Industrial Revolution had begun, there was a ferment of
innovation and invention, and national income was rising. Yet working people were not benefiting. Mortality rates rose as people moved from the relatively healthy countryside to stinking, unsanitary cities. Each generation of military recruits was shorter than the last as their childhood nutrition worsened, from not getting enough to eat and from the nutritional insults
of unsanitary conditions. Churchgoing fell, removing
a major source of community and support for working people, if only because churches
were in the countryside, not in the new industrial cities. Wages were stagnant and would remain so for
half a century, like today. Profits were rising, and the share of profits
in national income rose at the expense of labour. It would have been hard to
predict a positive outcome of this process. Yet by century’s end,
the Corn Laws were gone, the rents and fortunes of the aristocrats had fallen along with
the world price of wheat. Reform Acts had extended the franchise from one in 10 males at the
beginning of the century to more than a half by its end, although the enfranchisement of women would have to wait until 1918. Wages had begun to rise in 1850, and the more than century-long decline in mortality had begun. All of this happened without
a collapse of the state, without a war, or a pandemic, though gradual change in institutions that slowly gave way to the demands of those who had been left behind. Good story, sort of. America’s first Gilded
Age is another case. It also shows that the
fundamental rules of the game can be changed. In the Progressive Era, four constitutional
amendments were passed, all designed to limit inequality
in one form or another. One instituted the income
tax, one gave women the vote, one prohibited alcohol,
strongly supported by women who believed that alcohol abuse was an instrument of their oppression, and one an electoral reform that instituted the direct
election of senators, as opposed to their previous appointment by state legislatures that were
often dominated by business. I’ve already mentioned the
case that is most on my mind, the construction of the
modern welfare state by Attlee’s government
after the Second World War. The Great Depression, like the stagnation of
wages in the early 1800s, spawned a large literature on how to modify or abolish capitalism, and according to one version of the story, it was Attlee’s government
that tamed the beast and that made it possible
for the tamed beast to deliver the unprecedented shared growth that many of us grew up upon. Joe Stiglitz has recently written that he grew up in the
golden age of capitalism, very odd statement,
though, as he wryly notes, it was only later that he discovered that it was the golden age. And, of course, it wasn’t
really a golden age, at least in terms of
material living standards or in terms of health, but perhaps it was in terms
of the rules of the game that allowed the growing
post-war prosperity to be widely shared. I don’t think that anyone
would argue that the late 1940s was a golden age in Britain. There was bread rationing,
petrol rationing, and to a young Angus Deaton, the terrible deprivation
of sweet rationing. But the safety net that
was built in those years played a role in fairly sharing, and perhaps even in helping generate, the prosperity that was to come. That safety net is needed
just as much today. Globalisation and automation
are challenging us today just as they did in
the early 19th century. Safety nets are most needed
when change is rapid, and it is one of the reasons why America is doing so much worse, most obviously in deaths of despair than are wealthy European countries. But what is happening today is also a real threat to
Britain and to Europe. The argument that Anne Case and
I are making in our new book is that less-educated white
men and women in America have had their lives
progressively undermined, starting in the 1970s
and showing up since 1990 in rising numbers of deaths from suicide, alcoholic liver disease, and
accidental drug overdoses. African-Americans experienced this similar disaster 30 years earlier and the improvements in
their lives since then have protected them to an extent. In the face of globalisation
and innovation, many of us would argue
that American policy, instead of cushioning working people has instead contributed to
making their lives worse by allowing more rent-seeking,
reducing the share of labour, undermining pay and working conditions, and changing the legal framework in ways that favour business over workers. Inequality has risen not only due to wealth generation from
innovation or creation, but also through upward
transfers from workers. It is not inequality itself
that’s hurting people, but the mechanisms of enrichment. It’s how inequality happens,
not the inequality itself. So how much of this is
a threat to Britain? Some of the mechanisms of
enrichment are not operative here. The US wastes about a
trillion dollars a year on a healthcare system that is very good at enriching
providers, hospitals, device manufacturers, and
pharmaceutical companies, but very bad at delivering health. You do not have that problem. The US has licenced pharma companies to sell opioids to the general public, including for chronic pain, which ignited an epidemic
of addiction and death with a cumulative toll that is now larger than all Americans lost in both World Wars. You too use opioids, but
usually in hospitals, not in the general population. Yet the opioid manufacturers are following the model
of tobacco manufacturers and working hard when blocked in the US to expand elsewhere. Purdue pharmaceutical has
the subsidiary, Mundipharma that agitates on behalf
of the greater pain relief that they argue opioids can bring. As I write this, Matt Hancock,
the Minister of Health, noted that, “Things are not
as bad here as in America, “but we must act now to protect people “from the darker side of painkillers.” So people here know that it’s a problem. The BBC News report on
this carries a chart showing the extraordinary
geographical inequality in opioid prescriptions in England, with prescription rates
five times larger in Cumbria and the Northeast than in London. As the briefing note
for this launch shows, deaths of despair are rising in Britain, particularly in less
successful parts of Britain, just as they are in other
English-speaking countries, although the numbers and death rates are small compared with the US. What about wages? The US has extensive business lobbying which you do not have or
certainly not in the same way. The US also had very little
lobbying prior to 1970 which is something that’s
not widely understood, so it could happen here too. It’s not something that’s endemic to the way the US
Constitution was written. As in the US, unions have become much less powerful in Britain, a decline that many have welcomed, but their countervailing
power in boardroom decisions may have protected wages
and working conditions. Unions provided social
life and political power for many people who
have less of both today. The replacement of stakeholder capitalism by shareholder value maximisation
is widespread in the US and has been remarked on here, too. Paul Collier in his recent book has noted that Imperial
Chemical Industries, ICI, once the crown jewel of British industry used to boast, quotes,
“We aim to be the finest “chemical company in the world.” But that, before it was lost to takeovers and mergers in 2006, it had changed it slogan to we aim to maximise
shareholder valuation. They weren’t pretty good at that either. (audience laughing) In Britain, as in America,
some cities and towns are doing much better than
other cities and towns and the easy mobility that tended to keep these differences in check seems to have been much reduced. America has no city that is dominant or as uniquely prosperous as London. Political disfunction
in Britain is different but there is a common thread that many voters believe that
they are not well-represented. And there are sharp
differences across groups, with age, education, ethnicity, gender, and geography important in both countries. For me, I think that people
getting rich is a good thing, especially when it brings
prosperity to others. But the other kind of getting rich, what you might call
taking rather than making, rent-seeking rather than creating, enriching the few at
the expense of the many, taking the free out of free markets, is making a mockery of democracy. In that world, inequality and misery are intimate companions. Thank you very much.

Author: Kennedi Daugherty

Leave a Reply

Your email address will not be published. Required fields are marked *