By Dan Kervick
Imagine a world and a society in which 500 people own everything – absolutely everything. These blessed few live in the Citadel, a mighty bastion of comfort with fortified and impregnable walls. The walls surround the Citadelians’ collections of lavish homes, spacious and opulent gardens, gorgeous pleasure arenas, and well-outfitted factories and workhouses.
Yes, factories and workhouses. These mighty 500 pay 100,000 other people to do various kinds of work for them. The work consists in transforming some of the resources and goods belonging to the 500 owners into a variety of consumable products, and also in using some of those products along with other raw materials to perform sundry services for the 500, services that include the production of splendid works of art and intellect.
The labors of the 100,000 workers yield more delights than can possibly be enjoyed by the 500 owners as the latter live out their luxurious but all-too-finite lives. The result is that the 500 owners in the Citadel are absolutely sated. They have no need to hire any other people to do any additional work. They already possess riches beyond the limits of enjoyment and desire.
The industry of the 100,000 workers also produces a surplus beyond what is needed to meet the quenched consumption needs of the 500 owners, and that surplus goes entirely to providing a few goods and services for the 100,000 workers themselves. That is how the workers are paid – with the products of their own labor. The workers are permitted to produce just enough extra for themselves to make it worthwhile for them to do the work offered by the owners rather than remain unemployed outside the Citadel walls.
And there indeed are millions and millions of people in Citadelia outside those impassable walls, living on the land owned by the 500. Yet all but the 500 owners and the 100,000 laborers inside the Citadel have no significant employment at all, and their lives are utterly impoverished. The owners permit the naked millions to forage for subsistence in the vast plains and forests that belong to the owners and lie outside the walls of their compound, and they also permit the wanderers to build rude shelters from dead grasses and fallen twigs.
But that is all they permit. Despite their sumptuous and sybaritic lifestyle, the owners are frugal savers of their unused property. They are determined to preserve and maintain possession of everything they own, including all of those assets that are not in use for their own present consumption or for the present payment of their workers. They are determined to keep all of their superabundant property in their own possession, in perpetuity, to be handed on down to their posterity. Also, the owners are wary of permitting production lest the rude millions improve their material conditions and powers enough to become threats to the power of the owners and rulers of the Citadel. They enforce their strict property regime with vigor and extreme prejudice, and do not permit the unhappy millions to engage in any significant productive transformations of the vast unexploited resources beyond the Citadel walls.
The system is frozen in place because the owners possess a monopoly of force – a monopoly not just in theory, but in unchallengeable practice. The owners possess a battery of laser blasters they built in an earlier period, and that are sufficiently powerful to discipline the 100,000 workers and keep them under the owners’ control. The laser blasters are installed throughout the Citadel along with surveillance cameras, and are operated remotely by codes that only the owners know. If a worker becomes unruly or insubordinate, she is summarily blasted into oblivion with a short burst from one of these potent armaments. And any worker who shows the smallest hints of inordinate curiosity about the workings of the laser blasters, or a budding interest in using the tools and raw materials of the workhouses to design weapons of any kind, is dispatched just as expeditiously.
Among the jobs performed by the 100,000 workers is the task of shooting, burning, laser blasting or otherwise punishing any of the millions of unemployed humans who turn themselves into pests and threaten the property of the owners. The owners send frequent patrols of stolid and reliable workers outside the walls to hunt, terrify and discipline the nomads. They also propel unmanned flying machines out beyond the Citadel walls and into the exterior wilds to survey the activities of the wanderers, and to annihilate them on the slightest suspicion of threatening activity, or for so much as a gesture that breaches the ordained demeanor of prostrate obedience.
The millions of vagrant foragers outside those imposing walls, wandering unclothed and stupefied through the wilderness, would love to possess lives like those of the 100,000 lucky workers, about whose more prosperous existence they have heard many stories and legends. When the owners are in need of new workers, they issue a call throughout the land. All eagerly apply for consideration. Everyone wants to be selected, and the owners can always choose from the very strongest and brightest among the nomads to find the choicest workers.
Thus is the tale of Citadelia. I now have some questions for theoretical economists. How would they describe the economic conditions of Citadelia? More specifically:
- Would economists classify the conditions of Citadelia as a depression?
- Are the markets in Citadelia routinely clearing?
- Is Citadelia an economy in equilibrium?
- Could the mass unemployment of Citadelia persist for a very long time?
And here is a question for the rest of us: Could we be living in Citadelia? Obviously, the conditions of the Citadelia story are extreme and fantastic. But in our world right now many millions of people – particularly young people – are involuntarily unemployed. The plague of unemployment is devastating large parts of Europe, The United States, the Middle East and Africa. Could it be that a chief reason for this persistent joblessness is that the owners of these regions and their resources, having sated most of their own personal desires, have no urgent need to employ more people to produce more goods and services, or to generate more profits? And could it be that the unemployed do not themselves own enough of the world’s property to create their own opportunities for productive work? And even if the owners of the world’s property are not exactly sated, might there be degrees of satiety such that when that degree is high enough, and when wealth is concentrated in too few hands, these circumstances have the effect of stifling economic development?
Notice that the unemployment in Citadelia could be relieved in two ways: If the owners were less exclusively concerned about their own well-being and property interests, and were more concerned about the well-being of others, then they might simply give away most of the land outside the walls, and liberate the natural industry of the foragers to begin improving that land, cultivating it, mining it and building on it. Also, if the owners were insatiable, so that no matter how much they had they always wanted more, then they would always be providing increasing amounts of work. They might gradually expand the walls of the Citadel over time, incorporating by stages more and more of the hinterlands into their enclosed civilization. But the combination of the owners’ satiety with their fixed determination to hold all of the property that is already theirs, works to prevent Citadelia from growing.
Dan,
Knowing that you are a fan of one great Scottish philosopher, I wonder if you have ever read the work of his friend, Mr. Adam Smith?
I’m still working on The Wealth of Nations and haven’t put all the pieces of the puzzle together yet, but there is a certain similarity between your thought experiment and the contours of his model.
“If the society were annually to employ all the labour which it can annually purchase, as the quantity of labour would increase greatly every year, so the produce of every succeeding year would be of vastly greater value than the foregoing. But there is no country in which the whole annual produce is employed in maintaining the industrious. The idle every where consume a great part of it; and according to the different proportions in which it is annually divided between those two different orders of people, its ordinary or average value must either annually increase, or diminish, or continue the same from one year to another.”
In other words, the degree to which the idle do (or do not) pay out the surplus as wages determines the growth rate. Smith circles back to this claim more than once.
And that’s just for starters…
best,
George
Thanks George. I need to go back to Smith.
I’ve been putting it off until I’m done with a Hume project I’m currently working on – I’ve always been afraid that the similarities between the two will color my interpretations of Hume.
Excellent recommendation! One of the best books ever written. And some knowledge of classical economics would definitely help the cause here. A lot.
This film offers a classical analyses and features another UMKC faculty member, Michael Hudson:
http://realestate4ransom.com/
Thanks very much. A lot of thinking and imagination went into this. How can you get this parable to the legions of Evangelicals in America who learn best from parables? Can this be turned into a voiceover in an animated film, widely distributed? This is a story the indoctrinated masses could understand. Of course, there would have to be a presenter of the film/video, who can help the audience to connect the dots between the video and their own place in the real world. This might lead to a Q&A, and a lively discussion; maybe even to “New Economic Thinking.” Would some foundation sponsor this project? What if the video and presentation were sent through school systems, to encourage “participatory democracy?” This would be a “public service.”
Thanks for the compliments Dr Bernard. I suppose we could start small by forwarding the link to people you think would like it?
I wanted to write it up more as a piece that poses a question than gives answers. Maybe there are some economists who have already thought through the problem it poses about the impact on an economy if wealth is concentrated and the wealthy are sated. George made the helpful suggestion I look at Smith.
One interesting question is whether the modern word with its high-tech systems of surveillance and weaponry have made it easier for the few to claim and defend property rights over the many, without serving them. Or are things really no different fundamentally?
“One interesting question is whether the modern word with its high-tech systems of surveillance and weaponry have made it easier for the few to claim and defend property rights over the many, without serving them. Or are things really no different fundamentally?”
I don’t think the armed forces are big enough yet to control the people. Especially with so many of them overseas. That might be in place 20 years from now, but not yet.
On the issue of whether extreme wealth plus satiety explains the persistence on high UE, I don’t think that’s the explanation or even a very important factor right now. I think, instead, that it’s much more attributable to the sectoral financial balances. If savings desires are at 6% of GDP, and the current account balance is at 4%, we know that the public deficit should be 10% or roughly $1.6 Trillion this year. But thus far the Federal Government is deficit spending at only about $800 – $900 B, roughly 50% of what’s needed. I think that accounts for it. If we immediately did the full FICA holiday, and State Revenue Sharing at about $1000 per person, and put in a JG in September, I think we’d be at FE by year’s end, whatever the rich want.
Hi Joe,
I’m just trying to explore different aspects of the factors that might be diving continued unemployment. This was written mainly in response to people who argue that the private sector left to its own devices, driven purely by the profit motive, should always move toward full employment so long as the government doesn’t distort the market. I’m suggesting here that you can describe circumstances in which that would not be the case.
I see this hypothesis as fully consistent with with the MMT/Keynesian aggregate demand shortfall story. Notice that a big part of the reason that Citadelia does not have full employment is that the owners in Citadelia have savings desires that are incompatible with it. (Of course, in Citadelia there is no difference between the government sector and the class of capital owners.) So, if we apply the MMT framework to our society but then go on to ask why savings desires are what they are, we can speculate about various answers. One of them has to do with the savings desires of households that could be due to balance sheet factors, fears and anxieties about the futures, etc. But another has to do with the behavior of firms and those who own those firms. Couldn’t it be that the possessors of financial capital as a group are more disinclined than usual to invest in production not just because of anxiety about the future and the perception of a lack of demand but because many of them already have a comfort level that diminishes their incentive to seek a high return on investment? They are content just to save what they have – which in our society includes doing such things as purchasing government bonds, and purchasing shares on the rents from existing enterprises. In a world that is stagnant, the few can still be very rich if they own sizable shares of that stagnant output. The view that private wealth is always driven to grow and invest and accumulate is based on the presupposition that they always want more.
The different specific factors that account to the savings desires of the the private sector makes a difference for policy choices. If the issue has to deal mainly with fearful and indebted households – and I think that is a big part of the story – then the solution probably consists in flooding households with new net financial assets, including by hiring the members of those households to do additional work. But if the overly high savings desires of the owners of existing financial assets are the main factor, then part of the solution might be to shift existing the balance of ownership of existing assets from those who are relatively sated to those who are hungrier.
I understand the logic, Dan, and everything you say could be part of the operating dynamic. However, as I see it, the rich aren’t having trouble investing, so much as they’re having trouble in the United States. Moreover, many of the member of the Forbes 400 or is it 500 (I always forget), don’t seem sated. They seem busy making additional money hand over fist. When the crash occurred, if I recall correctly George Soros’s fortune was reported at about $8 B. Now it’s said to be $20 B. The Kochs have continuously been increasing their net worth, which is now, what, $45 or $50 B for both of them combined, compared to about $30 B before the crash?
On this:
While it makes sense to ask about the relative priorities of these factors, I think it’s pretty clear that middle class people want to repair their balance sheets, since they’ve lost so much of the paper value of their homes, or have been foreclosed upon, or have lost their jobs and have had to increase their credit card debt to maintain their life styles or even just get along. It’s just not at all plausible to say that increased savings desires are not a factor here, especially when we consider that increasing credit card indebtedness was balanced by increasing paper home values in the period before 2007, but certainly not after the crash. So, it seems pretty clear to me that we certainly do want to add NFA to the private sector while actually providing money to most of the population to raise AD among them and allow them to pay down debt.
As far as the policy of shifting the balance of assets away from the sated to the hungrier is concerned, whether the richest people are really sated or not isn’t the consideration that ought to drive such a policy, in my view. That is, if they are sated, and that’s why they won’t invest, then the Government can still directly provide investment money because its nominal wealth creating capacity is unlimited, so there’s no need to shift their assets to others for that reason. On the other hand, if they are not sated and are willing to invest if the demand is there, there’s still a reason to shift their assets away.
That reason is the extreme wealth inequality and its continuing threat to the political system. If we found they were still hungry and we let them continue to invest for that reason, then we’re providing opportunities for them to further increase wealth inequality. I’m not for letting Gates, Buffett, the Kochs, Soros, etc continue to have low taxes and be free to choose where and when they will invest all their surplus and where they will choose to give it to charities of their choice. I mean, I never elected them God, and while I like Soros’s choices when it comes to giving, at least relatively speaking, I don’t approve of the way Kochs, Gates, and Buffett, use their money.
So, bottom line, I prefer confiscatory income taxes for all of them and very high inheritance taxes, as well, completely apart from the need to get more money to most of the rest of the population. Of course, I share the MMT view that the Government can transfer money to most people without taking anything directly from the very rich. But from my point of view, they earned much of their money because (a) they rigged the rules of the game; and/or (b) they engaged in control frauds or other questionable behavior. So, I have no trouble when it comes to justifying taking back the fruits of their efforts over the past 40 years whether they’re sated or not.
No, I agree the increased savings desires of household are the biggest part of the story. I see it in my own life. But I’m just wondering whether there are other factors involved. And why is there so much money tied up in such low-yield investment?
I understand. On why there is “. . . so much money tied up in such low-yield investment?” perhaps it isn’t tied up. Can’t they leverage Treasuries in borrowing? Scott Fullwiler’s remarked on banks allowing that frequently. If so, maybe all the money sunk into Treasury is just leveraging new money which is then used for investment outside the US.
And also, although in our actual world there are few people who are actually sated, I mentioned at the end degrees of satiety. I suppose this just enters into the old idea of the “marginal propensity to invest”, and I’m suggesting that that propensity is not just dependent in a purely mathematical way on the return from investment, but also on psychological factors determining the marginal value of that return. This is why artists are advised to “stay hungry”, right? The more you have, the less you care about getting more. Maybe that’s not true of George Soros, because he is interested in making more to fund various causes, and also other compulsive accumulators. But it might be true of the pool of investment capital on average.
I agree with this. There may be a lot of psychological factors feeding the marginal propensity to invest and keeping it high.
Just a question to Joe Firestone and others too. Savings desires? Is that just a turn of phrase? It seems to hark back a little to the idea that macro aggregates are explained by a simple aggregation of individual human economic motivations.. We don’t know what those motivations desires etc. really are, nor if the macro is even really determined in the way this model sugests.. But the tendency is nonetheless to personalise anyway. Is it a bit like calling a car by a human name and personalising it’s behaviour as if it was human?
Excellent thought provoking piece Dan.
Jim,
I’m not sure I understand your question. Are you suggesting that the savings that people are accumulating might be happening against their will? Is it not choices to hold $balances in accounts which accrue as savings? Anyone who doesnt wish to hold dollars can certainly find an outlet to get rid of them so Im not sure there can be another way the
“macro is even really determined”, can there?
Thanks Greg, and are there institutional actors? Choices that aren’t really choices?
Hi Jim,
You are right to be skeptical, I think, about language that seems to impute to large entities like a whole sector of the economy any personal human traits like desires. But in this case I do not think there is a theoretical problem. As long as we can assume that for each actual human agent in the economy, and for some period of time during which that agent receives a net flow of income, there is a quantity of dollars that that agent wishes to save from that income, then we can interpret the “savings desires of the private sector” as just the sum of each of those quantities.
Hi Jim, I agree with Greg and Dan’s remarks about savings desires, and I also distrust simple reasoning that projects individual desires to the macro-level, often resulting in fallacies of composition. In this case, however, I think it’s certainly a reasonable conjecture to think that in a time when loans are hard to come by, following a process that led to the loss of from 30-50% of the nominal value of the major asset held by many millions of people, and even the loss of that asset by millions more that there would not be pretty strong desires to start building private balance sheets again.
Now, do I know that savings desires, when aggregated, would translate into 6% of GDP and import desires into 4% of GDP if the Government accommodated them with a 10% deficit? No I don’t. That’s a guess. But, if the Government restricts its deficit to $900B or about 6% of projected GDP, then I’ll predict that savings will fall to about 3% of GDP and and imports to about 3.0 % in response. That’s just a guess, of course, because I’d have to have a good model of the month-by-month dynamics to be more confident of that. But, nevertheless, I’ll bet it’s in the ballpark.
Basically, Citadelia is populated by chimpanzees (you need a chimp CHUMP) and is an unfortunate analogy: but humans are so much more …..! I don’t think unemployment is mechanical like in the sectorial balances: (nothing in nature is unemployed) – it’s an aberration; the better side of human nature (creativity) constrained, twisted internally and involuted, destroying good lives? Chimpanzees …. the neanderthals still rule ….
It reminds me of Tamerlaine’s empire, Citadelia is like Samarkand. He was just as ruthless, any city his troops attacked was completely devastated if they did not surrender immediately. If any city later rebelled his soldiers killed everyone there, destroyed the city, and salted the ground so no crops would grow there. Consequently everyone was too terrified to refuse to pay tribute, also the workers in Samarkand were just as liable to be killed.
Greg O, that sounds about right.
Citadelia describes a more or less steady state system. The real economy moves in cycles. Today’s conditions of high unemployment are not a steady state, they are the down portion of the cycle, and they will not continue forever.
The persistence of the feudal power in Citadelia depends on their perfect monitoring and weaponry. There is no such thing in the real world, and revolution is still quite possible, as is occasionally demonstrated. Tyrants eventually fall.
Much of the “saving” going on today in the real world consists of foreclosures and bankruptcies, reducing debt to 0 and thus “raising” the NFA of households. To use the term “savings desires” to describe it is a distortion of the motivations involved.
Maybe Golfer1john. But I’m thinking that if you look at the world from the perspective of the millions of unemployed young people in the Middle East, the world looks a lot like Citadelia: persistent stagnation under a global order held in place by awesome military power.
Saudi? Kuwait?
North Africa, Jordan, Palestine, Yemen
Unfortunately, humans possess one “consumption need” that can never be quenched: the desire for status.
It is intolerable for a billionaire to exist in a world that contains several trillionaires.
There are many methods of control other than guns. We already live in an economic control grid. Upward mobility is determined more by compliance than industry and skills. Non-compliance pinches out even highly educated and highly capable individuals. The control is not complete but almost there. A cashless society will close the grid even more.
You debate savings and cash flow and other factors which is nice for a Sunday afternoon but does nothing but perpetuate the status quo. There is no free market, there never was. Philosophers and Economists are chosen and their opinions are spread to indoctrinate/create a mindset- a secular religion that satisfies a sufficient percentage of the population to allow the minority to continue to deprive the majority of their right to exist in this world in a meaningful way. The 1% make the rules and reward the 20% that agree to play by their rules, who than serve to maintain/perpetuate/enforce/impose an illegitimate, unjust social-economic and political system on the world. Any way you describe it or justify it or rationalize it, in the end it is just another (more subtle and more complex maybe) form of TYRANNY.
No one can claim, by inheritance or individual effort, the right to lay ownership to a disproportionate share of the world’s essential resources or the right to determine another man’s existence. We are socially engineered to accept injustice and criminal behavior by the 1%. The rule of law does not exist. Read John Taylor Gatto – “How public education cripples are kids and why” and understand how we are engineered from young.
The 20% need to decline the bribe and restore human nature to the planet. We are subhuman now and the elite, instead of becoming a master race, are decaying into mental illness- sociopaths, inhuman. They create the conditions for their own demise. The cycle continues . . .
Well put, Andreas!
The thing that’s missing from the tale (a bit like Metropolis, perhaps?) is the possibility for any of the workers to expand their ownership over anything. In our society people can and do this all the time. Some, if they are very fortunate, can go from owning very little to owning vast riches. Usually though, one has to pay a great deal of ‘rent’ to the existing owners (interest, etc) before one can substantially increase one’s claim.
Of course it’s also possible to create your own property. A great idea can be transformed into huge wealth.
So within the Citadel it’s not so simple. Rather than a ruling class and their petrified slaves, there is a complex hierarchy, with each person pursuing their own incentives, each disciplining the other.
True, our world isn’t quite so static. On the other hand weren’t there some studies published recently showing that social mobility in the United States is now far behind that of most other “developed” countries? Maybe something is freezing the established order in place? Perhaps it’s not laser blasters, but then what?
There’s a common orientation among the professional class, and hardcore neoliberal economics is drummed into people from the gate. You don’t get to touch money or the people who have it, without it. If you don’t accept the neoliberal consensus, then you get to be at a “non profit” or work for one of the government agencies that does social work etc. In which case, your argument is “be nicer to people because it’s the right thing to do.” But then the guys come out with the flip charts and supply/demand curves, and the austerity talk. The rest of the population either buys into neoliberal stuff, or they argue “be nicer to people because it’s the right thing to do.” The people who have concrete power, i.e. they work in IT or tech, are always going to listen to the guys with the flip charts because, they have charts and power points, and most of the best STEM people are high functioning autistics anyways. They therefore aren’t going to respond to “be nicer because it’s right” because they aren’t going to see the functional utility of it– well at least, until their jobs are outsourced, or their carefully constructed retirement account blows up.
Austerity is always going to play well with the security services because they use an orientation and narrative of self-sacrifice to bind together their members — contempt for the undeserving weak is a big part of that as well.
People may know there is something wrong, but they aren’t sure what. There isn’t (yet) too much of a mainstream narrative of oppression that can apply to everyone. I do like this blog entry because it DOES put together a coherent narrative of oppression. One of the things that drew me to MMT is that it provides a roadmap for “what to do,” which is the next step. First, we have to explain to people exactly how we are all being kept down– and then, we have to explain what to do about it.
The established order is frozen in place by the dominant neoliberal narrative, and lack of a popular cohesive narrative of oppression, and what to do about it.
Dan,
have you seen the documentaries “the 1Percent” and “Born Rich” by Jamie Johnson? Pretty interesting insight into the mindset and philosophy of the uber rich, including an interview with the high priest of wealth inequality, Milton Friedman (Johnson is no match for him, unfortunately).
No, haven’t seen them – but I’ll look for them. Thanks.
Dan, I think you should work with a script writer and present it to the movie industry. It needs to be fleshed out, of course, but I believe it would be a winner. I would immediately copyright your title and story and also purchase the dot com of it. Do it right away.
When I read it, I immediately thought of “Hunger Games.”
I think this idea of satiety and risk aversion as a primary driver to UE is not incompatible with the sectoral balances view. The sectoral balance model simply tells us what the deficit has to be to accommodate the savings desires of the domestic private sector. This satiety and risk aversion idea tells us why the savings desire for at least some of the private sector is what it is.
Moreover, the sectoral balances model is simply agnostic on the suitability or nature of the “desire for savings” and seems to me to conflate a desire for savings with savings in fact. Anyone who has income in excess of spending saves, as a matter of simple accounting. Does the fact that their income exceeds their spending indicate a desire to save? Does the fact that some people are spending some of their income on paying down their debts, which is de facto savings, indicate that these people don’t wish to spend more on consumption? The sectoral balances model reads the desire to save from the fact of saving, when savings in fact is a matter of accounting, and has more to do with the distribution of incomes and spending than with anybody’s desires. In terms of policy, we can’t afford to be agnostic on the kinds of savings that occur. Some kinds of saving and some desires for saving is good, and some kind is not. Accumulation of nominal resources with an eye towards spending them on something in the future is good. Accumulation of nominal resources for the sake of accumulating nominal resources is not.
And you have to admit that there is something to the fact that there’s only so much food a person can eat, only so many movies they can watch, only so many clothes they can wear once and throw or give away, only so many houses they can simultaneously occupy, and so forth. Just as there are hard, physical limits to production (that we’re not really very close to yet), there are hard, physical limits to consumption, even if someone’s desires were perverse enough to know no such bounds. In terms of real consumption, there are real limits, and the very wealthiest have such levels of nominal wealth and income that they could correspond to no real pattern of consumption. There’s no way they’d be able to spend and consume their income, let alone their wealth, which in many cases not even the grandkid’s grandkids could deplete through consuming. Lose it sure, by making bad decisions on how their nominal wealth should be saved, but consume it? No way.
Yes, I think this is right!
The lack of social mobility:
A large, growing and persistant trade deficit pulls the rug out from under the working class, making it harder for them to campaign for higher wages.
The trade deficit massively increases profits for the upper classes, whilst driving down wages.
The trade deficit leads to demand leakage, ensuring permanent recession at the lowest rungs of the economic ladder, whilst those at the top enjoy permanent economic boom.
As the demand leakage is not adequately offset by government budget deficit, growth only comes through increasing private indebtedness. Debt servitude of the middle and working classes further enriches the upper class.
Conservative governments promise to ‘bring jobs and prosperity back to America’ by cutting taxes for the rich and implementing supply-side reforms. The working/ middle classes lose further ground, the upper classes disappear further into the economic stratosphere.
The trade deficit continues to grow because foreigners are so poor and downtrodden they will always be willing to undercut you.
Inequality breeds inequality – price inflation at the high end of the market cuts out anyone that isn’t uber rich, exacerbated by cuts in government support to non-rich people. The super rich begin to live in their own exclusive universe. Then they give internships to and hire each other’s children, lend each other money for startups, etc. The super rich only know other super rich people, or their servants. Everyone else is ‘sad’, ‘lazy’ or ‘unimportant’.
Instead of spending on social welfare and economic stimulus, the government wages war to secure oil supplies.
The budget deficit balloons but few actually benefit whilst loads of people get killed.
The interest payments on the debt go into the pockets of capitalists around the globe.
War breeds terrorism. So soon you find there are surveillance cameras on every corner and the secret service is listening to your phone calls. Congress starts to strip you of your rights.
Supply side reforms continue, removing ‘burdonsome’ regulation from the financial schemes of the new global aristocracy.
The new Global Lords promise you the American Dream if only you sign on the dotted line and promise to work like a slave for them. In return they create some money out of thin air for you and allow you to live in a house.
Then one day, oops! It all blows up.
No worry, a quick phone call toWashington and its sorted. You are thrown out of your house and the Global Lords receive a few trilllion dollars in pocket money. Nothing to worry about.
But now the government owns the new Global Lords even MORE money! So the little people have to be willing to sacrifice, yet again.
Sorry, but we can’t afford all those services you used to get. But that’s ok because you’re really just ungrateful scroungers and you really should learn to stand on your own two feet for once. Just look at the new Global Lords for inspiration – take a leaf out of their book and learn to look after yourself you pathetic prole. They are your role models. They are your idols, your rulers, your masters, your Gods. Now bow down and worship you ant.
You know, Mr. Dan, this reminds me of a recent rant of mine:
The Forbidden Question: Who Owns What?
Steve Cole (New America Foundation, funded by the Peterson Foundation), author of the latest book on ExxonMobil, Private Empire: ExxonMobil and American Power, has been on the book tour, appearing on show after show, where repeatedly one question is never asked:
Who owns ExxonMobil?
Why is the most obvious question never – ever – asked?
Why won’t Amy Goodman, of Democracy Now!, and the various NPR show hosts ever ask this question?
Yes, ExxonMobil is a publicly traded corporation, but who or what owns the most stock in that corporation?
Why is this always a mystery? Why should this be a mystery?
True, today with an endless number of holding companies and shell companies registered at offshore finance centers to obfuscate ownership – to make all things murky – it is difficult to ascertain, but knowing who owns stuff can be truly enlightening.
What if the same individuals or families own the controlling block of shares of both BP and Transocean?
Who knows the answer to this question — and why is it never asked?
When certain corporations and banks are mentioned, certain family names come to mind:
ExxonMobil (Rockefeller and Mellon), BP (Rockefeller and Rothschild), AT&T (Morgan and Rockefeller), GE (Morgan), JP Morgan Chase (Morgan and Rockefeller), Citigroup (Rockefeller), Morgan Stanley (Morgan), Royal Dutch/Shell (Rothschild), Rio Tinto (Rothschild), Northrop Grumman (the Bush family and James Baker), and Transocean (Rothschild).
Quite probably this is still the case?
When Louis Brandeis wrote the epochal book at the beginning of the 20th century, Other People’s Money and How the Bankers Use It, he exposed the true ownership and super-concentration of wealth; an exposé eventually leading to the New Deal.
It’s the 21st century: do you know who your owners are?
I’d definitely be interested in reading something along these lines. “Follow the money” is still the truest rule of thumb.
«The Forbidden Question: Who Owns What?»
There is a large difference between that and “Who Controls What?”, which is a much more interesting question.
However the answer to the ownership question is very simple: pension funds and investment funds, for most first-world economies.
Because nobody is rich enough to own a substantial part of most large corporates. It is a situation which in some countries is called “capitalists without capital”.
Come companies have majority “legacy” shareholders, but most companies are either diffusely owned, or are “owned” by people who borrow money from banks to buy shares, and then put those shares as collateral for the loan. In other words, “capitalists” whose capital is access to very good “friends” in banks. Things become even funnier when those “capitalists” lease via repos the shares they “own” from the pensions and investment funds, often using borrowed (from friendly banks) money to pay for the fees.
That most corporates are owned by pension and investment funds makes them TBTF: because a collapse of the stock prices would blow up many pensions and investment funds.
Especially public sector pension and investment funds, which according to some research from the Atlanta Fed:
http://macroblog.typepad.com/macroblog/2011/10/state-and-local-fiscal-fortunes-follow-the-money-collected.html
http://macroblog.typepad.com/.a/6a00d8341c834f53ef014e8c52cacf970d-popup
that shows that public sector pension fund returns follow closely the SP500 on the upside, but overshoot it significantly on the downside, which seems to mean that the funds are mostly invested in the stock market instead of treasuries and bonds, and that stock investment is leveraged.
The Network of Global Corporate Control
http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995#abstract0http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025995#abstract0
Pdf of the whole study:
http://www.plosone.org/article/fetchObjectAttachment.action?uri=info%3Adoi%2F10.1371%2Fjournal.pone.0025995&representation=PDF
PDF of Brandeis’ book:
http://ia700309.us.archive.org/32/items/otherpeoplesmone00bran/otherpeoplesmone00bran.pdf
I think the model becomes even more interesting with a couple of minor modifications:
-The 500 gained ownership rights to their property in a legitimate way (say they arrive first and initially had to farm the whole island for themselves before the masses arrived.
– instead of the 500 using extreme violence against the masses they simply use the minimal force necessary to protect their property.
With these additions I think that follower s of Murray Rothbard would believe that:
– any attempt to disrupt the power of the elite would be unethical
– this economy is in equilibrium (at least potentially, not enough data is given to know for sure) . No market fails to clear and the structure of the economy accurately reflects underlying preferences of those in the market.
(I would be interested to hear what Rothbardian’ss would say about the ethics of such a society and under what circumstances it would be legitimate to challenge those “property rights”)
Rothbardian’s would not agree that this model was similar to modern day America in some key features. They believe:
– America’s power elite got their power by theft and use of illegal violence
– Even with a corrupt power elite the economy is not in equilibrium.
– The power elite has distorted the economy by introducing price controls and barriers to entry that prevent markets from clearing.
– By distorting the market for money itself the structure of production does not reflect underlying preferences.
Not sure how relevant this is to the above debate but those were my thoughts.
–
That definitely is a relevant debate. It really goes to the heart of the problem with Rothbard’s libertarianism: that some outcomes are so bad that the question of whether they came into existence via the kinds of appropriations and transfers of property libertarians consider just is not terribly relevant.
Sometimes a minority is more intelligent or has better business skills (not politically correct but often true), they might then get to this situation by outsmarting the other people and by collusion with each other. This happened in Fiji for example where Indians migrated there and took over most of the businesses. The Fijians responded by an uprising and dictatorship, Citadelia would go the same way eventually. The weaker people would band together in mobs and overwhelm the defenses.
Yes possibly, although I wonder if it is possible for the technologies of control and repression to grow so powerful that mass popular resistance, mobs, etc. lose their efficacy.
@ Jim
Thanks for the reference on the global corporate network. Very interesting indeed.
Dan,
The 500 would have to a) never be in conflict or competition with each other, b) strictly control the number of children they produced, c) somehow manage to indoctrinate enough people into their ideology to protect them and their property from the unwashed masses. These people (the army) would have to feel that they were benefitting enough from the situation to not turn their weapons on the rulers.
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The scenario you describe above is very similar to a scenario I have long used with friends to descrive to them both the crucial role of ownership of productive plant and extractive resources and what libertarian paradise would look like.
One of the more interesting aspects of your scenario is that it is completely outside neo/teoclassical assumptions, which postulate infinite wants and markets across eternity.
Another interesting point is that hyour scenario looks like an extreme version of the world economy, with the USA (and first world) as the 500, illegal immigrants or chinese/indian workers as the 100,000 and the rest of the world.
Yup, the problem with Dan’s parable is the first word. What’s there to “imagine”?