Stone Lecture: Inequality Continues to Flummox Us...

As Prepared for Delivery: A meditation on “Slouching Towards Utopia"

Nov 30, 2022

I want to thank Gabe. I want to thank the Stones. I want to thank the Stone Foundation. I want to thank the production team for this very nice opportunity to deliver my thoughts on how inequality is a Gordian knot of a socio-economic problem that has us as a species pretty completely flummoxed—even though human progress across the 20th century is, in many

I will divide my thoughts tonight into four parts:

1. Rebalancing the University, the Strike, & What We Deserve

The first part of this talk—the current strike. We are, here and now, in the third week of a strike by our graduate students, who teach so much for this university and who find themselves under great stress, as they can see the lives stretching ahead of them, falling wildly short of the lives, they anticipated when they decided to enter graduate school. They are complaining not so much about inequality per se—they are among the richer half of Americans, certainly; but rather that they are not receiving what they think they deserve.

Such questions of what you deserve, and its relationship with inequality, are knotty ones…

What do we deserve? And how does it tie into issues of inequality?

A story:

Back when I was finishing up college at the start of the 1980s it was the Volcker disinflation. Leaving the university to enter the highest unemployment job market since the Great Depression seemed hazardous. I did not want to do what my father, sister, brother-in-law, brother, sister-in-law, and wife, all round up doing—go to law school. But what would our lives be like if we went to graduate school? I noted, even then, that people applying for assistant professorships in economics were 26 with 1/2 written article and extravagant praise from their advisers, while people applying for jobs as assistant professorships in history were 35 with one book published to good reviews, and another well on the way. So it was going to be economics.

My close friend Andrei Shleifer and I then went to the archives and went through the list of all those receiving Ph.D.s in economics from Harvard ten and fifteen years before. We found two people we had heard much of—Steve Marglin and Bob Barro. We found that about 1/3 of those 15 years out were tenured professors, overwhelmingly at state universities, and liberal arts colleges. We found that about 1/3 were bank or corporate senior vice presidents, doing forecasting and similar chores. We found the rest scattered—but looking as though they were doing interesting economics-related things in government, for international agencies and businesses, and elsewhere, and making enough money to hold body and soul together. All in all, it seemed likely to be a path to a very nice life—with an economics Ph.D. at least, history seemed dicier.

So I took the plunge, and things have turned out vastly better than the principal of mediocrity would have led me to expect, overwhelmingly because of good luck in the small and also the very large—born in the mid–1900s United States with a prenatal and neonatal nutritional environment that kept my brain from being protein-deprived during its development, and raised and molded into a personality with many great flaws and some excellences which are as-if fine tuned to give me great social power in the particular society in which we live.

Most recently, my book published early this fall, “Slouching Towards Utopia: An Economic History of the 20th Century” is an instant “New York Times” bestseller, peaking at #6 on the nonfiction list that has—so far—sold approximately 25,000 all-format copies worldwide.

But let me return to the strike, and to the University of California’s graduate students. Even as I went through graduate school and beyond, things were changing, and the gap between we economists and what was going on elsewhere in the university was growing. The maid of honor at my wedding, married a very smart and hard-working man my age who went and got his PhD in history, starting graduate school when I did. I was promoted to full professor here at Berkeley in the same year that he got his first tenure-track assistant professor job. And here in economics, job prospects for our graduate students are still very good: tenured professors do sometimes retire, and their slots are usually filled with new tenure-track appointments; International agencies and business schools are still expanding rapidly, and greatly value Ph.D. economists; Silicon Valley thinks our students have a great deal of utility. Here in economics, we professors can say: your lifestyle while in graduate school will be relatively spartan, but your pay will ramp up very fast afterwards: don’t worry.

In other departments in this university, professors cannot now say this to the graduate students. In fact—given that American universities by and large ceased to grow a generation ago, and the absence of business-school and international-organization demand for the Ph.D.’s of other non-STEM disciplines—they have not been able to say that your post-Ph.D. prospects for a fulfilling life and job —in your Ph.D. discipline_ are bright for a generation. For a generation, in the humanities and social sciences (and I know many Ph.D.’s in math and physics now doing things like financial arbitrage and computer game design), becoming a graduate student has been starting a low-paying job as a teacher, with the attached opportunity to write a dissertation that might, with very low probability, put you on the path to a tenured professorship somewhere someday. Becoming a graduate student has not been entering a phase as an apprentice with a spartan lifestyle leading to a relatively secure career path.

For a generation university administrations nationwide have noted this transformation and failed to deal with it.

I cannot judge any individual administrator harshly. California Hall starts each month hoping to take bold action to fix the problems of and tackle the opportunities open to the university—but three days into the month it finds it must focus all of its attention on senior-faculty retention cases, as universities with much larger endowments seek to attract us senior professors. Plus there is the iron logic of a successful bureaucracy that accumulates for generations, undisrupted by either market forces, partisan-political circulation of elites, charismatic renewal, or clear and obvious substantive failure. C. Northcote Parkinson told a parable of this iron logic: A “civil servant, called A, finds himself overworked”. At the end of the story A has six subordinates C through H, is more overworked than before, and yet the seven of them accomplish less than A did on his own, as most of their time is spent cancelling each other out.

But I can judge the administrative system as a whole that has brought us to our current position harshly. There is no vision. And we are told in Proverbs 29:18 that King Solomon said: “Where there is no vision, the people perish”.

And that is the end of the first part. The takeaway? Our current strike is not merely a short-run contest at the margin over the distribution of the university’s resources, but rather the surfacing of a very difficult problem of how the university of the future is to be organized for our collective benefit.

2. Since 1980: The Rising Inequality Surprise

The second part of this talk is how my self of 40 years ago that I talked about before—my twenty-year-old self—would be very surprised to find his elder self here, talking about inequality as a first-order problem for human society.

That twenty-year-old self confidently expected his lifetime to see a great narrowing of income and productivity differentials across nations. Roadblocks formed by imperialism and colonialism—external to a country and internal—by distance, and by blinkered ideologies had greatly widened income and productivity differentials since 1800. But those historical forces were passing away. Global development was on the agenda. And the profits to be made from raising productivity worldwide to Global North standards were so great that every exertion would be made to make it happen.

But, of course, that convergence has not happened.

Looking across nations, the world today is about as unequal as it was when I was born in 1960, albeit somewhat less unequal than at the moment of peak international income and productivity inequality in 1975.

Moreover, that twenty-year-old self confidently expected income and status differentials inside America to fall, not rise, over his lifetime. Racism and patriarchy seemed to be in retreat, and the underlying framework of social democracy—the New Deal Order, as historian Gary Gerstle likes to call it—gave us on the one hand full employment and rapidly increasing investment in education which gave market power and productivity to labor, and on the other the social-insurance state and progressive taxation which significantly leveled pre-fisc inequality and disrupted plutocratic dynastic accumulation. The dominant political-economic understanding of how this New Deal Order had come about had been most compactly set out by the great Simon Kuznets, with his heuristic of the “Kuznets Curve”. As my teacher Jeffrey Williamson summarized it in his Yale Kuznets lectures:

As an agrarian economy industrializes, inequality rises simply because the modern-industrial sector pulls away from the traditional-agrarian one.
More important, however, is that, at least in the early stages of industrialization, technological progress is labor-saving—makes capital a substitute for rather than a complement to labor—and so boosts returns to capital while lowering returns to labor.
Moreover, a largely agrarian poor class, not yet through the demographic transition cannot afford the human-capital investments in their children needed to rescue the next generation from poverty.
And last comes the substantial amplification of wealth disparities from the rewards to market position in increasing-returns and high fixed-costs industries.

The consequence? As industrialization takes place, income and wealth inequality rise, very substantially, producing a Gilded Age that the rich of later generations see as a Belle Époque.

All of these factors, however, are reversed in the later stages of industrialization. After the demographic transition is completed, resources to invest in human capital are ample. Rural-urban wealth gulfs are steamed away by the market. Technological progress becomes more labor-complementing than labor-substituting. Easier technological diffusion makes first-mover advantages of less important. Plus there is more: even an oligarchic political society can believe in antitrust to curb its plutocracy; and, most important, literate working class can organize and flex its political muscles for first political democracy, and then social democracy—steeply progressive taxes and an ample social insurance state

Simon Kuznets thus envisioned, and the near-consensus back when I was 20 or so agreed, that post-WWII social democracy—the New Deal Order—was very much a Fukuyama-like “end of history”. Yes, there were historical survivals from a worse past: the economic consequences of racism, sexism, past wealth dynasties and the transmission of wealth inequality. But those were all ebbing away. Robber barons were replaced by corporate techno structures. Political democracy made wealth, the servant of rather than the master of society.

Once again, it did not happen.

Or, rather, it happened—and then, with 1980, came the Neoliberal Turn. It turned out that social democracy —the New Deal Order—was in no sense an “end of history”. The future after 1980 did not see increasing equality of opportunity that continued to reduce inequality of result. Instead, we entered into the Second Gilded Age, in which we are now enmeshed. . And that is the end of the second part. The takeaways? The failure of post-colonial convergence, and the Neoliberal Turn of the early 1980s and the consequent coming of our Second Gilded Age, were great surprises to the supposed wise of previous generations.

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3. Why the Neoliberal Turn?

And now I get to my third part: Why? Why the Neoliberal Turn?

Let me start this third part by focusing down, and dropping international income and wealth, disparities from my subject. They are probably the most important part of global inequality from the perspective of the human race as a whole. But I have limited time and limited knowledge. So let me focus on the reasons for the coming of the Neoliberal Turn, and our consequent Second Gilded Age.

Let us first go back to the days of 150 and more years ago—the years when humanity was ensorcelled by the Devil of Malthus. Slow productivity growth ,poverty, and the patriarchal requirement that one have surviving sons if one were to have social power—those all meant that population pressed upon the limits of subsistence. There was simply no way that humanity could possibly bake a sufficiently large economic pie for everyone to have enough.

What was one then to do, if one wanted enough for oneself and one’s family?

The answer was straightforward: one strained every nerve and muscle to become part of an élite. That élite would then elbow other potential élites out of the way. It would then run a force-and-fraud domination-and-exploitation game on humanity, so that it could grab enough for itself. Thus politics and governance were, primarily, how that élite—thugs with spears, and later with gunpowder weapons, assisted by their tame accountants, bureaucrats and propagandists—ran this domination-and-exploitation game, using of the resources they extracted to maintain their dominance, and some to build and enjoy their high culture.

Come 1870, however, the spell of Malthus began to lift. Worldwide, technological progress over 1770 to 1870 had been three times as rapid as over 1500 to 1770, which in turn had been three times as rapid as in the previous Agrarian-Mediæval years. But even 1770–1870 had not yet been fast enough to trigger the infant-mortality decline and the demographic transition to low fertility, and hence the ability to invest in a mass education on a large scale. After 1870, however, the global rate of technological progress more than quadrupled to something like our current 2% per year. Better nutrition, followed by a growing ability and growing knowledge to make public health investments—those started to push infant mortality on the way down. The population explosion could not keep up with technological advance. Slowly and unevenly, the fertility decline began, and, haltingly and unevenly, real income growth began to accelerate.

Within a generation after 1870, it became apparent that humanity had found what John Maynard Keynes was to call “Economic El Dorado”. It became apparent that it would not be that many more generations before humanity could bake a sufficiently large economic pie for everyone to have enough. And then, after that, what would be the point of the domination-and-exploitation machine run by the elite? Maintaining it was expensive. Why not have a free society of associated producers in which people rotated through the needed administrative tasks? It was not that anyone especially “deserved” more. The true source, after all, of rapidly growing human wealth was not the sweat of those currently doing the work. It was, rather the treasures of technological knowledge that all had inherited from our predecessors.

One answer was that “soon” was not “now”, and that the domination-and-exploitation machine needed to be kept going in order to power the engine of research and development, capital accumulation, and economic growth. As John Maynard Keynes, fully flying his upper-class twit freak flag, put it in 1919. Let me read out a long passage:

Precisely the inequality of the distribution of wealth… made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others…. The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably…. This remarkable system depended… on a double bluff or deception…. The laboring classes… from ignorance or powerlessness… compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake…. The capitalist classes… theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice…. There grew round the non-consumption of the cake all those instincts of puritanism…. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you…. Society knew what it was about. The cake was really very small in proportion to the appetites of consumption…. If only the cake were not cut but was allowed to grow… a day might come when there would at last be enough… and men… could proceed to the nobler exercises of their faculties…. But these thoughts lead too far from my present purpose. I seek only to point out that the principle of accumulation based on inequality was a vital part of the pre-war order of Society and of progress as we then understood it, and to emphasize that this principle depended on unstable psychological conditions, which it may be impossible to recreate…

In short, for Keynes in 1919 the maintenance of Edwardian class structures and Gilded Age-levels of wealth and income inequality was essential for the progress of human race. And the restoration and shoring up of the Belle Époque order of economic and social inequality was the principal task of post-WWI reconstruction. And in 1930 he stressed the point:

For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight…

It has not quite been 100 years since 1930. But it has been 103 since 1919.

I cannot resist digressing to note that six years later Keynes had changed his tune. Under pressure from the Great Depression and the threats to liberal society then emanating from Moscow and Berlin, in 1936 he wrote about how:

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes…

Full employment was to be attained by letting Keynes’s technocratic students run a low interest-rate monetary policy supplemented by a “somewhat comprehensive socialization of investment” to match investment effort to desired savings at full employment.

But wealth and income inequality? A low interest-rate policy, Keynes hoped, would lead to the euthanasia of the rentier: plutocrats would find themselves only able to exercise the social power banked up in their wealth by spending-down their capital, and so ceasing to be plutocrats.

However, do not go too far toward full equality!:

There is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today…. It is better that a man should tyrannise over his bank balance than over his fellow-citizens… It may still be wise and prudent statesmanship to allow the game to be played… so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making passion…

But also:

It is not necessary… that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them….

In my Slouching Towards Utopia book I speak of the post-WWII global-north social democracy that Simon Kuznets thought of as the end-state of the inequality story as: the shotgun marriage of Friedrich von Hayek’s insights into the market as a social device for crowdsourcing solutions to human problems with Karl Polanyi’s insights into the refusal of humanity to accept any order in which the only rights that count are property rights and only the rich have social power and voice, blessed by John Maynard Keynes. I think that gets his final position as… presiding minister?… Father-in-law?… of social democracy broadly right.

This was, as I said in part 2, supposed to be “The End of History”: political democracy in tandem with social democracy, as the surviving remnants of plutocracy, patriarchy, and racism died away.

So why then the Neoliberal Turn?

To put it broadly, there are three theories.

The first is “unlucky accident”—you hear this, I suppose, most often from Paul Krugman. It was the inflation of the 1970s that destabilized belief in the New Deal Order, and the Neoliberals—those who believed that the rich needed to be made richer so that they focused their energies on being job creators rather than evaders of punitive taxes, who believed that the non-rich needed to be made poorer to incentivize them to cease being slackers and moochers, and that the market did things for good reasons, meaning that whatever income distribution the market generated was there for good reason which people should not dispute—who then picked up the pieces.

The second is Thomas Piketty’s theory. In broad and oversimplified strokes, it is that tenor of politics is largely determined by the concentration of wealth, and that even when the political power of potential plutocrats is at a low ebb they still have sufficient influence to maintain the typical rate of profit at 5% per year. Thus take 5% per year. Subtract from that the proportion of wealth that potential plutocrats consume, give away, and are taxed. Subtract from that the rate at which the labor force plus non-rich real incomes grow. If the answer is greater than zero, plutocratic wealth is becoming a larger share relative to the economy and a Gilded Age is on the way.

In Piketty’s view, Gilded Ages are the rule, and social democracy is the exception. We transitioned from social democracy to our Second Gilded Age in the global north as population growth fell and immigration restrictions lowered the rate of growth of the labor force, as the end of catch-up growth and productivity slowdowns reduced the rate of non-rich income increase, and as left-wing parties took their eyes off the ball and became “Brahmin”: focused on demonstrating that they took a proper moral attitude toward injustices rather than focused on lunch-pail income issues.

The Neoliberals themselves had a mish-mash of reasons as to why the Neoliberal Turn made sense:

Make inequality greater to re-incentivize both the rich job creators and also the non-rich potential slackers and the moochers.
Social democracy was hopelessly corrupted by rent-seeking.
Social democracy was vastly over-bureaucratized.
Market means were better at attaining worthwhile social-democratic ends.
In fact, the market has a wisdom and a logic of its own, and if it produces inequality, it must be doing so for a reason.
The coming of information technology allows for a much more flexible, pro-freedom mode of social organization.
Social democracy is insulting: it gives you good things by virtue of your status as a citizen, when what you need is the opportunity to earn good things.

Let me briefly comment on the last of these. There is a great clip of American actor Craig T. Nelson saying:

I’ve been on food stamps and welfare. Did anybody help me out? No!…

There is a logic under there. Food stamps and welfare are not “help”. Why not? Because they force him to trade his self-respect for food and shelter. They make him one-down, a moocher, in the great reciprocal gift-exchange network that is society. And Craig does not want to be a moocher—does not want to be the guy who always takes and never reciprocally gives. To assist him by providing him with the chance to pull his weight and contribute would be to help him out. To simply feed and house him by virtue of his status as citizen, asking nothing in return, is to degrade him.

And there is something worse than the social democratic state forcing you to be a moocher. It is watching it enable others to get away with being moochers themselves. We heard this on Mitt Romney’s post–2012 election conference call:

The president’s campaign… focused on giving targeted groups a big gift… forgiveness of college loan interest… free contraceptives were very big with young, college-aged women…. [For] African American voters, ‘Obamacare’ was a huge plus… getting free healthcare worth, what, $10,000 a family, in perpetuity, I mean this is huge…. With regards to Hispanic voters, the amnesty for the children of illegals…

And in Mitt Romney’s leaked dinnertime conversation:

There are 47 percent who are with him: who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it…. My job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives…

Now Mitt Romney is not a bad man. He will be either my 51st or 52nd favorite out of the 100 senators in the next congress. And he has a strong, visceral aversion to social democracy precisely because it offers a drop of “to each according to their needs”.

The takeaway: social democracy—the New Deal Order—failed its sustainability test at the end of the 1970s. Perhaps it could have been revived and restored, even if somewhat zombie-like. Certainly those of us who worked for Bill Clinton or Tony Blair thought so. But I think people go too far when they see the coming of the Second Gilded Age as unhappy accident, or even as simply the consequence of r > g in a world of demographic and productivity slowdown.

There are an embarrassingly large number of powerful candidates for the Neoliberal Turn ranging from the large political megaphones that money can buy through the vulnerability of social democracies to rent-seeking to the deep structure of human or perhaps only Indo-European language thought in placing a very high value on reciprocal gift-exchange as social glue. That the even moderate steps toward less income and wealth inequality taken during the age of social democracy proved unsustainable should give all those who wish for it pause.

4. What to Do?

Finally, I arrive at the fourth part of my talk: Given all this, what should I do? What should we do? What should you do?

Remember, first, that economics’s utilitarian roots place an extremely high value on equality. We have every reason to think that the marginal utility of consumption declines steeply with wealth, even after we have gotten out of the range where a 50% increase in family wealth, cuts infant mortality by 50% and raises adult height by 2 inches. Any aversion to interpersonal comparisons of utility turns out, in practice, to be a claim that maybe it does not matter if they are poor because they would not appreciate the finer things. It is obvious how to judge any such claims.

Remember, second, that economics’s libertarian roots also place an extremely high value on equality. Absolute wealth is power over nature. Relative wealth is social power: power to seek the attention and assistance of others, to have a voice in what we are collectively going to do—and it is collectively, because on our own each of us would have a life nasty, brutish, and likely to be short. As John Stuart Mill wrote, the lives of the poor are lives of degradation and imprisonment. If one is locked in a cage, it does not matter much whether there is no key or whether one is just not rich enough to buy a key

Remember, third, ethical philosophy also places an extremely high value on equality. We have none of us made anything by our hand and brain alone, but only through what has been freely gifted to us in the form of this planet and of the accumulated stock of human wisdom, to which we are all heirs.

We understand why, before 1870, human societies were greatly unequal: humanity had no chance of baking a sufficiently large economic pie for everyone to have enough. Those who did have enough did so by virtue of their participation in the élite’s domination-and-exploitation scheme. Since 1870 humanity has accomplished a great deal: we now have the technological powers to bake a sufficiently large economic pie that everyone living before 1870 would have seen as certainly more than enough. Yet, although we have solved the problem of baking a sufficiently large economic pie, The problems of slicing and tasting it—of equitably distributing our collective wealth, and of utilizing it wisely and well so that people live lives in which they feel safe and secure, and are healthy and happy —those continue to flummox us, more or less completely.

That the social democratic order collapsed so rapidly around 1980 makes me think we should look back and try to figure out why it had not collapsed earlier—what had changed then? I am tempted to put forward the hypothesis that what had changed was the aging of those with visceral memories of the Great Depression and of World War II, who had in the front of their minds an unusually strong degree of empathy with others, remembering how the world, chance, and fate had demonstrated that we were all in this together.

So perhaps the first step is to recognize that this loss of solidarity is odd, for we are all in this together.

In his Wealth of Nations, Adam Smith argues against those who claim that a more unequal society is a better society, for in a more unequal society the rich and the government can get more work out of the poor for the same amount of coin. Adam Smith pulls an intellectual-judo move, drawing on expectations about gift-exchange:

No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged…

There are people in Pakistan whom I do not know who wove the carpets that are on the floor of my house. Whenever one of dogs looks like it might vomit, we frantically hustle them outside because the rugs are things of great beauty, which enrich our lives. In fact we should spend more time than we do looking down at them and admiring them. The thing about a well-functioning gift-exchange relationship is that each party benefits greatly on net, and each party believes that the current favor balance is against it, so it needs to do more and thus to strengthen the relationship.

Every time I walk on any of my carpets, I should think: I am really one-down with respect to the balance of favors vis-à-vis the people in Pakistan who wove this, and I should strive harder to appreciate the artistic gift they have given me, and find more ways to better their lives. I should take care that they’re somewhere close to the front of my mind.

I wish I had more to offer you. But I do, at least, have this. Thank you very much.

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