On Inequality

A symptom of bigger problems and the case for re-industrialization

One nice recent phenomenon is hot shot bankers getting disillusioned after seeing how fucked up the economic system is, then just saving up and getting out and starting youtube channels about how fucked up the economic system is. This includes the channels How Money Works and Gary’s Economics.

An empirical manifestation of the economic polycrisis is the steep rise in the inequality of the distribution of income and wealth throughout the west, see e.g. the Pew research. In addition, there is a more broadly phenomenologically greater distinction between the life of the upper and upper middle class as compared to the working class and lumpenproletariat/underclass. If you are surprised by this then you are probably one of the majority who underestimates the level of income inequality.

One of the commonly cited books among contemporary writers and speakers about economic inequality is Thomas Piketty’s Capital in the Twentieth Century. He presents a model whereby the monetary return to capital is greater than the return to labor in the long run thus suggesting under capitalism the share of income will increasingly shift towards capital. He presents copious statistical information regarding inequality, its history and extent in the present day. This work is cited as an argument for a policy of comprehensive income redistribution.

Of course in accordance with proper epistemic virtue, I consulted critiques of the work. The best counterargument I saw was the following: one thing that Piketty didn’t seem to take into account is that empirically if you include taxes and transfers into the incomes of the different quintiles, then the actual measured increase you see in income inequality significantly drops. Thus, to a significant degree, many governments have already been redistributing, although perhaps there is a lag time.

But I do believe that the pre-tax inequality is itself a problem. More redistribution can’t be the answer: would people working low-valued jobs but getting nice government checks and foodstamps make for an ideal society? During primary / elementary school I lived in working class neighborhoods, my friends were using foodstamps sometimes to grab some snacks at the supermarket. And it’s a different world, those with strong community bonds, e.g.. a church or strong local kin or immigrant group network, got by, and those without noticeably struggled.

The Decline in Manufacturing

Recall from the Introduction that there has been, in the last 50 years, an increase in the productivity of labor but a stagnation of real workers’ wages. This, obviously shouldn’t happen in a free market.

Relatedly, one of the popular narratives surrounding the long term decline in manufacturing employment is that automation caused it. But that clearly is impossible:

1) since wages stayed stagnant but productivity increased, this means the Baumol effect has taken place, meaning there is the presence of some other inefficient workforce in the firm. As described in the Introduction, the economic anthropology work On Bullshit Jobs corroborates this. This is discussed in the Introduction.

2) In general firms prefer to grow when they are running a profit, as would happen from a sudden increase in productivity from the introduction of some automation technology. Why get rid of a trained skilled work-force when you can move them to a new and more higher value added product?

3) Most countries with a high percentage of the workforce in manufacturing have maintained that percentage while taking up automation.

4) A lot of other corrosive economic dynamics beyond the real wage stagnation appeared around the same time, suggesting that something that should in aggregate be positive, automation as productivity, cannot be responsible.

The long decline in manufacturing employed accompanied many manufacturing based industrial powers into service economies. This included the bureaucratic bloat in government and the increasingly monopolized corporate economy. To return to the opening, How Money Works has a nice episode on the increasing concentration of the economy.

An additional element that contributed to inequality that the Austrian economists noticed: since the service-based economy has increased financialization, the financial industry will push the government to inflate the money supply. A highly liquid financial industry can immediately seize and gain all of the initial arbitrage from the expected price increases, while workers may get pay rises after the price increases have appeared. Thus, they end up benefiting more than workers from the increased money supply and there is a redistribution of income from workers to finance capital in real terms. This effect was made more possible by the abandonment of Bretton Woods, which fits the timeline.

The how of re-industrialization, which is a general question of economic reform, will be the topic of some future article.

I proceed to explain now as for why moving from less services and towards more manufacturing, and also even to agriculture, is necessary for long term economic well being.

To begin with, this is the only way to enjoy sustained productivity increases. Technology can become increasingly more capable and efficient with a reliable pathway from physics to engineering to product innovation, presenting a number of possible industries, for example aerospace engineering and robotics, with far from tapped potential as far as technological innovation and productivity. However, with services, it becomes difficult to consider how a, e.g., a nurse or hairdresser or waiter would or could increase their productivity, as far as “output” per hour. Thus this presents a natural limit to productivity gains in much of the service sector. Productivity gains are the only way to sustainably increase real per capita income, since land and labor are finite and capital stock quickly saturates with marginal gains.

This is discussed in this excellent article on the Long Slow Death of Global Development. The slowdown in the OECD per capita growth coincided, and contributed to, a stagnation in the middle income trap for some countries in the Global South, and for yet others enduring Least Developed Country status.

In addition, there is a psychological element. Knowing that one’s labor is of low value in the marketplace, many being in an optics of lower status as far as attending to a wealthy client by facilitating their comfort, and a lack of opportunity to apply ingenuity to obtain greater work performance, the itinerant nature of many of them, are all factors that make a service economy seething with worker alienation.

This concept of alienation as far as not seeing tangible utility in the product of one’s labor but just functioning as a cog in some machine is one of the few ideas from Marx that have significant validity. Indeed, although on average across all demographics, the data says that elderly people feel most fulfilled by the relationships they had in their life, for men specifically, there was a greater priority towards the feeling of accomplishment and contribution through their work. This is corroborated by the increasing deaths of despair rates among older men to the point of stagnating or even declining life expectancy. These contemporary phenomena in the state of men’s mental health can be easily summed as men not being able to do manly things, that is make big and/or nifty things with their minds and hands.

Of course there are fulfilling service jobs as well, such as nurse or teacher or artist entertainer. But such jobs clearly put off the introvert portion of the population.

I feel like every tradesman (plumber, electrician, carpenter, etc.) I’ve met had this peaceful happiness that was jovial while being rather effortless about it, no pretenses or subtle self-qualifying.

Now, it is claimed that, by contrast, a large quantity, if not outright majority, of manufacturing jobs are physically strenuous and often lead to workplace injuries or chronic pain. However, to this I counter that this is where innovation can play a role in facilitating the transition to a new industrialization – with robotics and other embedded computing assisting the operations of the production, many such jobs can be made safer and less physically hazardous and potentially debilitating.

Immigration

I’m not going to write about my ideas for the optimal policy, but there is something that is relevant here from the public discussion on immigration policy.

There is a Nobel Prize winning economist, Angus Deacon, who said that he changed his mind regarding tariffs and immigration in finding that while theoretically free trade and open immigration will increase aggregate output, there are distributional effects and people losing employment. Theoretically, however, you can use part of the net gain in output to retrain the workers for higher value added jobs, for a Pareto optimal improvement.

Did the government do that?

….

And so Trump getting elected...what do you expect?

Next, this is one of those things where the mainstream economic narrative is really just pissing down people’s backs and telling them it’s raining: In case you are not aware, a “skills shortage” is euphemism for “wages are too low”. In a free market, enduring long term shortages are impossible. Firms would raise wages to compete for workers, more workers would be enticed to enter this market until a new equilibrium is reached. So there is significant market failure and/or government policy that helps companies keep the wages low.

Shortages were common in the Soviet Union, just as a reminder. People worry about it happening, but elements of a dirigiste corporate monopolistic National Socialism are already here.

Finally, an important consideration is the effect of the Brain Drain on Developing Nations. This paper shows that the drain outweighs the brain gain (receiving education and/or training in high value added skills and returning to the home country thereafter). Of course, the dynamics between the Global North and the Global South is an entirely different topic, which I will also write at some point.

I do not seek to justify or call for any particular policy with respect to immigration. The main point is that neither the interests nor the voice of the working class is taken into account in elites’ discussion of the topic. We can see the deftness in how there was a period of time around the mass migrant arrivals in Europe wherein mainstream media universal drummed for immigration as always economically beneficial for all developed countries and that opposition is bigotry (this was non-stop in The Economist), but the tune changed without apology as soon as a landmark Danish study came out indicating the significant net fiscal drain of immigrant groups from certain regions of the world in their country.

In general, we do have to consider that because the moving costs of capital across countries is much lower than of labor, capital will naturally receive the greater advantage in this exchange. This is less for the upper middle Symbolic Capitalist class, of course. Ultimately, the narratives around the topic of immigration point to economic realities corresponding to the overall theme of this article as tonedeaf treatment of working class interests of increasing available high income manufacturing jobs.

Contours of a Solution

Strategy as to how to achieve a society with far less destitution and corporate dirigiste control is for a future article. Moreover, this is a challenging problem, that will require significantly more development as far as defining all of the important details to address for reindustrialization in a manner that helps the working class prosper and thrive. So here I will just describe some aspects that particularly stand out as due to the particular points and phenomena I highlighted.

Of course, I’m going to say this from the Free Market Left Libertarian perspective.

First, one has to realize how much of the capitalist class control is through the government.

Various programs of government corporate welfare, extensive regulations encourages concentration of monopoly capital because it can swallow the costs, moral hazard marinating bank bailouts, and other elements of dirigisme are done for the benefit of capital at the expense of labor.

There are also a number of vestigial like the 40 hour work week, that just contribute to both inefficiency and alienation. How Money Works talks about how this as well as corporate social events ultimately helps companies assert greater control.

Consider small government, with just a basic welfare state and provision of public goods, while encouraging a real free market, not one of monopoly capital, that is a potential worker being able to offer “I can do X work at 32 hours per week 10 on site for $Y” rather than having to send large quantities of job applications.

One element of the concrete application is this: extensive research devoted to 3D printing and manufacturing robotics to the point that they can be made cheaply enough so that a regular working class individual can purchase a powerful one. This would incentivize innovative autonomous individual, who can come up with their own ideas of furniture, various electronic devices, cookware, etc. etc. Many additional heavy industry products can be made from a few individuals teamed up, small firms and cooperative economic units, using a few of these devices together. Overall, this technology would facilitate an atmosphere of far greater competition with many products by providing a means to expand the breadth of market goods for which economies of scale are unnecessary.

In addition, clearly a more effective means of disseminating research results into application in technological innovation must be developed, and incentivizing research results that have potential for application with positive social and/or economic impact.

On that note, I’ve observed that small manufacturing firms have both engineers and technicians, providing a natural means of STEM intelligentsia and working class co-interest in re-industrialization. If it takes a schism from the social science intelligentsia, so be it.

There are a couple of things the government does need to start doing.

Finance capital needs to get smacked down a notch. Introduce the Tobin Tax, named after the Nobel Prize Economist James Tobin: this adds a very small percentage transaction cost to every financial transaction. This effectively throws sand in the wheels of high velocity speculative investment. Then, of course, get rid of some of the clown world going on, such as CEOs getting golden parachutes regardless of company performance through stock buybacks, as also discussed by How Money Works.

A Georgist Tax, which simply taxes land, presents the optimal set of incentives: one has to use the land productively or otherwise sell some of it, or you are losing money. This discourages buying land as a speculative investment. Obviously this would also help housing costs.

Overall, it’s not just about the distribution of income but the manner and content of economic production and the structure of the interrelationships between economic production, capital, and labor. More autonomy together with meritorious competition should be instituted, and a greater portion of the population engaging in high value added economic production, with potential for ever greater growth through skill and technology. People want to feel like they are contributing to the well being of their society, rather than just filler in the swamp of brands, logos, and stock tickers.

In all, the Free Market Left Libertarian approach is to carefully steer between the Scylla of Right Libertarian callousness and Charybdis of Socialist naivete and indulgence. A means of at one end, ensuring a lack of disempowerment by circumstance or power, while at another, incentivizing productivity and innovation. While unqualified handouts and dirigisme leads to economic sclerosis and an avenue for opportunistic commissars to bleed the productive, at the same time, to quote Eminem’s lyrics (though I’m sure he got it elsewhere), “Pull up your bootstraps? Well where are the boots?!” In a way, this is well aligned with Amartya Sen’s capability vector approach to Welfare Economics, it is the sum of total freedoms as abilities to act, that should be maximized, and in a prosperous society neither arbitrary authority nor deprivation should hold these back.