The Philosopher's Beard Mini-essays in philosophy, politics and economics

What to do about the rich?

We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both.  (Justice Louis Brandeis)

The rich may be identified by their independence from and command over others. Those two features make being rich very pleasant indeed. But they are also what make the rich bad for democracy, and indeed for capitalism. The problems I'm concerned with are not about justice. Perhaps it is unfair that some people are rich and others are poor, and perhaps it would be fairer to redistribute wealth from rich to poor, and from wealthy countries to poorer countries. But from my perspective that resembles debating the proper (re)arrangement of deck chairs. What I'm concerned with is the sinking ship - the threat the rich pose to liberalism itself by destroying its home: democratic society. Though my examples and figures are mainly taken from the American context, where the current debate about wealth inequality is most extensive, my analysis applies generally. Democracies are extended moral communities whose flourishing and indeed survival depend on the interdependence and equality of their members. The rich not only have no place in this model, but their very presence undermines it. Therefore, if we believe our democracy is worth preserving, we should offer the rich a choice: give up your money or give up your membership of our society.

The normative definition of the rich is always those who have too much. Yet there are various ways of defining this, usually in the language of liberal justice i.e. what is the fairest way to arrange our society? Some take an egalitarian distribution of wealth as the naturally just distribution, and argue that deviations from that which lack a specific moral justification are prima facie unjust, and the greater the inequality, the greater the injustice. Others focus on how the present concentrations of wealth in our society are the legacy of a long history of theft and extortion for which restitution is required (including even libertarians, when they take seriously their historical account of entitlement). Yet others focus on the inefficiency of great inequality. The pop utilitarian, Peter Singer, for example argues that ordinary middle-class people in the west have much more than enough (anyone with annual income over $35,000 is in the global 1%) while a great many (around 2 billion) live in appalling absolute poverty. So we middle-class types should give as much as we can to meet the basic needs of the absolutely poor, at least up to the point that we have to sacrifice something of comparable moral significance (which seems pretty far).

There are lots more of these justice-type definitions by different kinds of liberals. Although I won't be taking them up, it is worth noting that they all identify the problem of the rich as 'absolutely relative' i.e. the rich pose a problem of justice not because of how wealthy they are in absolute terms (how much they can buy) but because of the relation in which they stand to the poor. I will use the same concept in analysing why the existence of very wealthy individuals threatens liberalism itself by converting democracy into plutocracy. However, my approach is quite different than the justice-types because I am not concerned with the just distribution of wealth, and I won't try to fix things by making the rich give their money to the poor.

Democracy

Democracy is fundamentally government by and for the middle-classes, the bourgeoisie. As the political scientist Barrington Moore put it succinctly, "No bourgeois, no democracy." It is no surprise that the flourishing democratic societies of the world are all politically dominated by a middle class: middle-class circumstances are particularly amenable to the spirit of democracy (and no, India does not count as a flourishing democracy). The bourgeoisie live in circumstances of moderate abundance: neither so poor as to be utterly dominated by circumstances or powerful persons, nor so well-off as to be free from inter-dependence on the goodwill of other people for success. This is the sweet spot of sufficient independence to think for oneself, and sufficient inter-dependence to be sensitive to the interests and concerns of other people, that cultivates the civic habits and dispositions on which a flourishing democratic polity depends.

A democratic society is organic, not a construct of high theory. Its heart is equality of political status, which sounds like it's only worth the paper it's written on, but which is actually all about the freedom of all from domination, whether by government or other people. A real democracy must pass what the political philosopher Philip Pettit calls the 'eye test': Is every person free to look any other in the eye, without fear and trembling?

The brain of a democracy is its ability to make legitimate collective choices in a way that everyone accepts even when they disagree about the conclusions. Again, that sounds like an abstract adding machine (and social choice theorists' terminology doesn't help). But actually it's about community and common sense. The brain works so long as everyone recognises that we are all in this together, and that we have a shared interest in and commitment to making things better for everyone, even though we disagree about how to do so. The members of a bourgeois society have an orientation to co-operation, even with those we disagree with, because we are fixed in relations of interdependence with each other and have no choice but to try to make this society work.

So what's the problem with the rich? Their circumstances of life are distinctly different from the bourgeoisie. At the extreme, the combined assets of Wal-Mart's Walton family have been calculated to be equal to that of the bottom 150 million Americans. That changes them and their relationship to the rest of us

The rich are independent of the rest of us. Obviously they are materially independent so long as their property rights remain recognised. They can achieve what they want by themselves, by buying it from others or paying someone to queue up to buy it for them. But their wealth also generates a social distance from the rest of us that allows them to become 'ethically independent'. Since they don't depend on the goodwill of others to succeed, they can become less concerned in general about whether they deserve goodwill. For example, they don't have to keep bosses and colleagues happy - they don't really have to work for anyone - but can choose their own projects and partners (in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries, falling to 8% for the top 400 taxpayers).

They are therefore freed from the disciplinary power of bourgeois social norms and standards (and, it often appears, even from the laws that apply to little people). I'm sure that sense of liberty must be quite exhilarating (romantics and hippies also aspire to it, though they actually have to make sacrifices to achieve it). But that freedom also means that they aren't really like the rest of us. As research has shown, they not only feel entitled to opt out of ethical standards, to lie and cheat when it suits them, but they are also less compassionate to others. This 'ethical independence' from the rest of society has political implications, since, to put it mildly, it does not suggest that the rule of the rich would be to the benefit of all.

Turning to politics itself, one can see that for the rich the spirit of cooperation on which democracy depends is only an option, not a necessity. When the rich engage in politics they are not under the same constraints as the rest of us to find a mutually agreeable solution, since their fortunes are not fixed to the success of this society as ours are. They can always buy their way around the lack of public goods, or leave for somewhere nicer.

That means that rich don't have the same political interests as the rest of us. They aren't worried about crime (their gated communities come with private security) or the quality of public education (their kids go to the fanciest schools money can buy) or affordable health care, job security, public parks, gas prices, environmental quality, or most of the other issues that the rest of us have no choice but to care about, and about care about politically since they are outside of our individual powers to fix. Rather than such public goods, their political concerns lie in furthering their private interests, whether in government bailouts of their investments or the tax treatment of 'carried interest' .

It is an unfortunately widespread fallacy that democracy is a means to achieve one's interests, rather than a space in which the public interest can be deliberated [previously]. Thus some people seem to believe that, in line with the general working of our modern consumer society, one orders something one wants on the internet and then 2 weeks later it arrives. Then if it doesn't arrive, they think democracy must be broken.

However, for the rich, politics actually does work somewhat like this, because they have the power to intervene non-democratically in our politics. They can and do use their wealth to command outsize political influence, whether by being powerful enough to negotiate directly with our elected officials about government policies; by cultivating private relationships with political candidates who want their financial support; becoming politicians themselves; or just by buying a louder media megaphone to transmit their opinions to voters. They act this way because they believe that their opinion deserves more voice because it is theirs, and the consequences are that indeed it receives more attention. This is the logic of the market, of course. Both in its conception and effects, it undermines the principle of political equality on which democracy is founded.

Capitalism

It is sometimes thought that the rich are necessary to the flourishing of capitalism, that because they have more wealth than they need for their own consumption it is their investment of capital that makes the economy spin faster and creates jobs.  (Indeed, in America the richest 10% of families own 85% of all outstanding stocks, 85% of all financial securities, and 90% of all business assets.) But in fact the relationship is rather the other way around. The more important 'capitalists' are in an economy, the less efficient it becomes.

Although a free market economy generates inequality, that is a by-product, not its function. Flourishing capitalism generates prosperity for a society as a whole by requiring genuine competition between producers. Just as athletes who are genuinely competing will give everything they can to run as fast as possible (for the amusement of the crowd) and abstain from either collusion with other runners or sabotage of other athletes' performance, so is genuine capitalism a demanding task-master with no quarter for slackers. Capitalism characterised by genuine competition creates new wealth by incentivising innovation and imitation, and by allocating resources efficiently to the parts of the economy where they can be most productively employed. Competition also leads to the transfer of that new wealth to consumers, because prices (and hence profits) are driven down to just above the real costs of production by the competition for sales.

There are however some problems with this model when it is is played out dynamically. First, since competitors have every reason to want an easy life (off of the treadmill) they will seek out or create niches protected from full competition where excess profits can be guaranteed. i.e. they will seek to create and maintain quasi-monopolistic positions. That means that markets need continuous and independent policing.

Second, even if the economy is super-competitive and the average return to producers is very low, the winners of any particular cycle will probably do very well (like Bill Gates). This is a necessary incentive to get people playing the game in the first place. But these winnings create a problem for the sustainability of the system in the long-term. As Marx noted, the winners of previous rounds of capitalist competition will not start the next race in the same position as other competitors. They will be able to invest in building economies of scale, network effects, proprietary technologies and so forth which make them much harder to defeat (a Goliath effect). In fact the more rounds that are played, the more likely it is that the system will become a de facto monopoly (or cosy oligopoly), with all the relatively weaker competitors eliminated and almost no possibility for new entrants (Davids) to enter successfully.

When one combines these structural tensions of capitalism with the outsize political influence enjoyed by the rich, the result is toxic. Monopolists will then not only have de facto pricing power. They will also have outsized influence on determining the rules of the 'competition', to make them even more favourable and to legitimate and cement their monopoly privileges. Here we come back to the first problem: capitalists want a break, not a real race. Given the opportunity to carve out a domain of guaranteed excess profits free from competition, they will take it. Like Carlos Slim's telecoms empire in Mexico, they will rewrite the laws to secure their position, and Mexicans end up paying much more for phone calls than people in much richer countries. Or, on an even grander scale, consider the re-construction of the financial services industry over the last 30 years in America. As the number of firms went down, favourable laws went up, converting the industry into a rentier system in which the costs of financial services to the economy as a whole rose, profits rose, and risks were socialised.

Rentier capitalism doesn't have the same virtues as genuine capitalism. It undermines the policing required to maintain real - fair - competition. It misallocates the country's wealth by funnelling it away from more productive enterprises into the pockets of those whose who have managed to assign themselves ownership rights over bottlenecks in the network of transactions. That means that although the rich might directly employ lots of people in their companies - and as gardeners and housekeepers for their enormous mansions - they aren't actually net 'job-creators' because their wealth comes from harvesting the productivity of others in the economy, rather than making a genuine contribution of their own to increasing the wealth of the nation. And of course, the richer these people get, the more power they obtain to manipulate the economy as a whole for their own personal benefit. And this is what is known as a plutocracy.

What to do about the rich

I think it is clear that the rich are a burden and a danger to our democratic society as a whole (if you're still not convinced, try an economics Nobel prize winner). But that doesn't tell us what to do about them. Some people would say that we should tax them into the middle-class, but this seems punitive and unfair. After all, they got rich by playing - and winning - the economic game according to the rules we set. It's not their fault that their wealth is toxic to democracy. The history of democratic politics also suggests that genuinely redistributive taxation is not really feasible because rich people, understandably, fight very hard politically to prevent it, and that fight is ongoing because the working of capitalism continually produces new winners. (The only countries that have achieved it are monstrous totalitarian regimes, like Stalin's Russia and Mao's China, primarily motivated to destroy any possible alternative political power base to themselves. And these are not good examples to follow.)

To confiscate the fairly earned wealth of the rich and give it to the middle-class would be unjust, say libertarians. I'm not going to disagree. But then the problem I'm concerned with is not social justice - whether relatively poor people in our society have some sort of moral claim on rich people's money - but that the very existence of the rich poses a constitutional problem for a democratic society. I'm against the rich, but I don't care about their money. And that allows me to advance a different kind of proposal than one normally sees in this debate: the simple rule that no-one can be both a member of our democratic society and rich.

A good way of thinking about what a democratic society is and should be, and how its members relate to it, is in terms of a social contract. A social contract is an agreement between all members of a society to form a kind of private association for the mutual security, cooperation, and justice of all. One important feature of this idea is that it allows us to scrutinise whether our current society would be one that we would have chosen to create, or whether we would select another constitutional form that was more just (John Rawls' project). But one can use it more crudely to draw our attention to the closed character of our society and its similarity to a private members club. If we think of our society as a private association for the mutual benefit of existing members, as we arguably do when thinking about immigration [previously], then it seems legitimate to require that members agree to its constitution and goals.

Whatever the differences in how its institutions and principles are specified in detail, any society which chooses democracy, as we have done, will have an implicit constitution and a goal. The constitution would specify that all members are politically equal. The rich, as I have shown, do not meet this criteria. The goal is a flourishing and sustainable democratic society that is to the benefit of all. Yet because their concentrated wealth leads to concentrated economic power to resist competition the rich reduce the well-being of the rest of us economically by reducing the efficiency of the economy. And they undermine the sustainability of democracy as a whole by their outsized command over our politics and their self-serving use of it for their independent interests. It seems to me therefore that the rich simply do not fit the requirements for or have the requisite interests in being genuine members of our democratic society. They don't belong here.

Hence my modest proposal. We should first identify with some precision the category of what it seems reasonable to call rich i.e. those people whose capabilities for independence from and command over the rest of us crosses the threshold between enviable affluence and aristocratic privilege. That definition should be 'absolutely relative' rather than merely relative (e.g. we can't just use the richest 1%, because there will always be a richest 1%). A good way to go might be to use some multiple of the median citizen's wealth as a proxy for the distance from and power over ordinary citizens that defines problematic wealth. What that multiple should be is a matter for social scientists to investigate and democracies to debate, but, for the purposes of this discussion, let me suggest 30.

Exact numbers are tricky here because measuring wealth is highly subject to accounting definitions and methods. Another issue is that wealth defined in terms of net financial value of one's assets depends on market conditions. For example, the assets of the middle-class are primarily their house and pensions, which have both been hit hard by the economic crisis; while the assets of the rich are primarily financial products, and thus prone to continuous fluctuations. In light of this, it might be best to set bands based on average data, and then revise them every few years to take account of long term trends. But for reference, the median American household's wealth is presently around $120,000 (having declined 35% over the crisis), suggesting a cut-off of $3.5 million. (For context, $5.5 million is the present entry point to America's richest 0.1%.) On the other side of the Atlantic, the slightly less unequal UK apparently has a median wealth of £200,000 (pdf), suggesting a rather more generous wealth allowance of £6 million. 

Then, when anyone in our society lands in the category of the problematic rich we should say, as at the end of a cheesy TV gameshow, "Congratulations, you won the economy game! Well done." And then we should offer them a choice: give it up (hold a potlatch, give it to Oxfam, their favourite art musuem foundation, or whatever) or cash out their winnings and depart our society forever, leaving their citizenship at the door on their way out. Since the rich are, um, rich, they have all the means they need to make a new life for themselves elsewhere, and perhaps even inveigle their way into citizenship in a country that is less picky than we are. So I'm sure they'll do just fine. Still, we can let them back in to visit family and friends a few days a year - there's no need to be vindictive.

There are obviously many difficulties in making my proposal a reality (and I'm sure readers will point them out). Leave aside for the moment the technical problems, like how to properly incorporate income; how to assess the real value of volatile financial assets; whether individuals or households are the right units of analysis; or how to beat the lawyers who have already done so much for the tax efficiency of the rich. If it could be made to work, what would happen?

Obviously there would be a mass outpouring of wealth, especially when it is first instituted. But this need not make our society poorer. An economy's wealth - as opposed to an individual's - relates to its efficiency in converting resources into valuable goods and services. In the long term our economy's productivity would be higher without the distorting influence of the rich, and the gains from that productivity would likely be more equally shared than they are now.

But I don't think everyone would leave. After all, while tax avoidance is extremely popular among the rich, true tax exiles are somewhat rare. Democratic societies really are great places to live, and plutocracies really aren't. (Even Russian oligarchs come to live in New York and London, and send their kids to school there.) I think that many rich people understand that, and will in fact appreciate that better if our society forced them to make an explicit choice between their money and life as an equal member of a democratic society.

Another possible consequence is a decline in innovation and entrepreneurship - vital to the future growth of the economy. If the rewards for winning 'the economic game' became truncated at a few million dollars, rather than a few hundred million, will people stop trying so hard? Will there be no future economic revolutionaries like Bill Gates and Peter Thiel? This argument seems to rest on two wobbly assumptions.

First, at the macro-level, that high wealth inequality in a society drives a higher level of economic innovation. If you look around the world that obviously isn't true. The most unequal societies are generally not innovative economies (look at Russia versus Sweden) but extractive economies (where privileged elites extract rents).

Second, at the micro-level, that innovators are only motivated by the possibility of very high rewards. On the one hand, this seems false because innovation is just what free people do in the face of interesting or important problems, whether that be in literature, computer science, or logistics. On the other hand, it is true that the people, like Bill Gates, who package up the technological breakthroughs of others into economically significant contributions are certainly motivated by the hope of economic windfalls. And yet, how big does the reward have to be to motivate entrepreneurial innovation? Does it really have to be in the billions? Would JK Rowling have stopped writing books after she reached her £6 million limit? Perhaps. But against this possibility one has to consider how purely monetary motivations for innovation can be distracting and counter-productive. Since the economy is not perfectly competitive, the financial rewards for innovation flow to those lucky enough to take advantage of distortions and privileges, not necessarily to those who actually make the biggest positive contributions to social welfare. For example, CEOs can profit from 'innovating' their corporate tax bill down, but this doesn't benefit the wider economy in the way that a more efficient supply chain would.

The poor

It may seem curious that I haven't yet mentioned the poor. If democracy requires a society that is bourgeois through and through, then the poor may seem as problematic to its success as the rich. It is not true, however, that the poor threaten democracy in the same way as the rich. Although their circumstances are as different from the bourgeois as those of the rich - characterised by the precariousness of their lives and dependence on others - they do not present a existential threat to democratic society that should be excluded, but rather an ethical challenge of including them fully. A society that wants to flourish as a democracy should commit to raising its poor into the bourgeoisie. No doubt about it. Yet it seems to me that the rich are an obstacle to this justice project and only limited progress may be made while they remain.

Our political-economy has been designed to suit the rich. Yes, the system 'redistributes' some money from the economic winners to the losers (only a small part of taxes paid). But this is considered a kind of charity that the poor should be grateful for. The resulting debates about how much charity they deserve are a distraction from the real issue of the fairness of the pre-tax distribution. The form of our social and economic institutions, from capital markets to labour markets to our system of higher education, determines who gets what share of the economy's productivity, and thus who gets to enjoy a life of aristocratic opulence, middle-class dignity, or precarious penury. Yet these institutions are not the pure reflection of perfect competition we have in recent decades been persuaded to take them for, in which wages exactly equal economic contribution. If you want to know why CEOs get so much money and cleaners so little, it's rather ridiculous to appeal to 'the market' in general (though The Economist likes to try), especially when pay levels can be seen to vary so greatly between successful economies. CEOs get paid so much because CEOs want to get paid so much, and they have substantial power to make it so.

There is a further sense in which the presence of a rich elite harms the poor: by skewing our bourgeois sense of justice from a concern for equal dignity to a concern for 'meritocracy'. The rights and interests of the poor are considered, to the extent they are, only in terms of whether they have a 'fair chance' to pass through the filtering process that selects who is worthy to be in the tiny elite (the narrow academic path up through the elite universities and thence to Goldman Sachs). Not whether they have a real opportunity to make a decent middle-class life for themselves and their famillies.

To conclude

My proposal will not be enacted anytime soon. But like the idea of the social contract, it is primarily intended to do its work hypothetically. The point is to politicise the issue of excessive wealth not in terms of justice but in terms of democratic citizenship. In this perspective the advantages of the rich are turned against them. The rich have been used to think of themselves as more equal than others in our society. Yet that power of command over others is exactly what puts the legitimacy of their place in politics in question. They have been used to enjoy their independence from the rest of us, hardly mixing with ordinary people and hardly noticing the national borders they cross. Yet this very feature would legitimate and justify our ostracising them in turn. The rich have made it perfectly clear that they believe all their accomplishments came through their own efforts and that they don't need us for anything except property rights. By their own reasoning, we wouldn't be doing any harm to the wealthy by exiling them from our politics, or even literally exiling them to another country. By achieving such independence, the rich have brought upon themselves the burden of justifying why they should be allowed to remain amongst us. If you don't need us, we can ask, why do we need you?