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November 1 - November 3, 2019
Half a million more middle-aged non-Hispanic white American males died between 1999 and 2013 than if their death rates had followed the trend of other ethnic groups.1 The additional deaths were concentrated among those with a high school degree or less, and largely due to drugs, alcohol, and suicide. To put these deaths in perspective, it is as if ten Vietnam wars were simultaneously taking place, not in some faraway land, but in homes in small-town and rural America. In an era of seeming plenty, a group that once epitomized the American dream seems to have lost hope.
The peril lies not just in influential communities not being able to adapt and instead impeding progress but also in the kind of society that might emerge if our values and institutions do not change as technology disproportionately empowers and enriches some.
This book is about the three pillars that support society and how we get to the right balance between them so that society prospers. Two of the pillars I focus on are the usual suspects, the state and markets. Many forests have been consumed by books on the relationship between the two, some favoring the state and others markets. It is the neglected third pillar, the community—the social aspects of society—that I want to reintroduce into the debate. When any of the three pillars weakens or strengthens significantly, typically as a result of rapid technological progress or terrible economic
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Importantly, community decline tends to feed on itself, as still-functional families escape so that their children do not get affected by the unhealthy environment.
Populist nationalists identify minorities and immigrants—the favorites of the elite establishment—as usurpers, and blame foreign countries for keeping the nation down. These fabricated adversaries are necessary to the populist nationalist agenda, for there is often little else to tie the majority group together—it is not really based on any true sense of community for the differences between various subgroups in the majority are usually substantial.
At its peak in 1979, there were 67.4 murders per 100,000 residents in Pilsen, over double the wider city rate. In comparison, Western Europe averages a murder rate of about 1 per 100,000 per year. The average military death rate for Germany and the Soviet Union during World War II was about 140 per year per 100,000 of population.7 Pilsen was thus truly a war zone—in 1988, a Chicago Tribune reporter counted twenty-one different gangs along a two-mile stretch on the main 18th Street thoroughfare. The 1980s and 1990s were years of horrific gang fights and bloodshed.
A common example of what Banfield calls “amoral familism” is visible in many developing countries, where people keep their houses spotlessly clean, but unceremoniously dump the garbage collected inside on the street outside. The ultimately self-defeating effects of having unclean and unhygienic public spaces surrounding clean homes can only be explained by extreme public apathy, a fundamental characteristic of dysfunctional communities.
The faint hope that the government will dig a latrine, pave a road, or discipline school teachers can prevent the local population from organizing to do so. In frontier towns in the United States, the community raised a barn or built a road itself, knowing there was no one else who would do it. In dysfunctional communities where the government is closer, the misplaced expectation that the ghost of the inefficient government will eventually appear and do the job crowds out what little private initiative there is.
In Europe, from the early Middle Ages till about the eleventh century CE, the Church frowned upon the charging of interest on loans but did not prosecute moneylending as a sin.3 However, from about the middle of the eleventh century, the Church moved aggressively to curb usury, regarding any interest as a sin, prohibited by the Bible. The usurer had to repay all interest received during his life in full before he could aspire for salvation.
the bubonic plague pandemic would wipe out an estimated third of Europe’s population.
Not only was the Catholic Church inclined to turn a blind eye to some types of lending, it was becoming weaker politically once again. Its pronouncements, including on usury, began to carry less weight. The Church’s wealth made it an attractive target for monarchs. They preferred their subjects’ wealth to stay within their control rather than be transferred into the hands of a distant, and possibly antagonistic, Rome.
Every country faced steady pressure from the outside to beef up its economic capabilities, else risk subjugation.
As we will see again and again in this book, the existence of vibrant competitive markets that allow productive and independent owners to emerge is a large part of the answer—markets help constrain the state and protect property as part of the balance.
While industrialization, transmitted through the competitive market, lifted average living standards steadily over generations, what was also new was great dispersion in incomes across society at any particular point in time, and great volatility over time. The market offered bountiful rewards and merciless punishment, which was both its greatest economic strength and its greatest political weakness. Economic security, not physical security, was now the primary public concern in industrializing countries.
By emphasizing labor as the only source of value, Marx was wrong, but not out of line with economic thinkers of his time. This theorizing also meant that all profits ought morally to belong to labor, and the profits accruing to the industrialist were mere exploitation, made possible by his property rights over capital.
When, in 1879, the United States returned to the gold standard, the debt the farmers owed was fixed to the steady dollar price of gold. The prices for their produce continued falling, though, in what is known as the Great Deflation between the 1870s and 1890s. The deflation was caused, in part, by the limited availability of gold, which caused everything else to fall in price relative to it (and the dollar). In the words of Populist leader William Jennings Bryan, with fixed payments on debt and falling revenues, farmers had been crucified by the Eastern financial establishment “on a cross of
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Opposition to the Progressive program mounted after the end of World War I, when people, having just emerged from a bloody war, became tired of Progressive sermonizing and government-imposed constraints on their behavior, such as Prohibition. Jazz and the Roaring Twenties were certainly not part of the Progressive agenda, and effectively marked the end of the movement.
The Progressives nevertheless had an important, lasting, influence. They emphasized three ways short of socialism that big business could be contained, thus preserving competition in the market. The first was through antitrust legislation and judicial enforcement. The second was through regulation. The third was through taxation. All three are still with us.
By creating a healthy competitive private sector, competitive markets also help keep the state’s authoritarian tendencies in check, and democracy vibrant. Thus, markets and democracy could be mutually supportive. I emphasize “could” because there are circumstances where the voting public is apathetic to public policy, and others where it might actively turn against private wealth and competitive markets. This is why democratic protest works best when it is timely, before people believe the system is beyond reform.
By 1860, the average years of schooling across the population in the United States was far in advance of any other industrializing country in the world, and it would stay so for nearly a century.23
Conversely, population diversity has been an important barrier to mutual assistance. Even today, studies find that countries with high levels of ethnic or linguistic diversity among their people tend to have significantly lower levels of redistribution by the government as a share of GDP.32 In other words, countries with very different communities opt to live with greater inequality and insecurity.
In the United States, the premium on education is higher than the OECD averages. The few who have not completed high school earned only 68 percent of the wages earned by high school graduates, those with bachelor’s degrees earned 66 percent more, while those with master’s degrees earned 132 percent more.
economists Thomas Piketty and Emmanuel Saez have documented in various studies, in the United States, the top 1 percent of earners took only 8 percent of total income in 1970, but this grew to 18 percent by 2010.
Such an explosion of the incomes of the rich has not happened in continental Europe.32 Each year, the top 1 percent have earned about 8 percent of total income in France since 1950, and about 11 percent in Germany over that period with little variation. Japanese top income shares have remained relatively flat at about 8 percent.
the span of control for corporate CEOs, as measured by the number of direct reports, has been increasing.39 CEOs can manage more people, perhaps because much more communication and reporting can be routinized today, with the CEO able to act quickly on exceptions that are flagged up to her.
the alarming decline in initial public offerings (whereby young companies go public) in the United States—from an average of 310 per year between 1980 and 2000 to only 108 per year from 2001 to 2016.45 They argue that it is harder for small companies to make money—the uptrend in small public companies reporting losses started in the 1980s and continues.
In the last decade, Google bought over 120 companies, Monsanto over 30, and Oracle over 80.46 It is easier to be part of a large public firm today than be small and independent. If the path to becoming big and profitable is harder, it would explain the decline in entry.
The average US public firm today is three times larger, even after correcting for inflation, than it was two decades ago.
the electorate in developed countries has become more open to listening to radical politicians. At the heart of the problem will be that technological change is creating a meritocracy based on capability. At the same time, access to capabilities is narrowing as communities weaken and so are opportunities for the people in them. The situation is further complicated by issues of race and immigration.
Surveys of people’s values across developed countries suggest that people tend to have greater trust and affinity for strangers, as well as are more concerned about the wider world beyond their immediate families, when they are economically secure.6 This partly explains why developed countries became significantly more open and generous to immigrants and minorities in the prosperous 1960s. The resulting policies, unfortunately, exacerbate domestic divisions today.
Companies seem to be rating jobs as requiring higher credentials, simply because schools are not teaching basic skills well; there is a greater likelihood of finding a capable candidate who writes reasonably and has simple numeracy skills among those who have completed college.29
Michael Spence’s Nobel Prize–winning theory of signaling, it was just this: College may teach students nothing of use in a job. It is particularly costly, though, to complete for those who do not have basic skills. Those who have solid basic skills can then separate themselves from those who do not by acquiring a college degree. The human resource departments of companies seem to believe something like this, and have simplified hiring by demanding a college degree even when it is not needed for the position they need to fill.
In 1960, only 5 percent of Republicans and four percent of Democrats felt “displeased” if their son or daughter married someone from the other political party. By 2010, fully 49 percent of Republicans and 33 percent of Democrats indicated they would be somewhat or very unhappy if their child married outside the party.
These are dangerous times. If people have lost faith in their ability to compete in markets, if their communities continue to decline, if they feel that the elite have appropriated all opportunities for themselves, both by monopolizing the markets and by monopolizing access to capability building, popular resentment can turn to rage.
China therefore followed a unique growth path. Ordinary households bore a burden that would not have been possible in a more democratic environment.
Many new jobs were created, and the productivity of existing jobs increased quickly. So average wages grew fast, even though they were lower than the additional value each worker created. China was growing rich quickly, so it was easy to ignore the distortions.
A 2005 white paper by the party defined democratic government as “the Chinese Communist Party governing on behalf of the people.”12 This meant more than single-party rule, it meant extending the party’s tentacles more directly into business.
Every large state-owned enterprise had a party cell, with the party boss often a more powerful figure than the company CEO.
What China has managed in the last few decades is truly unprecedented in the history of mankind. Never have so many been brought out of poverty so quickly.
In sum, China, having reached middle income and caught up with advanced economies in a variety of industries, has to move toward a more normal economy, repressing consumption less and subsidizing investment less.
It has to move away from relying on the rest of the world to consume its additional production to consuming more of it domestically.
Given that every significant firm is believed to be under some party direction, the party’s reputation for infallibility will be at some risk. The party’s reputation can absorb the occasional corporate failure, not a cluster of them.
The absence of any uncompromised opposition clears the way for an authoritarian faction to assume control of the party, if it so chooses.
China needs a more appropriate balance. The party dominates the state and markets have been repressed. The old pathways to growth are no longer viable. The new ways to grow require more of an accent on innovation and efficient resource allocation, less on financial repression and corruption.
In 1950, Indians had, on average, 0.92 years of education, somewhat better than the then Chinese average of 0.65.22 By 1970, after twenty more years of democracy, India had crept up to 1.24. In contrast, China’s population at that time had 2.77 years of education, nearly three times its earlier level. Apathetic uncompetitive democracy did not do much for the well-being of its people!
First, unlike the United States, where a still-independent private sector criticizes government policy, including on social and political issues that are not directly related to their business, the Indian private sector—the market pillar—largely applauds all government policy.
Since there is usually some past sin buried in a magnate’s past, as in China, which can be investigated and publicized if the magnate is uncooperative, very few are willing to speak out against the government of the day, let alone take steps to oppose it. This also means that when the party in power needs election financing, it only has to ask.
If India is to bury the specter of authoritarianism and cronyism, if Indian democracy is to be better informed and a stronger check on the state and corruption, India needs a more competitive, and thereby independent, private sector with higher public status. It needs many more small and medium enterprises to grow and flourish, providing competition to the established business houses.
Given the right reforms, India can still grow strongly for a long while. And with its vibrant democracy, it is probably better positioned than China for growth once it closes in on the frontier.
To deal with the humanitarian problem of refugees overwhelming some countries, the world needs to create a better system, where its safer countries can share the burden with each accepting some immigrants as part of their international responsibilities.
