Tuesday, February 9, 2010

Beneath Lilacs

This post could be titled "The New Economy" or "The Perversity of Rent Seeking Behavior", but I prefer a title that brings to mind an image of sitting under blooming lilacs and contemplating how much more pleasant life would be if generations of politicians hadn't thrown our futures away with a ruinous public debt.

The Work of Nations

In 1991, before he had become President Clinton's Secretary of Labor, Robert Reich published The Work of Nations, in which he described an increasingly globalized world and the the impact that this world was having on society and the workforce.  At a time before these changes were quite as widespread as they are today, Dr. Reich described how information technology and global wage arbitrage enabled global wage arbitrage, enabling workers in emerging nations to compete with workers in the more advanced economies.  As Dr. Reich predicted, wage arbitrage brought about a convergence of wages across borders, within different job categories, and a stratification of wages according to the scarcity and demand for each type of labor, within national borders.  One outcome of this process was to increase the divergence in economic outcomes across the labor force within the developed nations.  It was well established even before the time of Reich's writing that the less skilled, less educated members of the advanced societies were suffering lower wages and lower employment because of international competition and increasing mechanical and information productivity.

Roll Back the Enlightenment

Economic statistics demonstrate a long-term trend to greater inequality in American society, with a widening gap between rich and poor. Wealth is being concentrated into fewer and fewer hands, and the rising debt loads of the past thirty years or so have greatly depleted the wealth and the ranks of the middle classes.  This increasing inequality may look like nothing more than the inevitable results of greater global competition, greater financial complexity, or the folly of overconsumption, but there are yet other forces at work that threaten to continue the trend toward inequality and to drive it to barbaric extremes. 

In an interview in 2008 the economist Michael Hudson said:  "The economy has polarized to the point where the wealthiest 10 percent now own 85 percent of the nation’s wealth. Never before have the bottom 90 percent been so highly indebted, so dependent on the wealthy. From their point of view, their power has exceeded that of any time in which economic statistics have been kept."

About the wealthiest members of our society Hudson said:  "You have to realize that what they’re trying to do is to roll back the Enlightenment, roll back the moral philosophy and social values of classical political economy and its culmination in Progressive Era legislation, as well as the New Deal institutions."

He feels that the move is a deliberate attempt to transform society fundamentally to their advantage, no matter the consequences to everyone else: "So what you find to be a violation of traditional values is a re-assertion of pre-industrial, feudal values. The economy is being set back on the road to debt peonage. The Road to Serfdom is not government sponsorship of economic progress and rising living standards, it’s the dismantling of government, the dissolution of regulatory agencies, to create a new feudal-type elite."

By the way, there is more than one "Road to Serfdom".  Hayek's book of that title described one, undeniable route, which is the socialist state.  Hudson's interview describes another route, which is feudal domination by a conservative, exclusivist elite.  Both routes lead surely to serfdom and must be defended against.

New Feudalism

Although "rolling back the Enlightenment" sounds like an extreme view, there are identifiable forces working on the world to transform the economic and social system in a pre-industrial direction, as discussed in an article by Parag Khanna last year in Foreign Policy.  In "The Next Big Thing: Neomedievalism,"  Khanna pointed out a seeming incongruity, that globalized financial systems have spread economic crisis around the world at a time when increased corporate and local concentration of power may be dragging us all back to a more localized, feudal condition.  He called this state of affairs "a new Middle Ages".

The argument begins with the observation that:  "The state isn't a universally representative phenomenon today, if it ever was. Already, billions of people live in imperial conglomerates such as the European Union, the Greater Chinese Co-Prosperity Sphere, and the emerging North American Union, where state capitalism has become the norm. But at least half the United Nations’ membership, about 100 countries, can hardly be considered responsible sovereigns. Billions live unsure of who their true rulers are, whether local feudal lords or distant corporate executives."
Given the weak positions of many nation states, "This diffuse, fractured world will be run more by cities and city-states than countries. ... Today, just 40 city-regions account for two thirds of the world economy and 90 percent of its innovation. ... Add in sovereign wealth funds and private military contractors, and you have the agile geopolitical units of a neomedieval world. Even during this global financial crisis, multinational corporations heavily populate the list of the world's largest economic entities ..."

We wonder if America will be dominated increasingly by feudal elites, corporations, or new transnational organizations.  Or maybe this is the wrong analogy with the Middle Ages, which saw some remarkable progress in many spheres of European life, and which were perhaps even more remarkable in other parts of the world.  The medieval world in Europe was one of city-states, local military strongmen, and the loose international network of the church. In contrast, China developed national commerce under the Sung dynasty, and then a universal (if foreign ruled) state under the Mongol Yuan dynasty.

A Predatory Financial Sector

In the western world, government's role in finance has been shrinking for hundreds of years as new financial enterprises and instruments have been developed -- banks, bonds, insurance, stock markets, bonds, futures contracts, etc.  Economies and governments benefited as new financial institutions directed capital flows to where they were needed.

Any system can be perverted, however, and in recent decades financial activity has comprised a growing percentage of gross product -- but with no corresponding contribution to economic efficiency or growth.  Heaven knows, economic stability has certainly been sacrificed to financial interests.

The Rent Seekers

The financial sector and the elite clientele that it serves have been looking for new ways to maintain and increase their wealth.  This includes influencing legislators and bureaucrats to pave the way for more effective rent-seeking behavior.  In economics, rent seeking is the capturing of "economic rent" (income) by means other than economic transactions or the creation of economic value added.  That is, rent seeking requires manipulating the rules of the economy or exploiting special relationships, e.g., getting the government to regulate commerce in a way that effectively confers a monopoly advantage.  Other examples would be getting control of public resources or charging "fees" rather than usurious rates of interest.

As "real" economic activity wanes (from foreign competition or economic depression), you can be sure than rent seeking behavior will increase among the privileged.  They have to maintain their life styles, after all, and poor peons can't afford the lobbyists and corporate attorneys.  The growing role of government in financial affairs, in the wake of the credit bust, is sure to provide even more fertile grounds for nefarious rent seeking.

You can be sure that this does not bode well for new "real" economic activity.  People are always trying to get something for nothing.

My Brother Is Coming with Many Fremen Warriors

The intent has been to confine this post to known trends and to obstain from conspiracy theory, but you will of course have to consider for yourself whether this story is realistic or other-worldly.  Should it say beneath lilacs or Bene Tleilax

List of graphics:

Photograph of lilacs
Harry Sternberg, Bethlehem Steel in Moonlight, 1937
Jean-Honore Fragonard, The Reader, c. 1770-1772
Page from Les Tres Riches Heures du Duc de Berry
Otto Dix, Machine Gunners Advancing, from Der Krieg, 1924
Close up of Alia in Dune (David Lynch, 1984).