Why Capitalism inevitably leads to more inequality..( A historian’s perspective on inequality)

A food for thought long article by Jerry Z. Muller, Prof of history  at Catholic University of America.

He says both right and left are wrong about rising inequality:

Recent political debate in the United States and other advanced capitalist democracies has been dominated by two issues: the rise of economic inequality and the scale of government intervention to address it. As the 2012 U.S. presidential election and the battles over the “fiscal cliff” have demonstrated, the central focus of the left today is on increasing government taxing and spending, primarily to reverse the growing stratification of society, whereas the central focus of the right is on decreasing taxing and spending, primarily to ensure economic dynamism. Each side minimizes the concerns of the other, and each seems to believe that its desired policies are sufficient to ensure prosperity and social stability. Both are wrong.

He says the answer to rising inequality is that capitalism produces inequality:

Inequality is indeed increasing almost everywhere in the postindustrial capitalist world. But despite what many on the left think, this is not the result of politics, nor is politics likely to reverse it, for the problem is more deeply rooted and intractable than generally recognized. Inequality is an inevitable product of capitalist activity, and expanding equality of opportunity only increases it — because some individuals and communities are simply better able than others to exploit the opportunities for development and advancement that capitalism affords. Despite what many on the right think, however, this is a problem for everybody, not just those who are doing poorly or those who are ideologically committed to egalitarianism — because if left unaddressed, rising inequality and economic insecurity can erode social order and generate a populist backlash against the capitalist system at large.

Over the last few centuries, the spread of capitalism has generated a phenomenal leap in human progress, leading to both previously unimaginable increases in material living standards and the unprecedented cultivation of all kinds of human potential. Capitalism’s intrinsic dynamism, however, produces insecurity along with benefits, and so its advance has always met resistance. Much of the political and institutional history of capitalist societies, in fact, has been the record of attempts to ease or cushion that insecurity, and it was only the creation of the modern welfare state in the middle of the twentieth century that finally enabled capitalism and democracy to coexist in relative harmony.

This is something which even most econs choose to ignore..leave politics…Most models assume humans to be rational and homogeneous. Given an opportunity, all would benefit. Capitalism provides that opportunity and hence all benefits. Some other econs  which are more sympathetic say ok people may be different but trickle down effect will ensure that have nots will gain. First kind of models are ideal and hence unreal. On second which are more real experiences are mixed. Some places there has been trickle and some not. Most of the time one sees divergence and convergence, To this econs say it takes time. How much time? No one is really sure..So it is not a political problem alone. It is an econ problem as well..

Anyways back to the article.  The author discusses many aspects of inequality and how capitalism has led to problems. He points to several post-industrial revolution trends which has led to this rise in inequality:

For humanity in general, the late twentieth and early twenty-first centuries have been a period of remarkable progress, due in no small part to the spread of capitalism around the globe. Economic liberalization in China, India, Brazil, Indonesia, and other countries in the developing world has allowed hundreds of millions of people to escape grinding poverty and move into the middle class. Consumers in more advanced capitalist countries, such as the United States, meanwhile, have experienced a radical reduction in the price of many commodities, from clothes to televisions, and the availability of a river of new goods that have transformed their lives.

Most remarkable, perhaps, have been changes to the means of self-cultivation. As the economist Tyler Cowen notes, much of the fruit of recent developments “is in our minds and in our laptops and not so much in the revenue-generating sector of the economy.” As a result, “much of the value of the internet is experienced at the personal level and so will never show up in the productivity numbers.” Many of the great musical performances of the twentieth century, in every genre, are available on YouTube for free. Many of the great films of the twentieth century, once confined to occasional showings at art houses in a few metropolitan areas, can be viewed by anybody at any time for a small monthly charge. Soon, the great university libraries will be available online to the entire world, and other unprecedented opportunities for personal development will follow. 

All this progress, however, has been shadowed by capitalism’s perennial features of inequality and insecurity. In 1973, the sociologist Daniel Bell noted that in the advanced capitalist world, knowledge, science, and technology were driving a transformation to what he termed “postindustrial society.” Just as manufacturing had previously displaced agriculture as the major source of employment, he argued, so the service sector was now displacing manufacturing. In a postindustrial, knowledge-based economy, the production of manufactured goods depended more on technological inputs than on the skills of the workers who actually built and assembled the products. That meant a relative decline in the need for and economic value of skilled and semiskilled factory workers — just as there had previously been a decline in the need for and value of agricultural laborers. In such an economy, the skills in demand included scientific and technical knowledge and the ability to work with information. The revolution in information technology that has swept through the economy in recent decades, meanwhile, has only exacerbated these trends.

This has changed the role of men and women:

The trend for women to receive more education and greater professional attainments has been accompanied by changing social norms in the choice of marriage partners. In the age of the breadwinner-homemaker marriage, women tended to place a premium on earning capacity in their choice of partners. Men, in turn, valued the homemaking capacities of potential spouses more than their vocational attainments. It was not unusual for men and women to marry partners of roughly the same intelligence, but women tended to marry men of higher levels of education and economic achievement. As the economy has passed from an industrial economy to a postindustrial service-and-information economy, women have joined men in attaining recognition through paid work, and the industrious couple today is more likely to be made of peers, with more equal levels of education and more comparable levels of economic achievement — a process termed “assortative mating.”

Superb stuff..

These trends have led to rise in inequality:

These postindustrial social trends have had a significant impact on inequality. If family income doubles at each step of the economic ladder, then the total incomes of those families higher up the ladder are bound to increase faster than the total incomes of those further down. But for a substantial portion of households at the lower end of the ladder, there has been no doubling at all — for as the relative pay of women has grown and the relative pay of less-educated, working-class men has declined, the latter have been viewed as less and less marriageable. Often, the limitations of human capital that make such men less employable also make them less desirable as companions, and the character traits of men who are chronically unemployed sometimes deteriorate as well. With less to bring to the table, such men are regarded as less necessary — in part because women can now count on provisions from the welfare state as an additional independent source of income, however meager.

In the United States, among the most striking developments of recent decades has been the stratification of marriage patterns among the various classes and ethnic groups of society. When divorce laws were loosened in the 1960s, there was a rise in divorce rates among all classes. But by the 1980s, a new pattern had emerged: divorce declined among the more educated portions of the populace, while rates among the less-educated portions continued to rise. In addition, the more educated and more well-to-do were more likely to wed, while the less educated were less likely to do so. Given the family’s role as an incubator of human capital, such trends have had important spillover effects on inequality. Abundant research shows that children raised by two parents in an ongoing union are more likely to develop the self-discipline and self-confidence that make for success in life, whereas children — and particularly boys — reared in single-parent households (or, worse, households with a mother who has a series of temporary relationships) have a greater risk of adverse outcomes.


What to do?

One potential cure for the problems of rising inequality and insecurity is simply to redistribute income from the top of the economy to the bottom. This has two drawbacks, however. The first is that over time, the very forces that lead to greater inequality reassert themselves, requiring still more, or more aggressive, redistribution. The second is that at some point, redistribution produces substantial resentment and impedes the drivers of economic growth. Some degree of postmarket redistribution through taxation is both possible and necessary, but just how much is ideal will inevitably be contested, and however much it is, it will never solve the underlying problems.

A second cure, using government policy to close the gaps between individuals and groups by offering preferential treatment to underperformers, may be worse than the disease. Whatever their purported benefits, mandated rewards to certain categories of citizens inevitably create a sense of injustice among the rest of the population. More grave is their cost in terms of economic efficiency, since by definition, they promote less-qualified individuals to positions they would not attain on the basis of merit alone. Similarly, policies banning the use of meritocratic criteria in education, hiring, and credit simply because they have a “differential impact” on the fortunes of various communal groups or because they contribute to unequal social outcomes will inevitably impede the quality of the educational system, the work force, and the economy.

A third possible cure, encouraging continued economic innovation that will benefit everybody, is more promising. The combination of the Internet and computational revolutions may prove comparable to the coming of electricity, which facilitated an almost unimaginable range of other activities that transformed society at large in unpredictable ways. Among other gains, the Internet has radically increased the velocity of knowledge, a key factor in capitalist economic growth since at least the eighteenth century. Add to that the prospects of other fields still in their infancy, such as biotechnology, bioinformatics, and nanotechnology, and the prospects for future economic growth and the ongoing improvement of human life look reasonably bright. Nevertheless, even continued innovation and revived economic growth will not eliminate or even significantly reduce socioeconomic inequality and insecurity, because individual, family, and group differences will still affect the development of human capital and professional accomplishment.

 He places a lot of emphasis on role of families and groups to develop human capital. Rightly so..

The challenge for government policy in the advanced capitalist world is thus how to maintain a rate of economic dynamism that will provide increasing benefits for all while still managing to pay for the social welfare programs required to make citizens’ lives bearable under conditions of increasing inequality and insecurity. Different countries will approach this challenge in different ways, since their priorities, traditions, size, and demographic and economic characteristics vary. (It is among the illusions of the age that when it comes to government policy, nations can borrow at will from one another.) But a useful starting point might be the rejection of both the politics of privilege and the politics of resentment and the adoption of a clear-eyed view of what capitalism actually involves, as opposed to the idealization of its worshipers and the demonization of its critics.

Good stuff..Different perspectives are always welcome..


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