Wednesday, March 27, 2013

The Cycles of Inequality

There is a great article on Aeon Magazine - Return of the Oppressed - by Peter Turchin, the author of Secular Cycles. Even a casual observer of history is bound to notice cyclical periods of growth and decline repeating themselves throughout time and in different cultures. Turchin's work is an attempt to document and explain them. Here, he focuses on the role that inequality has played throughout history.
Today, the top one per cent of incomes in the United States accounts for one fifth of US earnings. The top one per cent of fortunes holds two-fifths of the total wealth. Just one rich family, the six heirs of the brothers Sam and James Walton, founders of Walmart, are worth more than the bottom 40 per cent of the American population combined ($115 billion in 2012).

After thousands of scholarly and popular articles on the topic, one might think we would have a pretty good idea why the richest people in the US are pulling away from the rest. But it seems we don't. As the Congressional Budget Office concluded in 2011: 'the precise reasons for the rapid growth in income at the top are not well understood'. Some commentators point to economic factors, some to politics, and others again to culture. Yet obviously enough, all these factors must interact in complex ways. What is slightly less obvious is how a very long historical perspective can help us to see the whole mechanism.
Economists can't figure it out because they see the economy as equally-placed rational cogs cooperating in an idealized clockwork market economy heading towards "equilibrium" through price discovery, or some such nonsense. Rather than the abstract alchemy of money relations, however, Turchin actually looks at history to document these repeated cycles and their underlying causes. As he writes, "Over periods of two to three centuries, we found repeated back-and-forth swings in demographic, economic, social, and political structures. And the cycles of inequality were an integral part of the overall motion."

Turchin's ideas echo Marx's historical theories of class struggle stripped of their Hegelian baggage, and with a cyclical focus rather than a directional one. Turchin's concepts are simple and elegant: Rising populations lead to an oversupply of labor and plummeting living conditions for the poor. As the poor get poorer, the rich get richer : "As the slice of the economic pie going to employees diminishes, the share going to employers goes up. Periods of rapid growth for top fortunes are commonly associated with stagnating incomes for the majority."

Paradoxically, falling wages for workers causes an increased number of wealthy elites: "...cheap labour allows many enterprising, hard-working or simply lucky members of the poorer classes to climb into the ranks of the wealthy...On the face of it, this is a wonderful testament to merit-based upward mobility. But there are side effects. Don't forget that most people are stuck with stagnant or falling real wages. Upward mobility for a few hollows out the middle class and causes the social pyramid to become top-heavy. Too many elites relative to the general population (a condition I call 'elite overproduction') leads to ever-stiffer rivalry in the upper echelons."

As the number of elites increases, competition among them becomes ever more fierce, featuring lavish displays of wealth as the rich intermarry and become an entirely separate class from the wider society with whom they have less and less in common: "So far I have been talking about the elites as if they are all the same. But they aren't: the differences within the wealthiest one per cent are almost as stark as the difference between the top one per cent and the remaining 99. The millionaires want to reach the level of decamillionaires, who strive to match the centimillionaires, who are trying to keep up with billionaires. The result is very intense status rivalry, expressed through conspicuous consumption."

As the rich get ever richer they buy political power, and change the rules of the economic game in their favor. Political elites become increasingly out-of-touch and unresponsive to the needs of the wider populace, even in times of crisis. Government becomes an oligarchy, with acquisition of more wealth more important than the common welfare. Wealth leads to more political power, which leads to more wealth: "In the US, there is famously a close connection between wealth and power... The US political system is much more attuned to the wishes of the rich than to the aspirations of the poor."

As competition becomes normalized and class divisions more pronounced, a dog-eat-dog, "every man for himself" ethic becomes the order of the day. Any sense of common purpose is lost as everyone tries to grab their piece of the pie by whatever means necessary:  "Norms of competition and extreme individualism become prevalent and norms of co-operation and collective action recede....The glorification of competition and individual success in itself becomes a driver of economic inequality."

Eventually, extreme inequality and political dysfunction comes to a point where it undermines social trust and faith in institutions and begins to tear apart the fabric of society. Realizing this, the ruling oligarchy slowly introduces limited reforms to placate an increasingly restless and indigent populace: "Unequal societies generally turn a corner once they have passed through a long spell of political instability. Governing elites tire of incessant violence and disorder. They realise that they need to suppress their internal rivalries, and switch to a more co-operative way of governing, if they are to have any hope of preserving the social order... Put simply, it is fear of revolution that restores equality. And my analysis of US history in a forthcoming book suggests that this is precisely what happened in the US around 1920."

Turchin uses this idea to explain the "great compression" in the period following the Great Depression. American elites were genuinely afraid of a domestic Communist revolution: "These were the years of extreme insecurity... The US, in short, was in a revolutionary situation, and many among the political and business elites realised it. They began to push through a remarkable series of reforms." Once Communism went away as a viable alternative however, they no longer had anything to fear and went back to the greed and rapaciousness of the Gilded Age by waging a relentless assault against the New Deal, and putting American workers in competition with workers across the globe: "...by the late 1970s, a new generation of political and business leaders had come to power. To them the revolutionary situation of 1919-21 was just history. In this they were similar to the French aristocrats on the eve of the French Revolution, who did not see that their actions could bring down the Ancien RĂ©gime - the last great social breakdown, the Fronde, being so far in the past."

Turchin concludes that inequality appears set to worsen in the near future, and with it, social instability:
Our society, like all previous complex societies, is on a rollercoaster. Impersonal social forces bring us to the top; then comes the inevitable plunge. But the descent is not inevitable. Ours is the first society that can perceive how those forces operate, even if dimly. This means that we can avoid the worst - perhaps by switching to a less harrowing track, perhaps by redesigning the rollercoaster altogether.

Three years ago I published a short article in the science journal Nature. I pointed out that several leading indicators of political instability look set to peak around 2020. In other words, we are rapidly approaching a historical cusp, at which the US will be particularly vulnerable to violent upheaval. This prediction is not a 'prophecy'. I don't believe that disaster is pre-ordained, no matter what we do. On the contrary, if we understand the causes, we have a chance to prevent it from happening. But the first thing we will have to do is reverse the trend of ever-growing inequality.
Turchin's essay is chock full of numerous illustrative examples from history, especially from Ancient Rome, the Black Death, the first Industrial Revolution, and America's Gilded Age. Definitely required reading. These repeating cycles are why modern American history seems to be tracking so closely to that of Ancient Rome, as so many have noted. For an excellent overview of just how closely, see Cullen Murphy's excellent book, Are We Rome?

There are a couple of things to add. Sometimes elites refuse to reform the system, and the system simply collapses or breaks apart as in the case of the Roman Empire. The system undergoes rapid decentralization and simplification. This leads to a great reset, but this period is characterized by chaos, breakdown, vice, lawlessness, and in many instances, death. The so-called "Dark Ages" is a classic example. See, for example, Bryan Ward Perkins The Fall of Rome and the End of Civilization. Dmitry Orlov's new book on the five stages of collapse looks to cover this as well. Only after survivors pick up the pieces do things start to improve.

Also, these cycles are intimately tied to the natural world. Overexploitation of the environment is a major cause, along with a population explosion which Turchin deals with in the context of falling wages and steadily decreasing quality of life for the masses. Throughout history, periods of warm weather and plentiful rainfall are associated with periods of expansion, and periods of cooler, dryer weather are associated with dissolution and collapse, e.g.: Fall of Rome Recorded in the Trees (Science Magazine).
When empires rise and fall and plagues sweep over the land, people have traditionally cursed the stars. But perhaps they should blame the weather. A new analysis of European tree-ring samples suggests that mild summers may have been the key to the rise of the Roman Empire—and that prolonged droughts, cold snaps, and other climate changes might have played a part in historical upheavals, from the barbarian invasions that brought about Rome's collapse to the Black Death that wiped out much of medieval Europe.
This is true of every ancient empire, from the Mesopotamians, to the Indus Valley, to the Bronze Age collapse, to the Roman Empire to the Han Dynasty to the Khmer empire to the Classic Mayans, to the Anasazi and the Hohokam; the list is endless. It seems hardly a year goes by without archaeologists pointing the finger at climate change, chronic drought and crop failure as a cause of collapse for some ancient culture using things like tree rings and ice core samples to analyze historical climate patterns.

The erosion and depletion of healthy topsoil is also a factor in imperial decline as David Montgomery explains in Dirt The Erosion of Civilizations. Disease epidemics also play a role such as malaria and the plague in Roman times, the Black Death in medieval Europe, and smallpox and other zoonotic diseases in the Western hemisphere.

There are some unique conditions in our era, though. The extreme distribution and misallocation of wealth has been masked by the energy abundance provided by fossil fuels. This has also allowed us to overexploit the natural world to an extent never seen before. This has led many to believe we have escaped these cycles and are on a permanent upward trajectory in living standards for all. History does not look too kindly on this. Also, a sophisticated mass media capable of manipulating the public's thoughts and ideas has not existed before (except perhaps in the guise of religion). This can best be seen in the United States where support for an overtly anti-worker party of plutocrats comes mainly from the uneducated lower classes. And the all-seeing mass surveillance state that has been created by digital technology is also a new development.

Turchin's ideas also dovetail with the ideas put forward in Why Nations Fail - and explains what's missing from their story. Acemoglu and Robinson correlate successful countries with inclusive elites and institutions - ones that allow social mobility, cooperative behavior and democratic governance to create conditions where the common good is pursued and all citizens are better off. Failed nations, by contrast, have extractive elites who rig the game in their favor and prey on the people below them in the hierarchy in a zero-sum game where the elites' lavish lifestyles are made possible by the suffering of the citizens they supposedly serve.

But inclusive elites don't just happen - they are forced into existence by increasing prosperity for the majority who demand new rights and a renegotiation of the social compact. And extractive elites come to the fore in periods of downward mobility, depleted resources, maximum territorial expansion, and overpopulation. if you put these analyses together, you get a situation where societies become a victim of their own past success as inclusive elites and institutions become increasingly extractive over time, immiserating the general population. Inclusive institutions and social progress are associated with periods of plentiful resources and low population density. Plentiful resources could be the result of increased crop yields due to more rainfall, more land availability, better agricultural techniques, territorial expansion, or, in our own time, cheap and abundant fossil fuels. Low populations could be the result of a mass dieoff like the plague, emigration, or birth control.

This leads to my argument, often repeated, that "innovation" is misunderstood by economists. It is not a creator of abundance, it is the result of abundance. Thus it cannot occur in a vacuum, and will be increasingly stifled as resources fail, rather than create new resources to save us. Innovation is intimately tied to the underlying health of society. When that breaks down, so too does innovation.

There's one element of Turchin's essay, though, that deserves special attention. Very frequently we hear how we need to increase our population to "grow our economy." Many prominent economists and commentators, including those supposedly on the "left" such as Adam Davidson and Matt Yglesias, continually beat the drum to let in more immigrants, or even eliminate any immigration restrictions whatsoever. They claim unrestricted mass immigration will grow our economy, and therefore make everyone better off. History, however, tells a different story:.
This connection between the oversupply of labour and plummeting living standards for the poor is one of the more robust generalisations in history. Consider the case of medieval England. The population of England doubled between 1150 and 1300. There was little possibility of overseas emigration, so the 'surplus' peasants flocked to the cities, causing the population of London to balloon from 20,000 to 80,000. Too many hungry mouths and too many idle hands resulted in a fourfold increase in food prices and a halving of real wages. Then, when a series of horrible epidemics, starting with the Black Death of 1348, carried away more than half of the population, the same dynamic ran in reverse. The catastrophe, paradoxically, introduced a Golden Age for common people. Real wages tripled and living standards went up, both quantitatively and qualitatively. Common people relied less on bread, gorging themselves instead on meat, fish, and dairy products.

Much the same pattern can be seen during the secular cycle of the Roman Principate. The population of the Roman Empire grew rapidly during the first two centuries up to 165AD. Then came a series of deadly epidemics, known as the Antonine Plague. In Roman Egypt, for which we have contemporary data thanks to preserved papyri, real wages first fell (when the population increased) and then regained ground (when the population collapsed). We also know that many grain fields were converted to orchards and vineyards following the plagues. The implication is that the standard of life for common people improved - they ate less bread, more fruit, and drank wine. The gap between common people and the elites shrank.

Naturally, the conditions affecting the labour supply were different in the second half of the 20th century in the US. An important new element was globalisation, which allows corporations to move jobs to poorer countries (with that 'giant sucking sound', as Ross Perot put it during his 1992 presidential campaign). But none of this alters the fact that an oversupply of labour tends to depress wages for the poorer section of the population. And just as in Roman Egypt, the poor in the US today eat more energy-dense foods - bread, pasta, and potatoes - while the wealthy eat more fruit and drink wine.

Falling wages isn't the only reason why labour oversupply leads to inequality. As the slice of the economic pie going to employees diminishes, the share going to employers goes up. Periods of rapid growth for top fortunes are commonly associated with stagnating incomes for the majority. Equally, when worker incomes grew in the Great Compression, top fortunes actually declined in real terms. The tug of war between the top and typical incomes doesn't have to be a zero-sum game, but in practice it often is. And so in 13th-century England, as the overall population doubles, we find landowners charging peasants higher rents and paying less in wages: the immiseration of the general populace translates into a Golden Age for the aristocrats.
But once the United States seemed destined to spiral into chaos and revolution:
In 1921 and 1924, Congress passed legislation that effectively shut down immigration into the US. Although much of the motivation behind these laws was to exclude 'dangerous aliens' such as Italian anarchists and Eastern European socialists, the broader effect was to reduce the labour surplus. Worker wages grew rapidly.
In America, mass immigration has always been used to break the back of workers when labor became scarce and wages looked set to rise. During the induatial revolution in America, whenever there was a labor shortage and wages looked set to rise, the floodgates were opened to immigration to stop that trend, In the nineteenth century, that consisted of impoverished  immigrants from central Europe (such as my own ancestors), many of whom were fleeing the great potato failure (the introduction of which having caused a population explosion). In the late late twentieth century it was immigrants from Latin America, especially Northern Mexico, many fleeing the collapse of rural Mexico's economy thanks to NAFTA.

The same thing each time, the ruling class imports workers to keep wages from rising. In the 1970s, women entered the workforce en masse under the idea of "liberation." It must be the first social movement actually encouraged by the business class, as it led to falling wages as the supply of labor increased. The part-time low wage jobs that were once the purview of housewives seeking a little pocket money become the mainstay of the economy. And each time the result was the same - depressed wages and a hollowed-out middle class followed by economic crash, as workers could no longer spend enough to keep the economy afloat. Here's the proof in a chart:


So ponder that the next time you see some op-ed piece claiming we need to increase immigration or start having more babies. Notice who is paying the salaries of who is making those arguments, and whether they are part of the falling working class or rising wealth class.

UPDATE: 'Inequality, Evolution, & Complexity' (Economist's view)
Inequality, Evolution, & Complexity: Why has mainstream neoclassical economics traditionally had little to say about the causes and effects of inequality? This is the question raised in an interesting new paper by Brendan Markey-Towler and John Foster.

They suggest that the blindness is inherent in the very structure of the discipline. If you think of representative agents maximizing utility in a competitive environment, inequality has nowhere to come from unless you impose it ad hoc, say in the form of "skilled" and "unskilled" workers.

But there's an alternative, they say. If we think of the economy as a complex (pdf) adaptive system - as writers such as Eric Beinhocker, Cars Hommes and Brian Arthur suggest - then inequality becomes a central feature. This is partly because such evolutionary processes inherently generate winners and losers, and partly because they ditch representative agents and so introduce lumpy granularity. ...

This ... new paper by Pablo Torija ... shows how, since the 1980s, western politicians have stopped maximizing the well-being of the median voter, and have instead served the richest few per cent. If the economy is an adaptive ecosystem, it is one in which a few predators are winning at the expense of the prey.


4 comments:

  1. Marvin Harris, Cannibals and Kings:

    "The peculiar capacity of hydraulic societies to restore themselves despite frequent dynastic upheavals and recurrent conquests by barbarian invaders arises from the interplay between their political structures and their basic ecological adaptation. The sheer size and complexity of the state apparatus gave high officials and lesser bureaucrats the opportunity to satisfy their own ambitions at the expense of the people under them. . . The bureaucracy tended to fatten itself at the expense of peasant welfare. Corruption tended to increase geometrically with the number of years a dynasty remained in power. Soon public works were neglected, the dikes began to leak and production declined. Sheer incompetence, human error, and natural disasters added to the subversive forces at work. Recurrently, therefore, a reigning dynasty would find that it was no longer capable of protecting and providing for the peasant masses. Torn by dissension, it would become vulnerable to the "barbarians" outside the walls, to the armies of neighboring empires, or to its own rebellious people. The dynasty would then 'collapse. This happened again and again in the history of Egypt, Mesopotamia, India, and China. But the new leaders-whether internal or external foes-had only one choice if they wanted to enjoy 'the' wealth of empire: to repair the dikes, clean out the canals, rebuild the levees, and restore the hydraulic mode of production. A new cycle would then begin. Production would increase, the depauperized peasantry would lower its rate of infanticide and abortion, and population density would rise. But as density rose, productivity would decline, and corrupt officials would become more and more immoderate in their attempt to line their own pockets. Finally, as the peasants slipped back into pauperdom, the struggle for dynastic control would break out once again."

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  2. Turchin states "Ours is the first society that can perceive how those forces operate, even if dimly."

    Wow. What hubris! His statement and belief that we are the "first" in terms of understanding the forces that cause inequality to wax and wane is not true, and is an example of why we are no better off than the ancients when it comes to self-insight and the ability to guide our collective destinies. Hubris and arrogance, in the guise of science. Not a good sign.

    The ancient Greeks routinely had debt jubilees - an enlightened policy based upon pretty good insight. We, however, are making debt forgiveness harder, not easier. Whole nations are being undermined by unsustainable debt!

    Turchin is overly optimistic, because there is little sign that individual insight or knowledge of natural or human processes leads to better collective decision-making. Look at the huge percentage of people who don't believe in climate change. Look at the huge prison-industrial complex - this despite the known fact that it doesn't yield a better, more just society.

    It would seem that as societies decay, they become less able to change course, despite any insights that social scientists or other gain.

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    1. Ours is the first society that can perceive how those forces operate, even if dimly

      Not only that - it's patently wrong. Ibn Khaldun's great book Muqaddimah spells out many of the same forces. But then again, literacy was far less widespread than today, something optimists point out. More likely, ours will be the first generation that historians will look back on and say that the problems were widely undestood by certain people, viable solutions were proposed by certain people, and yet nothing was done, and the people who were correct were villified. It will be the final nail in the coffin of human rationality, and probably the Enlightenment era. Then again, maybe the Greeks had it all figured out with the story of Cassandra.

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