EconoMatters, Future of Globalization

A New Crisis of Faith

On the 500th anniversary of Martin Luther’s Reformation, faith in the fundamental dogmas of the Western world is again faltering.

Credit: Greg Brave Shutterstock.com

Takeaways


  • Can capitalism improve general economic welfare? The very short history of the 20th century was the failure to find a better alternative.
  • Economists realize that past a certain point, the social costs of rising inequality outweigh the benefits of letting people hoard wealth.
  • The very rich can tilt the economic playing field in socially harmful ways by using their outsized wealth to influence policymaking.
  • In authoritarian states, the capture and corruption of public institutions by wealthy elites is plain to see.
  • In the US, the top 1% hold more than one-third of all wealth.

Can capitalism really improve general economic welfare? The very short history of the 20th century was the failure to find a better alternative.

Therefore, if we want to reap the broad benefits of a dynamic, competitive economic system, we need to celebrate, rather than demonize, the wealth it generates and accept the differences that it generates, too. That’s the deal we’ve struck with one another.

But the opening decades of the 21st century are testing how far we can stretch that bargain. In 1990, the three largest companies in Detroit were worth $36 billion to shareholders and employed 1.2 million workers.

Today, the three biggest Silicon Valley firms are worth nearly thirty times more (over $1 trillion), but pay salaries to nine times fewer (less than 150,000) people.

The creation of a few billionaires – and the loss of a few million jobs – is the price we must pay for technological progress and broader welfare gains. Or is it?

The costs of inequality

Economists now realize that past a certain point, the social costs of rising inequality outweigh the incentive benefits of letting people hoard the wealth they create. Extreme inequality depresses economic growth.

The logic is that when the rich get richer, they don’t buy more stuff, because they already have everything; they just save and invest more.

However, if the poor get richer, they buy all the things they don’t yet have – including, most importantly, better health for themselves and better schooling for their kids.

The very rich can also tilt the economic playing field in socially harmful ways by using their outsized wealth to influence policymaking. They can fix the rules to favour themselves and to discourage would-be competitors from innovating.

Still rule by the people?

That leads us to the second grave doubt that is gnawing away the faith/foundation of our society. Can democracy still deliver “rule by the people”?

In authoritarian states, the capture and corruption of public institutions by wealthy elites is plain to see.

Russia’s oligarchs won vast fortunes at taxpayers’ expense in the early 1990s when, under the guise of market reform, state-owned infrastructure and natural resources were sold off to friends of the regime for pennies on the dollar.

In China, more than one-third of all wealth is in the hands of the 1%. Corrupt officials, many now disgraced, have amassed private fortunes through their control of state assets and their authority to award licences and contracts without independent oversight.

In the United States, too, the top 1% hold more than one-third of all wealth. In the 2016 election cycle, U.S. presidential and congressional candidates raised and spent a total of over $7 billion.

Owing the lobbyists

Clearly, on assuming power, successful candidates (and their staffers) owe a lot to the lobbyists and other financial backers who paid for their campaigns. One of the most common demands lobbyists make is to ratchet back taxes, which squeezes public investment in education, health, welfare, infrastructure and shock preparedness.

Lobbyists also push for deregulation, which can hasten the development of the complexities and concentrations seen in the last chapter, contributing to financial, environmental and other crises.

And they seek to strengthen their intellectual property rights, extending the monopolies granted to them by patents and copyright to the point where these laws imprison, rather than release, creativity and innovation.

Back in the 1990s-era Battle of Seattle, protestors still had faith in democracy to set things right. It was the lack of democratic scrutiny over trade deals that frustrated them.

But by the time they arrived in New York’s Zuccotti Park to Occupy Wall Street, ‘If Voting Made a Difference, It Would Already Have Made a Difference’ and ‘Error 404: Democracy not Found’ were top-trending #slogans.

As it was for Martin Luther, so it is for many today: The distinction between corrupt leaders and a corrupt system has eroded until the only way forward now is to reject the whole religion.

For them, through too many successive crises, no leader has convincingly demonstrated how our present politics and economics can accomplish anything, but to magnify the gains of the winners at the cost of the losers.

Editor’s Note: Chris Kutarna and Ian Goldin’s book “Age of Discovery: Navigating the Storms of Our Second Renaissance” is now available in paperback.

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About Chris Kutarna

Chris Kutarna is a Commonwealth Scholar and a Fellow of the Oxford Martin School with a doctorate in politics from the University of Oxford.

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