Why Economic Inequality is Not Good for the Economy

The nineteenth and twentieth centuries saw multiple discourses on the relationship between concepts of ‘truth’ and power—social, political and economic. The ‘view from nowhere,’ the rhetorical device of science and economics used to claim that truth exists in ‘the world’ outside of social relations has faced challenges from Marxian materialists, phenomenologists, cultural anthropologists and post-modern deconstructionists. It persists because it is useful in an operational sense—it appeals to the fundamental premises of personhood in the Western democratic, capitalist political economy. This is to say it is rhetorically effective.

That a century prior philosopher Edmund Husserl felt compelled to recover the ontological premises required for mathematics (and science) to be what proponents describe it to be with his Crisis of the European Sciences is effectively ignored in the graduate economics departments in the West. And that philosopher Martin Heidegger placed these premises in the context of culture and history, not ‘nature,’ first with his History of the Concept of Time and later with Being and Time, would no doubt surprise the zero economists with any deep interest in the tools they call ‘objective.’

Being American, there have to be a few ‘practical’ points here somewhere, so here they are: the operational issue can be illustrated through analogy. There is a saw among statisticians that ‘any statistical result can be undone by redefining the variables.’ (I spent fifteen years building mathematical models). This places the objects of interest to Western economists in the realm of the social discursive, not in the ‘ether’ of subject / object dichotomy. (If not, where precisely do these objects reside)? The second order point is ‘the economy’ exists in the realm of factual existence, not in the mental objects of the view from nowhere. Another way to say this is that deference to ‘the economy’ in the abstract requires explanation of where it resides outside of actual human lives.

And so we find a debate between Western liberal / progressive economists over whether economic inequality hinders economic growth? Whereas one defers to objectivity—he would like to side with the argument inequality hinders economic growth but the facts simply don’t support that case, another begins with a more developed notion of what economic well-being, versus growth, is. The strategy for framing the difference involves ‘under-consumption,’ the Keynesian conceit rich people save more of their incomes than poor people so low levels of income inequality result in greater consumption, and with it economic growth, than high income inequality. But as with the history of Western economics, there are differing concepts of exactly what it is that is being debated at work here.

To the contrary of the general perception post-modernism is from the political ‘left,’ following from later (Ludwig) Wittgenstein and ‘transactional analysis’ in psychology, post-modern philosopher Jean-Francois Lyotard developed his concept of ‘language games,’ the social practice of localized negotiations through language, just as Margaret Thatcher and Ronald Reagan began selling corporatist imperialism as atomized individualism to an unsuspecting world. Setting aside the Marxian conceit that who has voice in society is a function of political-economic relations, Mr. Lyotard places social ‘negotiations’ in silos where local truths replace the grand ‘Truths’ of earlier centuries. The various disciplines of ‘economics’ constitute such silos.

To those who read the economic literature broadly, that there are multiple discourses with localized strategies of inclusion and exclusion, proof and dis-proof, probably seems an accurate description. That the economics that through history come to the fore overwhelmingly support the existing political economy probably also makes sense to some, likely by degree of one’s Marxian inclinations. That criticism of the dominant economics in support of the existing political economy serves a function as ‘faux’ dialectic may make sense to some (Democrats and Republicans anyone?). But that the methodologies used by economists are embedded ideology hasn’t found that many takers in the West. However, both Herbert Marcuse (technological rationality) and Antonio Gramsci (hegemony) put forward robust expositions on just this very point.

So, is economic inequality an economic good or an economic harm? One place to start might be to ask: is it a fact of nature or an artifact of existing economic relations? In fact, taking economic inequality as a given regardless of origin may serve an operational purpose, e.g. serve as a starting point for empirical analysis, but it implies that the historical development leading up to the point of departure for the analysis is itself operationally irrelevant. Another way to say this is that while there may theoretically exist an infinite number of ways economic inequality might arise, why defer to the vagaries of infinity when there is actual history to consider? In recent actual history we have approximately four decades of specific policies designed to concentrate income and wealth with a small economic elite. Prior historical analogies might be the Gilded Age and Roaring Twenties in the U.S., European and U.S. imperial histories and European Monarchies in the often long lead ups to violent revolutions. With apologies for what this leaves out, actual history offers probably a few dozen cases, possibly a few hundred, but substantially short of infinity.

Another reason to consider history is the alternative, the Cartesian idealist economics of the Western mainstream, carelessly assumes away causal relations in historical development. Since the implementation of policies designed to concentrate wealth (or reward society’s ‘job creators’ if you will) the U.S. has experienced three financial debacles—the Savings and Loan debacle of the 1980s, the Dot-com boom-bust of the 1990s and the private debt bubble and bust of the 2000s. These have had dramatic impacts on the ‘real’ economy leading to increasingly severe recessions and their associated economic harms. And as can be seen in economist Emmanuel Saez’s income data, a leading component of income inequality in this epic has been capitals gains—the returns to concentrated wealth. Another way to put this is that concentrated wealth has tended to beget more concentrated wealth at an exponentially increasing rate. (Some may recall this tendency, or ‘forecast’ if you must, from Marx’s Capital, Vol. II). So recurrent crises of increasing severity and compounding concentration of wealth are at a minimum coincident, if not yet determined to be causally related.

Where then is the link between income inequality and these financial debacles? Massive financial fraud was behind the three episodes listed above. If this is unknown to readers, one place to begin is the next link below. (And following from economist Hyman Minsky, the fraud was structural, not an episode of mass ‘moral’ failing). Thousands were convicted of crimes and sent to prison in the early 1990s, a few analysts were forced out of the industry in the early 2000s and culpable banks and bankers were handed several trillion in public largesse and told to carry on in 2008. And they still exist on the public dime. The point here is the substantial capital gains component (about 25% of total income) of the very highest income recipients derives from a corrupt financial system fully subsidized by public institutions. (Others have made this point, but the bank subsidy can be partially estimated from the yield at which banks can borrow with the implicit too-big-to-fail subsidy versus without it. And given the Federal Reserve’s multi-trillion dollar bid to lower borrowing costs and raise equity values, the ongoing subsidies from taxpayers to the wealthy are likely in the trillions of dollars).

If twenty-five percent of the wealth of the wealthiest has come from capital gains from a crisis prone financial sector that systematically delivers income up the wealth hierarchy, this leaves 75% unexplained. Here we have the Minskyite’s endogenous money argument versus the neoclassical’s exogenous money. Basically, the economic growth that boosted the corporate profits executives used to justify their exponentially increasing pay derived in fair measure from the economic impact of the financial bubbles. There were other factors, such as the shift in negotiating power between labor and capital, but these issues are related. The money that made large-scale corporate restructuring ‘transactable’ and so decimated labor’s bargaining power came from these same bubbles. With three financial / economic booms and busts in this epic to date and so little changed in the financial system, who cares to bet these booms and busts are a thing of the past? And each subsequent bust has had a larger impact on ‘the economy.’ Whether economic inequality is cause or effect is only relevant if one posits modes of inequality unrelated to this actual history. And the much-maligned rise in the Federal budget deficit after 2008 was a necessary subsidy to this boom-bust system from which the wealthy have overwhelmingly benefited (see Saez link above). (Put another way, the ‘heads the rich win, tails the rest of us lose’ outcomes of these crises tie economic inequality directly to the causes of the crises).

But in the larger sense, what does it actually mean to ask what is good or bad for the economy? This takes us back to the nature of Western economics—what is ‘the economy’ outside of factual existence we live?  Furthermore, where does it reside if outside of lived experience? In other words, is it possible for ‘the economy’ to perform in an operational sense without performing in the existential sense of fulfilling human needs? If, as earlier Social Darwinists and apologists for slavery had it, ‘the world’ benefits from the time concentrated wealth affords society’s elite to contemplate the ‘finer’ things in life, how does this relate to the factual conditions the toiling classes exist in to provide the necessary material support for that system? Where might the toiling classes enter into the operational definition of ‘the world?’ The Western economists’ answer tends to be the economic good is total economic production divided by the number of citizens. If one arrangement of the social order produces a higher number than another, the higher is the economic good. But again, where does this economy reside apart from the factual existence of its participants? This isn’t a ‘qualitative’ question—it is as operational as it needs to be. And the answer is: nowhere.

Deference to a system of economic relations that resides in the ether and benefits ‘society’ in general is in fact a rhetorical device that obscures actual economic relations, whether intentionally so or not. Suppose the conclusion is drawn that economic inequality benefits ‘the economy,’ where does that leave us? It leaves us with the specific economic relations that already exist. These relations are no more a ‘natural’ state or a ‘neutral’ starting point than any other. Current economic relations are embedded historical struggle and this is the source of existing inequality. So in what sense is this starting point dissociated from subsequent outcomes? Where does the legacy of slavery in the U.S. fit in? Where does the current concentration of wealth fit in? Where do the ‘free trade’ agreements that insert extensive institutional control for the benefit of some economic actors against others fit in? In other words, where does the economic good reside if ‘the system’ benefits but actual people don’t?

As globalization has increased, the tension between the idea of citizenry in explicitly political entities, nation states, and the ‘collective good’ of global trade economics has partially illuminated the sleight-of-hand at work here. Why would citizens facing subjugation and environmental destruction in Zimbabwe be expected to find economic offset, the economic ‘good,’ because the Chairman of Chevron’s stock options rose last year? These conditions are not disconnected. As with the existing conditions of wealth concentration in the West, they are directly related. And conversely, environmental destruction that threatens most life on the planet illustrates the collective effect of locally ‘beneficial’ economic production. Unless one wishes to posit the lives of some deserve precedence over the lives of others, either in the present or across time, economic inequality would have to be socially neutral for the sum total to represent the economic ‘good.’ Economic inequality is not socially neutral and no one is proposing the conditions that would make it so.

Rob Urie is an artist and political economist in New York.

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Rob Urie is an artist and political economist. His book Zen Economics is published by CounterPunch Books.

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