Tuesday, April 28, 2015

Shrinking Circles of Prosperity

On an episode of the C-Realm podcast, KMO interviewed the author of Manna, Marshall Brain:
[34:00] KMO (host): I’ve been reading Jaron Lanier’s book Who Owns the Future? And a big part of his thesis is that a lot of these tech fortunes that have been amassed in recent decades are the result of systematic accounting fraud made possible by technology. He says that lots of jobs are being pushed from the formal sector into the informal sector and lots of work that should be paid work is being pushed into the unpaid category. The obvious examples are things like Facebook. Facebook is of no value to Mark Zuckerberg and his investors without the users, and yet the users who are expected to contribute all of the content to the site are not paid for their efforts. And you ask what will people be doing when there’s all this jobless technology, well, they’ll be doing something like Facebook, but if it’s not paid, then our economic system is not viable, because for businesses to exist there has to be people earning livings who can by the things that those businesses sell. 
Marshall Brain (guest): Indeed. And so, just to expand a bit on what you said, capitalism in general is –I have not figured out the right word for what capitalism is – but it’s a set of rules that on their surface make sense, but underneath don’t make sense at all. And that whole little scene you painted about Facebook is a perfect example of that where someone is able to make huge amounts of money through ownership and everyone else is cut out of that, and we all accept it, I think, because on the surface it does seem right. But underneath it’s not quite right, and there’s quite a bit of brainwashing that occurs that makes us complacent about how unnatural and unfair the fundamental rules of capitalism are. 
So I don’t know that I’ve answered your question, but it is a really…you know, you said people aren’t going to have money and therefore they’re not going to spend it in the economy and therefore you would think that the people who need customers would be alarmed by that. But then you look out ant the world and you realize that about half the population of the planet doesn’t participate in the economy in a real way either. And they could all be empowered to participate in the economy but we don’t do that. Instead the tendency is to concentrate wealth which inevitably lowers the ability of the rank and file to consume. And that is not in the best interests of the people who are concentrating wealth if they looked at it with a broad vision, but they aren’t looking at it that way,. They’re looking at it from a very selfish standpoint that is enabled by the rules of capitalism. And it’s like I’m going to take whatever I can get and screw everyone else. And that’s the society we live in. 
KMO: well that is a very interesting response because I noticed in your Robotic Nation series you don’t make any overt criticism of capitalism, you don’t name it although it seems that so much of what you are writing, particularly the bit that I read aloud is an implied criticism of capitalism. 
When you went to the Singularity summit, a good many of the people there are the beneficiaries of this concentration of wealth and a lot of the other people there are the wannabes. And they are certainly not open to the notion that the system by which these large fortunes are being amassed is one that is based on unfairness. 
I spent time recently with the family of my girlfriend who are all staunch Republicans who were born Jewish in the Soviet Union and got out in the eighties and who worship Ronald Reagan. There’s no talking to them about any of the issues that we’re discussing here. Their narrative that they adhere to with just fanatical zeal is that people in a capitalist system, they get what they deserve. They earn what they deserve to earn. The money they make is a reflection of how much value they put into the system. And the fact that more and more people are struggling is symptomatic to them of a moral malaise where people are just too lazy to work. And it’s a self-reinforcing, self-congratulatory narrative and it’s very seductive. And I don’t think that the  folks who assemble at the Singularity summit are necessarily Fox News consumers, but they do have a particular self-justifying narrative that is very hard to shake them out of and I don’t know that there’s really any point in trying to shake them out of it. But as more and more people are displaced, and more and more people who used to have a secure retirement lined up, or used to have a reliable income no longer do, I think there’s an opportunity to spread a message, and I’m just hoping over time to begin to pick up the pieces that allow me to articulate that message.
KMO’s description at the end is, I think, the fundamental justification behind support for capitalism. It goes by a variety of names – the "Just World Fallacy," "Just Desserts," etc. I’ll have more to say about that later.

For now I want to focus on Mr. Brain’s assertion -  why are there so many outside the economy in the twenty-first century?  Why are so many people “cut out” as Brain puts it, of wealth production? This system for “generating wealth” has been around for 150 years, at least. Why are there still so many people outside of the global economy at this stage of the game? See this: Five billion people 'have no access to safe surgery' (BBC)

It’s often argued that you cannot have an economy where only the rich can afford to buy stuff. But is that really the case?

That is, you need a mass market, under capitalism the thinking goes. By definition capitalism must create broadly shared prosperity because it needs to pay workers enough to buy the products that they produce. The idea of an economy where a tiny amount of people do all the earning and all the consuming while the great mass of people are outside the system - useless as workers or consumers and struggle just to get by, is impossible, according to this line of thinking.

But on a global scale, in essence, this is exactly what we already have!

Of course, the big repudiation here is the great “emerging middle classes” of China and India, especially. However, it should be noted that China and India also have the most poor people. Internationally, inequality has gone down even as it has gone up intranationally. This is just the natural workings of the market  we are told – nothing to be done.
…about 69% of Indians live on less than US$2 per day: 850 million people. A third of Chinese, 400 million, remain similarly poor despite the country’s amazing success in reducing poverty. Together those two countries contain more poor people than there are Africans.

That is, capitalism seems to have this tendency only to sell to people who can already afford it. Just as the popular Tea Party slogan goes, “no poor person ever offered me a job,” we can also say that “no poor person ever bought any of my products.” It doesn't make sense to sell to poor people because they can’t afford what you’re selling. It seems like every advertisement is targeted to the already affluent – to get them to buy yet another product, a second car for junior, perhaps, or an Apple Watch, or a computer system that lets them adjust their thermostat from their smart phone. These people not needy, but they are the only ones whose living standards are going up, while most people increasingly can’t even afford to partake in the consumer economy at all.

It is often said that the large amounts of hard-working poor in China and India is just a temporary condition – that once enough time passes (someday…), wealth will trickle down such that even the poorest of the poor will have lifestyles their ancestors could only dream of!

But if that were true, why are we cutting every-more people out of wealth production in mature industrial capitalist economies? Why are living standards going down? Why are families poorer on average in America? Why is workforce participation dropping? Why have lifespans stalled, or even gone into reverse, for most people outside of the wealthy in mature Western economies? Why do we assume that eventually the poorest will prosper when we are already going in reverse in the places where capitalism has been around the longest? That which had trickled down once upon a time is now busily being Hoovered back up.

If, globally we cut a huge portion of the human race out of production (the masses of India, Africa, Latin America, etc.), what is stopping us from doing the same domestically? What’s to stop us from an economy where 10-15 percent buy ever more stuff because only they can afford it, and the rest of us consume hardly anything and have the living standards of a Bangladeshi bricklayer? Why do we just assume this can’t be a natural outcome of globalism? If living standards are falling for us outside of a small minority, why do we assume they must expand for the Chinese and Indian masses?

I think people ignore this possibility.

Besides, if everyone becomes a middle class American, who will  make our toys, shoes and T-shirts? Certainly not middle class people – then we couldn't afford them! We need cheap labor, so aren't we lying to ourselves when we say that capitalism will eliminate poverty? Yes, robots and all that, but then where will the jobs to “lift yourself up” come from?
…the current economic system relies on cheapness. Capitalism functions partly via its ability to maintain low wages. Why has global inflation been so low over the past decade or more? Partly, the China effect, whereby the opening up of huge untapped labour markets meant that whole Western industries could outsource their manufacturing and that new local manufacturers could emerge. China’s rural poor keep Foxconn workers on their toes – if you don’t like assembling iPhones at US$18 for a 10-hour day (much higher than it used to be) 1000 people are waiting to take your place. 
Nairobi’s Kibera slum-dwellers and rural poor keep wages low by functioning as a reserve army of labour willing to work for peanuts. In Haiti garment manufacturers recently argued that a minimum wage rise to the equivalent of five dollars a day would kill their business.
People think that broadly shared prosperity and high living standards for all are just inevitable features of capitalism. They assume that because a mass market is needed, the raises will eventually come. But the last 30+ years show that this is false. See this – Big Mac test shows job market is not working to distribute wealth (NYTimes). China and India may be exception, but eventually they will follow the same pattern. The rich will become a self-perpetuating closed caste, with no more admission. Everybody else will be trapped where they are. Statistics say that while individual people may more up or down, but overall poverty levels will be “locked in,” (since people will be moving down as well as moving up).

Thus it seems like the natural workings of capitalism is not to expand the consumer market, or create new small merchants, but to cut people out of the market entirely. But can this be self-sustaining - a permanent overclass and an underclass – the aristocracy and the masses, forever?

Why not? As we've seen, billions of people are already outside the global economy. And most human societies effectively functioned that way for most of human history. Why should we expect something different under capitalism?

Anyway, just thinking out loud.


  1. I expect manufacturing jobs to return to the west when poverty levels increase and transportation costs rise. There will be a roll back of labour and environmental laws/regulations. The masses will except this - even call for it as any job beats starving and a few more environmental sacrifice zones are acceptable as long as it keeps the cheap consumer goods flowing.

    1. This is already happening here – Walker is busy rolling back environmental protections along with gutting labor unions.


  2. Environmental protection is driven by the elite, not the poor. The ultimate goal is to make much of the world an environmentally protected nature preserve for the exclusive enjoyment of the elite, with the proles either replaced by robots or crowded into big cities. The masses are irrelevant, they will accept whatever bowl of cr*p is fed them or be dealt with severely by the security forces.

    1. You know, there’s this idea about the masses being crowded into cities, but what’s really happening is that cities are too expensive to live in and the poor are being forced out to the suburbs. Cities have walkable neighborhoods, public transportation, plenty of shops and amenities, lots of jobs, etc. Meanwhile the poor are forced into slumburbs and have to bear the brunt of rising gas and energy prices. In my city, the house prices in the densest parts of the city preclude anyone from the rich living there, and the dense condos being built have eye-popping mortgages and rents. Meanwhile, when I go to the rural areas and near suburbs, that’s where I see much more poverty.

      The thing is – it isn’t helmeted UN troops doing this, but the natural workings of the impersonal ‘free’ market. But to cover up that fact, there are all these weird conspiracy theories are floating around.

  3. Environmental destruction now is by old men, to allow accumulation of wealth. That wealth will be passed on to a more environmentally concerned generation, and that is who will lead the next enclosure movement. The rural white trash are playing right into their hands by trashing the land, because that will legitimize policies to clear them from the land and move them into cities (suburbs are just the low rent neighborhoods of cities). Think lake Tahoe or Aspen, CO, rich people are very concerned about the environment where they live. Where environmental protection will be reduced is in those suburbs you mentioned plus the commons like the oceans and atmosphere. Final result will be horrific pandemics in those suburbs to cull the herd.

  4. I've read your blog a few times and surfed here after KMO linked to this article from Facebook. I noted something similar once before, and I called it by the clumsy name of "Economic Boutique Gravity". If you have access to Facebook, you can read my lengthy discussion ( https://www.facebook.com/notes/kevin-arthur-wohlmut/economic-boutique-gravity-economics-ongoing-series-29918/10151438021263841 ). The gist of it is, in real life I too have noted many corporate business models drift towards the "botique" model, where you make scads of money selling a few ludicrously overpriced products or customized service to very rich people, rather than the model where you mass-produce something reliable and affordable for a small profit margin for a broad customer base. You see this in the rising number of "boutique" doctors (paid a retainer to remain on-call to fly to Barbados at the drop of a hat so that a rich person's sniffle doesn't spoil their expensive vacation), all the way down to things like telephone service...

    I suggest that this drift or gravity towards "boutique" services is ultimately unsustainable, at least in theory. If a corporation can pay its workers enough to afford the type of lifestyle that the company's product implies, and several such corporations provide for all the workers' needs, then money flows back and forth, and we could say the corporations are "producing" or "creating" an economy. When a corporation does not pay its workers enough to afford the lifestyle its own products imply, the corporation is "consuming" or "destroying" the economy itself, in a Systems analysis, even though it's netting fantastic profits and catering to the movers and shakers. It is, nevertheless, consuming something that it does not replace.

    To switch to an aeronautical metaphor, the first company creates "lift" and the second creates "drag" on the economic airplane. In this Airplane metaphor, an economic "crash" is readily explained... Too much drag, not enough lift. Eventually such an economy will run out of momentum. Cold comfort to the rest of us who were long ago excluded, of course.


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