Proposition 4: Global inequity is not an indictment of capitalism to its supporters

Generally speaking, most of us believe that the scale and horror of global poverty ought to be, in and of itself, a stimulus to action. The global economy is a profoundly unequal economy, and the relative inequality seems to be only increasing. Again, as was the case with the phenomenon of globalization itself, the inequality of the system is historic. Back in 1965 Zimmerman made some rough calculations of world income distribution for three years:

World Income Distribution
1860-1960

  1860 1913 1960
Richest 25% 57.8% 68.9% 72.1%
Second 25% 15.5% 17.2% 17.9%
Third 25% 14.2% 7.8% 6.8%
Poorest 25% 12.5% 6.1% 3.2%

Source: J. Zimmerman, Rich Lands, Poor Lands: The Widening Gap. New York: Random House, 1965, p. 38.

I strongly suspect that the relative gaps are even more skewed in 1996, but I lack the data to complete Zimmerman's table. The OECD did a study of the world economy from 1820-1992 and its data on GDP per capita growth led it to conclude that "[T]he overall long run pattern of income spreads has been strikingly divergent...In 1820 the intercountry range (the distance between the lead country and the worst performer) was over 3:1, in 1870 7:1, in 1913 11:1, in 1950 35:1, in 1973 40:1, in 1992 72:1." [Angus Maddison, Monitoring the World Economy, 1820-1992. Paris: OECD, 1995, p. 22]

That global income inequality has increased throughout the entire period since the 15th century is, I believe, an irrefutable fact, and is, for me, an urgent cause for action. It is not, however, to supporters of market capitalism. Unequal outcomes are, for the neo-classical liberal, not evidence that the economic system is flawed. It is merely evidence that some are more efficient than others, and that the more efficient should be rewarded for their efforts. A neo-classical liberal may lament the fact that incomes are so unequal and may in fact contribute heavily to charities to ameliorate the plight of the poor. But the neo-classical liberal would not sanction any changes in the system or recommend any policy changes which would distort the market simply because the outcomes are unequal. This position is held because unequal outcomes are not necessarily unfair outcomes.

The neo-classical position deserves respect. Its advocates are defending a system which has been phenomenally successful in terms of creating wealth. Maddison estimates that the GDP per capita (in 1990$) in 1500 was 565. By 1820 it had risen to 651, an increase of 15 percent in 320 years. By 1992, through the period in which globalization was occurring, per capita GDP was 5,145, an increase of nearly 700 percent in 172 years (p. 19). One cannot argue that the benefits of this growth were reserved exclusively to the very rich. In 1830, after nearly two million years of growth, the human population finally reached one billion. Now, after only 166 years, it is nearing 6 billion. Life expectancy has certainly increased dramatically since 1820. Capitalism is certainly not responsible for these improvements, but it cannot be discounted as at least the context for most of them.

Having sung the praises of capitalism, I would like to offer two parenthetical thoughts on its success. First, capitalism has succeeded only in its own terms: the astounding increase in material productivity is all that capitalism ever promised to accomplish. We may rightly demand much more from an economic system; consumption patterns, for example, may be more important to us than production. Economic systems do not exist in moral or political vacuums. Simply because capitalism tells us that its only possible definition of a "fair" income distribution is whatever income distribution falls out of market transactions is no reason for us to accept that definition. Some alternatives to the market definition can, I think, be readily rejected. The income distribution of the former Soviet Bloc countries was self-indulgent and hardly reflective of the scarcity of resources. And I worry about letting people decide what their income distributions should be: unfortunately, we all tend to believe that we deserve more than others. If we wish to challenge capitalism's definition of "fair," we need to come up with a rigorous definition of an alternative fair income distribution.

Second, the success of capitalism does not necessarily imply that it should be universalized. As a system spawned in the Enlightenment, there is a tendency to believe that capitalism is a "revealed" truth, sharing the characteristics of a natural law such as gravity. Supporters of capitalism argue that, just as an object dropped from a tower in Pisa will fall at exactly the same rate as an object dropped in Beijing, the greed of an Englishman is exactly equal to the greed of a Zulu. I sincerely doubt that the assumption is valid. Moreover, capitalism's success may be due to entirely contingent circumstances. It is, after all, a rather hungry system which developed during a time when those who believed in it felt they had the right to appropriate for their own purposes the land and resources of others. It also developed during a time when the industrial processes necessary for production felt no obligation to consider the environmental damage associated with that production. Both circumstances are no longer valid: the world is now a closed system, and globalization itself may have brought about the end of capitalism's universalist claims.

Returning to the central point, the hard reality is that global inequity in and of itself is not a sufficient justification for a policy change which warrants dramatic changes in the market mechanism. Capitalism as a system is primarily concerned with production; consumption is merely a derivative of production. One can consume only after one has successfully produced and sold a product or service on the market. A person's income should be exactly equal to the value that society places on the product or service. That that person's income might be very large or very small is of no concern to the market, nor should it be. However, this is not the end of the consumption side of the story to which I shall return in a few minutes. But this analysis leaves us with a very clear conclusion: moral judgments about global inequity are unlikely to persuade those who have the power to implement policy changes largely because they believe that the market divests them of the responsibility to make such judgments.

Proposition 5: Global inequity does not represent a traditional security threat

If the problem of global inequity itself is not enough to induce policy changes, then perhaps something associated with the problem may be sufficient. One traditional argument for the amelioration of poverty has been that the poor represent some sort of security threat to civil society. Steps to reduce poverty are therefore viewed as prophylactic, and justified, in cost-benefit terms, as a legitimate use of state revenues. Moreover, viewed from this perspective, the reduction of poverty is consistent with the security responsibilities of the liberal state and therefore ideologically justified.

The problem is that this perspective is both wrong and dangerous. Genuinely poor people do not have the time nor the means to pose significant security threats. One of the greatest ironies of poverty is that being poor is more than a full-time job: it requires almost total attention to the issue of subsistence and there is virtually no time for leisure. I will concede readily that poverty is unquestionably a conditioning factor toward the use of violence--poverty itself is a ubiquitous form of violence. But although economic inequality is almost always an underlying factor in every conflict, the inequality itself has rarely been the organizing principle behind most conflicts. Thus, for example, the violence is Northern Ireland may be fundamentally economic, but the participants in the struggle more typically invoke other issues, such as religion or nationalism, to justify their actions. The same can be said of the violence in Bosnia, Rwanda, South Central Los Angeles, or Haiti.

The difficulty in identifying inequity as a cause of conflict is that there is a response to that definition of the problem which is more congenial to the nature of the liberal state than the more difficult and ambiguous redistributive response: lock 'em up. Rather than intrude on the market with redistributive measures, the state would prefer to exercise its more traditional role as the provider of physical security. And it is clear that the more conservative middle class prefers that role: the willingness to spend tax revenues on police and prisons and the unwillingness to spend money on welfare is one of the hallmarks of contemporary politics.

Posing the poor as a security threat plays into the hands of the state, which has its own reasons for retaining and enhancing its monopoly on violence. Moreover, this tactic reduces profoundly whatever sympathy the better-off may have for the poor. These outcomes are dangerous. After the collapse of the Soviet Union, the mission of the US armed forces became opaque. Recent attempts to clarify that mission have all centered around vague and ill-defined threats from "rogue" states and disgruntled "terrorist" groups, all of which come from poor states like Korea, Iran, and Libya, or groups like the Hezbollah. That these states and groups have interests in changing the current distribution of power in the world is unquestionably true. That those interests are primarily rooted in the desire to eliminate global inequity is nonsense. The poor are everywhere and they are numerous. If we allow their existence to be used as a justification for increasing the coercive power of the state, then no action or capability will be denied to the state. Better not to open that door.

Proposition 6: Global inequity can be a threat to the collective interests of capitalists

If morality and security concerns are not sufficient to induce policy changes designed to reduce global inequity, then we must search elsewhere. I propose that we look into the heart of the capitalist himself or herself, taking guidance from Montesquieu: "And it is fortunate for men to be in a situation which, though their passions may prompt them to be wicked, they have nevertheless an interest in not being so" [Montesquieu, Espirit des lois, XIX, as quoted in Albert Hirschman, The Passions and the Interests: Political Arguments for Capitalism before Its Triumph. Princeton: Princeton University Press, 1977, p. 73]. The interest in this case seems to be clear: if global inequity can be defined as a threat to the continued success of capitalism, then capitalists will have an interest in reducing global inequity.

Does global inequity threaten capitalism? I think it does. Globalization has created a single unified market for capitalism out of a series of smaller markets, historically isolated from each other by distance, politics, culture, and ignorance. These smaller markets established price and wage levels in accordance with these constraints, and some of the wage and price levels varied tremendously from market to market. The unification of the global market suggests that these wage and price levels must converge. The higher-priced markets must reduce their prices and wages in order to compete with the lower-priced markets.

The danger of such a transition is clear. Capitalism, at least as it has been practiced in the second half of the twentieth century, requires a high level of demand. If wages go down, demand will go down. If jobs leave the high wage countries, who will be able to buy the (albeit) cheaper products now produced in low wage countries? Lower prices do not compensate for a vanished income. Capitalism has not exorcised the demon of underconsumption, the root cause of the Great Depression. Professor Epstein gave us more than enough evidence to believe that, if wages continue to decline in the advanced industrialized countries, that a globalized world economy will face a serious collapse in demand. In a completely globalized economy, there will be no place to hide from such a calamity.

Do capitalists have a self-interest in reducing global inequity in order to avoid the problem of underconsumption? Here we must be analytically very careful. The capitalist system is a collective good. Its benefits are indivisible and will be shared by all, even those who do not contribute to its maintenance. Such individuals have a rational interest in being a free rider. If they can enjoy the benefits of a collective good, without paying for its production and maintenance, then they will have maximized their benefits. Thus, no single capitalist has any incentive whatsoever to reduce global inequity--he or she should wait and let others pay for the reduction, and then enjoy the benefits.

Thus, the answer is straightforward: capitalism does have an interest in reducing global inequity, but capitalists have an interest in letting some one else pay for that reduction. The answer is the same in the area of environmental protection. Everyone wants a clean environment as long as someone else will pay the price. The position of the free rider, while rational in a very narrow sense, is profoundly selfish and, in the end, self-destructive. We need to assure that people and states understand the short-sightedness of their position. This task ought to be everyone's.


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