The Tolerance of Inequality

John Plender from the FT recently looked at the tolerance of inequality in the capitalist system today. Stewart Lansley, an author of “The Cost of Inequality” says that the modern economy appears to have only two routes:

1. the super-rich who are racing ahead on the autobahn at unlimited speeds
2. everyone else who has stalled in the slow lane in a 50km zone

Before 2007 those in he slow lane enjoyed enjoyed rising living standards maninly due to their ability to borrow more money using their property as collateral. Since the crisis they have struggled to service unmatched levels of debt whilst finance has come to play a new role as “a cash cow for a global super-rich elite”. However according to Plender this is nothing new – the industrial revolution saw large differences in income distribution as did the 1920’s and 30’s. This was when John Maynard Keynes wrote about a more humane form of capitalism and was notably scathing of what he called “individualist capitalism and the money motive.”

Although the despair of earlier recessions are not prevalent today ie. soup kitchens, 25% unemployment, and extreme poverty, the conerns seem to focus on the unfairness of the system. Top of the agenda is the banking system which in the 1930’s was concerned with deposit-taking and lending but today has become incredibly complex system which they themselves do not always understand and whose social utility is not apparent to the lay person – including the head of the UK Financial Services Authority who stated that the business of banking has become far too large. Historically this is not new. Keynes remarked

“To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society”

Solution – Reduce the Power of the Lobbyist
The economic system of late has also rewarded those that have taken risks and failed ie. bailouts from the government. Surely this is against what the definition of capitalism is. So where to from here? Mancur Olson a institutional economist has argued that nations decline because of the lobbying power of distributional coalitions, or special-interest groups, whose growing influence fosters economic efficiency and inequality. In the 1970’s it was trade unions and business cartels whilst today it is finance professionals on Wall Street and in London. Jeffrey Sachs in his recent book entitled “The Price of Civilisation – Economics and Ethics after the Fall” noted the total lobbying outlays by sector during 1998-2011. The table shows those sectors that receive the most funding are in the deepest strife for reasons tied to regulatory failures. Each of these sectors – finance, health care, transport, agribusiness etc – have landed cushy federal contracts, subsidies, tax breaks, and slack regulation and inattention. Not surprisingly finance, real esate, healthare, and pharmaceutical companies rank amongst the lowest in public approval in Gallup polls.

“These industries epitomize the destructive policies produced by the corporatocracy, and the public knows it.” Jeffrey Sachs

Below is a presentation by Jeffrey Sachs at LSE in December last year. Well worth a look but it is long.

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