The Present Inequality

The richest 1% will soon own 50% of global wealth. The richest 20%, i.e. those in the developed nations, currently own 94.5% of all global wealth.

This is by design. Not the conscious, conspiratorial design of a few, but it is the systemic evolutionary design that is the end result of the cumulative decisions of millions of people over many decades. (Though as with all things, some people and some decisions carry a great deal of weight.)

The rich countries became rich by combining the nation state system (power/war/loyalty) with increasing returns manufacturing (production/technology/profits), and by spreading the newly generated wealth among the population (welfare/insurance/justice). The strong tendency to concentrate wealth at the top was bolstered by government and the new capitalists, while it was fought against by organized labor and, from time to time, government. These latter clawed back wealth from the rich, a process aided immensely by the catastrophes of WWI, the Great Depression, and WWII. Even in the absence of these disasters, labor was still able to put up a strong fight. This was possible because increasing returns manufacturing allows positive sum games, labor was essential to this growth in manufacturing profits, it could organize to demand a share, it could apply pain to the owners and capitalists, and whatever greater shares it won would eventually trickle out to others in the working class and raises wages, prices, and so on in a virtuous cycle of economic growth. Manufacturing couldn’t easily relocate to cheap labor locations, so the owners had to negotiate. They could be pressured into concessions by demonstrations, strikes, riots, and the threat of greater violence.

This was the case up until the latter half of the 20th century in most countries in the West. The process was an inherent feature of the system, manageable by nation states and their industrial sectors to varying degrees.

This rarely happens anymore in the West. Our political economy has moved from a nation/empire focus, where capital and labor must duke it out in close quarters, to an international/global focus, where capital is able to flee to cheap labor locations very easily thanks to a lax regulatory environment bought and paid for by the global elite. This has led to an international race to the bottom. Labor in the rich nations can now be ignored in favor of cheaper labor elsewhere, which eliminates the pressure to increase wages in the rich nations and removes much of the motive force that pushes the virtuous spiral of production and innovation. Remove the wage growth support, and in its place put the economy on life support by funneling money into protected industries that cannot be exported such as healthcare, housing, and military/intelligence. As costs in these areas balloon, service them with private debt (instead of rising wages) to pump up the financial sector. De-regulate and bailout as needed.

While wages are held in check and ballooning costs are mediated by debt servicing, perform ultra-cheap manufacturing overseas. The finished products are shipped to the rich countries for sale. It’s development arbitrage: Split enough manufacturing out of the developed countries to create loose labor markets and halt their virtuous cycles of wage increases, relocate to cheap labor locations, ship the products back to the high-income developed countries for sale, and harvest their wealth and high incomes to make a tidy profit. On a global scale, it’s cheap production and high retail prices (equals profits) without the messy political negotiations for wage increases. Central banks and governments switch enable this by de-regulating, signing trade agreements, and moving from targeting full employment to keeping inflation in check, the latter of which means monitoring for signs of price growth (which is an imperfect proxy for tight labor markets, as wages go up, prices go up) and cramming down on any potential virtuous cycles behind them.

The elites are transnational. They don’t identify much with their own countries. To facilitate their rule, they have outsourced much of governance to markets and the private sector, a process identified as early as the 1960s in the US.  Blame “impartial” market mechanisms for injustice instead of class interests and political agendas. Government institutions must be constructed to manage and regulate the markets at arms’ length, lest they interfere.

Of course, states do still have power to set tariffs, invest in key sectors, etc. Just look at China. But in the West there has been an underlying co-evolution of ideology and resource constraints as well. Oil and energy geopolitics (the Red Queen’s Race) put limits on what can be done, which in turn places ideological pressure on the professional/managerial class in developed countries that constrains the horizon of intellectual thought. In a supply constrained global oil market, running a large national economy too hot with imported energy can spike oil prices, crippling the economy just as it’s taking off. Run too low and you get depression and deflation. We can’t grow our way out of the current setup without new energy sources, but current elites on both sides (the resource economies and manufacturing economies, especially the US) are locked into the existing arrangement. The owners on both sides will extract profits until there are no more to be had or until forced to change by others.

The ideology of “neoliberalism” evolved to manage this, a kind of imagination-constrained version of capitalism fit for safeguarding the developed nations’ rich under a regime of zero sum austere economic management. The economics profession, the financial sector, and various stripes of financial profiteers became the “smartest guys in the room” and used technical jargon and complex accounting magic to cover up what is, at base, a system for keeping the current geopolitical arrangement running and pushing off the future for as long as possible.

It is an ideology of stagnation, where only minor changes at the margins are allowed and all else is inconceivable or labeled impractical. An ideology designed to serve the rulers at the expense of everyone else.

I noted above that China has bucked the trend. This has been accomplished mostly by going hard into coal, an energy resource it has in abundance, and now pushing hard for renewables to replace its fossil fuel infrastructure. It’s been able to grow so rapidly through a combination of good resource access (especially domestic energy) and smart policy. It has made itself an attractive place for the international elite to do business thanks to low labor costs and a reckless disregard for the environment, and has used its size to produce enough leverage to enact the types of policies that led to national success in previous eras.

I’m of two minds as to what needs to happen to kick us out of the stagnant era. The example of China shows that a large nation with a strong government and domestic energy supplies can industrialize despite the current globalizing period. This provides some hope that the gloom of stagnation in the West can be reduced, after a few new tweaks such as domestic renewables, to an already solved problem involving the system of nation states. It has its flaws, and I worry that the chance of renewed major power war would increase, but it might work.

The other solution is to develop a new international body to manage industrialization, wealth distribution, and labor and capital flows among nations. The UN doesn’t do this and was not designed to do this. The World Bank and IMF don’t seriously attempt to do this outside the current international elite’s interests. Something new must be created. It must not become a single world government, as that scenario opens up the potential for total stagnation at some point. (My reasoning: Units of political economy that are hooked into the same feedback loop may experience the same positive and negative forces simultaneously, increasing the risk that every region will enter depression at the same time and top-level management may not act correctly, leading to global depression and collapse. Why all empires eventually stagnate. In a global market this is already the case to some extent, but a formalization of this feedback system through a regulatory body may increase the signal dramatically and increase the risk of this scenario. The system is more robust if some are up while some are down, enabling recovery without the need for any or much explicit intervention from high level managers. Or the intervention must be automatic as well…) The current international elite represents an informal and very limited version of this solution, having hijacked various national and international institutions to manage global wealth to serve their purposes.

Too much diversity and you get war, waste, and (thanks to nukes) the risk of annihilation, yet you may also get much greater innovation and experimentation, along with a “jailbreak” from the current era. Too much homogeneity and you get stagnation and slow collapse. We have to thread the needle and we’re missing it, tending toward homogeneity because nukes are scary and oil and development arbitrage are comforting for the elite and their servant classes. This is why the present is so stagnant in the West. This is why the 1% are gobbling up so much wealth, why the developed nations (the top 20%) are kept rich internationally but their people are so often desperate domestically, and why the remaining 80% are still impoverished.