Collective Conscious

I’m often con­cerned with the dis­tri­b­u­tion of power and money between dif­fer­ent groups in Amer­i­can soci­ety. In par­tic­u­lar, I’m con­cerned with the stan­dard delin­eation of peo­ple into ‘cap­i­tal­ist’ and ‘laborer’ classes. It’s been a lin­ger­ing ques­tion whether the divi­sion is suf­fi­cient, and I con­cur with Stephen Gor­don in claim­ing it’s not.  In par­tic­u­lar, how­ever, I won­der whether a sim­ple adjust­ment might make much more sense of the present division.

Econ­o­mists have long sought a the­ory of rents to explain the dif­fer­ing pro­duc­tiv­ity of dif­fer­ing invest­ments, even when those invest­ments have the same out­put. For exam­ple, two peo­ple who both own vine­yards may make dra­mat­i­cally dif­fer­ent prof­its even if their wine is indis­tin­guish­able; some places are sim­ply not suited to grow­ing grapes. We call the excess prof­its enjoyed by the man with the good land ‘rent’, par­tic­u­larly when the price of wine is high enough to keep the other vint­ner is busi­ness as well.

Prices — and the resul­tant prof­its — guide the flow of invest­ment cap­i­tal into the var­i­ous indus­tries. How­ever, the infor­ma­tion age has devel­oped a par­tic­u­lar insti­tu­tion dis­tinct from any point in the past — invest­ment finance. Finance has always played a large role in busi­ness devel­op­ment, but only in the sec­ond half of the twen­ti­eth cen­tury have financiers taken large equity stakes in the real econ­omy. Before the devel­op­ment of invest­ment bank­ing, and before the pub­lic offer­ing of shares in the major banks, the involve­ment of finance was largely lim­ited to debt and under­writ­ing: cap­i­tal had to be raised from the pub­lic. Debt crises have tra­di­tion­ally been the source of major finan­cial crises.

Lend­ing, more or less, was a ‘nor­mal’ indus­try. But since the devel­op­ment of invest­ment bank­ing and espe­cially since its dereg­u­la­tion begin­ning in 1980, it has been some­how dif­fer­ent:

Dereg­u­la­tion is touted by con­ser­v­a­tive thinkers as lead­ing to more ‘effi­ciency’; that is, peo­ple do more of what they would do if only the pesky gov­ern­ment wouldn’t get in the way. By that def­i­n­i­tion, that’s just what hap­pened since 1980. The ‘nat­ural’ equi­lib­rium appears to be a nat­ural monop­oly. Money makes more money, and so there is a seem­ingly nat­ural con­cen­tra­tion of a great deal of the prof­its — in par­tic­u­lar, the rents — in the hands of the peo­ple own­ing the capital.

The con­cen­tra­tion of ownership-​​oriented cap­i­tal with invest­ment banks has in turn led to a con­cen­tra­tion of rents there. The inter­est­ing bit is that the losses were sim­i­larly con­cen­trated there, sug­gest­ing that banks really do con­trol a huge por­tion of the rent-​​bearing assets in the econ­omy. If this is true — if dereg­u­la­tion and the insti­tu­tion of the invest­ment bank really has dri­ven the dra­matic rise in inequal­ity of the last few decades — then Tyler Cowen and Will Wilkin­son are not too far off the mark in tak­ing aim at finance in par­tic­u­lar, and James Fal­lows is spot-​​on when he goes after Peter Orszag’s move to Citigroup.

Why? Because the left has indeed been too cozy with finance. If we as lib­er­als are con­cerned about inequal­ity in Amer­ica - and per­haps as an insti­tu­tion that con­cern has escaped us — then finance is the prime sus­pect. Let­ting rents accu­mu­late in the hands of the few is indeed the rea­son that we see the mid­dle class strug­gling even though their real incomes are as high as ever. Remem­ber, rents rep­re­sent the ‘excess’ income above what is needed for sur­vival. Busi­nesses strug­gle, indi­vid­u­als strug­gle, but financiers live high on the hog. It’s not cap­i­tal v. labor, and I don’t believe it should be. But these excess rents make the dif­fer­ence between sur­viv­ing and thriv­ing, and so rents are what social lib­er­als must fight to redi­rect to the com­mon citizen.