Whenever there is a labor oversupply, wages drop and business owners naturally make greater profits in the near term. This trend, of course, cannot continue indefinitely, since eventually the high numbers of low wage earners and unemployed begins to erode mass markets. At some point this hurts the general economy substantially while the rich become super-rich. The result is extreme wealth inequality and general public discontent.
We have knowledge of multiple events of this kind in world history that ultimately caused the collapse of the economy and/or popular revolution. It is clearly not a sustainable situation in any kind of long term scenario. This is not something any individuals or conspiracies necessarily have anything to do with. It is typically a blind result of individuals and multiple special interest groups acting according to their own short-term interests and/or needs. It is a social ill that is a spontaneous collective result of individual behaviors and special interests within a society, each acting blindly in their own apparent short term interests.
In recent history, some revolutionaries have attempted to solve this problem with Marxist ideas. However, we all know that Marxist ideas and the reality underlying the way markets naturally work on a social scale are incompatible. Some level of inequality is natural, since we all have different abilities and levels of motivation to make productive contributions to the economy. The natural level of inequality is that which corresponds most closely to these differences. Marxism attempts the impossible, which is to eliminate such natural inequality. The inevitable result is corruption and political power mongering to gain both political and economic advantage.
The extreme inequality that precipitated these Marxist revolutions, on the other hand, is equally unsustainable, since it results in the extreme general discontent that causes revolution in the first place. In the case of the city state Venice, extreme inequality caused the fall of the city from its former glorious economic status as a major economic hub and caused a global collapse of the world economy of that era, reaching its dismal peak around the year 1340. This evolved to its gruesome climax gradually across multiple generations as a result of major wealth holders slowly turning to the use of guilds and other means to limit who had access to economic privilege to preserve it for themselves and their descendants.
This continued until the high levels of inequality became unsustainable as the contribution of the general population lost any incentive to remain productive. The major banks became extremely speculative with their international loans that show highly inflated value on the books. The underlying financial realities were enormously less valuable, which translated to excessive leverage, draconian contractual conditionalities etc.
Sound familiar? The essence of what this points to is that when social organization, whether political or economic, reaches very large sizes, unregulated economic activity based on short-term profit motives among individuals and small, powerful special interests becomes self-destructive. This is not the fault of any particular individual or group of individuals.
No, this is instead the spontaneous result of ignorant, short-sighted chasing of self-interest operating collectively but blindly in large social structures of any kind. This reality is far from the idealistic situation proposed by Ayn Rand, for example, which has never seen any historical realization on a significant social scale or even the idealistic preconditions she postulated. I see her idealism as an almost equally impractical, mirrored, polar inversion of Marxist idealism, which makes some sense considering her reactionary Russian background.
If we look at the economic engine, perhaps we can view the solution as some kind of engineering problem metaphorically equivalent to a governor that limits rpm (revolutions per minute) so the engine can't blow itself up by increasing revolutions beyond what it can materially tolerate. It seems that we might need some kind of more or less fixed, automatic economic mechanism to prevent this kind of runaway socio-economic effect. But so far no one, or at least no one many people are listening to, has proposed a viable solution to this social reality. Some simplistic combination of capitalism and socialism is clearly not the answer, as European economies unquestionably demonstrate. Any takers?
Copyright October 2014 © Robert P. Wendell
Redistribution freely permitted contingent upon the unmodified inclusion of this copyright notice.