The Future of Plutocracy

What strange bedfellows History makes.  It turns out that Joe Stiglitz, Aristotle and, eventually, Sir Isaac Newton are congenial companions after all.  A new study by a Paris-based economist Thomas Piketty and Emmanuel Saez, an economist at Berkeley, examines the growth of capital through history in various countries and concludes that it leads inevitably to excess concentration of wealth - plutocracy - correctable only by political means.  Piketty essentially argues that at certain levels of accumulation, capital growth detaches itself from the GDP growth of the surrounding economy.   Wealth grows as a function of inheritance or financial instruments rather than through production of goods and services. The concentration of capital away from production causes stagnation of the middle class, whose income is based on production, and the GDP growth of a national economy lags more and more below growth of the capital assets of the wealthy . Historically, this wealth accumulation outpaces growth in production until major technology change, crises or political means correct the imbalance.  In Europe, historical growth of invested wealth has been about 3 to 4 percent annually while growth in national GDPs has averaged 1 percent.

Capitalism per se lacks an internal mechanism to correct its own problem, and must always be corrected from “outside the system.”  Moral restraint by capitalists just doesn't seem to do the job.  Piketty and Saez argue for example that the vigorous growth of the American middle class in the 1950s was stimulated by the negative impact of World War II on the concentration of wealth and its positive impact on production of goods.  So also was the “Downton Abby” lifestyle described by Jane Austin curtailed by the Industrial Revolution and the Ancient Regime of France destroyed by the French Revolution.

Nobel Laureate Joe Stiglitz’s prior analysis of the modern American economy had already led him to that conclusion.  Stiglitz’s conclusions are based on the gradual accretion of small non-competitive advantages, “rents” in the language of economists, acquired through manipulation of, among other things, the political process to provide things like favorable legislation or regulation. The heaping up of small advantages eventually produces enormous imbalances that destroy the market. That is, wealth is accumulated not through superior production but through manipulation of non-market advantages.  Stiglitz, like Piketty, sees the result as eventual decay and decline of the economy, starting with decline of the middle class. History shows that the plutocracy that emerges is always corrected eventually by social revolution or societal transformation.  

Interestingly, Aristotle saw the same kinds of processes, though couched in considerably different terms, about 2500 years ago.  First, he saw the middle class as the key to the health of the nation; in fact, he invented the term ”middle class.”  He essentially saw the middle class as enabling political stability along with its economic role. Second, he warned against wealth not tied to the production of goods.  In his language, money was naturally barren, and the increase of it not tied to the fair value of the production of goods and services was an unnatural evil.  He seems more right all the time, though he lacked the tools of modern political economics to put his ideas into a comprehensive framework.

And Isaac Newton continues to remind us that “for every action there is an equal and opposite reaction.”  One can extend that to political economics as well as physics.  The continuing efforts of plutocrats to create economic “rents”, uncontainable within an already broken market system, inevitably produce backlash through the political system.  The stamp act, navigation acts and tea tax, “rents” for the British plutocracy, which set off the American Revolution are just one example.

I realize it’s ridiculous in a modern scientific sense to apply physics and classical philosophy to political economics, and I have made angry companions in arms of both physicists and economists (philosophers are a calmer breed.)  That’s partly what creates the problem.  We sit in our modern intellectual cubbyholes optimizing ROI without thinking about how the world really fits together and what our actions are doing to it.  Eventually the weight of our accumulated wealth collapses the floor (or climate, or middle class) beneath us, and there are no carpenters left to fix it.  There’s a sizable group of plutocrats these days who need to take a harder look at the future they are creating.