How much inequality?
by Michael Roberts
“Some inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate….The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy.”
So says Robert Reich in his latest post from his blog (http://robertreich.org/post/85532751265). Reich is a ‘progressive’. He is a ‘left’ Democrat that has railed against the apologetics and greed politics of the Republicans and the extreme bigotry of the Tea party faction. He was in Clinton’s cabinet as Labor Secretary and he wrote a book, After Shock, arguing that inequality was the cause of crises in capitalism – see my post http://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/.
Now he is telling us that an ‘economy’ needs some inequality to work. Really? Do we need ‘inequality’ to provide ‘incentives’ for people to ‘work hard and innovate? Reich is talking about inequality of income here, I suppose. But think of this.
A doctor in the US or the UK earns probably at least five or six times the income of a garbage collector. Most garbage collectors do a sterling and steady job clearing our rubbish in the early mornings and street collectors all day long without screaming that they need a salary like a doctor before they would do it. They would like one, I’m sure, but if garbage collectors got the same income as a doctor, would that mean doctors would stop doctoring? Maybe some would switch to garbage collection and get up at 5am and work in mucky conditions in all weathers until early afternoon rather and look at people’s bodies, check scans, do operations and work night shifts in hospitals. But most would not. Doctors become doctors because on the whole they want to do it and think they are doing something useful. Of course, not all people do it for that reason. But I doubt that the inequality of income between doctors and garbage collectors is necessary for either to do their jobs.
But what about the incentive to innovate? Surely, without the prospect of making huge gains or profits from an invention or a new piece of technology or a new drug, these things would not be discovered or developed? Well, the evidence is the opposite. Most great inventions did not benefit the direct inventor, but only the capitalist company that developed the invention. And most great advances in technology, social welfare, productivity and health were found and developed by state funding. Take the worldwide web or the internet: the products of state funding of ‘defence’ and the space race.
But what about Apple, Microsoft etc and the great entrepreneurs of the recent hi-tech revolution? Surely, Bill Gates, Steve Jobs etc would not have applied their unique skills without the ‘incentive’ of eventually making billions? Well, a recent study by Mariana Mazzucato shows it has been the state that has sparked all that ‘innovation’. She comments “the real story behind Silicon Valley (at the centre of my new book The Entrepreneurial State: debunking private vs. public sector myths ) is not the story of the state getting out of the way so that risk-taking venture capitalists – and garage tinkerers – could do their thing. From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”
She goes on: “Apple initially received $500,000 from the Small Business Investment Corporation, a public financing arm of the government. Likewise, Compaq and Intel received early-stage grants, not from venture capital, but via public capital through the Small Business Innovation Research program (SBIR). As venture capital has become increasingly short-termist, SBIR loans and grants have had to increase their role in early-stage seed financing the US Department of Health and the Department of Energy. Indeed, it turns out that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in 2012 alone. Although venture capital entered the biotech industry in the late 1980s and early 1990s, all the heavy investments in this sector occurred in the 1950s through to the 1970s.“
Mazzucato shows that none of these ‘enterpreneurs’ would have done what they did without state aid to kick them off. The taxpayer enabled them to become ‘uber’ rich. Indeed, most entepreneurs would do what they do anyway and they mostly fail. A 1997 study in the Journal of Business Venturing found that entrepreneurs are overconfident about their ability to prevent bad outcomes. They’re also overconfident about the prospects of their business. A 1988 study in the same journal of some three thousand entrepreneurs found that eighty-one per cent thought their businesses had at least a seventy-per-cent chance of success, and a third thought there was no chance they would fail—numbers that bear no relation to reality.
Mazzucato makes the point that private investment though so-called venture capital or private equity firms is more damaging than beneficial to society. “Venture capitalists entered 20 years after the state funded the most high-risk and capital-intensive parts of the industry. And their desire to reap returns within three to five years has also done quite a bit of damage to the industry. Today it is filled with product-less companies that produce little for the economy beyond the returns earned by private equity in the exit stage.”
As a result of the 2010 Dodd-Frank Reform and Consumer Protection Act, US private equity firms must now register with the Securities and Exchange Commission (SEC). This, in turn, allows the SEC to examine the behaviour of private equity firms on behalf of investors. The SEC just completed an initial wave of 150 firms and what it found is shocking. Half of the SEC’s exams find corruption in the way fees and expenses are handled. “The business model of private equity, which manages almost $3.5 trillion dollars of our nation’s assets, has unique conflicts of interest built into the structure. Private equity firms use their client’s money to do leveraged buyouts of companies. Since this gives them major operating control of both the investment and a pool of other’s investment money, there are significant opportunities to shift costs and otherwise skim off their investors.”
One scam is to fire employees of the private equity firm and rehire them immediately as “consultants.” The investors are responsible for consultants’ salaries, where private equity employees are paid out of their own pockets. Another is taking what most private equity investors believe to be part of management fees, things like legal and compliance costs, and billing their investors for them without the investors properly knowing it. A third is private equity firms lying about the valuation methods they use to tell investors about the returns they make each year. All of these are ways for private equity firms to take money from their investors for themselves – so much for innovation through private enterprise.
It is not ‘equality’ either of income or wealth that should be the benchmark for delivering a better society for all. The issue is not equality as such but the mode of production in an economy and its social control. The benchmark is not an ‘equal’ society but a classless one. That means a mode of production that is ‘owned’, controlled and planned ‘in common’: a social formation where ‘in common’, each contributes to production according to ability and in common, each receives in distribution according to need.
In such a society would a garbage collector get the same living as a doctor? It depends on the number of dependents, issues of health, location etc. There would be ‘inequality’ because distribution of wealth would be based on need. In such a society there is plenty of incentive to ‘work hard’ and to ‘innovate’ if we know that all will benefit through less toil, better health, education and living conditions etc.
Would it not be better for the people in common to decide whether how much society, a government and an economy invests in fossil-fuel or nuclear power over renewables, whether we build more roads or more railtrack etc? These decisions are not in the power of people now either locally, nationally and definitely not internationally. They are decided by big multinationals in consultation with the governments that they control and influence. And they are decided on the basis of profits not need.
Reich reckons that we need capitalism, but we just need to make it less unequal and less excessive. Such is also the position of the new economic star of the hour, Thomas Piketty (see my posts, http://thenextrecession.wordpress.com/2014/04/30/piketty-in-french-its-worse/). As Reich puts it: “Time and again, when the situation demands it, America has saved capitalism from its own excesses. We put ideology aside and do what’s necessary. No other nation is as fundamentally pragmatic. We will reverse the trend toward widening inequality eventually. We have no choice. But we must organize and mobilize in order that it be done.”
In his book, Reich says: “It doesn’t mean socialism. We don’t need socialism. We need a capitalism that works for the vast majority.” ‘Capitalism that works for the vast majority?’ A contradiction in terms. It’s the replacement of the capitalist mode of production and class society that is needed, not the tempering of capitalist excesses – even if that was possible.