Galbraith’s Economics of Innocent Fraud

A Synopsis of J. K. Galbraith’s final book:

The Economics of Innocent Fraud: Truth for our Time

      Late in life, at the end of his long career as an economic advisor to governments, as a Professor of Economics at Harvard, and as the celebrated author of nearly two dozen previous books, John Kenneth Galbraith published his short final book titled The Economics of Innocent Fraud. In this book Galbraith intended to bring into sharp focus the truth about certain pernicious economic myths that have led to some dangerous economic and social effects—effects that have led in turn to some serious social injustices. It was Galbraith’s hope that exposing the truth about these myths might help free the discipline of Economics from many of the current sins committed in its name.

      Galbraith called these myths “frauds,” because they are false and because they have been used to enable and justify accretions of wealth and political power that previously would not have been acceptable in a truly democratic society. He called these frauds “innocent” because in some cases their falsity, and their pernicious effects, are not recognized by those who continue to perpetuate them. Galbraith recognized however that many of those who do perpetuate these myths do so with a less innocent intent, knowing these myths to be conveniently false. For such people, be they economists or bankers or corporate executives or politicians or business school academics, these myths generally help to assure them of their own continued comfort, wealth, and power.

      Houghton Mifflin published The Economics of Innocent Fraud in 2004. It contains twelve short chapters or essays that occupy just 60 pages of print. The book has received generally admiring and favourable reviews, more for its important content than for its style and presentation. Although the book is succinct in many respects, nowhere does Galbraith actually list the myths that he discusses, nor does he name them consistently. I experienced the writing in this book to be repetitive and at times quite unclear and puzzling. It is written in a casual style, a style that might properly be characterized as “first-draft-shorthand.” Nonetheless, the importance of what Galbraith was trying to teach in this final book justifies its close study. I have summarized below what appear to be the primary lessons or truths that concerned Galbraith as he wrote. Each of these lessons he addressed in various and scattered locations throughout the book.

*   *   *

      Among the frauds that Galbraith begins to describe early in this book is one that I will call the fraud of misdirection through mislabeling. The language used in economic discourse is often carefully managed in ways that make appropriate criticism of it more difficult. It is often a language designed to create an aura of scientific respectability, but one that is unearned.

      Galbraith begins his book with this theme by examining the history of the use of the word “capitalism.” In the early decades of the industrial revolution the excesses of unregulated “capitalism” led both to the subjugation of, and to the exploitation of, many workers. It also led to the burst economic bubbles that precipitated the Great Depression. These events severely tarnished the reputation of corporate free-market “capitalism” and those economic policies that had supported it.

      Today economists and others invariably speak not of capitalism, but rather they refer to it as “the market system.” This empty and benign term, with its suggestions of a neutral, mechanistic inevitability, is used to preclude any close examination of, or regulatory tampering with, the modern capitalistic status quo, a status quo that again shares many of the features of earlier oligopolies with their attendant monopolistic behaviours and effects. “The market system,” Galbraith makes clear, is neither a natural nor an inevitable economic entity. It has been carefully fashioned over many decades, by earnest lobbyists and friendly governments, to suit the preferences of those in society who are more fortunate, articulate, and politically powerful.

      Galbraith also discusses mislabeling of a different sort, used to camouflage the existence of any modern monopolistic corporate behaviour. Economists now argue that there can be no monopolistic corporate abuse because “today the consumer is sovereign.” The so-called “economic demand curve” is said to guarantee that consumers have control over prices and supply, because consumers can always refuse to buy what they don’t want or what seems to be priced unfairly high. Galbraith, however, points to the many ways that, in reality, this is false. He argues that increasingly it is large corporations that now decide what will be produced, and what prices will be thought to be acceptable. “Marketing” departments work hard, and advertise effectively, to create “consumer demands” that fit the wishes of the corporate producers, all the while claiming these are only responses to public preferences. The hidden assumptions that appear to justify the so-called law of the economic demand curve are unrealistic and overly simplified.

      Galbraith gives another example of manipulating words, useful for misdirecting any criticism of the comfortable status quo that is enjoyed by the very wealthy. He argues that in reality “work” can be divided into two general types: one type applying to jobs that are boring, difficult, and stressful, and one type applying to jobs that are self-fulfilling and enjoyable. The former type generally pay rather little, and the latter type generally pay very well. The better paid people (who would resist being called “workers”), include many who do not work at all because they enjoy generous rents and dividends and annuities. Such people are often now praised for being “self-sufficient.” But those who don’t work, even if only because they are unable to work, people who “require welfare” to survive, have come to be condemned as social spongers and characterized as basically lazy.

      Galbraith notes that over time society, helped initially by Veblen’s book The Theory of the Leisure Class, has been encouraged to accept great wealth and ostentation as both proper and commendable. Today the word “work” has come to refer to something essential for the poor, but not for the rich. Moreover, it has become accepted that the most generous wages and benefits should go to those most enjoying their work, while low wages are appropriate for stressful “unskilled” jobs, and even for teachers and nurses, police and firemen. Society has been increasingly inhibited from questioning wage policies and labour policies, whenever that questioning threatens corporate and individual convenience.

      The carefully managed use of another word which Galbraith examines is that surrounding the word “bureaucracy.” This word too has come to embody negative connotations of inefficiency, delayed action, poor customer service, and general incompetence. In particular, corporate executives and certain economists argue that governments are bureaucratic, while corporations are organized much more efficiently, making them far better than governments at taking effective rapid action whenever that is called for. Galbraith argues that corporate assertions of this kind are a myth, and that the managerial structure of corporations are at least as complex and bureaucratic and inefficient as are many branches of government.

      Galbraith points out that in a corporation your status and pay is almost always a direct function of the number of employees who work under you. Thus there is a strong incentive for managers to increase the size of their work group and their corresponding responsibilities. This of course can be equally true of some government departments, as corporate managers delight in pointing out. But bloated and inefficient bureaucracy is hardly limited to governments. Galbraith goes on to develop this criticism further when he looks at how corporate management gathers control of profits and decisional powers to itself, all the while falsely claiming to be answerable to stockholders and directors.

      Later in his book, Galbraith interrupts a discussion of corporate power and management to take up another form of misdirection and mislabeling. He looks at the use of the concept of the two market sectors: the “private-sector” (corporate) and the “public-sector” (governmental). For Galbraith, the distinction between these sectors has today evaporated. Corporations and governments have become equally bureaucratic, and equally subject to effective corporate control. They both have marked inefficiencies, and for many of the same reasons. Private-sector “supply” of goods and services is loudly touted as less costly and more effectively available when needed, but the reality is generally otherwise. The private sector is focused on ensuring profits. Government departments are normally focused not on “profit,” but on public service, as are other non-profit, non-governmental, organizations.

      Galbraith concludes by pointing out that the largest single segment of public-sector spending in the USA is by its military, amounting to close to 50% of all US discretionary government expenditures. But military spending is largely directed by military lobbies with the consent of congress and the department of defense. It is paid almost entirely to corporations, not to government employees. Even government “security forces” are often contracted from private corporations today, rather than supplied by governmental armed forces. The so-called public-sector has long since become privatized.

*   *   *

      Another myth that Galbraith examines I will call the fraud of economic metrics and their hidden agendas. Initially he treats this topic with the example of how economists and governments and statisticians have managed to enshrine GDP [the measure of “Gross Domestic Product”] as the single most important metric reflecting the economic health of a society. Galbraith points out that there are many assumptions and decisions that underlie how the GDP shall be measured, and these are rarely examined or debated. The “product” measured for GDP is largely confined to paid goods and services. It does not reflect the unpaid “products” of, for instance, housework, or nursing of sick relatives, or volunteer services of a thousand types.

      The “economic health” of a society, when measured by GDP, reflects no values of, and no accounting for, educational or medical or artistic and cultural contributions to general social well-being. Moreover, GDP tells us nothing about the degrees of poverty, or unemployment, or crime, or severe illness that a society may currently suffer, or, might have recently managed to reduce. In fact, GDP focuses attention only on narrow economic goals in a fashion that often makes social problems worse. To call the GDP a measure of the success, of either a society or an economy, is thus a fraud. Yet corporations and financial advisors and economists typically perpetuate their convenient myth that only “growth of the GDP” reflects the road to economic and social well-being. They want governments and voters to quake at the thought of any policy said to threaten a decline in GDP. We must expect “growth” to continue, without limit or difficulty.

*   *   *

      Galbraith also discusses what I will call the fraud of economic expertise and predictability. He observes that “in the economic, and especially the financial world, …prediction of the unknown and unknowable is a cherished and often well-rewarded occupation.” [pg. 40] Galbraith emphasizes that there are always too many important, unknowable, and highly unpredictable factors that play a role in determining the direction of economic trends and market behaviours. Thus, economic and market predictions always depend heavily on multiple, risky, simplifying assumptions that underlie the resulting predictions. Some of these assumptions are recognized, but many of them are not recognized, and all of them are potentially fallible. Sooner or later every economic model and strategy fails. The apparent and claimed successes in economic prediction have always been temporary, always successful for reasons that include unrecognized lucky effects that are likely to disappear soon.

     And yet, there remains today a strong and well-paid demand for economic predictions and claimed expertise: i.e. a demand for investment advisors, for political advisors, and for advice to managers and bureaucrats. All are assured that they can rely on “expert” predictions of things that are fundamentally unpredictable. Galbraith emphasizes that sometimes those who pay for economic advice do not care if later it proves false, so long as it is temporarily helpful in achieving the aims of those who have paid for it.

      Galbraith continues this theme with a specific discussion of the reputed “expertise” of the U.S. Federal Reserve Board. Like most central banks, the U.S. “Fed” is charged with protecting the U.S. economy from recessions and high unemployment on the one hand, and harmful inflation on the other hand. Its tools for doing so primarily involve adjusting lending rates for and between banks. Galbraith explains some of the false economics assumptions that suggest these actions will work as intended. And he points to the many historic occasions on which the actions of central banks have not worked as intended. He concludes that “Quiet measures enforced by the Federal Reserve are thought to be the best approved, best accepted of economic actions. They are also manifestly ineffective. They do not accomplish what they are presumed to accomplish. Recession and unemployment, or boom and inflation, continue.” [pg. 44]

*   *   *

      Galbraith focuses much of his attention in this book on the public portrayal of corporations, by economists and by the media. In general these portrayals protect various myths surrounding what I will call the fraud of corporate benevolence and natural self-control. Galbraith begins by observing that academic economic theory still holds to its historical roots, and so it portrays all corporations as if they were medium-sized small business, with the owner/founder still in control, just grown a little bigger. But the modern corporation, be it “small-cap” or global, does not obey that dated economic model, to which existing small businesses may sometimes still appear to conform.

      Galbraith notes that “The corporate management illusion is our most sophisticated, and in recent times one of our most evident, forms of fraud.” [pg. 26] He refers here to the illusion that owners, shareholders, and investors generally can and do play a controlling role in determining the direction taken by, and the behaviour of, the corporation. But in truth these people have no effective powers at all. Corporations quickly become too complex, and too extensive, for any such group to be able to control, or even simply to monitor, corporate behaviour.

      Boards of Directors are no exception to this rule, contrary to current economic dogma. Directors are crucially dependent upon what the corporate management allows them to know. They invariably depend for their appointments on friendships with the top management and with other Board members. Often they manage companies of their own and reciprocate with offers of memberships on their own Boards. Their pay and bonus incentives for service on the Board depend on recommendations made by the management and vice-versa. Conflicts of interest are very common. In practice it is almost unheard of for a Board to contradict a decision made by the top management of a corporation. Galbraith notes that even when a corporation’s profits, and/or its stock values, have recently dropped dramatically, management pay and favourable stock options have continued rising to extremes without so much as a pause.

      Galbraith concludes by saying “No one should be in doubt: Shareholders—owners—and their alleged directors in any sizeable enterprise are fully subordinate to the management. Though the impression of [ultimate] owner authority is offered, it does not in fact exist.” [pg. 28] Because this fraud is accepted, it is used very effectively to excuse corporate governance from any responsibility for managerial policies that prove detrimental either to stockholder values or to the public interest. Management can be made accountable only with active and effective regulatory oversight. But this oversight is again rare in today’s world, with the intense and effective political lobbying efforts that are carefully designed to inhibit just such oversight.

      In chapter ten of his book, Galbraith returns to this same theme, this time to focus on certain major corporate scandals: at Enron, WorldCom, Tyco, etc. These show how management’s control over and misuse of corporate power for personal enrichment, coupled with corrupted or lax accounting and corporate auditing, has caused major harms to the national economy and to society. Galbraith shows how corporate influence now extends even to some corporate regulators, auditors, and accounting firms. He concludes that what is required is “independent, honest, professionally competent regulation…a difficult thing to achieve in a world of corporate dominance.” [pg. 51] He notes that prison time, if mandated for cases of corporate fraud, would help to deter such corruption, if only the legal system would facilitate its use.

      In the last chapter of his book, Galbraith returns to the theme of the private sector and its inappropriate control over public sector policy and decision making. Again he emphasizes examples of corporate encroachment by the military-industrial complex into decisions about defence spending. He reveals how a post-war study of the efficacy of strategic bombing in WWII, a study demonstrating that this campaign had no effect either in shortening the war or in reducing the enemy’s production of military aircraft, was vigorously and effectively suppressed by the Pentagon in Washington. And later, in Vietnam, a study by Galbraith found complete military dominance of U.S. foreign policy in that region. Similar corporate control of national energy policy, of pharmaceutical policies and pricing, of broadcast and media ownership, and of health policies, are all further examples of corporate encroachment into the affairs of the so-called “public sector” of government. The myths of corporate benevolence and of public control over government policy are not innocent at all. For Galbraith, they present an increasing danger that needs correcting.

*   *   *

      How such corrections might be realized, Galbraith does not tell us. But he has emphasized that first we must recognize the myths and frauds for what they are. These frauds are not nearly as innocent as we are still being asked to believe they are, by many economists, by the media, and by corporations themselves. Each of the frauds that Galbraith describes in this book plays a supporting role in amplifying the increasingly rapid growth of inequality throughout the world. There can be no limitations placed on excessive social and economic inequality without recognition of, and effective rejection of, the existing myths that Galbraith has described in The Economics of Innocent Fraud.

© J. Barnard Gilmore   Kaslo, British Columbia   March 2016

 

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47: Retiree Sabbaticals

Chapter 47: Retiree Sabbaticals

Kaslo, B.C.    Sunday October 11, 2015

     While talking recently with an old friend I happened to mention that I had just returned from “a little getaway.” He immediately asked, “what did you get away from?” Deep question, that. Good question. And I had to laugh when I discovered that I had no good answer.

      As a retiree, with more enticing reading arriving this fall than there has been time to indulge, and with a forthcoming Canadian election producing in me mounting shivers of dismay and disbelief, my appetite for elsewhere had been growing more and more intense. A change of scene, to a remote place of fresh views, fresh air, and fresh activities seemed to promise restoration and renewal. It was not so much a getting away then, but rather more a getting to. In this case it was a question of leaving behind our inspiring local mountains and getting down to the sea. Down to an unfamiliar island. To a place that offered no telephone, no television, no knowing what might be found around the corner or on some serendipitous café menu.

     So it was a seaside sabbatical that I went on, or so it seems to me now. If “retirement” has been seen by some to be one permanent sabbatical, then I think we have underestimated the breadth of wisdom resonant in the word “sabbatical.” It seems to me that retirements too should have their sabbaticals, and this for most of the same reasons that mid-career academics should have them. It seems odd, somehow, that the unspoken understanding of how academic sabbaticals facilitate both mental health and productivity, is not generalized to the occupational situations of almost every other person. Particularly, to retirees.

     I now suspect that all healthy civilizations should facilitate sabbaticals for everyone, from every worthy activity. And each of us should probably plan for our own various built-in sabbaticals: i.e. sabbaticals from too much reading. From too much television. From too many communications of every sort. From all our habitual entertainments. Moreover, our sabbaticals should probably not be limited to a seventh day and a seventh year, but they should also be applied in some creative fashion to seventh weeks, seventh months, and seventh seasons. Restoration and renewal, mental health and mental productivity: these are apple-pie goals if ever there were any.

     You might imagine that what I am today calling a “sabbatical” is what has long been called a “vacation.” There is a difference however. The difference is that a “vacation” often refers simply to a stop, a rest, to vacating our home or office, i.e. “getting away.” But the “sabbaticals” I am talking about include a central component of challenge, of allowing the unpredictable and embracing the serendipitous. A vacation is a getaway. A sabbatical is a going-toward what is yet unmet.

     Recently, then, let’s just say I returned from a successful going-toward, one spent on a previously unfamiliar tidal inlet. It had its ups and downs, this sabbatical. But it sure felt healthy and productive. If only everyone could enjoy such sabbaticals. Wouldn’t that be a social blessing well worth our counting?

© J. Barnard Gilmore    Kaslo, British Columbia    October 2015

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46: Past-Perfect

46: PAST-PERFECT

     I used to believe that most older professionals had an inner curmudgeon, one that was just waiting to spring into life upon retirement. Of course, if that were true, it might not be particularly nice for the rest of our world. Still, this thought eased some of the pain brought to me by encounters with my own inner curmudgeon, the one who can no longer be persuaded to smile tranquilly, for instance, in the face of modern liberties taken with that strong old trunk of our English Language, the language that once seemed so useful to academics and professionals.

     Members of the third generation after mine seem to be particularly cruel to those distinctions and shades of meaning that once so nicely served clear communication and clear thinking. Worse, it is beginning to sound to me like those in that third generation are infecting the language of the generation above them, and even the generation immediately following my own. Suddenly it seems to me that every server, every salesperson, every recipient of any information that I have been requested to provide, automatically replies “Perfect!” (Border guards always excepted.)

     Excuse me? Nothing in this world is perfect. It is ridiculous, for instance, to respond that the beverage I have just selected is “perfect.” One might even say that my server’s response is “perfectly” ridiculous. But that would almost be perfectly ridiculous of me. Because, I repeat, even ridiculousness is never perfect.

     In this same vein, if the world really were perfect, then no one would ever treat the plural word “data” as singular. But today everyone seems to speak of data as if they meant a single set of data. “The data is clear,” they say. But hold on; nothing is clear anymore. And the data are no exception. Let me be perfectly clear: The Data Are Not Clear. Nor, even, is any single datum. Do you understand? (You do? …Perfect!)

     Sometimes I also prefer to imagine that most retirees have an inner, avuncular, peace-dispenser, one who reminds us gently that no theories about ourselves, or about others, about planet earth or the universe, are ever likely to be perfected. And thus the wisdom of those who can and do calmly say: “Who am I to judge?” is as useful a wisdom for retirees as we might wish it were for those others whose judgments (or apparent lack thereof) affect us. Still, the apparently shortsighted, self-centred and ungenerous behaviours of so many governments, corporations, institutions, and individuals seem to call for someone (and who better than a retiree?) to speak out as a forthright judge of such behaviours. Perhaps none of us really has the right to judge, yet it does seem that most retirees have the responsibility to judge. (And even to act.) Such are the contradictions of a past-perfect, language-based, life.

     So yes, who are we to judge? It is perfectly obvious that our understanding is not perfect. It is enough, however, that we are experienced retirees, entitled to contradict ourselves. To me, today, that seems, well, . . . perfect.

© J. Barnard Gilmore    Kaslo, British Columbia    July 2015

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Joseph Stiglitz (2012) The Price of Inequality

 A Synopsis of the book: The Price of Inequality (2012)  by Joseph Stiglitz

      INCREASES IN POLITICAL AND ECONOMIC INSTABILITY:             THEIR LINKS TO INEQUALITY

     In 1887 England’s Lord Acton wrote: “power tends to corrupt, and absolute power corrupts absolutely.” Leopold Kohr, in his 1957 book The Breakdown of Nations, demonstrated that history has repeatedly confirmed the psychological, the commercial, and the political truth of Lord Acton’s dictum. But from where, and what, does excessive power arise?

     A partial answer to these questions is currently emerging in recent examinations of “inequality,” with particular reference to marked inequalities in income and wealth. Power and wealth are closely entwined, in part because they are mutually amplifying. This is one important lesson emphasized clearly throughout Joseph E. Stiglitz’s book The Price of Inequality, published in 2012 by W. W. Norton & Co.

     Stiglitz begins this book talking about the psychological importance to humans, young and old, of what is or isn’t experienced as fair and just, and, what is and isn’t in accordance with socially accepted law and custom. Children from a very young age become very sensitive to unfairness, i.e. to the denial of what they perceive to be a person’s normal right. They are quick to note status differences between what they are permitted and what others are permitted, and, between what they receive and others receive. Morality and ethics matter to children. A moral society and a fair society are central to their developing senses of personal safety and comfort, as well as their social safety and comfort.

     Similarly, adults remain sensitive to marked inequalities in their personal share of goods and services, of social status, and of social power or influence. For some, these sensitivities are conscious and troubling. For others marked social inequalities are either denied, or simply ignored as an unalterable fact of life. However, among the very few who command the very largest shares of wealth and power, marked inequality is generally held to be right and fitting, and to be expected. For these fortunate few, social inequality appears to be simply an expression of a natural market Darwinism working its comfortable and inevitable social magic. These people usually see themselves as the fit and deserving survivors in a completely normal, inevitable, and competitive monetized world.

     In his book, Joseph Stiglitz emphasizes that personal reactions to marked inequality always depend in part upon our perceived opportunities to access some fair share of wealth and status. Equality of opportunity appears to be one important criterion defining social fairness. Moreover, the “opportunity” for fair treatment includes equal opportunity to access helpful others, particularly to access those authorities in the justice and political systems who have the power to redress unfair treatments and restore fairness.

      All these themes are introduced in Stiglitz’s preface to The Price of Inequality, and they are developed further throughout his book. In it he reports considerable evidence to suggest that generally (but particularly in America) existing systems of government and justice often seem to undermine a sense of fair play, particularly so in recent years following the Wall Street banking crisis of 2007–2009. He writes of that crisis:

 A basic sense of values should, for instance, have led to guilt feelings on the part of those who were engaged in predatory lending, who provided mortgages to poor people that were ticking time bombs, or who were designing the ‘programs’ that led to excessive charges for overdrafts in the billions of dollars. [pg. xvii]

     Yet in the financial and corporate culture of America there has been almost no such guilt, nor any evidence of remorse. The U.S. justice department did not bring charges against most of those who both could and should have been convicted of fraud for their deliberate actions that triggered the crisis. Instead, a rigid economic ethos, celebrating the survival of the financially fittest, appears to have created an expanding amoral desert, one that has dried up all former considerations of fairness, justice, or recognizable dangers flowing from extremes of social inequality.

*     *     *

     Financial inequality has recently grown to near-record levels in almost every corner of the world, including many of the world’s most industrialized nations. In America this growth has been particularly clear, and particularly disruptive. Chapter 1 of Stiglitz’s book documents, in great detail, this growth of American inequality.

     The American data available for determining inequality in personal wealth make it clear that this form of inequality is even more extreme than is the inequality in yearly incomes. In 2007, prior to the financial crisis of 2008-2009, the wealthiest one-tenth of 1 percent (one for every one-thousand Americans) together possessed more than one-third of all American wealth. These same wealthy Americans had an average income in 2007 that was 220 times the average income of the bottom ninety percent of all Americans.

     The forces leading to increasing inequalities of wealth and income were augmented in America following the “Great Recession” that began in 2008. Stiglitz documents how this recession led to: (a) troubling increases in unemployment, (b) increasing limitations on unemployment insurance benefits, (c) increasing rates of personal bankruptcy, (d) increasing losses of health insurance coverage, and (e) decreased retirement benefits. He shows how each of these trends in turn increased further the amount of inequality throughout American society.

     Over the 12 months during the year 2010, ninety-three percent of all the additional (new) income generated went to the top 1 percent of income earners. Average middle-class incomes continued to stagnate, measured in constant dollars (i.e. adjusted for inflation), as they had already been doing for many years. During the decade from 2000 to 2010, when adjusted for inflation, American households composed of college graduates saw their real income fall by 10%. Those with fewer skills did even worse. And yet the real income and wealth of the top 1 percent increased dramatically.

     At the conclusion of chapter 1, Stiglitz compares American inequality to that in other countries around the world. He notes that America is among those countries with the highest inequality metrics in the world, countries that include South Africa and much of Latin America. Much less inequality is found in most of Europe, particularly in the Scandinavian countries and in the Netherlands, but also in Germany as well as Japan. Stiglitz notes that:

In other advanced industrial countries families don’t have to worry about how they will pay the doctor’s bill, or whether they can afford to pay for their parent’s health care. Access to decent health care is taken as a basic human right. In other countries, the loss of a job is serious, but at least there is a better safety net. [pg. 23]

     Stiglitz ends chapter 1 commenting on a few of the objections that are made to the inconvenient facts he has already detailed, objections from members on the American political Right who deny that extremes of inequality are in any way unfair and risky. He counters that there can be no denying the recently diminished opportunity for poor Americans to improve their economic situation. Nor can it be denied that governments can afford successful policies to reduce poverty. The U.S. government has already done that for seniors, with policies like Social Security and Medicare. Yet Stiglitz points out that it is still sometimes argued that attempting other economic policies, policies that would help to reduce extremes of inequality,

…will simply ‘kill the golden goose,’ and so weaken America’s economy that even the poor will suffer. As Mitt Romney put it, inequality is the kind of thing that should be discussed quietly and privately. The poor in this land of opportunity have only themselves to blame. In later chapters…[I will] show that, for the most part, not only should we not blame the poor for their plight but also that the claim of those at the top, that they earned their money ‘on their own,’ doesn’t have much merit.  [pg. 27]

*     *     *

     Stiglitz begins his second chapter as follows:

American inequality didn’t just happen. It was created. …The forces that have been at play in creating these outcomes are self-reinforcing. By understanding the origins of inequality, we can better grasp the costs and benefits of reducing it. The simple thesis of this chapter is that even though market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does, and what it does not do. [pg. 28]

     Governments shape markets and profits and income distribution in many ways. Throughout his book, Stiglitz lays particular emphasis on the ways that Governments encourage, permit, and decline to limit or tax, “rent-seeking income.”

     As economists use this term, “rent” is any payment received not for services and labour and creative accomplishment, but rather for simple ownership or control of resources that are “loaned” to, or temporarily shared with, the person or organization who pays rent for this privilege. This is most obvious in the case of a landlord, who temporarily rents his land or home while still retaining ownership and control of it. But “rents” can take very subtle and indirect forms too. The fish you raise in a pond in your back yard you may eventually “harvest” and sell to the public, but that is not rental income. However, if you sell to vacationers the right to fish in your pond, you are receiving “rent” from the pond. The “work” is being done by the renter, not by the owner of the pond.

     Similarly, if a government gives you the sole license to import sugar at a price below the domestic price, and if you sell that sugar at the domestic price for a profit, that profit is called rental income. It is money earned by virtue of your ownership of the favourable license. If you own part of a sugar refinery, and receive interest payments or dividends on your investment, this too becomes “rental income” in the sense that economists use the term. In this case it is your “capital” that you have rented out. If an oil company or a book publisher pays you royalties, for drilling on your land or for selling the book for which you own the copyright, then you are receiving rental income on these properties. If you are a television company, one that owns of a band of the broadcast spectrum that is no longer available to others, then your company is receiving indirect rental income. By extension, every monopoly, every government subsidy, every trade restriction that reduces competition, every advantage you might enjoy by virtue of special ownership or special position, yields a form of “rent-seeking” income.

     Income from “rent-seeking” currently tends to be taxed very differently than does income from wages and services. And corporate profits (which often come from rent-seeking sources) tend to be taxed very differently than do individual wages. Thus, it is generally true that rent-seeking income will provide a much higher percentage “return on investment” than will the income from wages or the production of goods and services. In his book, Stiglitz traces the many links between the rent-seeking activity that is supported by governmental actions and inactions, and the associated forces that amplify inequality in personal incomes and wealth.

     However, Stiglitz also points out another aspect of rent-seeking. When private companies sell goods or services to governments at inflated prices (e.g. when only certain companies are capable of supplying what is wanted, or only a few are allowed to supply it) then governments end up paying “rent” to the owners of their necessary supply chains, “rent” that comes in the form of the inflated prices that those suppliers can and do command.

     In the remainder of chapter 2, Stiglitz describes the close links between great fortunes and rent-seeking activities. He describes many of the powers and financial advantages that governments allow to rent-seekers. These ownership powers are then misused and they endure over long periods of time. They constitute, in Stiglitz’s phrase, “sustainable monopolies.”

*     *     *

     Chapter 3 of The Price of Inequality turns from governmental policy and behaviours to market rules and behaviours and their roles in creating major inequalities of wealth and power. Often, economists and others claim that market forces are simply natural, abstract, and impersonal, and that it is only through bad luck and perhaps poor judgment that market trends have turned out badly for those in the middle and bottom income groups. Implied in this view is that any interference with these “natural” economic processes, any attempt to “correct” the markets, will cause untold harm to all. Stiglitz responds directly to this argument, pointing out that in many countries of the world very different market rules and behaviour work well, yet inequality is much lower. These other countries are just as “advanced” and sometimes just as wealthy as America. Their economies do not implode. Stiglitz concludes:

Our hypothesis is that market forces are real, but that they are shaped by political processes. Markets are shaped by laws, regulations, and institutions. Every law, every regulation, every institutional arrangement has distributive consequences—and the way we have been shaping America’s market economy works to the advantage of those at the top and to the disadvantage of the rest.

There is another factor determining societal inequality…. Government, as we have seen, shapes market forces. But so do societal norms and social institutions. Indeed, politics, to a large extent, reflects and amplifies societal norms. …We shall see how changes in social norms—concerning, for instance, what is fair compensation—and in institutions, like unions, have helped shape America’s distribution of income and wealth. But these social norms and institutions, like markets, don’t exist in a vacuum: they too are shaped, in part, by the 1 percent. [pp.52-53]

     Stiglitz traces the historical decline in employment opportunities and wage levels in the American manufacturing sector, beginning in the 1990s. This was one major cause of the decline of middle-class incomes and wealth. Union jobs were increasingly lost to cheap labour markets abroad. Unionized autoworkers in 2007 still commanded hourly wages around $28, but six years later union workers were forced to accept starting wages of around $15 per hour. Public sector workers such as teachers, hospital workers, or road maintenance personnel, saw their wages fall too, as governments restricted union wages to levels below those paid to private-sector workers in comparable jobs.

     Government policies determining trade rules and costs have encouraged globalized transfers of capital, of jobs, and wages that have selectively favoured the rich over the middle-class. Stiglitz describes how financial capital is given relatively favourable global treatment while wage earners are given relatively unfavourable treatment in the globalized economy. The policies that create these effects increase inequality, but government policies have been shaped by large and powerful financial lobbies, and not by wage earners or their unions. Stiglitz writes:

…Imagine, for a moment, what the world would be like if there was free mobility of labour, but no mobility of capital. Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in, and that’s partly because the 1 percent doesn’t want it to be that way. [pp 61-62]

     Corporations argue that the current rules governing globalization are good for everyone. They claim these will increase the economic output of the countries to which capital is moved, and that those benefits will trickle down to benefit everyone in the country. Stiglitz shows that in practice neither of these effects are seen, and he gives examples for why they are unlikely to be observed. There are usually unintended and predictable consequences that prevent “trickle down” benefits from reaching wage earners. High unemployment followed by lowered wages are part of the reason that trickle-down doesn’t occur. Economic theory says only that globalized free markets could make everyone better off, if the “winners” compensated the “losers” in the country. But nothing says that labourers will be compensated. In reality, the “winners” usually prefer not to share their gains by paying better wages or benefits. As currently managed then, globalization contributes significantly to increasing inequality.

     Stiglitz turns next to factors other than government policies and market rules that contribute to increasing inequality, including some social and cultural factors. In the thirty years prior to the publication of his book, the percentage of U.S. wage earners belonging to a labour union dropped by 40%, from 20.1% overall to 11.9%. State and federal legislatures have passed laws eroding the negotiating power of unions and their ability to maintain members. Lobbyists have created a social climate encouraging the view that unions promote labour inefficiency and inflated social costs. Stiglitz argues the opposite point of view: that better wages and working conditions make for a more cohesive society and a more loyal, productive, workforce. History provides a number of examples supporting this view, which Stiglitz discusses further.

     Next, Stiglitz turns to the factors that determine how corporate profits are distributed among workers, shareholders, and managers. There are tax laws and government regulations that affect how much profit corporations will earn, but there are very few laws that affect who will receive how much of those profits. Recently, internal corporate politics have tended to result in corporate executives “…taking a bigger slice of the corporate pie, awarding themselves [excessive] amounts even as they claimed they had to fire workers and reduce wages to keep the firm alive.” [pg. 67]

     Another social force affecting inequality is discrimination in who becomes employed. Large portions of society are denied easy access to better-paying jobs, often including women, immigrants, those who are “under-educated” and members of racial minorities. Yet economic theorists have argued that, in a “free-market,” discrimination won’t happen once there are a few employers willing to hire the discriminated-against workers at a lower wage. History clearly shows otherwise however. Moreover, discrimination in employment can and does remain socially and economically enforced through various actions taken by employers that prefer to maintain the status quo.

     Historic tax policy has also had a huge impact on inequality in America. Stiglitz notes that in the recent past:

The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton, and down finally to 35 percent under George W. Bush. This reduction was supposed to lead to more work and savings, but it didn’t. In fact, Reagan had promised that the incentive effects of his tax cuts would be so powerful that tax revenues would increase. And yet the only thing that increased was the deficit. George W. Bush’s tax cuts weren’t any more successful: savings did not increase; instead the household savings rate fell to a record low (essentially zero). [Pg. 71]

     It was governmental relaxation of the capital gains taxes that most affected American inequality. The bulk of capital gains income goes to the very rich, who had their tax rate on capital gains dropped to 15 percent under Bush. Moreover, capital gains that are realized after death currently pay no tax at all. Thus wealthy families have been helped not only to stay that way, but to increase their wealth at a faster rate than families who live off wages and pensions. These policies and certain other tax loopholes have meant that today the American super-rich pay a lower average tax rate on their total income than do those less well off. In America the overall average tax rate dropped by 1.8 percent between 1979 and 2010. But the average tax rate among the top 1 percent of taxpayers dropped more than four times as much, by 7.5 percent, over the same time period.

     So the riches of the wealthy increase at a faster rate than do those of persons of average means. This is equally true for the riches of corporations that have special tax loopholes and advantages working in their favour. Stiglitz describes international, federal and state tax laws, all of which work in parallel ways to favour the protection of great wealth from taxation. Thus, the annual rate of increase in such wealth, and its degree of concentration in fewer and fewer hands, become more and more pronounced.

     Additional political and cultural factors that increase inequality are those that degrade or limit equality of opportunity. Education has become economically more segregated, with less diversity among students and their backgrounds, than was true prior to 1980. Stiglitz notes some of the many ways that this segregation perpetuates inequality and contributes to the sources that increase it.

     In concluding chapter 3, Stiglitz reviews and criticizes arguments that justify inequality as being something that, if not inevitable, then at least is fair and proper. Stiglitz notes that individual contributions to the development of profitable new products and services all depend greatly on contributions previously made by many others, and on infrastructure that must be maintained by governments and by the society supporting those governments. While those who truly have contributed most to society include a vast majority who are wage earners (teachers, nurses, scientists, etc.), super-rich individuals generally contribute much less. Yet the super-rich retain control of much more of the overall resources that society needs to support a good life and government for all. This cannot be said to be “fair and proper.”

*     *     *

     Stiglitz begins his fourth chapter with the following observations:

Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term. …We know how these extremes of inequality play out because too many countries have gone down this path before. [Pp. 83-84]

Stiglitz reminds us that prior to the Great Depression of the 1930s, and again with the Great Recession that began in 2009, historically high and still increasing levels of inequality were seen in the United States. For multiple reasons there followed a collapse in demand for goods and services with subsequent mass unemployment. This further reduced demand, and further increased job losses. Stiglitz traces some of the reasons for the bursting of the market bubbles that triggered these events, and the roles that excessive inequality had played in creating those bubbles. Recent political responses to crises like these have attempted to restore demand by putting more money, at lower borrowing costs, into the economy. Tax reductions for the wealthy were part of this plan, but the wealthy do not spend nearly the proportion of their incomes on ordinary goods and services that average wage earners spend. So consumer demand and jobs remained abnormally low. Putting more money into circulation, by lowering interest rates, led to new financial and housing bubbles being created, the profits from which went mostly to the wealthy, increasing inequality further.

     Deregulation of corporate and commercial activity was a further major contributor, both to increasing inequality and to market instability. Stiglitz concludes that “In a democracy where there are high levels of inequality, politics can be unbalanced, too, and the combination of an unbalanced politics managing an unbalanced economy can be lethal.” [Pg. 89]

     Stiglitz further develops this idea, showing how inequality, and the lobbying carried out by wealthy elites, has led to lowered investments in both education and the market infrastructure that makes possible commerce and trade, innovation, and economic growth. Government support for research has been eroded as demands for leaner government and lower taxes have grown. Yet the boost that public investments give to economic growth is far greater than that given by private investments. Recently, corporate investments in basic research have fallen far short of what is needed to restore employment and market demand. Stiglitz suggests that

The more divided a society becomes in terms of wealth, the more reluctant the wealthy are to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security. They can buy all these things for themselves. [Pg. 93]

     Stiglitz notes that government policies often divert talent from socially helpful projects, projects that help to promote a more secure work force and social support network. Instead governments now reward talent that is invested in legal and financial schemes, or lobbying activities that contribute mostly to market and social instability.

     Inequality is further increased, and increasingly distorts the economy, by the many ways that governments reward rent-seeking income: through advantageous tax treatments, or by selling rights to common resources (oil, gas, minerals, even water) to companies at prices well below their actual market and social values. Military and defense spending by the American government is the source of more rent-seeking corporate income than any other single type. Stiglitz adds:

The wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money pays for it, and if budgets get tight, middle-class tax benefits and social programs are given the ax, not preferential tax treatment and manifold loopholes for the rich. . . . For U.S. contractors, the military has provided a bonanza beyond imagination. [Pg. 101]

     But Stiglitz saves some of his sharpest criticisms for many American lawyers and the roles they play in tilting the economic playing field to favour both corporations and the top 1 percent. Too often it is only after damage has been done (as with the BP oil spill in the Gulf of Mexico) that those affected can try to get some legal redress, rather than getting legal help with regulations and interventions to prevent risky corporate behaviour before the damage occurs. And even then, deep corporate pockets are able to pay for lawyers who can delay and reduce payments for many of the forms that corporate damages may have taken. Other forms of corporate damage are never acknowledged, nor compensated, in such a lax regulatory and legal system.

     Stiglitz turns next to consider how high inequality, and the perceived injustices created thereby, negatively affect the motivation and behaviour of employees and their families. The effects on worker motivation in exploitive working situations are neatly summarized by an old Russian adage: “They pretended to pay us, and we pretended to work.” Research has shown that workers paid a fair and livable wage are much more productive than those paid less. Their families too are subject to much less financial stress and anxiety, and everyone becomes more productive in their roles as students and citizens etc. In one study that Stiglitz describes, the wages of some workers were raised and at the same time the wages of some others were lowered. He writes:

One might have expected that [this] would increase productivity of the higher-wage worker, and lower that of the lower-wage workers in off-setting ways. But economic theory—confirmed by the experiments—holds that the decrease in productivity of the low-wage worker is greater than the increase in productivity of the high-wage worker, so total production diminishes. [Pg. 104]

     Worker psychology is but one illustration of how human behaviour is affected by, and in turn affects, social inequality. Stiglitz next examines consumerism in America and how the drive for more personal goods and services exaggerates inequality. He notes that:

Trickle-down economics may be a chimera, but trickle-down [consumerism] is very real. People below the top 1 percent increasingly aspire to imitate those above them. …What matters (for an individual’s sense of well-being for instance) is not just an individual’s absolute income, but his income relative to that of others. [Pp. 104-5]

     If this very human trait is given prominence in a culture, it leads to extremes of consumerism and inequality. The “Joneses” keep falling behind the Joneses with whom they compare themselves. Consumer debt becomes a destabilizing influence. In more equal societies there is a greater recognition of how much is enough, and how valuable it can be to have extra leisure, family, and social time.

     Stiglitz concludes chapter 4 with an extensive critique of those on the political Right who argue that economic productivity and efficiency always require “incentives” that in turn require the conditions that lead to high levels of inequality. Summarizing this critique, Stiglitz writes:

The Right has in mind a perfectly competitive economy with private rewards equal to social returns; [but] we see an economy marked by rent-seeking and other distortions. The Right underestimates the need for public (collective) action to correct pervasive market failures. It overestimates the importance of financial incentives. And as a result of all these mistakes, the Right overestimates the costs, and underestimates the benefits of progressive taxation. [Pg. 107]

*     *     *

     Chapter 5 of The Price of Inequality is titled A Democracy in Peril. In it, Stiglitz addresses the question of how, in a democracy that intends to give each citizen one vote, the richest 1 percent of that country could so successfully shape the government and economy to serve primarily its own interests. He describes

…a process of disempowerment, disillusionment, and disenfranchisement that produces low voter turnout, a system in which electoral success requires heavy investments, and in which those with money have made political investments that have reaped large rewards—often greater than the returns they have reaped on their other investments. [Pg. 146]

     The process that has led to extreme inequality, and to the considerable power and influence wielded by the 1 percent in America, has exploited an erosion of social trust. Corporations, banks, politicians, lawyers, have all experienced sharply decreasing levels of public trust over recent years. But trust is the social capital that makes the economy and politics and government able to function sustainably. Stiglitz illustrates the various ways that this loss of trust has given greater influence to the wealthy.

     Closely linked to public trust, is the general sense of what is generally fair and what is not fair. Stiglitz next discusses the increasing doubts in America that businesses and politics and many government policies operate in a fair manner. Media too are losing public trust and appearing to become more biased. Control of the media is increasingly concentrated in the hands of the extremely wealthy who are in a position to monopolize access to advertising space, to news, information, and publicity. Stiglitz discusses how the control of ideas appearing in the media adds to the influence of the wealthy. And then he examines how the elite affect who is allowed to vote, and who is prevented from voting in elections.

     Next, Stiglitz discusses how the U.S. Supreme Court gave the wealthiest Americans considerable extra political clout by allowing corporations, controlled by Boards of Directors drawn from the 1 percent, to spend as much as they wished on electioneering and political lobbying. All these factors add to the disenfranchisement of the poor and the middle class. Government gerrymandering of electoral districts further erodes the voting power of those who might oppose the wishes of the wealthy. In America, candidates for office are decided by primary elections in each district, but getting nominated, and success in the primaries, are each very sensitive to the financial resources of the candidates. Here particularly, the wealthy can prevent unwanted candidates from appearing on the ballot. Stiglitz then lists some of the reforms that could restore electoral fairness.

     The fifth chapter concludes with an examination of globalization, its history and its potential dangers. Stiglitz writes:

…globalization, if managed for the 1 percent, provides a mechanism that simultaneously facilitates tax avoidance and imposes pressures that give the 1 percent the upper hand, not only in bargaining . . . but also in politics. Increasingly, not only have jobs been offshored but so, in a sense, has politics. [Pg. 138]

     It is in debtor countries that globalization has most often given control of politics over to the 1 percent. Creditors dictate the terms, economic and political, for the future of the country. In the nineteenth century these terms were often militarily imposed. More recently they were dictated through the offices of the International Monetary Fund. Unfavourable trade agreements are often imposed on all citizens of a country by globalized corporate powers that threaten severe financial punishment if their new rules are not accepted. In the end, globalization has greatly restricted the tax and nationalization options in many countries, helping the world’s 1 percent to achieve unopposed financial supremacy and political power.

*     *     *

     At this point in The Price of Inequality Stiglitz is all but finished with his descriptions of the nature and “costs” of excessive inequality in America. With chapter 6 he begins to emphasize much more what he sees are the historical paths that have led to such high inequality, and to prepare the ground for a final discussion of what could potentially be done to reverse such trends and avoid the dangers they increasingly represent. Chapter 6 begins with an examination of how it has been possible for voters to be persuaded that marked inequality is safe, and, that the policies creating increased inequality will best serve the common man.

    He begins with a consideration of some basic recent discoveries about human psychology and behavioural economics. Much depends on our perceptions of things, and those perceptions can be quite sensitive to subtle changes in how we are “helped” to think about them. Our perceptions in turn affect whether or how we vote in elections, and how we choose to spend our incomes, among many other factors that determine the society we live in and the degrees of inequality affecting that society. Stiglitz discusses these implications with particular reference to our perceptions of fairness (and justice) and how such perceptions determine the politics of social inequality.

     In the course of chapter 6 Stiglitz goes on to trace the rise of neoliberal economic theory in America and in many other areas of the globalized world. He discusses the conflict between the roles of small government advocated by this theory and the values attached to ideas of democracy, human rights, and equality, values that require a large role to be played by government. Some false assumptions and flaws of neoliberal economic theory are presented here, and these are expanded in following chapters of this book.

     Another topic, one that will also be elaborated again later in this book, is introduced next. It has to do with how slowly ideas tend to change in a population, even after weaknesses and problems have been revealed in them. Ideas and perceptions are each dependent on a social context. We look to others to confirm what appears reasonable, and, what doesn’t. We trust others when they agree with us, but we tend to mistrust their opinions when they do not. If most others in our immediate community of friends still hold one view, our own different view can have little impact for change. It is only after “enough” others also change their views that a tipping point is reached and society in general may then slowly come to adopt the new view. Stiglitz suggests that,

Today those who wish to preserve societies’ inequalities actively seek to shape perceptions and beliefs to make such inequalities more acceptable. They have the knowledge, the tools, the resources, and the incentives to do so. …The fact that those at the top can shape perceptions represents an important caveat to the idea that no one controls the evolution of ideas. Control can happen in several ways. [Pp. 159-60]

     One of these ways is by using preferential access to educational curricula and the public media. A second way is by creating a social distance between those whose ideas are to be disparaged and the rest of society. This limits the influence of those whose ideas are not welcomed by the elite. A third way is by deliberately distorting public information so that it appears to confirm the views preferred by the elite. Stiglitz cites the examples of the tobacco companies that for a long time successfully argued that smoking bore no risks. He notes the similarity to today’s energy companies that argue global warming is not a threat and is only based upon flawed “science” and flawed data.

     In the remainder of chapter 6 Stiglitz illustrates many of the techniques that the elite use to portray estate taxes as unfair, bank bailouts as necessary, mortgage relief (for the exploited) as dangerous, and “big” governments as evil. He concludes with a critique of the use of GDP (Gross Domestic Product) as the economic holy grail, apparent increases in which are being used in attempts to justify inexcusable social ills.

*     *     *

     In one sense, Stiglitz has at this point finished his main arguments detailing the causes and costs of both excessive inequality, and excessive political power in the hands of the extremely wealthy. But in the next three chapters he devotes some of his attention to additional and particular ways that democracy has come to suffer as a result of those excesses. In chapter 7 he focuses on how the rule of law is being eroded in America by the actions of the elite. Wealthy people, banks, and large corporations suffer far less in court for their illegal activities than do others. Court cases are expensive to defend, or to pursue, and the wealthy can and do prolong the time and costs of any final legal judgment against them. Justice becomes greatly delayed, and all but denied. Stiglitz concludes chapter 7 saying:

Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice. Some may still call it the “rule of law,” but in today’s America the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.” And the number of people who can afford it is rapidly diminishing. [Pg. 206]

*     *     *

     In chapter 8 of his book, Stiglitz sets the stage for what will become his recipes for reducing inequality. Many of the policies and practices that have led to excessive American inequality appear to be linked to, and justified as, American attempts to limit budget deficits. Most of this chapter then describes how budgetary policy has been based upon false economic assumptions and questionable rationalizations.

     Stiglitz begins chapter 8 with a review of the causes of the ballooning budget deficits in the U.S.A. Those deficits have resulted from decreasing tax revenues while at the same time government expenditures have been increasing. Decreasing revenues were the product of the sharp recession and the new tax cuts (said to “stimulate” more taxable income), cuts that actually resulted in much reduced tax revenue. Increasing government expenditures were the product of (a) new wars being waged in the middle east, (b) new costs occasioned by the after-effects of those wars, (c) increased military spending for future war materiel, (d) increasing Medicare drug benefits (which cost the government high amounts of “rent” paid to pharmaceutical monopolies), and (e) other efforts to “stimulate” the economy by offering special “rents” to selective other segments of the economy. Stiglitz concludes, saying: “The critical point to bear in mind in thinking about deficit reduction is that the recession caused the deficits, not the other way around.”  [Pg. 211]

     For Stiglitz, the intelligent way to avoid deficits is to ensure that the economy is managed in such a way as to maintain nearly full employment, and, so that tax revenue is much more equitably and effectively assured. Full employment requires avoiding “austerity” policies, with their recessionary costs in reduced personal incomes and productivity. Increasing revenue requires a tax policy that is very different from the current American model. However, achieving those goals will require combating some powerful economic myths that Stiglitz discusses (and begins to combat) in the remainder of chapter 8.

     The first such myth is that taxing the rich any more than at current levels will reduce employment opportunities and personal income and savings, and everyone will be hurt thereby. A second myth is that private companies (who always need to make a profit) are invariably more efficient than governments can be, and will deliver better goods and services, at lower cost, than will governments. Stiglitz argues that this myth is particularly harmful to the economy when it is used to prevent government control of the social safety net, including affordable health care and pharmaceutical costs, as well as unemployment supports that will help to maintain a stable demand for goods and services, and thereby, also maintain employment levels.

     For Stiglitz however, the worst myths about budgetary deficits are “that austerity will bring recovery and that more government spending will not.” [Pg. 230] He spends the rest of chapter 8 carefully rebutting these beliefs with data drawn from recent economic history. He concludes chapter 8 saying:

The 1 percent has captured and distorted the budget debate—using an understandable concern about overspending to provide cover for a program aimed at downsizing government, an action that would weaken the economy today, lower growth in the future, and most importantly for the focus of this book, increase inequality. It has even used the occasion of the [American] budget battle to argue for reduced progressivity in our tax system and a cutback in the country’s already limited programs of social protection. [Pp. 236-37]

*     *     *

     And then, in chapter 9 of his book, Stiglitz’ gives us a brief lesson about governmental economic policy, and how it tries to “manage” the economy to keep inflation and unemployment confined within acceptable ranges. It is the Central Bank (the “Fed”) that administers the policy decisions designed to achieve these goals. But these decisions bring with them consequences, some of which have painful effects on large segments of society. Moreover, in America the Central Bank is controlled by wealthy bankers, and their priorities currently reflect those of the 1 percent. Stiglitz describes in some detail how historic monetary policies, justified by some powerful economic myths, have benefitted the 1 percent while dangerously destabilizing the overall economy. He summarizes much of chapter 9 as follows:

Just as the Great Depression drew attention to America’s growing inequality—destroying the myth that all were benefiting from the growth that had occurred in the preceding quarter century—it destroyed two other myths: that a focus on inflation was the cornerstone to economic prosperity, and the best way of ensuring economic stability was to have an independent central bank. …There is an alternative set of policies and institutional arrangements that holds out the promise of not only better and more stable growth, but also of a more equitable sharing of the benefits of that growth. [Pg. 240]

     Stiglitz argues that central banks everywhere should not be independent, i.e. free from regulation and oversight. But with decreasing regulation of a nation’s financial sector, and the “capture” of most remaining regulatory bodies by lobbies that wish to weaken and limit controls on the powers of the central bank, the Federal Reserve Bank in America has become immune to government control. In the remainder of chapter 9 Stiglitz traces how the myths governing central bank behaviour came to have their power. He concludes:

As I have stressed in this book, policies have distributive effects, so there are trade-offs between the interests of bondholders and debtors, young and old, financial sectors and other sectors, and so on. I have also stressed, however, that there are alternative policies that would have led to better overall economic performance—especially so if we judge economic performance by what is happening to the well-being of most citizens. But if these alternatives are to be implemented, the institutional arrangements through which the decisions are made will have to change. [Pg. 264]

*     *     *

     In the final chapter of The Price of Inequality, Stiglitz shares his prescriptions for reversing the dangerous levels of inequality that otherwise are destined to continue increasing in America and beyond. These prescriptions also offer the promise of an economy less subject to recessions, to bursting bubbles, and to inflation. They offer as well an improved democracy that may be far more effective in making American society fair and sustainable. Many of these prescriptions will be difficult to fulfill, but over time they will each be important for accomplishing the economic and political and social goals that Stiglitz envisions.

     I will save a discussion of this final chapter for a later essay, an essay in which I still plan to examine various solutions that have been proposed for dealing with the dangers associated with extremes of inequality.

*     *     *

© J. Barnard Gilmore     Kaslo, British Columbia      March, 2015

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The Spirit Level and its Critics

 “THE SPIRIT LEVEL” AND ITS CRITICS

   Extremes of financial inequality, their possible sources and their potential dangers, have lately become the focus of an increasing number of books and articles. This has been particularly true since the western financial crisis of 2008-2009. One such book was titled The Spirit Level, written by Richard Wilkinson and Kate Pickett, who are public health epidemiologists in the U.K.  A synopsis of their book, discussing some of its implications, was posted on this blog in September 2013.

     Not long after the publication of The Spirit Level, criticisms of that book began to appear in the U.K. These critiques generally focused on the statistical analyses Wilkinson & Pickett had used, and on the conclusions those analyses were said to support. In general, their critics argued that Wilkinson & Pickett had been inappropriately selective in choosing the countries and the U.S. states that they did, and that in consequence the countries, states, or counties with high levels of undesirable social outcomes or problems were also seen to be those with higher levels of income inequality. It was argued that with more appropriate units of analysis, levels of inequality could be seen to be quite unrelated to those same undesirable outcomes.

     One of the first such critiques was in some ways the strongest. This early critique was published by the U.K. think tank Policy Exchange. It bore the title Beware False Prophets. Its author was Peter Saunders, a retired Professor of Sociology. Just below Saunders’ name on the title page, and in the same large font size, an “Editor” was also listed: Natalie Evans, who was the Deputy Director of Policy Exchange at the time. In what follows I will speak of Dr. Saunders as the sole author of Beware False Prophets, although some of what is argued in that book suggests that Ms. Evans may have drafted certain portions of it. She also published her own critical review of The Spirit Level in The Guardian on July 8, 2010, echoing and praising Saunders’ report, while making no mention of her role in that report or at Policy Exchange.

      At about the same time as the Saunders publication, the U.K. think tank Democracy Institute published a book titled The Spirit Level Delusion: Fact-Checking the Left’s New Theory of Everything. The author was Christopher Snowdon, a freelance journalist and research fellow at the Institute of Economic Affairs (IEA). Over the years, the IEA, has received considerable financial support from a number of large corporations, including a number of major tobacco companies. Mr. Snowdon is also the author of the book Velvet Glove: Iron Fist, which is a history that looks critically at past anti-smoking movements and legislation. Snowdon’s criticisms of Wilkinson and Pickett are sometimes similar to those of Saunders, but tend to be rather more strident in tone and scattered in approach.

      A third critique of Wilkinson & Pickett’s book was made by the U.K. Taxpayers’ Alliance. Rather like the Policy Exchange and the Democracy Institute, the Taxpayer’s Alliance is a well-funded free-market lobby group supported by a few large corporations and devoted to encouraging both small government and very low taxes. Clearly there are many wealthy corporations and individuals that are challenged by, and worried about, the Wilkinson & Pickett findings, including the potential effects of those findings on governmental economic policies. In the case of the Taxpayers’ Alliance, their critique was similar to that of Christopher Snowdon. Often it took the form of questions implying that a different study, and another author’s different conclusions, were sufficient to disprove the Wilkinson & Pickett findings. There might still be reasons to withhold judgment on Wilkinson & Pickett’s contributions, but no one or four studies can ever be said to fully disprove any scientific conjecture.

 *   *   *

     Wilkinson & Pickett  have  made  detailed  and  well-reasoned  responses  to  each  of their  critics.  And  they  have  made  these responses  public  on  the  web.  Their responses to their critics can currently be accessed at www.equalitytrust.org.uk/sites/default/files/responses-to-all-critics.pdf  In  each  of these responses they begin by pointing out that the research published in The Spirit Level was carried out in an epidemiological and scientific setting, using data provided by governments and NGOs including the U.N. and the World Bank. Their conclusions were also based on previously published studies carried out by many others, not simply on their own research. Although The Spirit Level was written for a lay audience, Wilkinson & Pickett argue that scientific criticism and scientific debate about their book deserve a scientific arena in which to take place. They write:

Almost all of the research we present and synthesize in The Spirit Level had previously been peer-reviewed, and is fully referenced therein. In order to distinguish between well founded criticism and unsubstantiated claims made for political purposes, all future debate should take place in peer-reviewed publications.

However, Wilkinson & Pickett do go on to address each of the questions about their work raised by their critics.

     Wilkinson & Pickett begin their response by emphasizing the restricted scope of their work and of their conclusions. They write that their work has specifically been concerned with

…a theory of problems which have social gradients—[i.e.] problems which become more common further down the social ladder. So, for example, we would not theorize that alcohol use would be related to inequality, [because] it does not have a social gradient, but that alcohol abuse would be, because it does have a social gradient…. …Our aim was to see if there was a consistent tendency among…countries for [the] health and social problems [that exhibit] social gradients to be more common in societies with bigger income differences.

…In contrast to our approach, much the most common strategy used by our critics has been to selectively remove or add countries to our analyses in an attempt to make the damaging effects of inequality disappear. But it is important to note that the criticisms are entirely ad hoc criticisms of each relationship between inequality and a social outcome. This means that they are irrelevant to almost all of the very many other demonstrations of similar relationships in different settings published in academic journals by other researchers.

     Wilkinson & Pickett then refer to studies showing relationships between levels of income inequality and certain health problems across the regions of Russia, the provinces in China and in Japan, and the counties in Chile. They conclude by saying:

Our analysis suggests that the social gradients which exist in health and [for] many social problems cannot be the result simply of a tendency for social mobility to move the resilient up the social ladder and the vulnerable down. No amount of sorting would explain why problems with social gradients may be anything from twice to ten times as common in more unequal societies. …What the evidence does suggest is that problems which become more common further down the social ladder are substantially a response to social status differentiation itself, and that when greater inequality increases the scale of social differentiation, the problems get worse. Our critics provide no alternative account of why so many problems have social gradients.

 [Additional recent commentary, for other Spirit Level critics, can also be found at  http://www.equalitytrust.org.uk/sites/default/files/jrf-response.pdf ]

*   *   *

      At the beginning of his book, Beware False Prophets, Saunders, speaking about The Spirit Level, writes: “As soon as the book is subjected to even a fairly cursory examination, it becomes obvious that it is deeply flawed.” Unfortunately, the “flaws” that Saunders will begin describing soon afterward are not “obvious” at all, and they are only “apparent” to him after some non-cursory statistical analyses that first require adding to (or much more often deleting) some of the supposedly “inappropriate” data that were being analyzed by Wilkinson & Pickett. Most of The Spirit Level data came from scientific journal articles, vetted by statistically sophisticated (and often skeptical) others. Those reviewers accepted the data in the final form that the authors published them. If there were flaws in those data and those statistical analyses, they were anything but “obvious.”

     This form of dismissive exaggeration by Saunders reappears frequently throughout Beware False Prophets. And it is true as well for the statistical conclusions he draws from his re-analyses of selected portions of the data in The Spirit Level. For the layman, when evaluating the statistical arguments made by Wilkinson & Pickett, and particularly when evaluating those made by Saunders and other critics, it may appear that a reader requires advanced statistical training to do so. That is partially, yet not entirely, true. A general appreciation of what statistics can and cannot do is not particularly hard to understand. However, a specific understanding of when statistical conclusions and inferences are reasonable often does require advanced training. It should not surprise you if different expert statisticians disagree about the use and interpretation of statistical techniques. The fact of any such disagreement does not mean that one of two opposite points of view must necessarily be wrong. Or even that one of those views is right.

     Saunders’ statistical re-analyses of some findings reported in The Spirit Level generally capitalize on techniques and conventions that currently change what is called a “statistically significant” finding into one that is called “not significant.” A layperson can certainly understand these conventions, even if not the mathematical techniques they rely upon. Here then is a very brief introduction to statistics, and to the conventions that Saunders exploits, written here for the lay reader. [I taught Statistics to university undergraduates and graduate students for many years. I also taught courses in Tests and Measurement Theory.]

*   *   *

     “Statistics” is the name of a special tool, one that is intended to assist us in getting a clearer understanding of confusing data sets and some possible errors in those data. Statistics are of two sorts: descriptive and inferential. Descriptive statistics consist of rules and conventions for describing presumed traits that are common to one or more large or complicated data sets. Some of the better-known descriptive statistics describe “central tendency” (e.g. the average; the median), and “variability” (e.g. the standard deviation; the variance) and the “degree of association” (e.g. the correlation coefficient; the “common variance”). All descriptive statistics can sometimes be helpful to understanding, but only after making certain prior assumptions about each data set, e.g. assuming that all the data in any one subset are reflecting much the same thing (even if we don’t know what that thing is) and, assuming that, in general, “errors” in measuring each datum have been essentially random. Such assumptions are invariably useful, often justified, and sometimes quite inappropriate. As tools, descriptive statistics do have their limits.

     Inferential statistics are generally tools for understanding how frequently we might observe the same or a greater degree of difference, or pattern-strength, as the one that we have seen in our particular data set, if and when what we have seen actually happens to have been produced only by chance. Suppose, then, that we examine hundreds of similar data sets where we know for certain that all these data came from a world where only random “errors” (i.e. chance) produced the values of each datum in those sets. We then ask, is our particular finding commonly seen, or is it rather unusual, in these control studies where we are confident that only random noise would produce the same suggestive effects as those we saw in our particular study? If our finding is quite uncommon when only chance is producing the outcomes, then we can feel more comfortable about concluding that the effects we have seen are real, and are unlikely to be due to chance.

     With inferential statistics too, however, there are conventions and assumptions. In general, if only random events are at work, and if seeing such an impressive difference or pattern in the data (like the one seen in our study) would only be observed once in every 20 or more studies from randomly produced data, then the convention has become that we will “reject” the idea that mere chance has produced the suggestive difference or pattern that we found in our study. We then say that the outcome in our study is “statistically significant.” But if our observed “suggestive” outcome would happen once in every 19 or 18 random data sets (or even more frequently), then the convention is to label our observed result as “statistically insignificant.” (Perhaps a better designation, or convention, would have been to call these latter results statistically undecided.)

     Whenever we call an observed effect “statistically significant” we have temporarily committed ourselves to the idea that some non-random, consistent forces or links have played some part in producing the differences or patterns that we see in our data. But when inferential statistics are used to declare that our data are “not significant,” we cannot logically assert that no consistent forces or links are producing any part of the differences or patterns that still appear to remain in our data set. The “strengths of the effects” seen (i.e. the magnitudes of group differences, or the strengths of various trends seen) are simply dismissed as being “non-significant” and therefore as if  “due to chance alone.”

     Many statisticians have recognized that the true “strength of the effect” is almost always what we are really interested in determining. A true but weak effect may still be very informative and interesting, even if the power of our technique for detecting that effect and declaring it “statistically significant,” is not yet strong enough to accomplish that detection. Measuring accurate “effect sizes,” and estimating the likely range of errors for such measurements, constitutes a difficult and as-yet under-appreciated branch of statistics. But to say that there is no statistical significance in a data set does not logically imply that the effect size is zero, or near zero, or negligible. Nor does it mean that the effect size cannot potentially turn out to be important or informative and possibly rather greater than is yet apparent. Random measurement error is, in theory, equally likely to produce underestimates of, or overestimates of, any effect size that we are trying to assess.

     There are two main conditions that will reduce the power of inferential statistics to detect true effects. One is when there are “large” amounts of random measurement error (“noise”) distorting each datum in the sets being examined. “Cleaner” (i.e. better) measurements, reducing random errors, may help to overcome this condition. The second condition is if the number of data in each set is too small to allow us to pick out the signal hiding amid the noise being produced by random measurement errors. Unfortunately, when you reduce the number of data points, by omitting data that you have decided do not belong, then the “power” of inferential statistics to detect true effects declines accordingly. Thus, after deleting some data it becomes easier to conclude that the trends in the data have not yet reached “statistical significance.”

     Too often Saunders dismisses as “insignificant,” trends that become harder and harder to detect after he has trimmed the data set. Too often he treats his newly “insignificant” findings as constituting a sound proof that no effect or no relationship was ever there at all. He does not doubt himself. He does not see the questions he is addressing as being particularly complex or deserving of further study before we might conclude that inequality is not a problem for society.

     For me, Saunders’ apparent impatience with those who see the world differently than he does, with those scientists whose cultural traditions and views of what constitute “good science” include an even-handed respect for others who examine the same phenomena, is an unhelpful and regrettable aspect of his writing. Time has a way of humbling most scientists and policy thinkers, bringing fresh viewpoints and new counter-examples to falsify their former beliefs. That is one reason why scientists should never imply, as Saunders so forcefully does, that we have finally arrived at the ultimate and “correct” interpretation of some portion of the world, and thereby have exposed its former false prophets.

*   *   *

     Saunders ends his long critique concluding not only that inequality is almost certainly unimportant for any useful discussions of social policy, he goes on to assert that it would actually be particularly dangerous to initiate any steps designed to reduce inequality. He sees grave dangers, mostly of the severe economic sort, if ever governments were to return to the regulatory and taxation policies that were in place for many years during and after the Second World War. And yet, during those same years economic growth in the U.K. and the U.S.A. was sustained and strong, while financial inequality remained at a much lower level.

     Sadly, however, after insisting that his statistical evidence shows that Wilkinson & Pickett’s analyses were highly flawed and their evidence lacking, writing in Beware False Prophets Saunders does not offer us any evidence at all to support his own rather doubtful prophesy of grave economic consequences for any society that flirts with policies intended to reduce inequality. True, policies to reduce inequality might possibly prove rather inconvenient for some financial supporters of the U.K. Policy Exchange who provided Saunders with part of his income for his work on their behalf. But Wilkinson & Pickett’s detailed rebuttal of Saunders’ arguments, with their many references to additional work published in scientific journals, articles reporting findings that replicate many of the trends that Wilkinson & Pickett reported in The Spirit Level, is telling. We are left with no good reason to dismiss their work, nor to condemn their provisional interpretations and conclusions drawn from it. Only time and closer scientific study can determine to what extent inequality amplifies social problems that are associated with social gradients, or, under what conditions inequality might not increase those problems.

     I submit that modest-scale social and political experiments, testing policy interventions designed to constrain inequalities: of wealth, of access to education, and of access to justice, could become very helpful experiments for eventually deciding where the truth about inequality really lies. Sadly however, the existing large inequalities in social and political power appear likely to prevent such experiments from ever taking place, particularly in those countries where they appear to be needed most.

*   *   *

© J. Barnard Gilmore    Kaslo, British Columbia    September 2014

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Pleonexia and Human Nature

WHEN ENOUGH ISN’T ENOUGH:

PLEONEXIA AND HUMAN NATURE

  “Money is just a way of keeping score.” H.L. Hunt

      Pleonexia is an ancient Greek word referring to a very old human problem. The word describes an obsessive desire to possess considerably more than one’s fair share of a limited resource. In this context, a “fair share” of a resource typically implies a share that is proportional to the number of others who need, or would like access to, that same resource. In a world of 20 people a “fair” share would normally start at 5% of the whole resource, e.g. 5% of the giant pie, or 5% of the combined wealth. If every one of those 20 people controlled 5% of some resource then there would be total equality with respect to that resource. But of course a certain amount of inequality could also seem completely fair. For instance if many of those same 20 people were quite satisfied with a nice 2% of the pie, and if no one wanted more than 6% of the pie, then everyone could have “enough” pie without exhausting the resource. The problem starts when some members among the group of 20 seek more than 40% of the pie just for themselves.

     Depending on the context, pleonexia often implies an obsessive wish to posses considerably more of a resource than does anyone else. It implies a degree of selfish intention producing levels of inequality that pass well beyond the limits of what seem “fair” or acceptable to most members of a group. Pleonexia describes a level of greed for which there is no longer any concept of “enough,” a greed that recognizes no limits on monopolistic excess.

      Pleonexia has sometimes been translated as avarice, covetousness, or “a passion for more.” Originally, pleonexia implied a form of greed centred primarily on obtaining much more money than anyone else. For many people who are already very wealthy, the importance of further increasing their wealth appears to be motivated by the increased social status that follows, both from their increased levels of wealth per se but also from the number of unique and desirable possessions, titles, and powers that additional wealth may provide to them. Status in the eyes of others, status tied to envy of one’s wealth with all its attendant powers and comforts, appears to be a key factor behind the inability of many of today’s extremely wealthy individuals to conclude that their existing wealth has become more than “enough.” And yet, the extremes of wealth that exist today have for some time reflected much more than is enough for anyone.

      Another key factor behind a pleonetic compulsion for acquiring yet more wealth can be seen behind H.L. Hunt’s assertion that “Money is just a way of keeping score.” At the end of a game, the high score “wins.” But the margin of victory is also experienced as significant. Games of sport almost never stop early, even though one competitor has already achieved an insurmountable lead. The size of the gap between the winning score and the losing score still carries psychological significance and perceived value, at least for winners. And often for losers as well. “A close game” carries a completely different meaning for a loser than does a game that has been lost by a large margin. Marked inequalities hurt.

      Life experienced as a game, as an arena where the purpose is to become the biggest “winner,” and particularly to avoid becoming “a loser,” leads to high degrees of social inequality. Those inequalities create deep problems for a society. Yet too many people have already decided to turn life into a competitive game. Too many people are encouraging too many others to believe that winning and losing, even just keeping score, is the way life must be understood and lived.

      For almost everyone in the “game” of life, “keeping score” (i.e. comparing oneself to relevant others) generally plays a deep and largely unrecognized role in determining personal satisfaction and happiness. Yet money becomes not just one way of keeping score. Money is often treated as if it were the only sure means for pure keeping: keeping respect, keeping in control, keeping safe, keeping comfortable, keeping every option open, and in particular, keeping ahead. With that psychology and its pleonetic ethic, having “only enough” becomes a likely trigger for considerable anxiety. Once the wealthy person is used to enjoying fifty times an income that is surely “enough,” then a 20% “loss” of income, to a level that is “only” forty times what is “enough,” feels like a terrible and threatening event. Yet the considerable “enoughness” of this huge remaining income is all but invisible when seen through pleonetic eyes.

      Inequality and pleonexia are mutually reinforcing: each helps amplify the other throughout a society. Modern economic life and culture, with its growing inequalities of corporate size and scale, with its emphases on more and more consumption, with its celebration of winners and its promotion of anxieties over becoming one of the “losers,” help to maintain a society where fewer and fewer people can recognize what is “enough.” This blindness creates a social danger that no society can afford to ignore.

      Whatever may be claimed in its defence, greed is not good. Nor is greed an inescapable part of all human nature. Greed is a type of social infection, permitted by modern elements of western cultural and economic architecture, elements that restrict sufficient awareness of, and support for, common fairness and justice and social compassion. It isn’t fair that so many have so very much more than what normally would be enough, while so many others have so much less than their fair share of access to social goods and social resources. It isn’t fair, but a society that permits and even celebrates pleonexia cannot expect anything better. Such a society has lost a moral compass without which it cannot long survive.

      Society has offered to us all, and particularly to the very wealthy, the possibility of enormous benefits and opportunities. Society has provided resources, including the education, the inventions, the infrastructure and the laws without which wealth cannot be created and enjoyed. It is only fair that societies and governments require a return of some portion of the extremes of wealth made possible by the earlier loan of these resources from our common pool. Thus, once a family has accumulated more than enough to live very well, most of their surplus wealth deserves to be returned to society, to be held in trust and invested to benefit all future generations. Otherwise, enough will never be seen to be enough.

© J. Barnard Gilmore     Kaslo, British Columbia      May, 2014

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Wilkinson & Pickett (2009) The Spirit Level

                    A Synopsis of the book:  The Spirit Level (2009)                           by Richard Wilkinson and Kate Pickett

INEQUALITY: THE PRIME SUSPECT

    There are many variables that could be associated with increased risks for, and higher incidences of, various societal ills—ills such as chronic poverty, chronic illness, infant mortality, high crime rates, social bullying, social mistrust, school dropout rates, unwanted pregnancies, etc. It wouldn’t be too surprising, for instance, if a few of these problems were linked to the overall economic prosperity of various societies, with more highly developed and richer societies doing better at avoiding, controlling, or minimizing such problems. Or, perhaps differing levels of medical care in different societies may help to make some of these problems smaller in some locales and more pronounced in others. It would be rather surprising, however, if one and the same variable was found to be strongly associated with better and worse outcomes for almost all of such problem areas. And yet it now appears that there truly is one variable that is more highly associated with poor social outcomes in general than is any other single factor that has been examined.

    That one key variable turns out to be the amount of income inequality existing among the members of a social group, i.e. the relative sizes of all the differences between every pair of individual incomes for members of that particular group. In groups where there are extremes of income concentrated among a small proportion of the population, as for instance when more than 20% of total yearly income belongs to fewer than 1% of the people in that group, then social problems of the type listed above are markedly more severe than they are in populations where incomes are much more evenly distributed across all group members. This is the important conclusion documented by Richard Wilkinson and Kate Pickett in their book The Spirit Level, published in 2009. The implications of that conclusion are likely to be very far reaching. [The Spirit Level was initially published by Allen Lane publishers in the U.K., a division of the Penguin Group. In 2010 it was published in the USA by Bloomsbury Press, with a forward by Robert B. Reich. All page citations below refer to the 2010 Bloomsbury edition.]

*    *    *

    In the preface to their book, Wilkinson & Pickett explain that in the beginning their research had been intended to determine the workings of the key variables that underlie large national differences in life expectancy.  It became clear at once that life expectancy was lowest among the poor, and that it appeared to be higher the further up the social ladder that you looked. But why? Was it simply that poor people couldn’t afford medical care and died early as a result? Was it because poor people were more exposed to medical risk factors like poor diet and unsanitary living conditions and polluted environments?

    Wilkinson & Pickett begin The Spirit Level with a graph showing the relationship between average income per person (in dollars) and average life expectancy (in years) for approximately 120 countries around the world. In the countries with low average income (less than about $15,000 per year per person) national average life expectancy is seen to be moderately low, but also highly variable. Life expectancy is less than 50 years in much of undeveloped Africa, yet it is above 70 years in some other undeveloped countries such as China and Albania. In economically developed countries however, with citizens who enjoy moderate to high average personal incomes, average life expectancy is rather higher, ranging between 75 and 85 years, and it shows no average increase with higher national incomes. Thus in Japan average life expectancy is nearly 82 years while the average income is about $29,000. Yet in the U.S.A. average life expectancy is about 5 years below that of Japan even though the average U.S. income is about 25% greater than in Japan. In Portugal the average per-capita income is half of that in the U.S.A., yet average life expectancy in Portugal is only a few months less than in the U.S.A. Clearly, in economically developed nations, national average income does not relate to, nor does it help one to predict, national life expectancy.

    Wilkinson & Pickett also note that, over the past few decades, average life expectancy has increased by a few years in all the developed countries. Thus, the reason that life expectancy appears to be unrelated to economic development in these countries is not because the people living there have reached some biological limit for life expectancy. The average limits that have been reached appear to be those resulting from sufficient access to basic food, hygiene, shelter, and medical care, once basic national economic development and political stability have been achieved. However, it turns out that life expectancy does still vary a great deal according to personal income within each of the economically advantaged countries, but not between them.

    Wilkinson & Pickett show that within each of the developed countries there is a clear link between average income and average life expectancy, one that shows no sign at all of disappearing at the higher levels of income. The average American and the average Portuguese live about the same length of time despite great differences in their respective incomes. But inside both the U.S. and Portugal, those who are relatively more wealthy live longer than those of average wealth, who in turn live longer than those even less well off, all in a nearly continuous decline across the entire income spectrum. Something about the relative differences among the incomes of people who are all citizens of the same national state clearly relates to longevity in a fashion that that average absolute income does not. Income inequality appears to affect life expectancy, even if the amount of income per se does not.

*    *    *

    Longevity is only one variable reflecting overall health and overall quality of life. Wilkinson & Pickett began to suspect that a variety of other social indicators relating to the quality of life in a population might also be linked in some fashion to the degree of income inequality or equality in the population. To study this question more closely requires a measure of “inequality” that can be applied reliably and consistently to many different populations, each with its different statistics reflecting, for instance, income levels among its various citizens.

    One very simple measure of income inequality, one that the authors use to illustrate how different nations can be from each other, is to compare the total amount of income received by the poorest 20% of the population to the total amount received by the richest 20% of the population. Wilkinson & Pickett present a graph illustrating these ratios for twenty-three economically developed nations. Measured in this fashion, income inequality was found to vary considerably among these different countries. Inequality was lowest in Japan, where the wealthiest 20% received a little less than four times the total income received by the poorest 20%. Inequality was about “average” in Canada, where the same ratio was just under six times more income going to the wealthiest 20%. The ratio was highest for the USA and for Singapore where the wealthiest 20% received respectively 8.5 and 9.5 times the income total received by the poorest 20% of their citizens. This amounted to more than twice the level of inequality (measured in this fashion) than was seen in Japan.

    There are other ways to measure income inequality. One might compare the wealthiest 5% with the poorest 5%. One might compare the wealthiest 50% with the poorest 50%. One might use the proportion of the total population income that would have to be removed from those with more than average income and distributed among those with less than the average income so as to give everyone the exact same amount. Fortunately, all of these statistical variations tend to produce very similar rankings of inequality for those countries or groups being compared.

    A particularly sophisticated statistic for measuring degrees of inequality is called the Gini coefficient. The Gini has the advantage that it is sensitive to inequalities throughout an entire population, not just between two or more aggregated portions of that population. The Gini takes the value of 0.00 when every member of some population possesses the exact same amount of the variable being measured (e.g. income). It takes the value of 1.00 if the total amount of some variable is possessed by just one person.  So a Gini of 1.00 defines maximum inequality while 0.00 defines maximum equality.

    In studies of income inequality, the Gini is often found to be around 0.25 in relatively more equal populations, and it is often around 0.50 in populations that are comparatively high in inequality. Gini values are generally preferred as measures of inequality, and these were used by Wilkinson & Pickett whenever they were available. But often Ginis are not available, in which case the ratio of the total income possessed by the top versus the bottom 20% of the population was the index of inequality used by Wilkinson & Pickett for comparing the degrees of relative inequality in different populations. In every case, the raw data that Wilkinson & Pickett report in their book came from UN agencies, from government statistics, or from census data.

*    *    *

    Wilkinson & Pickett first consider more than longevity as a sign of a healthy society. They write:

In the course of our research we became aware that almost all problems which are more common at the bottom of the social ladder are [also] more common in more unequal societies. It is not just [true for] ill-health and violence, but also…a host of other social problems. Almost all of them contribute to the widespread concern that modern societies are, despite their affluence, social failures. [pg. 18]

Wilkinson & Pickett were able to find reliable data for twenty developed nations, reflecting up to ten types of health or social problems. They were also able to get almost all of the same data (i.e. for the first nine of these same ten problem areas) for each one of the fifty states in the USA. These ten variables (health issues and social problems) were:

  • Life expectancy (as before)
  • Infant mortality rates
  • Rates of mental illness
  • Rates of obesity
  • Rates of early school leaving
  • Teenage birth rates
  • Homicide rates
  • Imprisonment rates
  • The degree to which people lack trust in the people around them
  • Social immobility (e.g. rates for earning no more than did one’s parents)

    Each nation was scored on each of these variables. For each variable, the twenty national (or fifty state) scores were numerically transformed in a fashion that moved the average of all the transformed scores to zero, with their standard deviation (i.e.their variability) equal to plus and minus 1.00. This had the effect of assuring exactly equal weight (importance) to every one of the ten “problem” variables when these were combined. Finally, Wilkinson & Pickett averaged the ten scores for each nation to form a single national score that they called their IHSP score (Index of Health and Social Problems). Thus, for each of the twenty nations, and also for each of the fifty American states, they had one IHSP score (reflecting the relative severity of problems and the general quality of life in that population) and, separately, one “Inequality” score (reflecting the degree of income inequality in the same population).

    In The Spirit Level, Wilkinson & Pickett present a two-dimensional scatter-plot for the twenty developed nations, illustrating and linking both the degree of income inequality and the corresponding IHSP scores. Increasing inequality was indicated along the horizontal axis and increasing “problem” scores were indicated along the vertical axis. For these twenty developed nations, all twenty data points in this plot can be seen to lie close to a rising straight line, thus exhibiting a marked association between the two variables across the full range of both dimensions. At the bottom on both scales lies Japan, lowest in inequality and lowest in average degree of the combined social problems. At the top of both scales lies the USA, with the highest degree of inequality and the highest combined score reflecting social problems. In between, the other 18 nations generally scatter proportionally along both dimensions. Thus, the degree of national inequality in personal incomes can be used to predict rather closely the scores reflecting the level of combined social problems found in each of these nations.

    But mightn’t the severity of the ten combined social problems simply reflect differences of average living standards (average per-capita incomes) in these nations? The same type of scatter plot, substituting per-capita incomes in the twenty nations instead of the degree of inequality, shows no relationship at all to the social problems scores. The USA and Norway have the highest two per-capita income scores, yet the USA has the highest total of social problems while Norway has the third lowest total of these same problems. The UK and Japan both have average per-capita income scores but Japan has the lowest degree of problems while the UK has quite a high level of these problems. It is true that Portugal has the lowest per-capita income score of all and it has the second highest social problems score. But the country with the highest social problems score is the USA, and it has the highest average per-capita income. Average living standard is clearly no help at all in predicting social problems in a nation.

    Are the data that so clearly link inequality to social problems in twenty developed nations simply some sort of fluke? To help decide that question Wilkinson & Pickett examined the relationship between these same two variables across the fifty states in the USA. The scatter-plot of income inequality versus the combined social problems index (the IHSP) for the fifty states looks very similar to that seen for the twenty developed nations. Again we see the data points clustered around a rising straight line, with the lowest social problems seen in states with low levels of income inequality while the highest levels of social problems are generally seen in states with high inequality.

    In this data set, however, not all the points lie as close to the “best-fit” line as they did for the twenty nations. There are four states in particular that do not appear to fit the trend illustrated strongly by the other forty-six states.  Alaska has the lowest income inequality of all fifty states, yet it has an average level of social problems on the IHSP scale, a level that is well above the bottom end of the “best-fit” line.  New York has the highest income inequality of all fifty states, yet it has an IHSP score that is actually below the U.S. average, well below the top end of the “best-fit” line. Connecticut and Massachusetts also lie far below the “best-fit” line, both of them with more than average income inequality yet notably lower than average IHSP-related problems.  But with these four exceptional states excluded, there again can be seen a dramatic clustering of the other forty-six states showing a very strong relationship between the overall income inequality in those states and the degree of the nine social problems (excluding social immobility rates, for which no data were available) that were combined in the states’ IHSP scores.

    Wilkinson & Pickett do not speculate on why Alaska exhibits relatively more social problems than might have been expected with so much economic equality present, nor why the three big New England states, with such significant income inequality, still do relatively well on the social-problems index. They do however look at the per-capita income versus IHSP scores for all fifty states and there they find a weak tendency for states with higher per-capita income to average slightly lower (better) IHSP scores. Alaska and New York have very similar per-capita income scores, both slightly above average for all fifty states. Connecticut and Massachusetts rank first and third of all the states in per-capita income, and do better than average on the IHSP measure. What is clear, however, is that per-capita income cannot be used to explain the strong linkage seen between inequality and social-problem levels among the fifty USA states, or among those twenty developed nations for which the required data were available.

    Finally, Wilkinson & Pickett asked themselves if the nine or ten variables they used for their combined IHSP index of social problems might have been unrepresentative or special in some unnoticed fashion. They decided to look at one other combined index similar to the IHSP. The United Nations Children’s fund (UNICEF) has created its own combined index for “child-wellbeing,” one that utilizes forty different variables (indicators) to come up with an overall “wellbeing” score for each nation’s children. Wilkinson & Pickett used this index, after removing the rate of child poverty that was part of it, since that factor is itself highly related to income inequality. Here too they found that greater income inequality in a country was associated with lower UNICEF “wellbeing” scores for the children in twenty-two developed countries. The strength of association was not as great as it had been for the IHSP measure, but the pattern was still very clear. And here too, when this UNICEF index was plotted against national per-capita income there was no sign of any relationship at all. So once again, it was the degree of income inequality, not low income per se, that was found to be strongly associated with health and social problems.

*    *    *

    Wilkinson & Pickett next consider some implications of the findings they have so far reported. They write:

The problems in rich countries are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within each society being too big. What matters is where we stand in relation to others in our own society. [pg. 25]

They go on to note that in America those who live below the poverty line (defined by an absolute income level, not some proportion of the average income) often find that they don’t have enough money to buy food. Yet surveys show that 80% of these same people have air-conditioning, almost 75% of them own a vehicle, and nearly a third of them also have a computer, a dishwasher, or a second car. Wilkinson & Pickett go on to say:

What this means is that when people lack money for essentials such as food, it is usually a reflection of the strength of their desire to live up to the prevailing standards. You may, for instance, feel it more important to maintain appearances by spending on clothes while stinting on food. …As Adam Smith emphasized, it is important to be able to present oneself creditably in society, without the shame and stigma of apparent poverty. However, just as the gradient in health ran right across society, from top to bottom, the pressures of inequality and of wanting to keep up are not confined to a small minority who are poor. Instead the effects are—as we shall see—widespread in the population. [pp. 25-26]

*    *    *

    Although income inequality is the only type of inequality for which clear and objective measures are available, there are other types of inequality that may also have adverse effects on the overall quality of the life that societies enjoy. Inequality in overall wealth is not the same thing as income inequality, and it may play an additional role in augmenting social problems. Inequalities in social class and status may play a further role. Inequality in social power—the ability to access legal help, or advanced medical help, or educational opportunities—may play an important role in augmenting social stress and discord. Until there are clear and objective ways to measure these different forms of inequality, all of which are likely to be highly correlated with income inequality, we can only work with this one measure. But Wilkinson & Pickett note that even just this one measure of inequality can be highly informative.

    Wilkinson & Pickett then cite certain studies suggesting to them that the amount of income inequality in a population reflects the degree to which that population has become stratified by various status and class distinctions organized in a hierarchical fashion. They write:

We should perhaps regard the scale of material inequalities in a society as providing the skeleton, or framework, round which class and cultural differences are formed. Over time, crude differences in wealth gradually become overlaid by differences in clothing, aesthetic taste, education, sense of self and all the other markers of class identity. …And it is surely because material differences provide the framework round which social distinctions develop that people have often regarded inequality as socially divisive. [pg. 28-29]

    Wilkinson & Pickett then ask why people might be so sensitive to inequality, and to answer this question they examine certain aspects of human psychology. But first they make it clear that they will not advocate attempts to change that psychology, instead they will advocate efforts to reduce inequality. Then they summarize the work of the psychologist Jean Twenge, who has documented strong evidence of increasing levels of stress and anxiety in the American population over a 40-year period starting in 1952. Since inequality in the USA did not start to rise until the middle of this period, inequality per se was not a direct cause of that overall trend.

    Parallel trends were found over the same period for feelings of social insecurity, or, in the modern jargon, what are called feelings of anxiety in the face of “social evaluative threat.” This term refers to a threatening sense that one is being judged negatively—that one will likely be found wanting, not smart enough, not capable enough, unlikeable or unworthy. It is the sort of anxiety many people feel while anticipating a school exam, or a speech they must give, or a job interview, or appearing in court.

    Medical research has repeatedly documented the deleterious effects of psychological stress on human health and illness. Moreover it has discovered an important signal and measure of bodily stress reflected in levels of the chemical cortisol, which can be easily measured from a little saliva or blood. From experiments that used different stressors while measuring the cortisol levels they produce, it has become very clear that situations provoking social evaluative threats tend to be the most common and the strongest sources of stress in North America. In summarizing the significance of such findings Wilkinson & Pickett write:

What matters most…is that the most powerful sources of stress affecting health seem to fall into three intensely social categories: low social status, lack of friends, and stress in early life. …They all [appear to] affect—or reflect—the extent  to which we do or do not feel at ease and confident with each other. [pg. 39]

    These three “social categories” are then examined more closely and a few of their links to status-inequality are drawn out. Low status is common during childhood. It is generally feared during adolescence. To overcome such fear requires friends, and experiences with social success. But in a society that is highly stratified into hierarchical status levels, where income inequality is marked, there are always those who are noticeably more “successful” with whom to compare yourself, providing you with more reasons to feel relatively deprived, inadequate, and at risk. In such stratified societies, opportunities for social comparison and evaluation become culturally and commercially amplified, by advertisers and by their clients who hope to sell to you reassuring trappings of status: your clothes, your cars, your vacations, your gadgets. Feeling shame and feeling inferior, feeling that life hasn’t been and won’t be fair, are the stressors that most erode your health; and these are just the kind of stressors that are amplified in consumer societies that are high in inequality.

*    *    *

  Wilkinson & Pickett turn next to a series of explorations into how income inequality and status inequality might come to cause, or to be associated with, each of the ten components of the authors’ IHSP index introduced earlier. They choose to begin with a consideration of social trust and mistrust, and the different forms these take in different settings and groups of people. Wilkinson & Pickett introduce this topic saying:

Early socialists and others believed that material inequality was an obstacle to a wider human harmony, to a universal human brotherhood, sisterhood or comradeship. The data we present in this chapter suggest that this intuition was sound: inequality is divisive, and even small differences seem to make an important difference. [pg. 52]

    One measure of social trust was provided by the “European and World Values Survey” conducted by a consortium of university researchers. This survey was given to a large random sample of citizens in 23 countries. A similar survey was conducted by the U.S. government, in 41 American states. For each population surveyed, a “trust” score was obtained. It consisted of the overall percentage of those surveyed who agreed with the statement: “Most people can be trusted.” Average national agreements ranged from about 10% (in Portugal) to about 65% (in Sweden, Denmark, and Norway). There was a clear trend seen, with countries having greater inequality showing lower agreement that people can be trusted. Among the 41 American states surveyed the trend was even more striking. Here too the agreement scores ranged from a low of about 15% (in Mississippi) to about 65% (in North Dakota). But across the American states the clustering around the “best-fit” line appeared greater. Increasing income inequality was seen to be strongly associated with declining belief that others could be trusted.

    In the USA taken as a whole, during the years between 1960 and 2004, agreement with the statement that “Most people can be trusted” dropped from an initial level of about 60% to less than 40%. Over the same time period, inequality in America remained low for a time, then began rising dramatically. Wilkinson & Pickett present a scatter-plot of the average yearly trust scores in America, and the corresponding sizes of the Gini index of income inequality across those same years. While inequality increased (from an initial Gini of 0.35 to 0.44 in 2007) average trust levels declined. These data persuaded Wilkinson & Pickett that it is increasing inequality that leads to an erosion of social trust and not falling trust levels that lead to increasing inequality.

    Wilkinson & Pickett then show that longevity is longer in trusting societies than in suspicious and mistrustful ones. They go on to trace various links between low trust levels and both decreasing cooperation and increasing isolation in communities. For example, people’s willingness to pick up hitch-hikers began dropping just as inequality started to rise in the 1970s. And soon came a notable rise in the numbers of people who live in gated communities. Sales of sophisticated “home-security” services also started rising. Neighbours no longer were relied upon to protect and assist neighbours. Hired professionals now did so. Charitable giving was also found to be lower in the more unequal societies, another sign that trust may be a casualty of inequality. Wilkinson & Pickett conclude this chapter asserting that “greater material equality can help to create a cohesive, co-operative community, to the benefit of all.” [pg. 62]

*    *    *

    In their next chapter Wilkinson & Pickett look at mental illness rates, and the degree of drug use, in countries and in American states that vary in inequality. While fully comparable data on “mental illnesses” are hard to achieve in different cultures and nations, the authors do find some suggestive confirmations that higher inequality often accompanies higher rates of mental illness and illegal drug use. But here the trends are sometimes weak or absent in certain populations (e.g. across American states), or in some sub-populations (e.g. among men, but not women.)

    The following chapter then looks at inequality in relation to both longevity (expanding what they had already demonstrated) and susceptibility to various diseases or health problems. The authors first give a brief history of changes in the causes of death over the past century, as sanitation and treatments for infectious diseases were improved.  They describe the first major longitudinal studies of heart disease in working men and the surprises emerging from those studies. It had been expected that executives would be most prone to stress and to heart attacks, but the results showed just the opposite. Employees earning the lowest salaries had death rates three times higher than did executives. When the study was expanded to include women employees and other diseases, low job status was found to be associated with higher incidences of many “illnesses” including some cancers, lung disease, gastrointestinal disease, depression, suicide, and absence from work. The higher the level of work status, the healthier were the workers.

    After holding constant the effects of risk factors such as obesity, smoking behaviour, lack of daily exercise, etc., most of these trends remained clear, with increasing risks seen when status (and pay for work) was lower. Wilkinson & Pickett report:

Of all the factors that…researchers have studied over the years, job stress and people’s sense of control over their work seem to make the most difference [to their health.] …Low social status has a clear impact on physical health, and not just for people at the very bottom of the social hierarchy. [pg.75]

They continue, saying,

Besides our sense of control over our lives, other factors which make a difference to our physical health include our happiness, whether we’re optimistic or pessimistic, and whether we feel hostile or aggressive toward other people. [pg. 76]

Low social status makes it hard to feel particularly happy, and makes it easier to feel aggressive and suspicious toward others. Wilkinson & Pickett then go on to cite research showing that those who have good friends and close family ties have better resistance to illnesses and also show faster recoveries from many illnesses.

    Wilkinson & Pickett end this chapter with a telling review of the simultaneous changes in both income inequality and civilian health observed in Britain during each of the two world wars. They report:

Increases in life expectancy for civilians during the war decades were twice [as great as] those seen throughout the rest of the twentieth century. …[Yet} material living standards declined during both wars. However, both wars were characterized by full employment and considerably narrower income differences—the result of deliberate government policies to promote co-operation with the war effort. During the Second World War, for example, working class incomes rose by 9.2 per cent, while incomes of the middle class fell by 7 per cent; rates of relative poverty were halved. …Crime rates also fell. [pp. 84-85]

Wartime rationing, of food and gasoline and status-linked luxuries, with it’s facilitation of a sense of shared social commitment and effort, created much more equality, leading both to healthier people and healthier communities.

*    *    *

    Next, Wilkinson & Pickett look at obesity, and the factors that appear to have promoted it over the past half century. As suggested earlier, they find a clear link between the degree of income inequality in a population and the rate of obesity seen in that population. The links are there across the developed nations, across the 50 American states, in adults and in teenagers, and particularly so for women. Genetic causes of obesity are weak, if present at all. Cultural and psychological factors seem to be most significant in the recent rise of obesity, particularly because eating is a common response to stress, and because relative poverty leads to increased preferences for inexpensive, high-caloric foods and drinks as a way to save income for acquiring more important status-related items. Increased income inequality is also related to reduced exposure to exercise, augmenting the tendency to obesity. The human body tends to lay down abdominal fat if it is under stress, but when not under stress the same diet produces less fat and that fat is usually concentrated in the hips and thighs. Diets and food preferences can also be linked to status differences. Income inequality appears to amplify many of these linked effects, resulting in higher rates of obesity and poorer general health.

*    *    *

    The next chapter of The Spirit Level is devoted to a consideration of educational performance and its links to income inequality. For developed nations, and across the American states, the greater is the inequality in the population the worse are the corresponding secondary school math and literacy scores on standardized tests. In the fifty American states, there is a particularly strong association between the level of inequality in each state and the proportion of students who drop out of high school before graduation. Here too, however, the three states of New York, Connecticut, and Massachusetts, with rather high degrees of inequality but better than average graduation rates, are partial exceptions to the general trend; excluding them makes the remaining association dramatically strong.

    Wilkinson & Pickett then explore some of the reasons that appear to contribute to these findings. Inequality is associated with several stress-related factors that impact parents of pre-school and school age children. Higher levels of inequality also appear to be associated with fewer educational opportunities and more restrictive access to better education. In populations that are more highly unequal, school children also seem to be exposed to more “social evaluative threats,” and less peer support, all leading to discomfort at school and an interference with learning.

    Next Wilkinson & Pickett look at corresponding levels of inequality and birth rates among teenagers. Again, the association is noticeable. And it is even more pronounced among teenagers aged 17 and below.  The association of inequality with teenage pregnancy rates appears to be even stronger than for teenage birth rates, although data on aborted pregnancies and miscarriages are less reliable than those for births. Societies high in inequality seem to have more problems and more stressors that lead to a variety of social symptoms, of which early, unplanned pregnancy is another example.

*    *    *

    Two of the clearest social ills associated with social and income inequality are higher crime rates and episodes of physical violence. Both these problems are found most often in socially stratified populations and populations high in inequality. In their next two chapters Wilkinson & Pickett present data from a number of different studies showing strong links between rising levels of inequality and variables such as homicide rates, children’s involvement in fighting, rates of incarceration and the severity of punishments given to criminals. These different variables were each found to be associated with inequality even after the degree of per-capita income is held constant.

    Violent crime is primarily a male phenomenon, one that is highly concentrated among men between 15 and 35 years of age. Those who study violent crimes report that these are almost always provoked by uncontrolled anger following feelings of helplessness in the presence of humiliation, a grave loss of face, or strong public shaming. A small remaining sense of self-respect and personal honour often feels like the one thing a criminal still has left; so he resorts to violence following a new perceived insult.  Wilkinson & Pickett discuss a number of potential ways that high levels of inequality might contribute to episodes of feeling shamed, humiliated, or ostracized.

    As much as violence itself is a problem, the fear of violence, of bullying, or of having your possessions stolen, can also be more troubling in societies that are highly unequal than are such fears in societies lower in inequality. These fears can have a significant effect on one’s quality of life and one’s general health. Fears of violence and crime are indeed found to be higher and more prevalent in unequal societies, in the same way that mistrust of others was earlier shown to be higher where inequality was high.

*    *    *

    Then finally, Wilkinson & Pickett examine the association of increasing degrees of inequality with decreasing opportunities for personal advancement and social mobility. Democracies all claim to value and promote “equal opportunity,” offering to all an equal and good chance to improve one’s current economic and social position, and, to better the fortunes of one’s children. When social mobility is low, parents and their children will have very similar incomes at similar stages of their lives. In that case, knowing a family’s income level will be relatively predictive of the income of a child’s family when that child grows to the same age. Thus, higher correlations between the two sets of income (for parents and their grown children) signal lower levels of social mobility. However, when these same correlations are low, it is because social mobility is greater, showing that opportunities for rising from a lower status (and, for falling from higher status) are greater.

    To gauge the extent to which inequality and social mobility may be linked, Wilkinson & Pickett searched for this type of correlational study carried out at different times (or places) with high and low levels of income inequality. Studies of this kind are rare because they are so costly in time and effort. However, one such study was carried out by researchers at the London School of Economics. They were able to get representative samples of fathers and sons in eight different European and North American countries. For each country they looked at the correlation between father’s incomes at the time of their son’s birth, and, the incomes of those same sons when they had reached the age of 30. These correlations were found to be modest in size in four Scandinavian countries and Canada, somewhat higher in Germany, quite a bit higher in the U.K. and very high (relatively speaking) in the USA. Plotting these correlations against the Gini measure of income inequality for the same eight nations revealed a marked degree of association: the lower the correlations (reflecting higher “mobility” for son’s incomes), then the lower was the income inequality in the same nations. The USA and UK ranked first and second in income inequality and they also ranked first and second lowest of all countries in “social mobility,” as this was reflected in relatively unchanged incomes over one generation. Of the eight nations studied, only Canada strayed very far from the “best fit” line. Canada had moderately high income inequality, yet it still had one of the highest scores for “social mobility” in this study. It is telling that America, self-described as “the land of opportunity,” offered to its children the least promise of advancement in income across the eight nations studied here.

    A somewhat different approach, also linking income inequality to reduced social mobility, comes from survey data gathered in the USA during each decade from 1950 to the year 2000. These data showed that the level of association between father’s-and-son’s incomes dropped slightly and continuously between 1950 and 1980. By 1980, using a father’s income to predict that of his son, would reduce the uncertainty about the grown son’s ranking on the same income variable by only about 10%. Thus, the “mobility” of young Americans was considerable in those days. But in the two decades after 1980, knowing the father’s prior income reduced uncertainty about the son’s ranking by 20% (in 1990) and then by 30% (in the year 2000). Thus, “mobility” by children, into better (or worse) jobs than their parents, had dropped considerably. The income of sons was more often becoming just like the income of their fathers. This changing pattern, from 1950 to 2000, closely matched another: the degree of income inequality in America during those same five decades. Inequality too had started out low and dropped very slightly until shortly before 1980, after which it had began to rise, slowly at first, and then quite rapidly. Wilkinson & Pickett are persuaded, then, that increasing inequality in America slightly led, and became one contributing cause of, the subsequent decline in America’s social opportunity and mobility. This same decline was also observed in the U.K., with its similar pattern of increasing inequality, but not in Scandinavia with its much lower levels of inequality.

    Wilkinson & Pickett cite another reason for their conclusion. The eight nations that differed in social mobility (discussed earlier) differed in another variable that was highly correlated with their social mobility scores, namely: the percentage of all school funding (from elementary through secondary school) paid for out of the public purse and available to all parents. In Norway, highest in social mobility and lowest in income inequality, just over 97% of all school funding was supplied by national and local governments. In America, lowest in social mobility and highest in income inequality, only 68% of all school funding came from governments. Schooling is (or was) the primary factor enabling social mobility for children everywhere. But only where there is low income inequality does there seem to be maximum opportunity for most children to realize their educational potential.

    Wilkinson & Pickett go on to point out further ways that increased inequality may limit opportunities for social mobility. They note:

A third type of evidence that may confirm the correlation between income inequality and social mobility is the way in which greater social distances become translated into greater geographical segregation between rich and poor. …The rich are willing to pay to live separately from the poor, and residential segregation along economic lines increased throughout the 1980s and 1990s. The concentration of poor people in poor areas increases all kinds of stress, deprivation, and difficulty—from [long commutes,]… worse schools, poor levels of service, exposure to gang violence, pollution and so on. [pp. 162-63]

    Wilkinson & Pickett then describe studies suggesting how snobbery, prejudice, and distinct class cultures become hallmarks of highly unequal societies, and how these attitudes serve to create limits on the mobility of those in the lower classes who may be hoping to “better” their situation.

*    *    *

    In the final four chapters of The Spirit Level, Wilkinson & Pickett discuss certain steps that appear necessary in order to produce a dramatic lowering of national and regional inequalities in income and wealth. More equality in income and wealth could help in turn to reduce current inequalities in political power, in physical health, in access to justice, and access to education. In the preface to The Spirit Level, Wilkinson & Pickett reveal that they had considered titling their book Evidence-based Politics, to emphasize the analogy between “evidence-based” medical therapies and those political and economic “therapies” that governments and administrators might better employ to treat the ills suffered by societies and institutions (even corporations) for which politicians, executives, and managers have become society’s designated caretakers. I plan to examine a variety of proposed policies for reducing inequality (including the policies suggested by Wilkinson & Pickett) in a separate essay at a later time.

    The Spirit Level is a rewarding read, with many virtues. Two of its biggest virtues are that it makes very clear (1) how broad is the ambit of all varieties and aspects of “Health,” and (2) how closely dependent are most of those aspects on the degree of social equality that is to be found in the social environments where we live and work. For this reason, The Spirit Level deserves and rewards close study by a wide public audience.

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© J. Barnard Gilmore     Kaslo, British Columbia     September, 2013

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McQuaig & Brooks (2010) The Trouble With Billionaires

A Synopsis of the book:  The Trouble With Billionaires
by Linda McQuaig and Neil Brooks (2010)

SOCIETIES IN AND OUT OF BALANCE:
EFFECTIVE SHARING OF WEALTH AND POWER

    A careful balance between private and public access to “property” of every kind appears to be essential to social harmony. Not all forms of property are, or should become, private. Moreover, an important and reasonable argument can be made that rather more of current “property” should cease to be exclusively and permanently in private hands. Parts of it deserve to be returned to the Commons from which it came, to be shared by all—now, and throughout generations to come.

    Monopolies have long been recognized as being potentially dangerous for economies and for societies. Monopolies invariably open the possibility (if not the virtual certainty) that they will be exploited in selfish and harmful ways. That is why the prevention of monopolistic powers has long been one important role for governments. By extension, governmental controls over excessive degrees of private property, and excessive levels of income inequality, are proving to be important as well.

    Of course, depending on the circumstances, any reduction of private property could bring with it its own dangers to society. And yet “expropriation” of some part of your income, or your land, perhaps your patent on a vital drug, or even requiring you to share your expertise, your time, and your labour, can occasionally be seen as necessary. And sometimes, with appropriate compensation, it can also be seen as fair. Yet currently, and not infrequently, all such “expropriations” are claimed to be extremely unfair—even to be a type of theft.

    In particular, there are those who claim that higher taxes on higher incomes are a theft of fairly “earned” and well “deserved” riches. Such arguments ignore the fact that those surplus riches might equally and validly be said to have been a form of loan to each of us, i.e. a loan from a society that provided us with most of the tools and knowledge and infrastructure that together were necessary to create so much income.

    A particularly clear and forceful exposition of this latter point of view has been presented in the provocatively titled book The Trouble with Billionaires, written by Canadians Linda McQuaig & Neil Brooks. This delightful and informative book documents many of the societal dangers and moral injustices that are associated with marked inequalities of income, of wealth, and political power. McQuaig & Brooks directly challenge the arguments that these marked inequalities are fair because they are the fruits of personal merit and effort, and, that such inequalities are necessary because they alone are what motivate “progress” and lead to better lives for the rest of the world’s inhabitants. [The Trouble With Billionaires was published in 2010 by Viking Canada, a division of Penguin Books Ltd. A paperback edition, with a new introduction, was published in 2011 by Penguin Canada. All page references given below refer to the 2011 Canadian paperback edition.]

    The links between wealth and social power, links that facilitate the abilities of the wealthy to determine many of the conditions under which all must live, and, to distort the flow of information and natural resources on which all depend, are a further problem posed by marked inequalities. These links too are addressed in this book, directly, clearly, and at length.

*     *    *

    In 2010, when McQuaig & Brooks published their book, there were 1,000 known billionaires in the world. By March of 2013 Forbes magazine counted at least 1,400 individual billionaires, plus a number of uncounted billionaire families whose wealth is held jointly, plus a number of billionaire royals and dictators whose wealth is nominally held in trust for their nation. If one adds to these billionaires the much greater number of multi-millionaires, people with personal wealth in excess of as “little” as one hundred million dollars, the amount of very highly concentrated wealth in the world has become truly significant.

    McQuaig & Brooks start their book by giving readers a concrete feel for just how vast is one billion dollars. [What follows here is a slight variation of the example they use.] Suppose you are hired to work counting $5 bills for six hours each workday, five days each week, every week of the year. Your pay will be all the money that you count. And let’s suppose that over the long run you consistently average a count of about 40 bills every minute, often more than one per second, but with periodic short breaks and moments when you reach for more bills and put what you’ve already counted into nearby containers. No time for any long rests during each six hours of work. But still, by averaging $200 per minute for 360 minutes per workday, you would be earning a very satisfying $72,000 each day.

    Seventy two thousand dollars is more money than 75% of all the people in North America currently earn in a whole year. By the end of just your first week you will have received $360,000, already more than 99.5% of all North Americans will earn in a year. And, shortly before the end of your third week of work you will have accumulated your first million dollars. How long, then, will it take you to become a billionaire?

    In fact, at this rate, it will take you more than 53 years to become a billionaire, working 30 hours every week of every year. Even just your first $100 million dollars would take you five years and 4 months to achieve, despite the fact that you continue to earn more every single workday than most people earn in a year. One hundred million dollars is a huge amount of money. Yet for every billionaire in this world there are hundreds more people who have at least $100 million in wealth.

*     *    *

    Having given us a better grasp on just how much a billion dollars is, McQuaig & Brooks then use another example to bring home just how much income inequality exists in Canada and in countries like it. The example they use was first suggested by the Dutch statistician Jan Pen, so it has come to be known as a “Pen Parade.” Each such parade (one for each country or group being discussed) lasts exactly one hour. During the parade a fast moving line of persons, all arranged according to height, move quickly by the reviewing stand. Thus one-sixtieth of the population passes you during every minute of the parade, beginning with the shortest person and concluding with the tallest. However, in this parade each person’s height is proportional to his or her yearly income. The people whose incomes are at the population median go by at the average normal height. But a person whose income is half of the median will appear only half that tall, while a person whose income is twice the median will appear twice as tall, etc. [Formally, the “median” is the middle income, such that half the population earns less than this amount, and half earn more than this amount.]

    The 1978 Pen parade for personal incomes in Canada documented the existing inequality that year. For the first six minutes in that parade, no one was as yet even one foot tall. At the fifteen-minute mark no one was yet three feet tall. Not until nearly forty minutes had passed were people of average height finally seen. With about ten minutes left to go, very tall people started to pass by, i.e. high-income professionals who began to reach seven and eight feet tall. With six minutes left in the parade there were people seen who were approaching fifteen feet tall. But the real drama in the parade came in the final minute. Twenty-five seconds before the parade finished, the marchers reached thirty feet tall. And in the 1978 parade, the final few participants included one who was 167 feet tall, another at 199 feet tall, and the last one at 224 feet tall.

    1978 was one of the last of a long string of years during which middle-class incomes enjoyed a small rise in purchasing power. In the decades that followed, while the economy continued to grow, the bulk of all increases in purchasing power (and wealth) were seen primarily among to top five percent of income earners, and particularly among those in the top tenth of one percent. McQuaig & Brooks contrast the Pen Parade for 1978 with the same Parade for Canada thirty years later. They write:

…For the first fifty minutes, this [2007] parade is strikingly similar to the 1978 one. But with just ten minutes to go it starts to look very different, with the people noticeably taller.  …The real giants appear only at the very end, particularly in the last few seconds. …We can recognize some prominent CEOs in the crowd—except that the faces are so high up that it is hard to see them. [pg. 11]

One of these tall people is the CEO of Magna International. He has just enjoyed an income of $13 million, and he is 2,054 feet tall. That is already nine times the height of the tallest person in the 1978 parade. Soon we see the CEO of Power Corp., who received $29 million in 2007. He is more than twice as high, reaching an altitude of 4,582 feet. Soon comes the CEO of Air Canada who stands over a mile high at 6,636 feet tall. (2007 was the same year that Air Canada suffered major revenue losses and let go thousands of its employees.) The last person in this parade is the CEO of Research in Motion. He stands 8,058 feet high. McQuaig & Brooks note: “From the viewing deck at the top of [Toronto’s] CN tower we don’t even come up to his knees.” [pg. 12]

    Between 1978 and 2007 the average height and the median income had each changed very little. But the increases and concentration of wealth at the top had grown dramatically. Moreover, in Canada the degree of inequality was much less than in the United States. The American Pen Parade for 2007 included many people taller than the tallest Canadian. It included Tiger Woods who stood 2.9 miles tall, and a television producer who was 4.3 miles tall. The U.S. parade ended with a number of hedge-fund managers, the tallest of whom earned $3.7 billion dollars that year. He stood 110 miles high. McQuaig & Brooks note that “A high-flying airplane is about at his knees. His head juts well into outer space.[pg. 14]

*     *    *

    Prior to the first World War, and for two or more decades following the second World War, financial inequality was relatively low in North America and in England. In those days significantly higher taxation rates were the norm for progressively greater levels of income and for large transfers of wealth. Even today, inequality remains low and tax rates are significantly higher and more highly “progressive,” in countries like Denmark, Sweden, Norway, and Finland. But in Canada and the United States, following marked reductions in tax rates and in government controls over the economy, inequality has twice reached its highest levels since modern measures of inequality began to be examined. One such peak occurred just before the onset of the Great Depression, in 1929, and the other peak occurred just before the western financial meltdown in 2008.

    One of the primary arguments developed throughout The Trouble With Billionaires is that high levels of inequality are clearly dangerous: economically, politically, and in many other aspects of public life. Only governments are in a position to control the degree of inequality. But recently, government policies that might reduce inequality have led to increasingly vocal opposition. “Big” governments, and their vaunted “interference” with “individual freedoms” are now proclaimed to be the enemies of sound economics and prosperity for all.

    The argument that governments, with their rules, controls, and taxes, unfairly distort a natural and democratic free-market system, one that would otherwise allocate all wealth and resources in the fairest and most efficient way possible, is an argument full of flaws. McQuaig & Brooks begin examining these flaws in their next chapter, addressing head-on the frequently asserted implications that governments, regulations, and taxes should be all but abolished. The authors point out, as have many others, that governments alone protect the property of the rich from seizure by others. Without government protection, the wealthy could suffer far greater losses than those in the middle-class. Because of governments the wealthy have far better access to legal support, and to protection by the judicial system, than do similarly threatened middle-class citizens. Governments are crucial for maintaining the comfort and security of the wealthy.

    Furthermore, McQuaig and Brooks point out that the “free-market” concept is a fiction. All markets can only be arranged and maintained by governments and their policies. Governments decide on when and where and how markets will be allowed to function. Governments punish violations of the market rules and sometimes they modify those rules, or the degree of their enforcement, to suit the wealthy. The examples given in this chapter underscore the extent to which “recent” changes to the market rules in North America have generally been at the direction of, and to the great advantage of, the very wealthy. Increasing economic inequality, plus further increases in the both the power and influence of the wealthy, have been the result. It is disingenuous for the wealthy to complain that governments should stay out of markets and their regulation.

*     *    *

    Having made the point that government regulation of markets is both necessary and fair, McQuaig & Brooks then address the claim of many extremely wealthy CEOs and celebrities that they alone deserve to keep their income, because only their unique skills and talent and intelligence have made their wealth possible. Step by step, McQuaig & Brooks refute such claims.

    If it were true that personal talent and effort alone are sufficient to create the products that have brought one great wealth, then it should have been possible to duplicate that feat on a desert island. But using this “Desert Island Test,” McQuaig & Brooks point out that very few if any of the very wealthy could have taken even the first few steps to their wealth without having built upon the legacy, the infrastructure, and the tutelage provided by those who came before. The wealthy could not achieve their goals without special contacts and powerful allies who help to push them ahead of others on the same or similar path to wealth. Wealth that derives from a new advancement in technology would not be possible without many previous advancements made by many others, advancements that have opened up the possibilities for this latest advancement. And if one particular entrepreneur didn’t exploit the new possibilities, there would soon be others that would do so. (In later chapters of their book McQuaig & Brooks return to these themes, illustrating with some detailed examples how billionaires achieved their financial success with help from society and from many other people.)

    McQuaig & Brooks then ask: who should receive the wealth generated by “innovations” that have been based on both a massive inheritance from the past and on the commercial infrastructure that society has provided to the innovator for producing and selling his products? They note that under the current market system “the innovator captures an enormously large share of the benefits.”  But, they go on to say:

It is our position that society—and by extension, all of us—should be entitled to a much larger share of the benefits. This could be accomplished through a decision to raise taxes at the upper end, thereby adjusting the economic goalposts—a decision no more arbitrary than the decision made to determine the current location of the goalposts. [pg. 28]

*   *  *

    McQuaig & Brooks turn next to consider the argument, often heard, that the presence of extremely wealthy individuals is an important source of inspiration to all, or, at worst, is “harmless fodder for the celebrity gossip tabloids and glossy magazines.” [pg. 30] But McQuaig & Brooks argue quite the contrary is true. Marked inequality in income and wealth has repeatedly been associated with a raft of socially damaging effects, including higher rates of crime, of mental illness, of heart disease, diabetes, infant mortality, higher levels of general stress, and lower levels of both longevity and social mobility.

    These other links they elaborate upon toward the end of their book. But the decreasing levels of social mobility and opportunity in the United States, where one of the world’s very highest levels of inequality is to be found, is particularly striking, and it is underscored here. The “American Dream” of a land of opportunity for all was valid in the years following World War II, but not today. The America of today, with the highest proportion of billionaires in the world, has one of the lowest levels of upward mobility. As McQuaig & Brooks note:

A society top-heavy with billionaires may seem like a paradise of upward mobility, but it’s actually closer to being a boneyard of broken dreams for all but a lucky few. Those wanting to give their children a real chance to live the American Dream would be well advised to move to Sweden. [pg. 31]

    There is one other casualty of income inequality that McQuaig & Brooks suggest needs to be added to the list above. As previously noted, inequality rose to its highest levels twice in the past century: both times just before a severe market crash and a bursting bubble of speculative investing, coupled with high levels of personal debt. Just before each crash, in both 1928 and in 2007, the top-earning one percent of Americans received a record high twenty-four percent of all the income in the country. We need to ask if one problem with billionaires might well be that their existence destabilizes the economy. McQuaig & Brooks note that:  “While poverty is treated as a problem, inequality in itself is rarely considered an issue, or even a subject for public debate.” [pg 33] They suggest that marked inequality in wealth is an equally serious issue, one that must also be considered. They begin their consideration by examining the roles played by billionaires, and by the wealthiest millionaires, in the history of the economic traumas of 1929 and 2008.

*     *    *

    In both events, the roles played by the wealthiest people in the land turned out to be crucial for creating the conditions that led on to the market crashes. Prior to the 1929 market crash, a few bankers and industrial tycoons were paramount in changing the market rules that led to excessive risk-taking and stock market speculation. Beginning with President William Taft in 1909 and particularly during the presidencies of Warren Harding, Calvin Coolidge, and Herbert Hoover, governmental economic policy was essentially dictated by fewer than a dozen of America’s most wealthy and powerful figures. McQuaig & Brooks document the history of J. P. Morgan and John D. Rockefeller and their successes at circumventing the rules that prevented banks from selling stocks and bonds. The authors illustrate the wide, monopolistic financial power and control wielded by these two men and their wealthy allies: how they shut down Congressional attempts to regulate them more closely; how they greatly weakened the powers of organized labour; and how they took control of the Federal Bank and used it to further their own interests.

    Beginning in the mid-1920s, the tycoons of the day, particularly through the efforts of the extremely wealthy banker Andrew Mellon, also pushed through congressional legislation that dramatically reduced the taxes paid by the very wealthy. Mellon’s efforts, in his role as the U.S. Secretary of the Treasury, even allowed the wealthy to receive very large payments from the government in the form of “rebates” for taxes the wealthy had previously paid on the large wartime profits they enjoyed during World War I. McQuaig & Brooks write:

Altogether, between the reduced tax rates and the refunds, Mellon’s Treasury Department handed over an astonishing $6 billion to the wealthiest Americans—equivalent to $72 billion today—a massive windfall that was to act like gasoline in fuelling the stock market bubble of the late 1920s. [pg. 43]

    In the ten years between 1919 and 1929, as income inequality was rapidly increasing, worker productivity rose by 43 percent, yet wages rose only slightly, by 8 percent. One effect of this trend was that the costs of production were falling and thus corporate profits were increasing. In general, consumers were unable to afford to buy many of the new autos and appliances coming on the market, so corporations were not investing in expanded production or in higher wages. Instead, corporations, just like their the wealthy owners, began investing heavily in Wall Street stocks. Stock prices began to rise dramatically and large profits seemed to be made by many investors.  Middle-class investors were lured into thinking they too could get rich with modest investments made on credit. Banks had been freed to deal in stocks and bonds by the Taft administration and they too joined in the buying spree. Banks also sold financial products of their own creation, giving the illusion that the wealth of the banks themselves stood behind these risky products. Moreover, insiders were issued shares of these new products early, at heavily discounted prices, to sell later for personal gain fuelling the illusion that everyone could get rich in the stock market.

    Following the devastating crash in October 1929 and the election of Franklin Roosevelt, hearings were held into the behaviour of the Wall Street Banks leading up to the crash. The tale and trail of abuses revealed in these hearings (described in detail by McQuaig & Brooks) led to legislative reforms that Wall Street was no longer able to prevent: Wall Street lost control of the Federal Reserve Bank; organized labour was reinvigorated; banks were again forbidden to sell securities or insurance; and taxes on the wealthy were returned to higher and more progressive levels.

*     *    *

    Thus, by 1936 inequality in America had begun falling rapidly, and it continued to do so during and after World War II when, for a time, wages were controlled (and effectively raised.) In 1928 the top one percent of the U.S. population had received twenty-four percent of all national income, but by 1948 this share was approaching its historic low of ten percent. McQuaig & Brooks describe the next 20 years as:

…an era of restrained banking, reduced incomes for the rich, and a rising middle class. [It] was also a time of extraordinary economic growth and prosperity. …Our point is that the measures that reduced inequality in the early postwar years did not in any way hamper economic prosperity. This is worth highlighting because in recent years conservatives have [asserted] that measures to reduce inequality lead to a decline in prosperity. [pp. 57-58]

    McQuaig & Brooks next explore the events that eventually produced the resurgence of marked inequality in America, ending in the Wall Street collapse of 2008. The regulations that had restored North American markets to stability did not exist in some European markets, and North American banks began to enjoy taking more risks and reaping more profits overseas. Banks also began to finance so-called leveraged-buy-outs (LBOs) at home, which permitted them to earn large fees loaning other people’s money while themselves avoiding most of the associated risks. Moreover, McQuaig & Brooks note that:

Meanwhile, …economists and finance professors at the leading universities started developing arcane new financial innovations—using high yield debt, securitization, arbitrage trading, and derivatives—based on highly complex mathematical models that gave a scientific veneer to the old game of gambling. [pg.59]

    Wall Street and corporate financial executives became particularly emboldened following the election of Ronald Reagan, their choice for President in 1980. They sensed a new opportunity for dismantling many of FDR’s regulations and controls on their business practices and taxes. They began a strong and effective campaign to achieve these goals with the help of Reagan and his Republican colleagues in Congress. Taxes were dramatically reduced for the very rich, trade unions were severely hampered, and the processes of corporate deregulation were begun in earnest. Almost immediately income inequality again began rising steeply.

    McQuaig & Brooks trace the rise of a new financial oligarchy throughout the period that followed Reagan’s presidency. They note an increasing defiance of regulations by the business elite of the time, and the subsequent dismantling of many remaining regulations. Budget cuts were made to weaken agencies and staff that opposed this process. Wall Street soon trained and supplied the great bulk of financial advisors and decision makers for the governments in Washington. Goldman Sachs alone was (and continues to be) a temporary home for almost every Treasury Secretary and chairman of the Federal Reserve that America has had since 1980.

    At this point in their review of the history of the 2008 crash McQuaig & Brooks turn to an examination of the Wall Street “culture.” They write:

In both the pre-1929 period and in recent decades, a culture celebrating greed and wealth accumulation dominated, with notions of social responsibility and public spiritedness shunted to the sidelines, even sneered at as a kind of political correctness. Wall Street traders routinely boasted about “ripping the face off” clients…. Such indifference to clients, let alone other members of the public, promoted an ethos in which greed and an obsessive focus on self-interest were considered normal and acceptable, even laudable and beneficial. [pg. 68]

    This culture—competitive, selfish, and often ruthless—greatly amplified the forces leading to extremes of inequality in society. Moreover, it greatly amplified the risks of severe financial collapse, a collapse producing a far-reaching cascade of painful effects, from which most of the very wealthy would be largely protected. For McQuaig & Brooks, both the 1929 and the 2008 crashes shared one key aspect that Wall Street and financial historians are not talking about today: the increasingly extreme inequality of wealth and power in the societies that suffered these financial disasters.

    Some historians of the 1929 market crash had previously pointed to inequality as one of the main causal ingredients touching off the Great Depression.  John Kenneth Galbraith listed five key factors, the first of which was: “The bad distribution of income.” The historian Robert S. McElvaine declared: “…the greatest weight must be assigned to the effects of an income distribution that was bad and getting worse.” McQuaig & Brooks also cite a number of others who lay the cause of the 1929 crash to “huge inequalities in income distribution.” They conclude:

The evidence suggests that a high level of inequality sets up a dynamic that contributes to financial instability. …[An] elite uses its clout to both create a social ethos that condones greed and to directly shape the political agenda to facilitate the amassing of great fortunes. A crucial element in this political agenda is the freeing up of financial markets for lucrative speculative activities. While these speculative activities are clearly orchestrated by the financial elite, segments of the broader public are drawn in, and bear most of the risks and the ultimate costs of a financial collapse. [pp. 71-72]

*     *    *

    With this history now in mind, McQuaig & Brooks turn to a direct discussion of the issue raised in the title of their book: The Trouble With Billionaires. They examine the lives of a number of individual billionaires, but they begin with a chapter on the man who was once the wealthiest person in America: Microsoft’s William Gates.

    Bill Gates is someone who often appears to be among the least ruthless or selfish among what today has become a highly competitive group of wealthy corporate executives. So how did Gates achieve so much wealth? McQuaig & Brooks trace in some detail the many unusual advantages that Gates enjoyed while growing up, and the sheer luck he enjoyed that put him in some fortunate places at some opportune times. They document how he persuaded IBM to give him a contract to supply the operating system of its planned personal computer at a time when a much more advanced operating system already existed, one that had been developed by a friend of Gates. IBM was also considering the purchase of this other operating system at the time. That more advanced system had already inspired the creation of yet another operating system, one to which Gates immediately purchased the rights, and which he then modified and sold to IBM. And Gates happened to have one other advantage in these negotiations. His mother was a friend of the new CEO of IBM, with whom she sat as one of the directors of the United Way charity.

    McQuaig & Brooks make a compelling case that Bill Gates came into much of his early wealth both from luck and from using the many gifts that his special schools and local public institutions laid at his feet. The operating system he sold to IBM could hardly be said to be his own invention. Without the earlier programs created by others, he would not have been able to come up with any product to satisfy IBM. And the faintly ruthless and highly competitive way that he closed his deal, behind the back of his older friend who had a much superior and existing operating program but who was conveniently on vacation at the height of IBM’s negotiations, further undercuts much of any argument that Gates earned his billions fair and square by dint of his brilliant and unique technical understanding. Those billions were earned legally, certainly. But McQuaig & Brooks draw a sharp distinction between the morality of obeying a loose set of written laws, and the moral question concerning how much income is fair and is deserved by each of us who enjoy the advantages that society and others have given to us.

    McQuaig & Brooks leave the Bill Gates story at this point to trace the historic development of computers and software code, demonstrating that technology has always derived from thousands of incremental advancements and improvements and insights, each of which in turn has been dependent on the assistance and contributions of other people. They show that new products and “advances” are often ripe for creation and more than a few individuals are generally ready to bring them to fruition if some particular person does not. At least three other inventors were preparing to patent a telephone when Alexander Graham Bell filed his first patent, and it was later discovered that his first patent would not work (until he modified it) while those of two others would have worked if their patents had been awarded in time. This history is given in support of McQuaig & Brooks’ argument that individual “talent” and reputed “genius” are no satisfactory argument for justifying extreme wealth allocated to a single person.

    Moreover, the Bill Gates story doesn’t end where McQuaig & Brooks leave it. The monopolistic efforts of Microsoft Corporation—its history of “unfair competition” and the legal battles spawned over that behviour—betray a whiff of personal ruthlessness and injustice that calls further into question any claim that Gates and the other senior Microsoft executives deserve their extreme wealth because of their unique financial abilities or genius. These executives were hardly alone in giving the world somewhat useful software, yet they alone arranged to garner most of the financial rewards for having done so.

*     *    *

    Another trouble with many billionaires is the trail of havoc they can create for society and for the economy in their pursuit of a monstrous hoard of wealth. McQuaig & Brooks illustrate this problem with a description of the activities of the billionaire hedge fund manager John Paulson during the years just prior to the financial collapse of 2008. Paulson anticipated the collapse of the existing real estate bubble, and he knew that huge numbers of subprime mortgages had created that bubble and could not survive such a collapse. Those mortgages had been recklessly issued, at great short-term profit, but they were given to people who would not be able to sell their homes for the amount of money they would still owe to the mortgage holders after a collapse, nor could these people continue to make their monthly payments if they lost their jobs, or when their interest rates rose as provided for in the terms of these mortgages.

    But Paulson also knew that the mortgage holders were no longer the banks that had written the mortgages in the first place, rather they were investors who had bought special stocks called CDOs, or Collateral Debt Obligations. These CDOs were composed of complex and opaque packages that included very many of these risky mortgages—packages that were sold as being quite free of risk when in fact the amount of risk was unknowable because the many mortgages inside each package couldn’t easily be identified  and assessed.

    However, in those times of lax regulation and creative financial “instruments,” there was a way for holders of CDOs to buy a kind of insurance against the possibility of their CDO loosing its value. For a small premium, if a CDO lost significant value, the firm that issued such insurance would reimburse the purchaser for part of the “value” that was “lost.” This form of “insurance” was called a CDS, or Credit Default Swap. But in the free-wheeling world of modern finance you could even buy a CDS on a CDO that was owned by someone else. In short, you could bet on the failure of a CDO stock that you didn’t even own. The “insurance” was actually just a gamble. But it was not a particularly poor gamble. One hundred million dollars worth of CDOs could be “insured” for a mere one million dollars a year.

    This is how John Paulson proposed to make himself and his clients rich. He invested heavily in CDSs for the risky CDOs that he believed must soon fail. But there was more. McQuaig & Brooks describe how there were not enough existing CDOs for Paulson to bet against:

[So he]…approached a number of investment banks with the request that they create more CDOs to sell to [their] clients, so that he could then take out insurance betting these would fail. The arrangement Paulson had in mind was rife with potential conflicts of interest. He clearly wanted to help pick the mortgages that would make up the new CDOs. …Bear Stearns, the giant investment bank where Paulson had once served as managing director, said no to his scheme. But Goldman Sachs agreed to the arrangement…. [pg. 95]

Thus Paulson was eventually able to bet against approximately $5 billion of risky CDOs which indeed did soon become all but worthless.  In 2007, Paulson himself received $3.7 billion for his investment efforts.

    Many of the CDOs that failed had been insured by the insurance giant AIG, not only to Paulson (and others) but also to Goldman Sachs, the same company that had created and sold the CDOs and then turned around and bet against them.  AIG was in no position to pay the billions it now owed, but the US Treasury Department, overseen by a former Goldman Sachs executive, insisted that allowing AIG to go bankrupt would devastate the U.S. economy. So the U.S. government supplied more than $150 billion to AIG, enabling it to pay off the bets it had so recklessly made with Goldman Sachs, with Paulson, and with a select group of others. (It was Paulson who stood tallest in that 2007 U.S. Pen parade with his $3.7 billion income that year.)

    McQuaig & Brooks note that Goldman Sachs was subsequently charged with fraud by the U.S. Securities & Exchange Commission, for selling CDOs without disclosing that Paulson had designed them or that they too were betting that these investments would fail. But since Paulson had not personally misrepresented the CDOs to buyers, no charges were laid against him. McQuaig & Brooks go on to point out that terrible pain had been caused to untold millions of people by the subsequent financial meltdown, and the worldwide recession that followed it. This pain resulted from the activities of those who had sold, packaged, and resold subprime mortgages, those who had facilitated betting against them, and those who then profited hugely from both the losses of others and the convenient gift of government bailouts. So McQuaig & Brooks ask: Did John Paulson deserve his billions? What “contribution” did his efforts make to a better world?

    McQuaig & Brooks identify a number of other billionaires whose “contributions” to society, whose reckless and selfish actions, have been clearly disruptive and harmful on a large scale. They note that Paulson’s $3.7 billion income was equivalent to the income of 80,000 nurses in that same year. And in the year 2009, the combined pay of the top 25 hedge fund managers was the same as the combined income of 658,000 schoolteachers. Nurses and schoolteachers clearly contribute greatly to society. Equally clearly, the pay of most billionaires cannot be said to be proportional to their “contribution” to society. So what does justify such pay?

*     *    *

    McQuaig and Brooks next consider the philosophical traditions that address this question. In the west at least, the question of what justifies extremes of inequality was not often raised until comparatively recently, for inequality was generally agreed to be due to “God’s will,” to fate, or determined (and excused) as being simply due to chance, and so it became your birthright. With the arrival of the Enlightenment came the need for a more reasoned justification for marked inequality. John Locke offered what has endured as the most popular justification for inequality. But his arguments had their contradictory aspects, and they have been distorted more recently by neo-conservatives to justify a modern form of selfishness and private property.

    McQuaig and Brooks examine Locke’s philosophy and its subsequent distortions in some detail. In summary, Locke argues that properties of all kinds deserve to become private as the result of personal effort put into modifying and creating them from raw resources. You clear the land, and it is yours. You build a house, and it is yours. But Locke also said that land and resources are originally given to all, and held in common.

    Historically, human societies have tended to use land, water, and similar resources communally. Property rights originally took two forms, communal and individual: i.e. as a right not to be excluded from sharing a property, and/or, as a right to exclude others from sharing a property. But Locke’s position, currently the philosophic basis for the world’s market economy, restricted property rights just to this latter private-ownership type. McQuaig and Brooks quote the political theorist Anatole Anton who wrote:

Private property, from a democratic point of view, amounts to the surrender of democratic control of social resources to private individuals. Surrender might be the right thing to do, but surely some good reasons ought to be given for so doing. [pg. 106]

    Locke went further, he argued that if the “property” is created by your servant, working at your direction, then that property too should belong to you. Thus does the billionaire “deserve” his billions. Yet importantly, Locke also had said that these claims on property are valid only provided that there [is] “enough and as good” left over for others. [pg. 107] Exploiting non-renewable resources would likely be excluded by this caveat, as for instance would monopolizing preferred access to food or to health care.

    McQuaig and Brooks conclude their examination of the philosophic assumptions that underlie these justifications for extremes of inequality saying:

Since billionaires are now deemed to have made it on their own, they are also said to owe little back to society. Indeed, the whole notion of responsibility to society has been so denigrated that billionaires are considered deserving of their fortunes when they contribute absolutely nothing to society—or even when they directly imperil the public interest. [pg. 111]

*     *    *

    McQuaig and Brooks next examine the argument that marked inequality is important and helpful because it motivates and inspires talented people to do their very best. In 1974 the highest paid baseball player (Hank Aron) earned $200,000. In 2008 the top salary in baseball, (paid to Alex Rodriquez) was $27.7 million. During that time, the skill and accomplishments of baseball players did not become detectably greater, and certainly not by 100-fold. In professional football (both kinds), in basketball and hockey, the same argument can be made: the rise in salary “motivation” has been completely disproportionate to any small increase in skill and accomplishments to be seen on the fields of play.

    The same is true for film and entertainment, where top salaries have become hugely inflated today. Yet it would be hard to argue that singing and acting have became noticeably better than they were in the films of 50 years ago, i.e. in the days of Frank Sinatra, Judy Garland or Gregory Peck. And certainly not ten times better.

    Among corporate chief executives, in 1950, the highest salary any American received was the equivalent in 2007 dollars of $5 million. It was paid to the CEO of a very profitable General Motors. But in 2007 the CEO of General Motors was paid $15.7 million, and this in a year when GM had shown a loss of $39 billion. Three times more pay for a far worse performance. In 2007 and 2008 the Wall Street firm of Merrill Lynch paid its executives some $30 billion dollars just in bonuses. Yet the firm earned no profit in either of those years. There are hundreds of similar examples. One might easily argue that very high pay and inequality seem to have become an incentive to greed, but it is hard to maintain that they have produced superior job performances.

    However, the neo-conservative economic argument also takes the reverse turn, insisting that to tax or to limit huge incomes and bonuses will reduce executive motivation and productivity. McQuaig and Brooks present considerable historic data that are also inconsistent with this assertion. Times of high progressive taxation, such as in the ‘50s and ‘60s, were times of very high growth and productivity. But after tax rates on high earnings had become significantly lower and executive pay had started increasing dramatically, economic growth began to slow and productivity began to decline. The authors stress however:

We’re not trying to make the case that high marginal tax rates encourage economic growth, but simply that the evidence doesn’t support the assertion that they discourage it. [pg. 115]

The evidence is just as suggestive that increasing the tax rate might motivate some people to work longer so as to keep their level of disposable income where they want it to be, or, in the case of those with already high incomes, a person might instead choose to live comfortably on what they still retain after higher taxes. The motives that lead to higher performance and to higher productivity are much more complex than neo-conservative economists portray them to be. McQuaig and Brooks review the psychological evidence concerning economic motivations and conclude:

A vast array of studies show that, once people achieve a basic material standard of living, economic factors greatly decline as important sources of happiness and satisfaction and are superseded in importance by factors such as family, friendship, self-esteem, and a sense of personal intellectual development. [pg. 119]

    The psychology ascribed to homo economicus (consumer-man) by neo-conservative economists, is much too simplified and selective. By assuming that income and wealth are the primary and over-riding goals (and rewards) for working hard and well, what may actually be the most important factor of all is quietly denied. That factor is the social status and social rewards that many high-paying jobs bring with them. McQuaig and Brooks discuss a number of studies confirming the importance of self-motivation and social rewards in the workplace. If every senior corporate executive or baseball player or actor or celebrity musician or President could receive no more than $500,000 per year, there would still be rather strong incentives to earn those non-monetary rewards that are provided by the esteem of both one’s colleagues and society in general. There would still be the gratification of doing an important job well. These motivating factors would still keep productivity and competition high, as they did in the 1940s and 50s, even with wage controls and very high taxes on the rich.

    But in nations that suffer from high degrees of inequality, there arises another problem that must be added to theories about job psychology and motivation. In particular there are two ways that inequality seems to create personal demands for higher income: (1) high income has become a sign and signal of your degree of social power and status, so it supports a demand for more of the same. And (2) social comparisons with those around you, comparing your “prestige” possessions with theirs, further creates a demand for the money needed to obtain equivalent possessions and comforts (and their corresponding signs of status.) Once basic needs can be met by one’s income, life satisfaction depends more and more on such social comparisons that people make with those they encounter regularly, including of course the people they encounter in advertisements. These social comparisons unquestionably augment the drive for more income, and thus they encourage more effort. The question is whether that effort creates more or fewer social problems.

    This leads McQuaig and Brooks back to one of the main arguments given to justify paying extremely generous salaries and bonuses: namely, that these are deserved because they are necessary, and they are necessary because the demand for rare and superior talents is so high while the supply of individuals possessing those talents is so limited. In the case of baseball celebrities, the talents are rare, they are generally clear, and the opportunities for players with exceptional talent to seek higher paying situations are understandably tempting. McQuaig and Brooks have no quarrel with letting competing markets (teams) bid up the salaries for these star players. However, they stress that:

It should be immediately noted that this argument in no way refutes the desirability of imposing high taxes on large incomes. …Teams could pay as much as they wanted to—and the players could still go to the highest bidder. Only after all this is resolved, and everyone is out playing ball, would taxes kick in. …High marginal tax rates would not interfere at all in the [process of acquiring and keeping talent.] …They would only apply after the fact and would apply to all. [pg. 128]

(And, it should be noted, those high tax rates would still have no effect on ranked amounts of after-tax income. Those who earned more would still keep more than those who earned less.)

    But one part of this story is rather different when it comes to “corporate talent” and the claimed “need” to reward such talent heavily, so as to acquire it and then to keep it. Here too, progressively increasing taxes on progressively increasing corporate incomes (whatever forms that income were to take) would have no bearing on the question of who should be offered how much and by whom. But the difference is that the “talent” of any CEO is rather harder to demonstrate objectively, particularly when his or her company makes no profits, or suffers declines in revenue, or faces large costs for errors and oversights or from recalls and lawsuits. In fact, McQuaig and Brooks argue that corporate “talent” is almost always only in the eyes of a few close beholders, old friends of the CEO, who sit on the company’s Board of Directors. The majority of these directors usually have what amounts to a conflict of interest in evaluating their CEO insofar as he or she is often able to help them financially and socially (for instance as members of the Board on their own companies). McQuaig and Brooks make clear a number of the ways that managerial “talent” is very subjective to start with, and the “marketplace” for auctioning that “talent” is neither “open” nor “competitive” in the way that it is for talented baseball or hockey players. Any analogy with paying “talented” corporate executives the same huge amounts, and for same reasons as the pay offered to those who clearly possess physical “talents,” is a failed analogy.

*     *    *

    In their next chapter McQuaig and Brooks discuss the many ways that the very wealthy use their influence to receive favourable tax treatment from governments to “protect” their wealth, including frequent and illegal use of tax havens. This additional problem with billionaires and millionaires they summarize as follows:

When people of modest means break the law by stealing—perhaps because they don’t have enough income—the government’s response isn’t to make sure they have more income, but rather to punish them, even to strengthen the penalties so that others will be discouraged from considering such activity. But when the rich break the law by hiding income offshore, the government often responds by lowering tax rates so the rich will have less incentive to engage in such behaviour. [pg. 148]

*     *    *

    In the next chapter of their book McQuaig and Brooks take a more direct look at how marked inequality appears to have deleterious effects on the physical, mental and social well-being of the residents in a nation or province or city. Much of the evidence they present is drawn from research summarized by Richard Wilkinson and Kate Pickett in their comprehensive book on the effects of inequality. This book was titled The Spirit Level and was published in 2009. The research in that book deserves its own close reading by students of inequality and its attendant ills. (In due course The Spirit Level is currently intended to become the subject of a subsequent blog-post here.)

    Then finally, McQuaig and Brooks examine the linkage between inequalities for wealth and political power, and thus, inequality’s many deleterious effects on democracy. In this context, after citing many examples of abuses of power, they have occasion to write:

The political muscle of the very rich may be most evident in issues like financial deregulation, taxation, and monetary policy. But it extends well beyond the purely economic sphere. Wealthy interests have been a key stumbling block—indeed the only real stumbling block—in efforts to organize a global campaign to tackle climate change. [pg. 185]

In short, McQuaig and Brooks reconfirm that marked inequality leads to political oligarchy, and it undermines democracy. And that is indeed a problem.

*     *    *

    There are some obvious cures for income inequality, as can be seen both historically and in those nations today that enjoy high levels of equality. However one such cure stands out over all the others: it is the imposition of progressively higher rates of taxation on progressively larger incomes and transfers of wealth. Dealing with hidden incomes, and with loopholes that take the form of favourable legal definitions of what constitutes partially taxable income, will still require their own corrective attention. McQuaig and Brooks end their book with a short list of actions that could help to restore fairness, democracy, and equality in the world today, without causing overall harm to national economies.

    Still, in the current political and economic climate, actions to correct extremes of inequality will not be easy. That is part of the trouble with billionaires. And that is why readers should study this book for themselves.

© J. Barnard Gilmore     Kaslo, British Columbia     July, 2013

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L. Kohr (1957) The Breakdown of Nations

A Synopsis Of Leopold Kohr’s Book
The Breakdown of Nations (1957)

WHY SMALL IS BEAUTIFUL, NATURAL, IMPERATIVE, AND GENERALLY UNOBTAINABLE

    Every human life has its seasons. And so does every human society, organization, and culture. There are times for growth and times for pruning back. There are times for acquiring, and times for letting go. However, as with so much in life, growth and acquisitions, pruning and simplifying, also need to occur in stately moderation. Too much growth is rather more dangerous and far more common than is generally acknowledged. Too little pruning invariably creates increasing problems later on. Sooner or later, growing size and increasing organizational complexities will overreach any human ability to recognize and respond adequately to the many problems they bring with them. These are just a few of the key insights of Leopold Kohr, “the most important political thinker you have never heard of.” [Leopold Kohr (1909 – 1994): economist, jurist, historian, political scientist, wry wit, and self-described “philosophical anarchist.” The accolade in quotes here appeared in a column about the man, written by Paul Kingsnorth, and printed in the Guardian Weekly late in September, 2011.]

    Kohr’s major work, The Breakdown of Nations (first published in 1957) makes a detailed and compelling case that, in almost every realm, size matters. Scale matters. When things don’t work anymore, when bubbles burst, or organizations fail, or societies fall apart, something has gotten too big. Big size is a form of malignancy, yet the urge for bigger size is latent in every type of social and commercial organization. Kohr sees the temptation to keep growing, to keep expanding the sphere of one’s reach and control, pervading every type of political organization and form of governance. That temptation is part and parcel of the foundations underlying monarchies, dictatorships, socialistic democracies, and capitalistic democracies. Kohr sees the same urges toward expansive growth in businesses of every type, be these state run or privately run, be they profit-driven or non-profit. If something is perceived to be good, then more of that something appears to be even better. Exposing the fallacy behind this characteristic of human nature, and teaching us its lessons, was part of Kohr’s life’s work.

    Drives for expansive growth and acquisitions are related to personal drives for greater control, wider control, increasing powers and prestige. They are related to our drives for more security, for increasing assurances of continued comfort and unobstructed access to resources. These drives infect every aspect of human life. Like other types of infection, we have evolved to be able to live with them in peace and health, so long as they remain “low grade,” manageable, and familiar.

    So it isn’t growth per se that Kohr identifies as a problem. It is growth that has exceeded its safe scale and “human” proportion. Kohr points out that for all things there are proportions that facilitate good function just as there are proportions that forbid good function. This appears to be true whether we are talking about civic function, or economic function, bodily function or interpersonal function. It is true of wholes as well as each of their constituent parts. It is true of nations, and states, and even of neighbourhoods. It is true of corporations, and the divisions within them, and the components of each division, as well as each of the markets served by them. When an organization exceeds a critical size, its components often spontaneously fission into smaller units, each at a more workable scale. When a city exceeds a critical size, it too may fission into neighbourhood districts, if not officially, then unofficially.

    The proportions that facilitate “good function,” i.e. stability, long-term survival and efficiency, Kohr often calls “human proportions.” They work at a “human scale.” They have a modest complexity that one human being can grasp and keep track of over time. Unfortunately however, in certain respects, and particularly in certain cultures, human nature is predisposed to create very large social units, and with them is created a malignant complexity, which sooner or later brings on its own collapse.

    Insofar as human nature seeks control over its environments, both natural and social, insofar as it tends to seek power over others and the resources they possess, so human nature seeks wider influence, greater reach and scope, and the very large social organization that this often appears to require. Regions want to become nations. Nations want to become empires. Empires want to become world governments. A small electric utility seeks to become a large corporation. A large corporation seeks to become a globalized multi-national conglomerate.

    Larger organizations are claimed to be better because they are more diversified and supposedly they have greater resources (literal, and figurative) on which to draw in times of need. But Kohr’s analysis demonstrates that these perceived advantages are illusory. They are limited in scope and availability. More particularly, Kohr points out that larger organizations increasingly develop points of unrecognized vulnerability and danger for others. But we are getting ahead of his story, his “theory of size, his view about the causes of miseries and human dis-ease, as set out in his seminal book The Breakdown of Nations.

*  *  *

    Kohr begins his book by discussing the problems with theories that attribute social ills to particular major causes, e.g. “attributing war and other forms of social evil to the expansive urge of profit-seeking capitalism” or to certain privations, or to “the design of evil men such as Hitler, Mussolini, or Stalin,” or to “evil ideologies such as Nazism or Communism.[These and all future excerpts (in italics) of Kohr’s own wording come, from the May 2001 edition of Kohr’s book, published in paperback by Green Books Ltd. in the U.K.  Only page citations will appear in footnotes that follow future italicized quotations here. The above topic and quotations appear starting on page 27 of The Breakdown of Nations.] But every such causal explanation suffers from the same fatal problem: it cannot explain the many exceptions to its assumed law. As Kohr notes, a theory may explain the brutality of Moslems but not that of Christians, the poverty seen in American slums but not that in Russian slums, the wars of Hitler but not those of Nehru or Napoleon. Continuing the theme, examining critiques of Capitalism and arguments advocating Socialism, Kohr notes that workers in many socialist countries are no better off than are workers in many capitalist countries. While it is true that some of the most aggressive countries have included capitalistic America and France, there are socialist countries such as Russia and China that have been equally aggressive. Meanwhile, the capitalistic countries of Canada, Belgium, and Switzerland are noted as being among the most peaceable, just as are socialistic Sweden and Norway. Such inevitable major exceptions always falsify simple causal theories explaining social or economic ills or virtues.

    Next, Kohr examines the development of cultures and civilizations that are said to cause social misery (i.e. wars, exploitation, famines, etc) because they are as yet “primitive,” “uncivilized,” or “barbarous.” These cultures supposedly have yet to evolve, and so to become humanistic, civilized, and devoted to justice. But here too, Kohr lists dozens of contradictions and exceptions to every example of a culture or civilization that is said to be wicked or is said to have become virtuous. In every case the wicked examples also exhibit multiple episodes of virtue and the virtuous examples are still found to exhibit multiple episodes of wickedness. Thus, the historical exceptions to every theory of cultural primitiveness or cultural virtue are legion. Kohr goes on to argue that no culture even appears to develop higher proportions of virtue over time. He gives many examples to support his later argument that with technological advances and increasing powers of destruction, modern civilizations actually tend to act with more barbarism than did so-called primitive cultures.

    And finally, Kohr examines the evidence surrounding a third variation on these themes: that certain races of men are evil incarnate, predisposed to spread misery around the world, either for genetic reasons or historic reasons. But here again, Kohr shows the multiple exceptions and counterexamples to every argument of this type. People of every type and every era have celebrated war. People of every historic background have contributed to social misery, and also to social harmony.

    Kohr concludes his first chapter with these words:

As we have seen, the greatest aggressions and the most monstrous crimes have been committed by nations at the peak periods of their civilization. Lack of education? Hardly. The most devilish designs of barbarism have not been conceived by illiterates, but by the most educated brains. Ideology? Economic system? Nationality? The phenomenon is too universal. The cause explaining it all must clearly still lie hidden. [Pg. 45.]

*  *  *

    In his second chapter, “The Power Theory of Aggression,” Kohr focuses on the causes of wars in his search for what might prove to be a more general theory of the causes of all social miseries. After reviewing the mass executions and atrocities perpetrated across the ages and across the globe, he is led to this conclusion:

If similar excesses occurred everywhere and in all phases and periods of historic development, there must apparently be a common element transcending these differences. This common denominator, as we shall see, seems to be the simple ability, the power, to commit monstrosities. As a result we arrive at what we might call a power theory of social misery.

    Since those without the ability to commit atrocities clearly don’t commit them, this conclusion seems trivial. Kohr recognizes this, and he responds saying:

But this is not the point. The point is that the proposition operates also in the reverse. Everyone having the power will in the end commit the appropriate atrocities. …[Here too,] clearly not everybody holding power must make evil use of it. …Just as not any mass of fissionable material will produce an atomic explosion, but only a critical mass, so not just any quantity of power will lead to brutal abuse, but only the critical quantity. …Once the critical [degree of] power is reached, abuse will result spontaneously. [Pg. 47.]

    And what then is this critical degree of power? Kohr says the answer is simple: it is the degree of power that appears to insure immunity from retaliation. But that perceived degree of power will be different for different criminals and despots, with their differing situations, their different oppositions, and their personal blind spots. In each case it will be the perceived immunity from retaliation that matters. Kohr goes on to anticipate another conclusion saying that if the critical degree of power depends on the amount of available power, that amount depends in turn on the size of the social group that can create such power. And so Kohr will call his new theory “the size theory of social misery.”

    One of the variables that often help to insure immunity from retaliation is anonymity. Mob violence is often ignited when sudden anonymity is achieved, as occurs after masking of one’s face and body. We see this with vigilante groups, and the Ku Klux Klan. But Kohr also points out that the sheer size of any large mob confers both a certain level of new power on its members and also a form of temporary anonymity.

    Immunity from retaliation is frequently given to certain professions too, including prison guards and policemen and soldiers, particularly in circumstances where there will be no witnesses, and where anonymity is further facilitated by uniforms that all look very similar. Brutality by such authorities is well known, just as it is known to occur in teachers and coaches and priests who may hold considerable authority and power over their underlings. The “spontaneous” eruption of such abuse, every time that critical amounts of power are amassed, may not be quite as universal as Kohr implies, but there can be no denying that, given the existence of some modest number of such power relationships, including the freedom from any fear of retaliation, then episodes of abuse become all but certain to occur.

    Kohr argues that internal stresses associated with the sheer size of a society that grows too big, one that becomes too crowded, with too much anonymity, also creates the conditions leading to more criminal behaviour. This in turn creates the need and opportunity for creating more powerful authorities (police and soldiers) to deal with the criminals. And that is another of many related factors that help to destabilize those societies that get bigger and bigger. Kohr discusses additional factors that lead to further stresses within such societies, including a growing tendency to condone criminal acts as being necessary, or “fair,” and inevitable. As brutality becomes more frequent in a society, it becomes less personal, less shocking and easier to perpetuate. More people become willing to do more and more hurtful things.

    Reviewing what he has argued so far, Kohr then stresses again that the misuse of power depends on the opportunity to use it without fear of punishment for so doing. In his next section, entitled “Lead us not into Temptation,” he recounts a German slogan that says: “Opportunity creates Thieves.” Kohr writes:

Opportunity is, of course, nothing but another word for the seemingly critical volume of power. Even a confirmed thief will not steal if he has no chance of getting away with it. On the other hand, even an honest man will misbehave if he has the opportunity, the power, to do so. This explains why all of us, the good even more so than the bad, pray to the Lord not to lead us into temptation. For we know better than many a political theorist that our only safeguard from falling is not moral stature or threat of punishment, but the absence of opportunity. [pp. 58-59.]

   Kohr goes on to point out how much personal willpower and moral effort is required to resist the temptations that opportunity can sometimes place in our paths. He concludes that neither personal virtue nor vice are intrinsic to human nature and social development. Moreover, the temptation to exploit opportunities for acts of selfishness, or for acts that will cause harm to others, are nearly universal temptations in the absence of likely retaliation. It is our faulty and unrealistic assumptions about human psychology and willpower, including our assumptions that “normal” compassion or empathy will cause “good people” to resist immoral temptations and acts of cruelty, that prevents political theorists, economic theorists, and social theorists from successfully designing a more peaceful and safer world.

    Kohr then reviews the wars of the twentieth century, and the cold war following them, noting that in every case peace was accompanied either by power stalemates among various nations, or by the lack of critical power advantages for any one nation. Moreover, in every case, wars began when one side perceived itself to have a major power superiority and negligible risk of unacceptable retaliation or unacceptable costs for invading a particular neighbour.

    Kohr then returns to the matter of the “size” of a social entity, and the powers that a social entity acquires as a consequence of its size. The “critical” amount of power that leads to aggression requires a “critical” social size to achieve it. Kohr observes that the physical size of the social entity, i.e. its absolute population is the major, but not the only aspect of “size” that matters. The “density” of a population, i.e. the concentration of its members can augment or dilute the power it can wield. (E.g. an army far from home has less power than an army close to home.) Similarly, a population’s “size” and “power” are sensitive to other variables including the degree to which that population is organized, mobile, developed, cohesive, and inter-coordinated.

*  *  *

    At this point in chapter two, Kohr turns to consider some objections to his power theory. [Pages 65 through 72.] Interestingly, these objections primarily emphasize that his arguments are flawed because they are materialistic, Marxian, and atheistic. He begins by pointing out that his theory does not affect moral or religious considerations as to how we ought to behave. Nor is it inconsistent with a world created by God. Kohr’s theory may be right or wrong, he says, but if it must fail then it must do so on the basis of historic evidence. (At the end of his chapter he will consider one such major piece of apparently contradictory evidence existing at the time of his writing, i.e. the apparent “peacefulness” of the United States super-power.)

    Kohr notes that the materialistic nature of his theory, which he acknowledges, does not imply an inevitability for wars and social miseries any more than physical laws of current geography and climate mean that a given valley town is always doomed to suffer floods, For it is always possible to devise flood control measures that will protect that town. Similarly, Kohr points out that if the size theory of social misery happens to be true, nothing prevents steps from being taken that may keep the sizes of social groups sub-critical. Just as Odysseus knew he must avoid the catastrophic temptations of the Sirens as his ship passed by their islands, and was able to do so by deafening his sailors and having himself tied to the mast of his ship, so society can surely devise ways of avoiding the siren calls for creating dangerous national sizes with unanswerable powers. Kohr writes:

There is nothing in a materialistic interpretation of history that could be construed as an excuse for man’s failure to apply his wit, and change a corrupting socio-physical environment in such a manner that unwelcome human responses will automatically cease, and more appropriate responses automatically arise. [Pg. 66.]

    Kohr then deals directly, and at some length, to distinguish his theory and his approach from Marxian philosophy. Marx gives central importance to the role of changing modes of production as these affect history and the behaviour of class populations. Kohr assigns central importance to changing sizes, of populations and of nation-states. Marxian analysis is fundamentally economic in nature. Kohr’s analysis is fundamentally socio-political. Kohr agrees that modes of production do have profound affects on changes within given historical periods, but he argues that Marxian analysis has never been able to give a satisfactory explanation for emerging changes between historical periods. Kohr then goes on to give a number of examples of how social-size theory can give a clearer and fuller account of historic developments than can Marxian theory.

    And then, at the end of chapter two, Kohr turns to consider the United States, the apparent great exception to his theory about the size of nations and their mis-used critical-powers. Kohr recognizes the signs that the U.S. has (in the mid-1950s) emerged as a proto-empire, and he predicts it will soon become the irresistible military fixer that it has since become, garnering many enemies in the process. He notes the already developing signs of America’s flirting with pre-emptive war, a war that “advocates aggression for the solemnly declared purpose of avoiding it. It is as if someone would kill a man to save him the trouble of dying.” [Pg. 72.] (Korea and Vietnam were soon to accompany the publishing of Kohr’s book. And the “menace” of communism was about to justify vigilante paranoia among many Americans.) But despite its post-war size and power, and except in neighbouring Central America and the Caribbean, America was not yet anything like a bully. Kohr explains this situation by suggesting that America’s geographical size and richness, its scattered populations and its isolationist heritage combined to prevent most Americans from acknowledging and exploiting in their great common power. Though Kohr doesn’t mention it, the newly created United Nations (headquartered in New York) had been given the task of World Policeman. The United States had yet to feel that there was much need for it to take over that role, and/or to protect itself from being “policed” by other UN nations.

*  *  *

    Kohr titles his third chapter: “Disunion Now.” (A clever additional defense perhaps against remaining charges that he is a secret Marxist or Communist.) The chapter begins with an epigraph from André Gide, declaring “I believe in the virtue of small nations.” Kohr will go on here to argue for the wisdom and feasibility of allowing regional secessions and political separations to rid the world of dangerously large nations, but he begins his discussion by recognizing that the twentieth century has long been persuaded that the road to peace lies only in creating fewer numbers of nations, i.e. in the unification of all the world. What once were “the Big Eight” nations, before World War Two, afterward became “The Big Five,” and then “the Big Four,” and then “the Big Three.” Kohr prophesied that soon enough there would be just a “Big Two” but he didn’t name which two he was anticipating. Kohr continues, saying:

[But] unification, far from reducing the dangers of war, seems [to be] the very thing that increases them. For the larger a power becomes, the more it is in a position to build up its strength to the point where it becomes spontaneously explosive. …Not only does unification breed wars by creating war potentials, it needs war in the very process of its establishment[Pg. 73 – 74.]

Even with a powerful United Nations, Kohr points out that “…whatever form the United Nations take, there will still be the great powers, and there is no reason to believe they would behave differently united than they do disunited.” And then, in one of his rare quotations from others, Kohr quotes Professor Henry C. Simons as follows:

War is a collectivizing process, and a large-scale collectivism is inherently warlike. If not militaristic by national tradition, highly centralized states must become so by the very necessity of sustaining at home an inordinate, ‘unnatural’ power concentration, by the threat of their governmental mobilization as felt by other nations, and by their almost inevitable transformation of commercial intercourse into organized economic warfare among great economic-political blocs. There can be no real peace or solid world order in a world of a few great centralized powers. [Kohr pg. 74, from Simons’ book Economic Policy for a Free Society. U. Chicago Press, 1948, pg. 21.]

    And so Kohr turns to the task of how we might create and maintain “small” workable nations. Firstly, he looks at how the European political landscape might appear after large and medium-sized nations had all been reduced in size. To prevent any remaining nation from having a marked advantage in power, population, or control of key resources, Kohr suggests a Europe that might need 50 or more nation states. He names very many of these small countries, including Bohemia, Castile, Cornwall, Macedonia, Naples, Normandy, and Scotland. Moreover, every name he uses applies to a region and culture that had existed before, under the same name. He calls this “Europe’s natural and original Landscape.[Pg. 75.] Each nation would be, and is, recognizable to those who live there and who share a common language and local cultural traditions.

    Kohr then addresses the question of whether such nations would in fact be more peaceful than are today’s larger nations that currently include them. He points out that in the past . . .

nearly all wars have been fought for unification, and unification has always been represented as pacification. So, paradoxically, nearly all wars have been, and in fact still are, fought for unity and peace, which means that if we were not such determined unionists and pacifists, we might have considerably fewer wars.   [Pg. 76.]

    Kohr asserts too that smaller states can solve the problem of minorities and minority rights within a nation. He holds that “each minority, however little, and on whatever ground it wishes to be separate, could be the sovereign master of its own house….” [Pg. 77. Quebecers in Canada would agree. They use the same phrase: Maîtres chez nous.] Kohr points to the marked success and survival of Switzerland that has created minority nation-like states rather than national minority rights. Centuries ago three Swiss cantons were subdivided into two completely independent sovereign halves, after minority dissatisfactions could not be reconciled in other ways. The most recent of these divisions occurred in 1833 in Basel when rural districts revolted against undemocratic control by urban trade guilds, to form the half-cantons of Basel-City and Basel-Land. There has been peace there ever since.

    Kohr points out that national rivalries have been created and maintained by mutual antagonism over territories and resources. For centuries the English have been encouraged to hate the Spanish, and vice versa. But no Scot hated a Basque and no Catalan hated a Welshman. Small states sharing no borders have no national rivalries to feed. With small states, each has less to fear from the other, and, less incentive to join a fight against the other.

    It will be objected, however, that long ago in the Middle Ages, when there were many small states, nearly uninterrupted warfare prevailed. Kohr agrees that this sometimes appeared to be the case, but he says:

The purpose of this analysis is not to furnish another of those fantastic plans for eternal peace so peculiar to our time. It is to find a solution to our worst social evils, not a way to eliminate them. The problem of war in modern times is not its occurrence, but its scale, its devastating magnitude[Pg. 78.]

(Kohr might also have added here the additional problems created by the much longer and widespread aftereffects following modern wars.) Kohr acknowledges that small states do not change basic human nature, including temptations to aggression, greed, jealousy and revenge. The point of ensuring that no states become too large is simply to make rogue states less effective and more easily controlled by those they might wish to harm.

   Kohr concludes this topic saying: “The paradoxical result of the constant occurrence of warfare during the Middle Ages was the simultaneous prevalence of peace. We fail to realize this because history records primarily disturbances of peace rather than the existence of peace.” [Pg. 80.] During every battle between a Bavaria and a Tyrol there was peace throughout many dozens of other regions. Never was the entire continent pulled into war in the Middle Ages. Moreover, this was a period of overall accomplishment, development, and building of infrastructure beyond any that would have been possible in a time of constant warfare.

    During the Middle Ages even the smaller wars were more peaceful than wars have become in the centuries since, thanks to the very widespread observance at the time of the Treuga Dei, i.e. the Truce of God. Fighting was strictly limited to certain times of the week and the year. Warfare was not permitted between Saturday noon and Monday morning to allow for observance of the Sabbath and tending to the dead and wounded. In some places other religious holidays were added each week to the times of mandated truce. Churches and churchyards, and fields ready for harvest were also off-limits to fighting. Entire groups of people, including all women, children, and old people were often given special protection and exemption from harm. In such a manner, war in the Middle Ages was carefully limited in scope.

    Unfortunately, the great peacemaker, Emperor Maximilian I of the Holy Roman Empire, decided to outlaw all war, anywhere and any time, by declaring his Eternal Truce of God. This, of course, proved impossible to enforce. Total peace may have been declared in a unified Empire, but it had the side-effect of ending the Treuga Dei, opening the doors leading to modern Total War. True, the time between wars grew longer, but the wars gradually became more destructive and extensive. Small nations began to unify, shrinking in number, but growing in size. The generally peaceful Middle Ages slipped into history.

*  *  *

    In Chapter four Kohr turns to consider tyrants, and their fates in small nations versus large. He has already argued that there is nothing in the design of education, or society, or nation-states that can prevent all abuses, all wars, all crimes. There will still be tyrants in a world composed entirely of small nations. But Kohr points out that in a small nation tyranny can be contained more easily, and its duration can be more easily shortened. The limited amounts of power available to a small country make it less dangerous for its neighbours, and less difficult for its own citizens to change. Kohr makes these points in a number of ways, using the examples of Hitler in Bavaria (where he failed) vs. Hitler in Germany (where he prevailed), and, Huey Long of Louisiana, who prevailed for a time but did little damage to neighbouring American states.

*  *  *

    In chapter five Kohr develops an argument that small unit sizes are the basis of all physics and all biology. They are the basis of the whole natural world. Thus it should be no surprise that small size would be the secret of sustainable economics and social orders. In physics, as in life, Kohr notes that “Below a certain size, everything fuses, joins, or accumulates. But beyond a certain size, everything collapses or explodes.[Pg. 98.] When things are too small to be sustainable (physically or biologically) they tend to grow until they become sustainable. But when things become too big to remain sustainable, they try to compensate by further growth, thereby becoming even more unsustainable. Eventually they fracture and decompose, becoming either too small again, or, potentially, becoming sustainable again.

    For Kohr, the key principle holding molecules, or healthy cells or societies in a state of long-term equilibrium is a principle of “balance”. The special meaning of “balance” for Kohr involves the mutual tendencies of amalgamated individual units (e.g. of molecules, cells, persons, etc.) to limit the natural but unworkable individual excesses inherent in the behaviour of each of their sub-units. If democracies have evolved a system of checks and balances to prevent excesses of self-interest from destabilizing those societies, this is but a natural extension of the principle of “balance” underlying all evolved matter. Kohr spends some time examining what constitutes a “good” balance (i.e. one that endures) from a “bad” balance (i.e. one that might be said to be “over-balanced” and liable to shatter.) Kohr argues that in every case the “good” balance involves grouping together of a large number of small units, and avoiding the grouping of a small number of large units. These “bad” groupings may be temporarily stable, but soon enough they will meet stresses they cannot survive.

    So it has been with the United Nations; Kohr tells us: “The chief symptom of a bad balance is…that it needs a conscious regulating authority.[Pg. 105.] He points out that the UN is too large to be regulated from outside, while attempts at self-regulation are continually thwarted by big powers within it that remain larger than the powers of all its small units combined.

    Kohr then returns to his theme of achieving political and economic progress by dividing large units back into smaller and sustainable units. In my view, Kohr goes astray here, conflating particularization of the parts of some wholes, and specialization in some parts of wholes, as if each of these constituted natural acts of “division”. He claims division is beneficial and natural because we distinguish helpful sub-units inside the units of interest to us. But these haven’t been “divided” in the same sense that Kohr is advocating for the severing of large nations and large businesses into smaller self-contained units.

    Kohr concludes chapter five by saying:

The evidence of science thus indicates that not only cultural and mechanical but also biological improvement is achieved through an unending process of division which sees to it that nothing ever becomes to big. It also reveals that in the entire universe there seems to be no problem of significance which is not basically a problem of size or, …a problem of oversize, of bigness…. [Pg. 109]

He concludes that the problems presented by smallness are automatically solved by tendencies to grow, and, in one sense, the problems of bigness are similarly “solved” by tendencies toward increasing expansion, tendencies that help assure “spontaneous destruction.”

*  *  *

    In chapter six Kohr marshals evidence for considerably greater degrees of individual power and freedom for those who live in small towns and small nations when contrasted to those living in large cities and large nations. Whether a nation happens to be the principality of Liechtenstein, (technically a monarchy) or the republic of France, Kohr argues that there is more real Democracy, i.e. considerably more shared power, among those citizen/neighbours who reside in a small state than in a large one.

    Individuals count for more in small settings, and for Kohr that is the most important value to be honoured in any political structure. Kohr notes:

The chief danger to the spirit of democracy in a large power stems from the technical impossibility of asserting itself informally. In mass states, personal influences can make themselves felt only if channelled through forms, formulas, and organizations. …We should [then] speak of a group or party democracy rather than an individualistic democracy. [Pg. 114.]

Party politics, or interest-group politics, claim to serve the “Average Man,” but Kohr argues that there is almost no such person. In too many large “democracies,” the minority who are left out of power because they are “not average” (i.e. not members of the largest minority) all too soon becomes a silenced majority.

    For large governments to work, a society must become “organized” and “collectivized.” For Kohr, these are dangerous trends that are anathema to personal freedoms. And without personal freedoms, no comfort and no sustainable social future can be expected. So Kohr concludes this part of his discussion arguing again for the creation of small states. And how “small” is small? Small enough so that each state “can be taken in at a single view.[Pg. 121; here Kohr is quoting from Aristotle.] Small enough so that each state retains its human scale. (And today we might say, small enough so there are at most two degrees of separation between any two people in the state.) Kohr notes that Andorra, with a population below 10,000, has endured unmolested and healthy since the time of Charlemagne. Endurance and sustainability do not require unification into large states.

    Another advantage for small states, in Kohr’s view, is that they are more cohesive and thus have fewer “issues” to divide them. He believes that small states are spared most of the stressful conflicts between factions and “isms” that bring religious or economic or social doctrines into fierce battle with one-another. Moreover, in small states such battles are localized and limited, whereas contentious “issues” dividing populations in large nations end up affecting half the rest of the world as neighbours are drawn to take sides or to try to keep the combatants from exporting their conflict to other states.

    Kohr ends chapter six persuaded that all people naturally prefer democratic freedoms to living under multiple dictates from institutions and from others. They are willing to give up these freedoms in wartime only because it seems necessary for survival. But in the absence of that necessity they “naturally” prefer and devolve back to “naturally” small administrative units of government, and, in particular to local governments. The propagandistic urgings of power-blocs to unify and to cede power to central authority is, in Kohr’s view, the chief cause of the evils of the modern world.

*  *  *

    In Chapter seven, Kohr takes up the cultural contrasts between large and small states. He marshals evidence attempting to persuade us that in small states individuals, and their intellectual and cultural creative works, do better than they do in large states. Part of the reason this is true, says Kohr, is that “energies” that tend toward aggression, and toward the wielding of power, have very limited outlets in small states, leaving much more “energy” available for creative work. Kohr writes:

The citizen of a small state is not by nature either better or wiser than his counterpart in a large power. He too is a man full of imperfections, ambitions, and social vices. But he lacks the power with which he could gratify them in a dangerous manner…. While the wings of his imagination remain untouched, the wings of his vicious deeds are clipped.” [Pg. 129.]

    If hiring a conquering army is unavailable to the incipient tyrant in a small state, he can at least hire craftsman to create great works to perpetuate his memory. Kohr argues that little states have produced a large and disproportionate share of the world’s technical and cultural treasures. He believes this is in part because small states offer much more leisure time and freedom to create. Crowds require increased coping time, and the strictures of large governments do too, as does the work needed for grand empire building. But small states provide little distraction, and they offer more solitude and access to needed help in accomplishing creative work.

    Kohr holds that in a small state it is easier to directly encounter a diversity of personal skills, viewpoints, ideas, and social resources In a large state specialization and compartmentalization narrow individual world views and limit individual experiences. Simple access to social diversity is, in Kohr’s view, the most significant reason why small states have produced so many innovations and cultural treasures.

    Kohr then presents considerable historical evidence to support his views about cultural richness in small states but not large. He reviews the histories of Germany and Italy when they were small powers versus when they were large. He cites supporting testimony from the writings of Toynbee, Saint Augustine, and Aristotle. He concludes chapter seven saying that social size again appears to be at the root of things, both good and bad; at the root of cultural productivity and human wisdom, when size is limited, and at the root of “specialized ignorance and meaningless excellence in social utilitarianism” when size is too big. [Paraphrasing Kohr’s conclusion on pg. 142.]

*  *  *

    Kohr begins chapter eight saying: “There is, however, one field in which our arguments in favour of a return to a system of small states seem to lose their validity. This [field] is economics. Would not such a return mean economic chaos?[Pg. 143.] Recreating smaller states would appear to bring the danger of a return to countless barriers to trade and competition, pervasive unemployment, and the undoing of economic progress generally. We might then anticipate the loss of mass-production efficiencies, with concomitant higher prices, and with more frequent scarcities. In short, we might anticipate a return to our impression of life in the Middle Ages.

    Kohr answers that one might well believe these dire predictions, given modern economic propaganda, but he intends to show that in fact smaller states produce more economic efficiencies and far more effective systems for the production and distribution of goods and services. He notes:

As everywhere else, it is not a system that is at fault, be it capitalist or socialist, but its application [on] too vast a scale. If capitalism had such stunning success in its earlier stages…it was because of its embodiment of the competitive principle whose most fundamental prerequisite is the side-by-side existence not of a few large, but of many small facilities, requiring not the waste of extensive but the economy of intensive operation. [Pg. 144.]

Kohr asserts that competition and diversity, and the under-appreciated advantages of local production and distribution, were all key to the early successes of capitalism. The loss of these advantages came when they were eroded by the increasing size and reach achieved by fewer and fewer producers.

    Most of us believe that today’s standard of living is much higher than formerly it was. Kohr begins his economic discourse by drawing a distinction, however, between “needs” and “luxuries.” The availability of the things that meet our needs, permitting our health and survival, food and shelter and basic comfort, were widely available even before the Middle Ages. Kohr points out that furniture, for instance, and items of clothing in the Middle Ages were generally of higher quality, and were serviceable for much longer than are today’s mass-produced counterparts. These goods were available widely, to “poor” farmers and to workers and to comfortable burgers alike. Antiques, still found in the possession of today’s descendents of yesterday’s “poor,” command high prices partly in recognition of their superior craftsmanship and design.

    But today much of modern mass-production continues to be devoted to these same goods meant to satisfy basic needs. Most factories don’t bring us new luxuries, illustrative of our imagined higher standard of living. True, they help to bring us more choice in shoes and shingles and ciders and sweaters, but that excessive choice is artificially made to appear a luxury, the hidden new costs of which include a loss of overall leisure and personal security compared with what was more often available in pre-industrial states. Furthermore, much of today’s manufacturing is devoted to the production of factories, and the machines inside them, and the infrastructure necessary to transport to consumers the basic and necessary goods they produce. These products too are not new luxuries.

    Kohr acknowledges that today there are some new luxuries. Costly ones, in terms of the side-effects that many of them bring with them, even if not too costly in terms of their affordability. Automobiles, for instance. But the “luxury” of mobility that cars once gave to us has since disappeared. Cars have become a new necessity of life, degrading our standard of living from what it was when life could be enjoyed on foot or bicycle or horse or boat or train, in that earlier time when making our living did not first require a long and stressful daily commute.

    In large nations today the number of state “necessities,” seen as requirements for a secure life in a large nation, has also greatly increased, primarily due to the escalating costs of a non-stop military arms race. Ever greater portions of economic production are going not to goods directly increasing the standard of living for individuals, but to provide “necessary” protection from aggression and crime.

    Kohr provides many detailed examples to suggest that life in smaller states has long been, and continues to be, richer in pleasures, comfort, and personal security, than is life in the largest nations on earth today. The standard of living is thus noticeably “higher” in Denmark or Switzerland or Sweden than it is in America or Russia or China. Very recently a number of scientific studies, using a wide variety of indices for a state’s quality of life, such as measures of health and disease, wages and benefits, crime statistics, etc., have all pointed to certain small nations as having noticeably superior living conditions than do today’s large nations. These studies lend strong support to many of the arguments in Kohr’s book, showing why economic fears should not dissuade us from attempting to divide large nations into many smaller nations.

    Next Kohr argues that the quality of life in societies today has become no better than it was long ago for individuals at every level of society: for kings and presidents, for professors and students, and for housewives and maids, among others. (Because I find those arguments weak, tangential, and incomplete, I will not detail them here.)

    Kohr then turns to consider modern business cycles, with their unavoidable periods of expansion and contraction, their booms and busts. He notes that any improvements in living conditions that society may enjoy while the economy does well are all but totally reversed, for a considerable time, by the depressions to which excessive expansion always lead. Kohr points out that these cycles are not confined to capitalist economies, they are experienced just as often in socialist economies, most spectacularly in communist Russia. Kohr argues that “a better name for them would therefore be growth cycles, since their destructive nature and scale depend not on business, but on growing business, and not only on growing business, but on growing industrialization and [economic] integration.” [Pg. 157.]

    The difficulty with the increasing size and reach of big businesses is the increasingly frequent and complex problems that these organizations then face, problems beyond the ability of management and employees and governments to limit and solve. Kohr suggests that no amount of education or training, no organizational changes or new management techniques, and no governmental regulations can compensate for the pace with which the problems of excessive size outdistance any efforts to catch up with them. Only organizational or governmental controls that limit the size and reach of business organizations can prevent the economic problems created by excessive growth. In small nations, market forces and governmental policies can successfully restrain the excessive growth of business organizations, and thereby depressions can be avoided, as can excesses of poverty, ill health, and social unrest. Kohr uses the examples of Denmark, Norway and Sweden to support this conclusion.

    Kohr acknowledges that the overall GDP of large nations has increased dramatically in the twentieth century. But the great bulk of these overall monetary increases have come from the production of the “essentials” serving military requirements, security requirements, the new and long-distance transportation requirements for items of food and shelter, etc. Some new products (Kohr’s new “luxuries”) do exist, somewhat increasing the general living standards of the whole population, but they are the first products that disappear again when there is a war, a depression, a financial crisis, or a period of severe inflation. The growth of nations, of global conglomerates and multinational corporations, has perpetuated a cyclic economic instability that small nations, with their many modest-sized producers, have largely avoided.

    Where then has the illusion of modern economic progress come from in this world that, nominally at least, demands scientific facts and full examinations of all the evidence for both sides of every theory? Firstly, Kohr believes that opposition to “gigantomania” has been very effectively rendered politically incorrect by a kind of economic fundamentalism actively promulgated by those whose wealth and power require monopolistic control of their particular markets. Naysayers are understandably timid in the face of potential social and professional ostracism if they suggest there are insoluble problems caused by growth without limits. Secondly, analysts and economic historians usually compare the wrong things: they compare mature large economies with immature small economies instead of with mature small economies. They compare the modern U.S.A with modern Haiti or with (immature) medieval England rather than with modern Switzerland or (mature) medieval Florence. Thirdly, immature capitalism, in its earliest phases, when many competing producers and small-scale markets still existed, did produce an improved standard of living for a considerable portion of the population. But unacknowledged are the increases in social costs like slums, pollution, declining health, and child labour abuses that soon were brought on with industrialization.

    Kohr next introduces the economic “law of diminishing productivity,” and its implications for his economic argument. This law describes how total production can be increased by increasing one or two key input variables, but only up to a point. Unfortunately the “efficiency” of producing each additional unit of product begins to decline well before the total amount of production itself declines and then stops altogether. However, introducing proportional increases in all of the input variables, allows total production to increase almost without limit, and the “efficiency” of producing each unit can be kept at its optimum level. In effect, this latter procedure amounts to creating duplicate production lines (companies), each in the same business. Many small efficient businesses can thus produce more, at less cost, than can a few large businesses turning out the same amount of product. If companies are limited to modest size, providing healthy competition, both businesses and consumers can share in the “profit.”

    Kohr summarizes this argument saying:

In other words, [an] increase in quantity, mass, size, power, or whatever physical element we use, does not produce a corresponding increase in [the production] of satisfactions. Up to a certain point, yes! But beyond a certain point, no! There is a limit. And the ideal limit is always relatively narrow. [Pg. 166.]

There is a similar truth applying to the sizes of business organizations. Kohr argues that the same law of diminishing productivity applies. He says:

As a result, the wise business man will not extend his production to maximum capacity but to optimum capacity. Whatever that may be, it is at all times considerably lower than the maximum. [Pg. 167.]

    There are data to support this conclusion even during times of booming economies. Kohr cites studies of corporate revenue in the period before the Great Depression in the USA showing that the sub-set of large corporations earned less on average (not more) than the average earned by all the corporations studied. Moreover, corporations with the least capitalization (less than half a million dollars) enjoyed a return on investment that averaged twice as high as the average return for the group with the greatest capitalization (of more than fifty million dollars.) Nor did the largest corporations invent new labour-saving products. Kohr quotes T.K. Quinn, a former vice-president of the General Electric Company, who wrote:

Not a single distinctively new electric home appliance has ever been created by one of the giant concerns—not the first washing machine, electric stove, [this list continues at considerable length, finally ending with…] vacuum cleaner, dishwasher, or grill. The record of the giants is one of moving in, buying out, and absorbing after the fact.” [Quoted from T.K. Quinn, in The Nation, March 1953. Kohr quotes him on pages 170 and 248.]

Quinn also observed that corporate research departments need to assure their corporate directors of the likely success of producing a profitable new device or technique, and so they dare not give their scientists the freedom to pursue their own ideas in their own ways, wherever those may lead. But creative inventors and scientists need exactly these latter freedoms to discover new principles and useful new devices.

   Kohr concludes his review of the economic arguments for encouraging the division of large states and large organizations into many smaller independent units, starting with a quote from Henry Simons, who wrote:

No one and no group can be trusted with much power; and it is merely silly to complain because groups exercise power selfishly. The mistake is simply in permitting them to have it. Monopoly power must be abused. It has no use save abuse.”  [Pg. 171]

So economic power is like political power, it is helpful in manageable doses but it will be abused in doses that become too large.

    Kohr stresses that in a world returned to many small nations these nations need not create “artificial” economic barriers to trade or to the movement of goods and people. Boundaries are not of themselves barriers. We all of us have our personal boundaries. They are natural. And we all relax them as makes sense. It is not economic folly to prefer a world of small and varied nations. It would mean greater economic equality for all if we had it.

*  *  *

    The remainder of Kohr’s book is devoted first to a general (and expanded) review, then to a plan for achieving the more just and peaceful world that he is convinced would follow from the division of big states into many smaller states, and finally to a look at what can be expected when his plan for division is never implemented.

    Yes, Kohr is very clear: while his plan would not be too difficult to implement, it will never be allowed to be implemented, except, says he, following the inevitable world unification that would occur after a terrible war between the last two remaining great powers, a war that leaves just one of them dominant. He writes:

As a result [of this great war], the surviving empire, confronted with the task of administering the entire globe from a single control tower and without the balancing and containing effect of a great rival, will have to do what every other world power has done, from the Persians, the Romans, and the Catholic Church, to Charlemagne, Napoleon, and Hitler. It will have to apply the principle of division to its great remaining national blocs, and cut them into units small enough to be governed without the necessity of a ruinously expensive executive instrument. In other words, the world state of total unity, if it wants to survive longer than the decade of its bloody act of birth, will have to recreate the very thing it may have imagined it had destroyed forever—a world of small units, a world of little states.” [Pg. 218.]

    For Leopold Kohr, small is beautiful, natural, imperative, and essentially unobtainable. In the political realm it has only rarely been approached. And in the economic realm, as in the organizational realm, sadly, it has become far less common than once it was.

*  *  *

    For a very long time mankind has unconsciously taken for granted the blessings bestowed on it by a planet filled with rich ecosystems and overflowing biodiversity. Recently, however, it has become strikingly clear how much we must depend on those ecosystems and that diversity. Redundancy and variability are of key importance, not only for evolution, but also for long-term survival. Small is beautiful because small is part of what is necessary to preserve generous redundancies and bountiful variability. Size matters in part because large size restricts general access to the resources that are necessary for the preservation of both redundancy and variability.

    It is sadly ironic then (but hardly surprising) that the advantages to be gained from facilitating more and smaller farms, more and smaller towns, more and smaller states, governments, and businesses, are precisely the advantages that have become less and less recognized and respected in our globalized world. Instead, the democratic and ecological virtues of small size are being increasingly denied and eroded by celebrations of bigness, of ballooning monocultures, and of inhumane concentrations of economic and political power.

    Our world is not getting smaller at all. Human population is already much too large. As is the quantity of human hubris.

© J. Barnard Gilmore     Kaslo, British Columbia     November, 2012

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45: Zooming Toward Oblivion

Chapter 45:   ZOOMING TOWARD OBLIVION

Kaslo, B.C.   Thursday April 7, 2011

 There can be something rather noble and reassuring about an aged face, full of character, well wrinkled, and composed. Even in films, where typically we see celebrations of youth, vigor and power, sometimes the archetype of aged wisdom is also portrayed and celebrated, as for instance in the role of a revered Aboriginal chief or a wise European grandmother, a person rich in sun-burnished wrinkles. An aging female celebrity once observed “I don’t want any makeup artist or photographer altering so much as a single wrinkle or blemish on my body. I’ve paid dearly for every one.

But sadly, in Canada today, we have a burgeoning commercial enterprise that is primarily devoted to selling to retirees of rather comfortable means not wrinkles, not wisdom, but selling instead unrealistic hopes, hopes for enduring youthfulness, for enduring vigor (both physical and sexual), and for enduring power (both political and social). More particularly, retirees are being sold hopes for enduring happiness, happiness that is to be achieved by means of an increasing consumption of both goods and services.  One prominent mouthpiece for promoting such hopes is the Canadian publication named Zoomer magazine. This magazine is but one of many arms of a business empire called ZoomerMedia.

Another arm of ZoomerMedia is called CARP. CARP was once known as the Canadian Association of Retired Persons. Formerly CARP was an “Association,” but today it stands transformed into a different kind of marketing vehicle, news about which is primarily communicated through Zoomer magazine. Retirees in Canada are specifically being encouraged, though CARP, to become consumer-zoomers. In this newest incarnation of CARP, it now appears that consumer retirees may simply have become the consumed.

CARP is still portrayed as a non-profit political lobbying organization for seniors, and technically that might be true. But CARP does have expenses, and it appears from the pages in Zoomer magazine that many of CARP’s revenues go to pay to ZoomerMedia, and to its well-connected friends, comfortable fees for their varied commercial, political, and publication services. Perhaps that is part of the reason that CARP now exhibits an increased need to market itself as earnestly as Zoomer magazine works to market itself.

Another of the many arms of ZoomerMedia is one that is called ZoomerCard.ca. In early issues of Zoomer magazine this entity purchased full-page advertisements for its “Platinum Plus” ZOOMER MasterCard. One such advertisement featured a lovely coquette of uncertain seniority (perhaps age 50, perhaps not) comfortably seated cross-legged on a plush red couch while gazing directly at the viewer, sharing both her winning smile and her winning cleavage. Beside her, in a large font, were printed the words: “Now it’s all about / Me.”  And just below the super-sized word “me” appeared a large MasterCard with the massive word “ZOOMER” emblazoned from side to side. Ensnared inside the second letter “O” in “ZOOMER” could be seen the sketch of a carp. (The metaphor, sadly, was perfect.)

In this advertisement, in undisguised form, was revealed what the new Zoomer movement seems to concentrate most upon, namely on my “Me,” my proud status, my proud health, my proclaimed agelessness, my ability to command copious resources and comforts. Unreflective and unapologetic pride is exhibited and encouraged here. And thus, it seems to me, the Zoomer movement celebrates some socially troubling forms of egotism, ostentation, and denial.

About 30% of each Zoomer magazine is filled with distinctly high-end advertising directed to financially comfortable seniors. Another 30% of the magazine contains feature copy that praises selected destinations and products and lifestyles that suggest the promise of an increase in wealth or comfort to those retirees who already command large helpings of both. Another 20% of the magazine is generally devoted to polishing the brands of celebrities who usually seem to have some new book or record or product that you should buy to increase your sense of superior discrimination and worth as a senior sophistocrat. Much of the remainder of each Zoomer magazine is devoted to reminding readers of, and then reassuring them about, fearful subjects, such as one’s eventual death, or illness, or perhaps poverty. More frequently however, these articles are about means for avoiding those fearful events that portend terrible embarrassment or the loss of some prized Zoomer traits, particularly traits such as attractiveness and sexual prowess.

For those who admire or profit from this approach to life, Zoomerism may be seen as a fine thing. But for those who cannot admire this full-court marketing press it can be painful and worrying to observe. Is “enough” never enough for Zoomers? One might easily imagine it is not. Is more Shopping and more Travel and more Dining the road to happiness for each of us? One might easily conclude that it is. Are we never to become comfortable with wrinkles or quieted appetites or the other imagined “failings” of old age? Apparently not soon if we buy into the Zoomer philosophy of Me.

Zoomerism shows itself as a philosophy of excess: Excess in the service of increasing acquisitions, acquisitions in the service of continued “growth”. But yesterday’s livable world is fast disappearing in an excess of excesses: excessive population, excessive greenhouse gasses, excessive waste, even excessive financial inequality and privilege. Reflection suggests that the all-too-likely price tag for more of such excesses might well become oblivion.

Retirement offers us our last best time for reflection. It is also the last best time for gratitude, for giving back, and giving away. It is certainly a time for reading. But alas, reading Zoomer magazine and its self-proclaimed “Zoomer philosophy,” may have just the wrong effect on those members of CARP who might otherwise be helped to slow down.

Oblivion should not be rushed. Nothing should.

© J. Barnard Gilmore

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