Income inequality and austerity measures are widely seen among policymakers as necessary pains for economic growth. To benefit most people, however, the economy must first be designed this way.
|This post is part of a reading series of Doughnut Economics by Kate Raworth. For quick access to all chapters, click here.|
As in any book club, you are kindly invited to let the rest of us know what you think!
Disclaimer: Being the result of personal work, this chapter summary cannot and does not pretend to offer a detailed and accurate transcription of all the author’s ideas.
The Economic Rollercoaster Ride
Today, three-quarters of the world’s poorest people live in middle-income countries, while the gap between rich and poor is now at its highest level in over 30 years in high-income countries1. In other words, the geography of deprivation has largely shifted from low-income countries to more affluent ones. Does it have to get worse before it gets better?
Contrary to the belief that economies have to go through periods of crisis to then flourish again, data show that there is simply no pattern linking economic growth and austerity one way or another.2 The absence of a balanced redistributive system, on the other hand, is a sure recipe for the pauperization of society at large. But in spite of a total lack of evidence, as noted with some frustration by economists at the International Monetary Fund (IMF), “the notion of a tradeoff between redistribution and growth seems deeply embedded in policymakers’ consciousness”. This may explain why the vice-chairman of Goldman Sachs, Lord Griffiths, thought he could justify lavish bonuses for his city traders after the 2008 financial crash, saying “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.”3
This form of wishful thinking coming from people who make their wealth by simply playing with money reveals in an indirect way the true nature of economic inequality. As anyone can tell through personal experience, there is a difference between profiting from earnings through rents or dividends and being paid in direct proportion to your individual labor. As demonstrated by Thomas Piketty in Capital in the Twenty-First Century, moreover, decades of tax records from Europe and the United States show that returns on capital have tended to grow faster than the economy as a whole, leading wealth to become ever more concentrated.
If inequality is admissible to an extent, it is definitely not in and by itself the engine of a prosperous society. In Piketty’s words, “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”4 The idea of redistribution, starting by taxing capital income at the same rate as work income, is not about establishing the Soviets, as the likes of Lord Griffiths would have it. It is about ensuring a fighting chance for all.
Why Inequality Matters
Societies can be deeply undermined by income inequality in several ways. To take just two of the most obvious ones mentioned by Kate Raworth, let’s focus on public health and on Democracy itself.
“When epidemiologists Richard Wilkinson and Kate Pickett studied a range of high-income countries in their 2009 book, The Spirit Level, they discovered that it is national inequality, not national wealth, that most influences nations’ social welfare. More unequal countries, they found, tend to have more teenage pregnancy, mental illness, drug use, obesity, prisoners, school dropouts and community breakdown, along with lower life expectancy, lower status for women and lower levels of trust.” (Id. p. 146) More equal societies, be they rich or poor, turn out to be healthier and happier.
As alluded to by Thomas Picketty, Democracy itself is jeopardized by income inequality. Among other things, a market of political influence is mechanically unleashed by the concentration of power in the hands of the few. This legal bribery is nowhere more blatant than in the United States: “We are now seeing billionaires becoming much more active in trying to influence the election process”, observes political analyst Darrell West5, “They’re spending tens or hundreds of millions of dollars pursuing their own partisan interests, often in secret from the American public.” The US former vice-president Al Gore concurs. “American democracy has been hacked,” he says, “and the hack is campaign finance.”6 The reign of oligarchs coupled with the lack of decent basic public services for the many erodes, in turn, the trust in the institutions and the social capital built on community connections and norms. With no clear collective landmarks of economic and social justice to rely on anymore, many get entirely lost and fall prey to the most reactive forms of demagoguery.
Get with the Network
It results from the observations above that “Equitable economies don’t emerge after an unavoidable process of economic pain: they are created by pursuing an intentional pattern of design.” (Id. p. 174). Contrary to the gospel of market fundamentalism, political will is indispensable to ensure that the collective economic body operates synergistically. The pattern of reference, unsurprisingly, lies in system thinking.
The laws by which any system sustains itself—be it the economy, our own body, or the internet—can be derived from the works of nature. It is all about finding a balance between efficiency and resilience: “Nature’s networks are structured by branching fractals, ranging from a few larger ones to many medium-sized ones and then myriad smaller ones, just like tributaries in a river delta, branches in a tree, blood vessels in a body or veins in a leaf. Resources such as energy, matter and information can flow through these networks in ways that achieve a fine balance between the system’s efficiency and its resilience. Efficiency occurs when a system streamlines and simplifies its resource flow to achieve its aims, say by channelling resources directly between the larger nodes. Resilience, however, depends upon diversity and redundancy in the network, which means that there are ample alternative connections and options in times of shock or change. Too much efficiency makes a system vulnerable (as global financial regulators realised too late in 2008) while too much resilience makes it stagnant: vitality and robustness lie in a balance between the two.” (Id. p. 149)
By the same token, “If large-scale actors dominate an economic network by squeezing out the number and diversity of small and medium players, the result will be a highly unequal and brittle economy. This certainly sounds familiar, given the current scale of corporate concentration across many industrial sectors, from agribusiness, pharmaceuticals and the media to the banks that are deemed too big to fail.” (Id. p. 149) This is why “Economic development must become more focused on developing human, community, and small-business capital because long-term, cross-scale vitality depends on these.”7
Redistributing Income—and Redistributing Wealth
Redistributing, in other words, does not mean arbitrarily taking from one to give to the other, but designing a system that can sustain itself for the benefit of one and all. Five distinct fields are more particularly concerned: land ownership, the power to create money, enterprise, technology, and knowledge.
Who owns the land?
“Buy land. They’re not making it anymore” quipped Mark Twain, merely noticing that the price of land constantly rises, thus generating ever-higher rents for landowners. His contemporary Henry George was struck by the inequity inherent in this setup. Rather than simply suggesting buying land, he thought that it should also be taxed. Why? Because much of land financial value comes not from cultivating it but from what is beneath its surface or from the surrounding commodities put in place by the community, such as local schools, roads, or hospitals.
Henry George’s proposal was echoing John Stuart Mill’s earlier call to tax the landlords who “grow richer, as it were, in their sleep, without working, risking, or economizing.”8 But taxation was to George a substitute for a more systemic fix: the common ownership of land. “The equal right of all men to the use of land,” he wrote, “is as clear as their equal right to breathe the air.”9 There is, indeed, a centuries-long global trend of both the state and the market encroaching on common land, leaving those who used to know best how to take advantage of the natural world with no other recourse than to sell their workforce to the landlords.
This is not any different today: “Since 2000, foreign investors have made over 1,200 large-scale land deals in low- and middle-income countries, acquiring more than 43 million hectares of land—an area bigger than Japan.40 In the majority of cases, those deals were land grabs: signed without the free, prior and informed consent of the indigenous and local communities that had inhabited and collectively stewarded that land for generations. In case after case, investors’ promises to create new jobs, enrich community infrastructure and skill-up local farmers have come to nothing: instead many communities have found themselves dispossessed, dispersed and impoverished.”10 (Id. p. 153)
The market cannot do everything. As demonstrated by Elinor Ostrom, there is an equally powerful alternative of self-organizing in the commons. “Gathering a rich array of case studies of ‘common-pool’ resource users, from Southern India to Southern California, she and her colleagues analysed how diverse communities had, sometimes for generations, successfully collaborated in harvesting, stewarding and sustaining forests, fishing grounds and waterways.11 Many of those communities, in fact, managed their land and its common-pool resources better than markets did, and better than comparable state-run schemes.” (Id. p. 154)
The conclusion about land ownership and management can only be, therefore, that there is not one single way to go: “There are clearly many ways to more equitably share the wealth that lies beneath our feet. Ostrom was quick to point out, however, that there is no panacea for managing land and its resources well: neither the market, the commons nor the state alone can provide an infallible blueprint. Approaches to distributive land design must fit the people and the place, and may well work best when they combine all three of these approaches to provisioning.”12 (Id. p. 155)
Who makes your money?
Let us first remind ourselves that money “is not merely a metal disc, piece of paper or electronic digit. It is, in essence, a social relationship: a promise to repay that is based on trust.”13 (Ibid.)
What are, more specifically, the mechanisms of money in the present-day financial system? “In the majority of countries, the privilege of creating money has been handed to commercial banks, which create money every time they offer loans or credit. As a result, more money is made available only by their issuing more interest-bearing debt, and that debt is increasingly being channelled into activities—such as buying houses, land or stocks and shares. Investments such as these do not create new wealth that generates additional income with which to pay the interest, but instead earn a return simply by pushing up the price of existing assets.14 (…) When such debt increases, a growing share of a nation’s income is siphoned off as payments to those with interest-earning investments and as profit for the banking sector, leaving less income available for spending on products and services made by people working in the productive economy. ‘Just as landlords were the archetypal rentiers of their agricultural societies,’ writes economist Michael Hudson, ‘so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies.’”15 (Ibid.)
This is one way to go; there could be others. For the sake of creating a truly resilient financial ecosystem, the state, the commons, and the market could be involved together at different degrees. One thing for sure, resiliency is not a forte of the current monetary monoculture, even though it would not take that much to provide adequate solutions to its shortcomings. Kate Raworth speaks in the light of the 2008 crisis but her words sound as loudly in that of the Covid-19 pandemic: “In deep recessions, however, once interest rates have already been cut very low, central banks attempt to further boost the money supply by buying back government bonds from commercial banks—a practice known as quantitative easing, or QE—in the hope that the banks will then seek to invest the extra money in expanding productive businesses. But as post-financial-crash experience demonstrated, commercial banks used that extra money to rebuild their own balance sheets instead, buying speculative financial assets such as commodities and shares. As a result, the price of commodities such as grain and metals rose, along with the price of fixed assets such as land and housing, but new investments in productive businesses didn’t. What if, instead, central banks tackled such deep recessions by issuing new money directly to every household as windfall cash to be used specifically for paying down debts—an idea that has come to be known as ‘People’s QE’. Rather than inflating the price of bonds, which tends to benefit wealthy asset owners, this approach—which resembles a one-off tax rebate for all—would benefit indebted households. Additionally, suggests the tax expert Richard Murphy, central banks could channel new money into national investment banks for ‘green’ and social infrastructural projects, such as community-based renewable energy systems, as part of the long-term infrastructural transformation that is urgently needed—an idea now known as ‘Green QE’.”16 (Id. pp. 156-157).
Who owns your labour?
For the last four decades stagnant wages have been the norm for workers in high-income countries, while executives have seen their income steadily increase during the same period. Obviously, this cannot be attributed to the relative productivity of each group but, rather, to their relative power. Only those who own the shares of a company benefit from its activity.
There are alternatives to this model, however. For an enterprise to be inherently distributive of the value it creates, according to the analyst Marjorie Kelly, two particular design principles are key: rooted membership and stakeholder finance. The first one means that instead of being the expendable outsider, the labor force becomes the ultimate insider, rooted in employee-owned firms. The second principle is that instead of issuing shares to outside investors as a slice of ownership, enterprises could issue bonds, promising their stakeholder-investors a fair fixed return. There are already many examples of companies that have flipped this way the ownership model on its head.
“‘What’s underway is an ownership revolution,’ says Todd Johnson, one of the innovative US lawyers rewriting corporate charters. ‘It’s about broadening economic power from the few to the many and about changing the mindset from social indifference to social benefit.’”17 (Id. p. 162)
Who will own the robots?
IT technologies and the internet could be considered the essence of distributive design. They blur the divide between producers and consumers, allowing everyone to become both a maker and a user in a peer-to-peer economy. But a parallel process of winner-takes-all is also at play. Google, YouTube, Apple, Facebook, eBay, Paypal and Amazon have become digital monopolies in their own activity, sitting at the heart of the network society. For emerging start-ups to have a chance to bring ever more creativity and innovation in the field and benefit society at large, the reactivation of anti-trust laws might be in order. On top of this purely economic reason, the current dystopia of a few companies hoarding all of our personal data to sell them to the highest bidder or hand them out to an increasingly surveilling state should also give pause to policymakers.
Another challenge specific to the development of IT is the replacement of humans by robots in many industrial and service sectors. Even though quite recent, the phenomenon is likely to be accelerating far too quickly for jobs creation in other fields to keep up. To which Kate Raworth answers: “So how could distributive design help to prevent the economic segregation that technology appears to be driving? An obvious starting point is to switch from taxing labour to taxing the use of non-renewable resources: it would help to erode the unfair tax advantage currently given to firms investing in machines (a tax-deductible expense) rather than in human beings (a payroll tax expense). At the same time, invest far more in skilling people up where they beat robots hands-down: in creativity, empathy, insight and human contact—skills that are essential for many kinds of work, from primary school teachers and artistic directors to psychotherapists, social workers and political commentators.” (Id. p. 164)
Beyond this starting point, the deeply split labor market that is expected from now on strongly advocates for a basic income for all. This solution has its limits however; the main one being that even though necessary to keep as much as possible an economic balance, a basic income for all would leave low-wage workers and workless people lobbying to maintain such high levels of redistribution year on year. “Far more secure, says Kate Raworth, is for every person to have a stake in owning the robot technology itself. What might that look like? Some advocate a ‘robot dividend’, an idea inspired by the Alaska Permanent Fund, which grants every Alaskan citizen, through a state constitutional amendment, an annual slice of the state’s income arising from the oil and gas industry, a dividend that exceeded $2,000 per resident in 2015.” (Id. p. 165) After all, “(…) when the state takes a risk, it deserves a return, which could be collected through royalties from co-owned public–private patents or through state banks owning significant equity in businesses that use robot technologies based on publicly funded research.”18 (p.165)
Who owns the ideas?
“With great irony, the intensive overuse and abuse of intellectual property law today is widely acknowledged to be stifling the very innovation that it was originally created to promote. Patents now last 20 years and are granted for a wide array of spurious inventions—ranging from Amazon’s US patent on ‘one-click’ purchasing to the medical firm Myriad Genetics’ patents on cancer-related genes. And in many high-tech industries, patents are frequently acquired tactically with the specific aim of blocking or suing competitors. ‘We have designed an expensive and unfair intellectual property regime,’ writes economist Joseph Stiglitz, ‘that works more to the advantage of patent lawyers and large corporations than to the advancement of science and small innovators.’”19 (Id. p. 166)
Kate Raworth sees the expansion of the commons as a solution for getting out of the misuse of patents: “First, invest in human ingenuity by teaching social entrepreneurship, problem-solving and collaboration in schools and universities worldwide: such skills will equip the next generation to innovate in open-source networks like no generation before them. Second, ensure that all publicly funded research becomes public knowledge by contractually requiring it to be licensed in the knowledge commons, rather than permitting it to be locked away under patents and copyright for private commercial gain. Third, roll back the excessive reach of corporate intellectual property claims in order to prevent spurious patent and copyright applications from encroaching on the knowledge commons. Fourth, publicly fund the set-up of community makerspaces—places where innovators can meet and experiment with shared use of 3D printers and essential tools for hardware construction. And lastly, encourage the spread of civic organisations—from cooperative societies and student groups to innovation clubs and neighbourhood associations—because their interconnections turn into the very nodes that bring such peer-to-peer networks alive.” (Id. p. 167)
The reflection about economic redistribution would not be complete without addressing its international aspect. Below is what Kate Raworth had to say (figures are given as per the time when her book was published).
“The traditional tool for international redistribution has been overseas development assistance (ODA), but the history of its rich-to-poor transfers is nothing short of a myopic failure in global action. In a 1970 UN resolution, high-income countries pledged to contribute 0.7 percent of their annual income to ODA and to do so by 1980 at the latest. But by 2013—over 30 years beyond that deadline—the total stood at just 0.3 percent, less than half of what was promised each year. Well spent, that missing finance could have delivered decades of progress in maternal health, child nutrition and girls’ education in the world’s poorest communities: it would have empowered women, transformed livelihoods, boosted national prosperity and helped to stabilise the global population at the same time.” (Id. p. 168)
“How could additional funds—on top of 0.7 percent ODA—be raised in the spirit of global redistribution? Through a global tax on extreme personal wealth, for starters. There are now more than 2,000 billionaires living in 20 countries from the United States, China and Russia to Turkey, Thailand and Indonesia. An annual wealth tax levied at just 1.5 percent of their net worth would raise $74 billion each year: that alone would be enough to fill the funding gap to get every child into school and deliver essential health services in all low-income countries. Match that with a global corporate tax system that treats multinational corporations as single, unified firms and closes tax loopholes and tax havens, so boosting public revenue for public purposes worldwide. Supplement these with taxes on destabilising and damaging industries, such as a global financial transactions tax to curb speculative trading, and a global carbon tax levied on all oil, coal and gas production. Yes, some of these tax proposals sound unfeasible now, but so many once-unfeasible ideas—abolishing slavery, gaining the vote for women, ending apartheid, securing gay rights—turn out to be inevitable. In the century of the planetary household, global taxes will too.” (Id. p. 170)
|Book Club Discussion: Among Kate Raworth’s redistribution suggestions to ensure both resiliency and efficiency in the economic system, which one seems to you quite obvious and which one, if any, too far-off or down-right unacceptable? Why? |
Share your thoughts and build on what others say in the comment section below.
- Cingano, F. (2014) Trends in Income Inequality and Its Impact on Economic Growth, OECD Social, Employment and Migration Working Papers, no. 163, OECD publishing
- Krueger, A. (2002) Economic scene: when it comes to income inequality, more than just market forces are at work, New York Times 4 April 2002
- Quinn, J. and Hall, J. (2009) Goldman Sachs chairman says “learn to tolerate inequality”, The Telegraph 21 October 2009.
- Piketty, T. (2014) Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press.
- West, D. (2014) Billionaires: Darrell West’s reflections on the upper crust
- Gore, A. (31 October 2013). The future: six drivers of global change. Lecture given at the Oxford Martin School.
- Goerner, S. et al. (2009) Quantifying economic sustainability: implications for free-enterprise theory, policy and practice, Ecological Economics 69, p. 79.
- Mill JS, Principles of Political Economy 1848, book V, chapter 2
- George, H. (1879) Progress and Poverty, New York: Modern Library, Book VII, Chapter 1.
- Pearce, F. (2016) Common Ground: securing land rights and safeguarding the Earth. Oxford: Oxfam International.
- Ostrom, E. (2009) A general framework for analyzing sustainability of social-ecological systems, Science 325, p. 419.
- Ostrom, E., Janssen, M. and Anderies, J. (2007) Going beyond panaceas, Proceedings of the National Academy of Sciences 104: 39, pp. 15176–15178.
- Greenham, T. (2012) Money is a social relationship TEDx Leiden, 29 November 2012
- Ryan-Collins, J. et al. (2012) Where Does Money Come From? London: New Economics Foundation.
- See Hudson, M. and Bezemer, D. (2012) Incorporating the rentier sectors into a financial model, World Economic Review 1, p. 6.
- Murphy, R. and Hines, C. (2010) Green quantitative easing: paying for the economy we need, Norfolk: Finance for the Future
- Cited in Kelly, M. (2012) Owning Our Future: the emerging ownership revolution. San Francisco: Berrett-Koehler, p. 12.
- Mazzucato, M. (2013) The Entrepreneurial State. London: Anthem Press, pp. 188–91.
- Stiglitz, J. (2012) The Price of Inequality. London: Allen Lane, p. 202.