In modern, developed economies and government institutions, negative human tendencies may have been constrained, but have not magically disappeared. Cheating to achieve financial and/or political power are human tendencies that did not end with slavery, child labor, and other forms of abusive exploitation of others for personal gain, but persists in whatever forms it can find to survive. These negative tendencies are not confined to any particular social or economic status, but exist at all levels in any real society.
In modern, developed nations these negative tendencies are legally constrained only when there exist reasonably effective enforcing institutions and then only to the degree that these are free of the same tendencies. To arbitrarily assume that enforcing institutions in any country are mysteriously free from unfair exercise of financial and political power is not justified by a foolish nationalistic pride masquerading as patriotism that reflexively canonizes that country as saintly. To believe otherwise with regard to the preceding practical, realistic points is morally, politically, and financially naïve in the extreme.
Cheating to gain political power exists in two contrasting extremes:
* Power grabs within Communist governments that attempt to control everything politically, including economic activity.
* Right wing, fascist, military coups that protect the oligarchy to which they answer and that also participate in unfairly controlling economic activity to favor that oligarchy.
Cheating to gain financial power appears in two principal ways:
* Businesses that engage in predatory strategies to unfairly gain market share or monopolize markets.
* Financially motivated political influence that artificially distorts markets (by definition no longer free), which if unchecked naturally tends to usurp democratic political process to favor the responsible economic interests, potentially ending in right wing, fascist subservience to an oligarchy.
Whether gained fairly or unfairly, we can compare financial power in societies that are at least quasi-democratic, especially at local levels, with political power that attempts to exercise absolute economic control, as in communist or right wing military dictatorships. Historically, those societies with at least some measure of democracy clearly allow a more efficient and fairer economy. Financial power in more democratic countries is also longer lasting whenever enough markets exist with significant economic freedom for buyers and sellers to negotiate. Put another way, economies that lie somewhere between left and right wing political extremes are fairer and more efficient to whatever degree markets are genuinely free. However, the capitalist ideal that many conservatives preach, as if it had ever actually existed, assumes across the board that markets are naturally free when governments just leave things alone.
For the purposes of this article, free markets are defined as markets that allow sufficient freedom of choice for both buyers and sellers that prices can easily find a point of equilibrium that balances supply and demand. That is, this article uses a very specific economic definition rather than a political one such as freedom from regulation. By this definition, genuinely free markets can only exist when all buyers and sellers have fair negotiating leverage in their respective marketplaces. Fair negotiating leverage can only exist when there are sufficient markets to provide viable competitive options for all buyers and sellers. This is an ideal virtually impossible to realize in practice.
However, only such markets are economically free enough to spontaneously and fairly self-regulate in the sense that many conservatives imply without actually stating it. Many if not most conservative defenders of free-market capitalism present arguments that tacitly assume these conditions actually exist in an unfettered capitalist society, despite the obvious idealistic nature of such an assumption.
It is perhaps worth noting that this highly unrealistic, tacit assumption is seldom if ever explicitly mentioned by these defenders, but although implicit, remains hidden underneath their rhetoric and certainly under the radar of their credulous audience. In light of the realistic prohibition against an assumption of economic sainthood in any society, such a capitalist ideal cannot come even close to practical realization without regulatory constraints. Indeed, it currently exists nowhere as a practical reality. It must nevertheless remain as a goal for which we must aim, just as the ideals embedded in the U.S. Constitution and the Declaration of Independence are ideals we have never achieved, but nevertheless must remain as goals if they are to have any practical value at all.
Under more realistic assessments, whenever financial and political powers are exercised unfairly they inevitably and undeservedly extract wealth from those who actually earned it. This process tends to embed itself economically as extractive institutions perpetuated by power elites who are either served by corrupt political elites or are synonymous with them. This is an operational definition of a politically extractive economy.
A perfectly ideal, inclusive economy could exist only if that economy fairly provided opportunity to all. It ideally rewards the intelligence and labor of those who contribute to the economy without rewarding those who attempt to abuse their power to divert some of these rewards into their own undeserving pockets. Within reason, it also compassionately cares for those who are legitimately unable to contribute. Again, this currently exists nowhere and is virtually impossible to realize in practice, but like equality under the law, it must remain an ideal to have any practical value.
Reality presents to us most practical economies existing somewhere along a gray scale connecting these extremes. Standard politico-economic theories indicate that democratization decreases income inequality, but empirical studies fail to bear this out. In Democracy, Ideology and Income Inequality: An Empirical Analysis authors Branko Milanovic, Mark Gradstein, and Yvonne Ying argue that prevailing ideology may be an important factor and that whatever effect democratization might have ‘works through’ ideology.
This study uses the dominant religion in each society as a proxy for ideology. Societies (Confucian and Muslim) that value highly economic equality among family and friends show less conflict resulting from income inequality, so democratization in such societies has a negligible effect on income inequality. The authors conclude that in this group of countries, a desirable reduction of inequality is reached with informal transfers of wealth among those with close ties. However, Judeo-Christian societies tend to place a lower value on such economic equality, so by contrast democratization has a significant impact in reducing inequality with political process via the increased power of lower income voters.
Empirical evidence shows income inequality has been increasing substantially in the U.S. Considering the analysis referenced above, since we are a predominantly Christian society and democracy ordinarily decreases income inequality under this condition, what could explain this? At first sight, we might point to becoming less Christian, which although true, fails to explain it. Democratization affects income inequality less in Confucian and Muslim societies precisely because informal means of lowering inequality already exist broadly within those social structures. With this understanding, a U.S. becoming less Christian could conceivably decrease inequality, but only if it is becoming correspondingly more similar to Confucian or Muslim societies in its informal means of lowering inequality.
It is highly doubtful that this is a very significant factor despite the increase in Confucian and Muslim ethnicity in the population. More likely we are going in the opposite direction, simply becoming less religious and more culturally diverse. Divorce rates are very high, so family ties and informal transfers of wealth are even less likely than in a more strongly Christian, ethnically homogeneous society with its corresponding traditional values. Church operated soup kitchens and similar but small church-sponsored means of wealth transfer would not only decrease, but despite their enormous value for those they serve, do not significantly affect the bigger picture in the first place, since they are aimed only at a relatively isolated population.
An increase or decrease in democracy should, according to this understanding, affect income inequality in current U.S. society even more markedly than in an earlier, more predominantly Christian society, let us say in the 1950s, with much stronger family and community ties. If we assume such an increase in sensitivity to variations in the degree of democracy together with increasing income inequality in the U.S., this points to a possible explanation. While Christianity has been decreasing in a direction away from what would provide increased informal means of wealth transfer, democracy has also been decreasing in the U.S., weakening any solution to income inequality with political process via the influence of lower income voters.
Of course, we could always return to conservative idealism and assume that greater income inequality is the natural result of a fair economy that justly rewards in exact agreement with who deserves what and how much. However, unless we assume this and its obvious implication that low income is always deserved, less potent political means to address economic unfairness leads directly to the consideration of other factors. There are indeed factors that have a far greater effect on income inequality than the degree and inclusiveness of democracy in a country.
In societies strongly plagued with politically extractive economies, incentives to be genuinely productive are lowered while incentives to participate in corrupt practices are increased. Extractive institutions either implemented or tolerated by a government unjustifiably appropriate wealth from the general population for the benefit of a powerful elite. Here we deliberately choose a source that eliminates any degree of democracy as a factor in income inequality. In Inequality, Extractive Institutions, and Growth in Nondemocratic Regimes by Nobuhiro Mizuno, Katsuyuki Naito, and Ryosuke Okazawa, the authors show a strong correlation between the degree of income inequality and the degree to which political preferences differ, something that should not be very difficult for most of us to intuit.
If we continue to ignore the question of democracy, it is not so hard to understand the intense degree of political disagreement that currently exists in the U.S., since income inequality has been increasing substantially for decades. In turn, this same study shows that the degree of political agreement or disparity in a population and the corresponding thresholds of varying tolerance for economically extractive institutions strongly affect the degree of popular support for that society’s government. That should also ring a familiar bell for U.S. citizens.
This study also shows that in societies with lower variation in incomes among its citizens, the choice or tolerance by its government of strongly extractive institutions reduces popular support enough to threaten the stability and survival of that government. However, if the inequality of income is sufficiently great and the extractive institutions strong enough, the stability and survival of the government is affected relatively little by choosing to implement or tolerate powerfully extractive institutions, leading to decreased investment and growth.
If indeed democracy has been decreasing in the U.S. while income inequality and political disparities have been increasing and extractive institutions such as international banking tolerated, it should be no surprise given the results of these studies that investment and economic growth are very sluggish. A general, internationally significant negative correlation between income inequality and economic growth and its recent, obvious manifestation in the U.S. reinforce this.
There are extreme cases of extractive economies in various parts of the world. For example, an article dated November 30, 2009 from the Financial Times of London titled Looted Wealth Fuels Congo’s Conflict by William Wallis reports that numerous free-lance militia there and the government army are virtually indistinguishable in terms of how they operate. They all chase down precious resources to control them. As a result of collusion by traffickers in surrounding countries involved in international trade, the extremely valuable mineral resources in the Congo yield a miniscule economic reward for the state and the vast majority of its inhabitants. Aid of various kinds from international sources, including expert intelligence support from the UN, are rendered useless by corruption and collusion from within the government that allow crucial intelligence to quickly evaporate and the same perpetrators to repeatedly operate.
In a much less extreme but nonetheless very damaging case, many blame the current Democratic administration in the U.S. for its tolerance of the blatantly extractive institutions represented in the international banking community, and rightly so in my opinion. But the Republican alternative has shown much greater tolerance and even blatant encouragement of the very same extractive institutions. Francis Fukuyama in his rather critical review of Daron Acemoglu’s and James Robinson’s book Why Nations Fail directly implies that good governance is necessary for development, but democracy is not necessary for good governance. He also states in the announcement of his Governance Project that, “One can think of many ways in which greater democratic participation actually weakens the quality of governance.” Although this may sound like political heresy to many U.S. citizens who are strongly committed emotionally to the idea of a broadly inclusive democracy as always the best form of government with no portion of the population disenfranchised, unarguably there have been benevolent monarchies. There are those who would even argue that some still exist.
The problem is these tend to be short-lived, since there is no mechanism to prevent the next ruler from being an utterly despicable tyrant, as history has strongly and repeatedly testified. Nonetheless, Fukuyama’s statements have practical merit in terms of economic theory at any particular moment in time. For example, many right now in the U.S. on both sides of the political spectrum are chafing bitterly at the “tyranny of the majority”, a historically oft stated weakness of democracy. This manifests both in Democrats against locally elected Republican majorities in the states that have them as well as the House of Representatives and Republicans against the locally elected Democratic senators and the federally elected executive branch.
There is an increasing sense on both sides that our democracy is not working. The attempts by Republicans in 2012 to disenfranchise voters with ID requirements that clearly discriminate in practice against certain demographic populations are a case in point. Although they backfired in Florida, these attempts are a practical expression, openly admitted or not, of a widespread sentiment that our democracy has been weakened by becoming too broadly inclusive in the face of our rapidly changing demographics. This same political sentiment is evident in the strong resistance in some quarters to immigration reform and the intense desire of many for protection of our borders so extreme that in practice it is unenforceable.
The irony in this is that the same voters expressing this kind of sentiment are largely the ones who have made us as voters so far powerless to politically overturn extractive institutions operating in our society. It is these same voters who demonstrate blind allegiance to the very political forces that maintain and seem forever bent on increasing the ultimately destructive power extractive institutions exercise over us. To further the irony, their financially and politically elite manipulators masquerade as the saviors of capitalism and preach an idealistic version of capitalism that by any realistic criteria does not, has never, and cannot exist in the absence of intelligent, honest policing.
Meanwhile they isolate their supporters from those who understand and work to undermine this pernicious game of economic extraction by preying on the social and emotional needs, faulty reasoning, and the tendency toward anti-intellectualism in their gullible audience. They capitalize on the same tendency we see in the previous most recent poor to blame the current poor for their problems, as evidenced in successive waves of immigration in the U.S. They cynically use this tendency to misdirect attention from themselves and blame the poor for our problems, emphasizing the evils of social welfare.while ignoring the hugely more significant corporate welfare. They use conservative paranoia and fear to exclude our spending on their international strategic arm, the military, from their arguments against "big government", which arguments turn out to actually mean "we don't want any oversight or accountability to anyone". The motive for this kind of rhetoric is clear. They don't want anything to interrupt their highly lucrative extractive strategies. This attitude is nothing more or less than the modern equivalent to the divine right of kings.
My next article, Practical Reality Check II, will look at how these principles apply in the world arena and how a Swiss study points strongly to the reality of a modern equivalent to the late Buckminster Fuller’s “Great Pirates”. It proposes that Fuller's "Great Pirates" are now replaced by an international oligarchy that effectively operates as a shadow government in a major portion of the world at large, and with the power elite in the United States of America playing a major role.
Addendum: For strong confirmation that we have become a highly extractive economy in the U.S., click here. The associated video is even more revealing than the article.
Copyright June 2013 © Robert P. Wendell
Redistribution freely permitted contingent on the unmodified inclusion of this copyright notice.