Solow on inequality
A 98 year old man understands this problem better than any active politician
Everyone has a podcast now. Freakonomics has a podcast! Steven Levitt, co-author of the book, interviewed Robert Solow last year. You can read the transcript here. He’s known for his growth model, which I am vaguely familiar with, but never seemed to equip me with any deep insights into how the world works. You can look it up, but as far as I can tell it just identifies the usual suspect as factors of production. Mind you, it was developed before I was born, and it’s the fate of all great theories that they become embedded in our intuition about the world, eventually, to the point that they seem obvious to later generations (arguably, for many theories).
Anyway, Solow, who was 98 when he made this comment, hits the nail on the head, as far as I’m concerned:
SOLOW: From the beginning of the Second World War until some years after, the country was generally getting more equal. The distribution of income — and as far as we know, the distribution of wealth — were becoming more equal. Sometime in the 1970s or early eighties that changed and inequality began to worsen, inequality of income, inequality of wealth. I think that’s pretty awful. I don’t care about absolute equality. I don’t care if you make more money than I do. But the coexistence of extreme wealth and extreme poverty strikes me as immoral, to use an old-fashioned word. It’s immoral because it’s unnecessary, and it has bad consequences beyond itself. The great wealth attracts great political power and a society which tolerates extremes in equality of wealth also tolerates extreme differences in political activity and political power. I deplore that. I think it’s a blot on our society, and I have not seen any evidence or any reason to believe that we profit at all from that. So why does it happen? First of all, Steve, the answer to a question like that is almost never one thing. I think a lot of it actually is what I was already talking about. It’s the interplay between economic inequality and political inequality. You start with some economic inequality. It generates political inequality. Well, the holders of political power, the beneficiaries of that political inequality, are going to pass laws and cultivate customs that help themselves.
It’s not that extreme inequality is bad in itself, it’s that it corrupts the political process. It happened to the Roman republic over two thousand years ago, it may be happening in the USA now. Politics depends on a degree of balance. That’s what the US constitution is supposed to deliver. But when Jeff Bezos can buy a national US newspaper for what, to a mere mortal, would be the cost of an ice cream, I cannot see how we can get balance. And it’s not just old media that are captured, as Musk’s purchase of Twitter proved. Is it likely that the controlling shareholders of Google, or Facebook, or Apple will tolerate a full blown attack on plutocracy organized through their products?
I know that measuring inequality is extremely tricky, and that by many measures inequality has remained constant or has lessened in recent decades. But the robber barons de nos jours are surely more powerful than the Carnegies and Fricks of the “Golden Age” of US capitalism. As Solow says, a society which tolerates extremes in equality of wealth also tolerates extreme differences in political activity and political power.
The inexorable rise of the “Magnificent Seven,” is, I think, the market understanding that these companies are now above the law, or, at least can bend the law to their will. Generally, US companies can arrange their affairs to pay no corporation tax on any economic activity outside the USA. Under Trump (the champion of the underdog, supposedly!), corporate tax rates were slashed. Governments everywhere want to bribe companies to invest, to build up the capital factor that Solow’s model refers to. Maybe, a better option would be to increase democratic participation. Nothing quite becomes an economy as a vibrant democracy, as Daron Acemoglu explained in “Why Nations Fail.” Slow growth and weak democratic institutions go together. China seemed to be the exception that proved the rule, but maybe it just proved that the rule operated with long and variable lags.