Capital in any century


At a recent lunch I discussed with a friend the perennial issue of populism and how difficult it is for the liberal elite to colport truer statements without oversimplifying. I mentioned as an example of such oversimplification an incident in the seventies at my high school when an in-crowd hippie told a large meeting how unjust it was that a normal worker would earn less than hundred thousand kroners when Denmark’s richest man would earn hundreds of millions.

My friend immediately said: don’t give me the trickle-down story now. And he was right, of course. Trickle-down is another oversimplification, partly because it does not distinguish between unequal consumption and unequal capital ownership.

Inequality is a moral and economic outrage. The moral aspect requires no explanation, but it is important to understand the economics in this respect. And it is important not to oversimplify.

What disturbs us the most is not necessarily that capital ownership is so unequally distributed. Our concern is mostly about the inequality in living conditions, the inequality in consumption. This inequality in consumption makes little sense from an economics perspective, since a healthy economy requires prosperous consumers. The current expanding global economy is largely driven by exporting to underserved markets, which is fine since this helps inter-regional equality. However, in the long run export markets will start to saturate, and start to be more self-sufficient, and the lessons of the Industrial Revolution is that that is when the purchasing power of the domestic consumer will start to become critical. Marx and Engels explained very clearly that the bourgeoisie ultimately requires a better paid proletariat in order to hang on to its wealth. Social democracy was the handmaiden to a blinkered capitalist class.

Capital that does not go into consumption must be invested. When we question unequal capital ownership we are implicitly also questioning whether the capital owners that be are the best to allocate capital. And this is an exceedingly pertinent question, and one that should be explicit, not just implicit. With a very high percentage of capital ownership concentrated in very few hands we are approximating the planned economy paradigm. The difference to Marxism is only that those who in our society are allocating capital are not politically chosen, but, in the best case, chosen by entrepreneurship, in the worst case by inheritance, and in many cases by the ability to climb a corporate ladder not dissimilar to that of a government bureaucracy. John Kenneth Galbraith explained fifty years ago how large corporations in the Industrial State exercise a planned economy function. That fundamental truth has only been exacerbated nowadays by capital ownership residing in so few hands.

Capitalists are genetically aligned with Adam Smith. Yet, the vision of Adam Smith was not an economy planned by the few and the quasi-monopolists. Adam Smith imagined a vibrant society of mainly middle class entrepreneurs. Ironically, if we want to pursue the Adam Smith ideas we must thus break the stranglehold on capital by the few. Adam Smith would have voted for a much higher degree of capital equality! But also, in a democracy we must believe that capital allocation should harness the wisdom of the population at large. Yet for that to happen capital ownership must be far more broadly distributed!