A crucial divide

Where are we headed — as economic inequality grows?

A crucial divide exists between those oligarchs who believe that insatiable cheating will forever perch them atop a neo-feudal pyramid of inherited wealth and power vs. those who can smell inevitable revolution.

“It’s not whether we should be capitalist or socialist. It’s how do we make sure that capitalism is working the way it has in the past,” said top investor Alan Schwartz at the recent Milken Institute Global Conference, warning of “class warfare.” He noted that salaries and wages as a percentage of the economic pie are at a postwar low of 40%, prompting a “throw out the rich” mentality that would require some form of income redistribution to head off.

Mega investor Ray Dalio further warned that unless the American economic system is reformed so “that the pie is both divided and grown well” the country is in danger of “great conflict and some form of revolution that will hurt most everyone and will shrink the pie.”

Let’s be clear. Capitalism did not “work” well across 6000 years, because elites foiled or slowed its competitive creativity with relentless cheating. It’s what powerful males will do, 99% of the time, and that history led Marx to confidently predict a violent, proletarian end game. But it turned out that there was another path: curb the cheating. Successive waves of reform across the last 200 years started with the American Founders seizing and redistributing up to a third of the land in the former colonies, ending feudalist oppression. But other cheats flourished and it wasn’t till the Rooseveltean social contract that markets became flat-fair-open-competitive enough to really take off, growing an unprecedented middle class, while making shared investments in infrastructure, science, education, health, R&D and children… the greatest success story in history.

That is, till that contract suffered slash-burn attacks, starting in the 1980s. And every retraction of that balanced approach — every “supply side” restoration of cheating — led to slower growth and skyrocketing disparities.

Maintaining a civilization of empowered citizenship — the “diamond-shaped social structure” about which I often speak — is a dilemma well described by famous historians Will and Ariel Durant, in The Lessons of History:

“…the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”

Doubt it? The works of Karl Marx, lately thought consigned to the dust-bin, are flying off the shelves now, on university campuses and in worker ghettos around the globe. And the smarter billionaires are starting to consider what kind of society will serve their enlightened self-interest. In my novels Earth and in Existence I forecast that some members of the world wealth aristocracy would start holding meetings about this. Perhaps we are seeing crude, preliminary signs.

The rise of inequality is discussed in great detail — and placed in historical context — in Thomas Piketty’s tome, The Economics of Inequality, as well as in Capital in the Twenty-First Century, where Piketty notes, “At the heart of every major political upheaval lies a fiscal revolution.”

Do read this article from The Los Angeles Times. Especially the end, where Milken quotes Ronald Reagan’s last speech in the White House in 1989, which celebrated immigrants as fundamental to renewing the American Dream.

“If we ever close the door to new Americans, our leadership in the world will soon be lost,” Reagan said in the video, which ended to wide applause.