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Yves here. While the thrust of Perelman’s post is no doubt familiar to readers, take note of how simple and few in number are the essential principles for creating a highly unequal society, and how easy it is to describe them them in antiseptic language.
By Michael Perelman, a professor of economics at California State University, Chico who also writes at Unsettling Economics
What follows requires an intense dedication to spirit of WEM (The Wondrous Efficiency of Markets).
A Successful Engineer will have to learn to refrain from falling victim to foolish feelings of justice or sympathy, both of which threaten to undermine WEM.
The architecture of inequality must be carefully constructed. As the founding fathers of the United States clearly understood, democracy must be kept in check. For this purpose, they invented the Electoral College to prevent the president from being elected by popular vote.
To ensure an effective electoral system, an obsequious media must be skilled in drowning the public with a flood of misinformation to maintain a constant level of fear to make them more likely to side with the CS (corporate system).
Knowing that the media is not currently up to the job of managing the electoral system, even with a generous flood of money from the CS. In order to protect the WEM, sophisticated methods are required. Gerrymandering almost essential by placing groups of people, too ignorant to understand that WEM, in districts where their votes will be inconsequential.
Now we get to a more important part of the architecture: the legal system. For example, courts in the United States agreed that corporations are people, deserving all the rights of an upstanding citizen. Moreover, the electoral system insurance that the appointment of judges will be restricted to those people who are sincere believers in the WEM. Their role is essential because some legislators get out of hand and create abominable regulations that undermine the efficiency of WEM. Some benighted members of the judiciary are too lackadaisical to rule these regulations as unconstitutional. For that reason, CES must offer very lucrative employment to the regulators who are intelligent enough to see the wisdom of WEM. Consequently they ignore the foolish regulatory structure.
Regulators are not the only ones to see the benefits of working with the CES. Politicians who resign or are defeated are almost inevitably destined to enjoy the benefits of their dedication to the WEM with the returns from taking a rewarding position with a major corporation, lobbying, or even a lucrative contract to write a book that virtually no one would want to read.
When done correctly, this system works magnificently, although it periodically it seems to fall apart until the detested government apparatus rescues it. In the meantime, huge amounts of wealth and income fall into the hands of the top 1%, the people of greatest importance, while the rest of the public can enjoy watching the spectacular performance of the CES, a reward worthy of their place in society especially because envy of the wealthy brethren will obviously make them work harder to succeed, adding to WEM.
All power to WEM!
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If we really want to make a dent in the inequality, we’re simply going to have to ban interest. Yes, I realize about the time value of money and all that; but sorry, interest is simply not compatible with a just and egalitarian society. There can be interest on money, or a stable and fair society, but not both.
Religions (in their early days at least) have historically embodied social movements against injustice and inequality, and the various proscriptions they’ve developed through history usually have something to do with that. Do unto others, kill money lenders, turn the other cheek etc, are not actually commandments from God, but rather are good practices for creating just and stable societies. I say that we take notes from these pioneers in social justice and follow some of their advice. And next time around we might just have something that’s a bit more durable and long-lasting.
Empirically: We have near zero interest rates now and I don’t feel any less unequal.
Theoretically: Inequality is a simple problem of distribution. There are many ways an unequal distribution is created and maintained, and interest, it seems to me, is only one of them. I see no reason to think that banning interest will fix inequality. ‘financial matters’ below points out that rent extraction, along with interest sustains inequality. Now, I don’t know whether these problems have to be “solved first” before wage labor can be “solved”, but from my point of view, it is wage labor where inequality is first established. Inequality of wages is the root, and it is wage labor that ought to be the primary target of anyone hoping to “solve” inequality.
I can quite easily imagine what I would consider a just society that retains both interest and rents (limited and well regulated) where the conditions of labor did not create vast inequality “on the front end”, so to speak. But if inequality is baked in at the wage level, no amount of banning or regulating interest and rents will “solve” it, though you may be right about “putting a dent” in it… But why work for a ‘dent’ when a solution is at hand? Confiscation and redistribution works just fine. Fixing wage inequality would reduce the amount of confiscation and redistribution required and is also a great idea. Interest and rents need to be managed, yes, but they are not the primary cause of inequality nor the most compelling path to egalitarianism.
Raising the minimum wage absent a maximum wage will not “fix” wage inequality, since inequality is by definition the difference between compensation at the bottom and at the top. You can’t reduce a range by constraining only one end. Which explains why the pretend progressives hype it so: they know it will make no difference to the status quo but makes them sound like friends to the common people.
But a minimum wage, along with a maximum wage (I use the term wage here loosely to comprehend total compensation) and a basic income guarantee along with an appropriate amount of confiscation and redistribution would do much more than “put a dent” into inequality. We could virtually eliminate it. And if that sounds too unrealistic, too politically infeasible… well “banning interest” is more so. It would take the same fight, have less effect and be a harder sell to the masses (because it is less clear how it will directly benefit them).
Finally, a robust commons is essential to an egalitarian society. When basic food security, housing, electricity, water, transportation, education, healthcare and public parks (green space) are provided (either free, as public goods, or at rates that exclude no one) residual inequality of wages is much less problematical. The masses do not demand strict equality of income. Give us all a decent life in safe neighborhoods and we really don’t care if the 1% wallow in luxury.
Really? Looked at your credit card statement recently? Or at student loans?
Good point. But it is possible to see that interest per se is not the problem (sorry if my sarcasm above is too subtle to carry). The problem is who collects interest on what… does interest funnel money upwards or spread it among the masses? It could do either. Don’t confuse the way the system is currently gamed for an inherent quality of interest per se.
Look, I don’t mean to defend interest. I would be happy to see it go if that didn’t entail the further impoverishment of the 99%. I just don’t think eliminating interest is the solution to inequality, or even a necessary concomitant. Banning (or lowering) interest rates on credit cards might help. So would increasing interest rates on treasuries if working people were paid enough to own some. That used to be the case and it could be again.
Still, the best way to lower credit card debt is to pay people enough to pay their bills. Targeting interest just draws attention away from that.
Interesting: “Increasing the minimum wage absent a maximum wage will not fix wage inequality.” I’ve never even heard that idea mentioned. But it is as obvious as a slap on the back. It is probably a big missing piece of regulation that by its absence allows inflation to take off. Which as all good austerians know, must be stopped by keeping wages and prices low and imposing high interest rates.
This is the real function of progressive taxation – to control inflation caused by excess money supply and “cap” earnings. You still have to deal with price inflation though, either through price controls, public ownership of necessities, or compensatory redistribution. You also have to make that soft “cap” apply to all kinds of income.
The banks have already partially accomplished this. My checking account pays no interest, and my savings account pays something like 0.10% per year. Yup, I earn a whole dime per year on every hundred dollars in my savings account!
Of course, if I want to borrow money, the rates are a bit higher…
“There can be interest on money, or a stable and fair society, but not both.” Reminding me of the tutorial linked here several years ago demonstrating how just a 2% interest rate went parabolic in a short time because it expanded money without adding to social value. Whereas if our money is put into a stable and fair society then society itself is that much more valuable and all is in balance. Or that symmetry we all call “beautiful”.
“When done correctly, this system works magnificently, although it periodically it seems to fall apart until the detested government apparatus rescues it. In the meantime, huge amounts of wealth and income fall into the hands of the top 1%”
Michael Hudson also takes up this theme on how crises are handled.
(Paradox)
“No observer of Marx’s epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. “The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”[6]
Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve’s policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.’s gambles and other counterparty “casino capitalist” losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par.”
—–
Hudson points out the damage done by unearned income
“These two dynamics – interest and rent – represent a privatization of banking and land that rightly are public utilities. ”
“Such credit creation should be a public utility, but it has broken free from public regulation in the West.”
———-
He also refers to how Marx understood the difference between industrial capital and finance capital and that finance capital is not sustainable. And how the finance problem of interest and rent extraction need to be solved first before the more purely industrial problem of wage labor can be improved.
“Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of “usury capital” – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation.”
I think medical costs can be looked at in a similar manner.
First, remove the extractive rent component: Health insurance by enacting single payer and student debt by making the education system more public.
Then, I think, appropriate compensation for medical providers and administrators can be looked at more reasonably.
Then you must also address the costs of a Doctor’s Degree..Pull on that thread for a while and see what edifices become unraveled…
Higher Education->Student Loans->Tenure->US Dept of Education->State Colleges Funding->State Taxes->Federal Taxes….but to name a few….
Does the phrase “Systemic” mean something here?
Plus Marx never worried about “productive” capital becoming so successful it destroyed itself. Not because competition resulted in monopoly, but because all that exploitation of the environment and all that money sloshing around without another place to find easy returns has finally, literally, poisoned the planet.
It seems that Marx thought the financial problem would be solved and then industry would have to pay workers more just to sustain its consumption base leading to a more equitable situation.
But we might be selling Marx short to say he wasn’t concerned about the environment.
Ecology and Socialism
“Marx was concerned with taking a long-term view of the earth over a century before the UN discovered a problem. In the third volume of Capital he essentially defines sustainability thus:
From the standpoint of a higher socio-economic formation, the private property of particular individuals in the earth will appear just as absurd as the private property of one man in other men. Even an entire society, a nation, or all simultaneously existing societies taken together, are not owners of the earth, they are simply its possessors, its beneficiaries, and have to bequeath it in an improved state to succeeding generations, as boni patres familias [good heads of household].20”
WHY DID CS turn into CES? Or did I miss something?
By failing to provide a risk-free storage and transaction service for its fiat, the Founders doomed the Nation to financial instability and downright monetary manipulation* as the population was left to the mercy of private banks. That lack has plagued US since the beginning and attempts to rectify it have been in the opposite direction of justice, eg. a lender of last resort and government deposit insurance.
*“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” attributed to Thomas Jefferson
“WEM”?!! … Ha! These heavily fiat-subsidized financial markets, devoid of meaningful regulation and characterized by extreme information asymmetry, are a parody of free markets. “Casino Capitalism” is too kind a term, and does a disservice to casinos.
Thanks for a thought-provoking post.
Any social system will eventually be gamed by the smartest-n-savviest people. Inequity is natural. Inequity is just a way of saying: the assholes win the nice people lose.
What other system could possibly exist?
And, please, don’t bring up Denmark and FDR. Denmark is Demnarkian because blood (nationality) causes people to cooperate to protect themselves from outsiders (Germans).
The FDR (era) attempted to save Capitalism (aka Assholism) from itself, and luckily for everybody WW2 happened and the US was saved from Socialism (assholes win) and Fascism (assholes win).
The assholes always win in the end.
The bankholes and the corporationholes appear to have “won” but what they’ve really done is dish themselves up a huge mess. They don’t have a clue how to go forward from here. It’s Karma.