The Telegraph
Tuesday , July 15 , 2014
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- Capitalism and inequality

There is a growing concern among several economists in the advanced countries — of which Thomas Piketty’s recent book, Capital in the Twenty-First Century, is an expression — with the rapid increase in wealth and income inequality occurring in their societies, which, they fear, is fundamentally inimical to democracy. An interesting debate has broken out among them in this context over the roots of this increase in inequality.

Some see it as an immanent tendency under capitalism that had been held in check in the exceptional situation of the post-war period, marked by two specific features: a militant working class that had emerged from the war having made great sacrifices; and a looming threat of socialism. They see this tendency now expressing itself freely. Others, notably Joseph Stiglitz, attribute growing inequality not to any “economic laws of capitalism”, whose very existence they are not prepared to accept, but to government policies driven by politics. Growing inequality, they hold, is not inevitable under capitalism.

However, even the latter group does not see politics as being unrelated to economics; it sees growing wealth and income inequality causing growing inequality in political power, which, in turn, promotes a further increase in wealth and income inequality. It visualizes, much like the former group, an interlinked process of growing economic and political inequality. The difference among them on this question relates to what sets off this process. The former sees it as being immanent to capitalism (when it is not restrained by exceptional circumstances), while the latter attributes its emergence to contingent political factors, among which Stiglitz emphasizes the collapse of the Soviet Union. This collapse made it possible to portray State intervention in a poor light, and set the stage for rolling back regulatory measures on big capital. (This debunking of State intervention was always a disingenuous argument: when the intervention was in favour of finance capital, as in the wake of the 2008 crisis, it was considered perfectly acceptable).

The problem with this latter position, however, lies elsewhere: it does not appreciate sufficiently the importance of the institutional barriers against the growth of income and wealth inequality that come up under capitalism, despite its hostility, and that did come up under post-war capitalism. The most important of these institutional barriers was the trade union movement.

Trade unions are usually presented as serving the interests of only a privileged segment of the working class; as undermining any work ethic (the “I am all right Jack” syndrome famously depicted in a Peter Sellers film of the same name); and as generally being in cahoots with the “bosses” with very little concern for the working poor.

This portrayal, however, is a travesty. Not only is it the case that a rise in real wages relative to labour productivity, if it actually materializes for unionized workers through trade union action, boosts the level of aggregate demand, and hence employment, in the entire economy, benefiting non-unionized workers as well; but trade unions also constitute a powerful force restricting an increase in the share of wealth and income accruing to the big capitalists — that is, the top decile or percentile of the population. Indeed, Margaret Thatcher would not have earned such loud applause from big capitalists for smashing trade unions, if the unions had not been a thorn in their flesh.

Even elementary arithmetic disproves the claim that trade unions represented only the privileged segment of workers before they were smashed. At their peak in 1980, the membership of trade unions in Britain had reached 12.2 million, nearly half of the total work-force. Taking Thomas Piketty’s rough categorization of the population into the top 10 percent (“rich”), the next 40 percent (“middle class”) and the next 50 percent who own very little wealth (the “propertyless), if we assume that the “rich” did not join unions at all and an equal proportion of the “middle class” and the “propertyless” did, then the proportion of trade union members belonging to the “propertyless” would have been as high as 56 percent.

No doubt one can assume other numbers, but given the high proportion of unionized workers in the total work-force, the idea of trade union members belonging only to the privileged segment of the work-force simply cannot stand scrutiny. The smashing of trade unions all over the advanced capitalist world in short removed a major bulwark against widening wealth and income inequality (in the sense of the top decile or percentile of the population appropriating an ever growing share for itself).

There were at least three weapons that were used against the trade union movement. One was the decline in the importance of the public sector (for which the collapse of the Soviet Union might have provided ideological ammunition). The degree of unionization is always higher in the public than in the private sector: in the United States today only 7 per cent of the workers in the private sector are unionized compared to 33 per cent in the public sector (this includes teachers); in the United Kingdom only 14 per cent of the private sector workers today are unionized compared to 56 per cent in the public sector; and this comparative picture has always prevailed. The increase in the weight of the private vis-à-vis the public sector, therefore, was a debilitating factor for the trade union movement.

The second weapon was the emergence of “austerity” economics, which meant, on average, higher levels of unemployment since the 1980s, with occasional interludes of massive unemployment when union membership dropped sharply. In short, the end of the so-called “Golden Age of Capitalism”, buttressed by Keynesian demand management, weakened trade unions greatly.

The third weapon was globalization of capital, which made advanced country workers compete against those from the third world, and hence become subject to the baneful consequences of the huge third world labour reserves. Real wages of the advanced country workers may not have actually gone down in absolute terms owing to such competition, but they certainly were prevented from going up; and trade unions lost much of their bargaining strength as their members became exposed to the huge reserve army of labour existing in the third world.

The question, here, is not the actual magnitude of capital flows from the advanced countries to the third world for setting up export units in the latter (including export units in the service sector); the question is the possibility of such flows, and hence the threats they posed to workers’ livelihoods in the advanced countries.

The weakening of the trade union movement in the advanced capitalist world was thus associated with the emergence of an international finance capital, which enforced a roll-back of Keynesian demand management and of State ownership, and a freer flow of goods and capital across national boundaries. However, the emergence of such an international finance capital — whose baneful consequences for demand management by nation-States for achieving near-full employment within national economies, were underscored by Keynes himself in an article for The Yale Review in 1933 — is an outcome of a spontaneous tendency under capitalism towards centralization of capital, that is, the formation of larger and larger blocks of capital. Hence, the trigger for the growing inequality in wealth and income, on the one hand, and the growing inequality of political power, on the other — that both reinforces the former and is reinforced by it, which appears to be provided by contingent political developments at first sight — lies in certain tendencies immanent in capitalism itself.

To say this is not to suggest that the demand for rolling back the growing inequality in income and wealth should be abandoned and emphasis laid only on an overthrow of the system of which there are no discernible prospects; it is only to underscore two points. First, if concern with growing wealth and income inequality is detached from an appreciation of the importance of working class institutions — that is, if the issue of inequality is detached from a class perspective — then the struggle against it will be a fruitless one. And second, the difficulty of rolling back growing inequality within the system must never be underestimated.

There is an important difference here between the US and the European Union (especially Germany, France and the UK), on the one hand, and, say, the Scandinavian countries on the other, which have continued with proactive State policies for curbing growing inequality even in the era of globalization. The US or the German State pursuing equality against the predilections of international finance capital would cause a break-down of the system in a way that the Scandinavian or the Venezuelan nation-state doing so would not. This does not mean that international finance capital will be indifferent to the latter nation-states’ unresponsiveness to its predilections; but it can afford to live with it. With the former nation-states, it cannot do so.