Technological change, wealth destruction and a restored social ladder

Figures published by the WTID (1) show that wealth inequality in the developed nations has reached levels unseen for a hundred years, prior to the First World War. Then the 1% formed a class of rentiers, holding the nation’s wealth as stocks and bonds, and demanding dividends and interest. The levelling of riches occurred in two stages. First bonds lost value because of the high inflation provoked by wartime spending, and then the stock market collapsed in 1929. By the 1950s, after a second inflationary world war, wealth inequality had reached an all-time low. Another equalising factor, bottom up rather than top down, was the access to universities given to demobilised soldiers of both conflicts. Even setting aside the two wars and their miseries, the levelling process was painful.

“We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The inflation that causes the former means injustice to individuals and to classes – particularly to rentiers – and is therefore unfavourable to savings. The deflation which causes falling prices means impoverishment to labour and to enterprise, by leading entrepreneurs to restrict production in their endeavour to avoid loss to themselves, and is therefore disastrous to employment. The counterparts are, of course, also true, namely that deflation means injustice to borrowers and that inflation leads to the over-stimulation of industrial activity.” J.M. Keynes (1)

The private property of the means of production and the accumulation of capital lead to increasing wealth inequality, this uneven balance must have a tipping point. When all is owned by a few, society is ruled by corruption and violence. The social bond is disrupted everywhere, from services to ideas. Governments adopt the underhand methods of criminal organisations, with mercenary troops doing their bidding. Money becomes the unique standard of measure. This situation has not perpetuated itself in the past and will not again for the same reasons. Mass production needs mass consumption, and surplus value (rent, interest, profit) is more easily obtained on an expanding market than on a contracting one. Aggregate demand grows when borrowing is cheap and employment increases. It contracts when borrowing is costly and unemployment increases. The key factor in both cases seems to be the cost of borrowing, but its purpose is just as significant. Is it for government and household consumption or is it for productive investments? Is the borrowed value destroyed or is it returned with a profit?

In Keynes’ time, household consumer credit for durable goods was just beginning to develop in the US, notably motorcars. So that borrowers were either businesses or governments. Since then household debts have become a large fraction of a nation’s debit, of its future incomes already spent. And the share of debts consumed exceeds the share invested. Ninety years ago, inflation benefited businesses and governments, and indirectly tax-payers and employees, to the detriment of lenders. Inversely deflation benefited lenders. Nowadays businesses auto-finance themselves and tend to be lenders more than borrowers, which means that the inflation vs. deflation debate opposes two camps, where banks and businesses are lending, and households and governments are borrowing. But governments usually side with banks and big business, which finance their electoral campaigns, rather than with households, who merely vote. This makes the debate very one-sided and, however rational the arguments may sound, its result is foregone in favour of lenders. Inflation is ruled out and deflation looms with its train of woes. Keynes believed the narrow path between the two could be followed, that stable prices and economic growth were not incompatible, but this may be so only in particular circumstances.

Capital funds the means of production and the wages of labour. It gets this value back, plus some more to cover rent, interest and profit. The source of this supplementary value has changed over time. In the early stages of the mechanical revolution the rural artisans paid the price with their livelihood. This was followed by the tributes of nations subjected to colonial imperialism. Wealth flowed from the peripheries to the centres and the riches of colonised continents accumulated in Europe. Unfortunately the vast abundance was soon squeezed dry. By the end of the 19^th century, colonial profits were increasingly based on credit granted by the metropolises. And by 1910 that structure began to fall apart. Surplus value, the part of production that capital has not funded, is paid for by the market. If capital funds less value than it receives, the market must be the source of that difference. It can do this in two ways, by drawing in wealth from the periphery and destroying local production, and by monetary creation and credit. The drawing in process seems linked to new technology and its concentration in industrial centres. Productivity does not progress equally everywhere. But the higher the productivity the larger the share of surplus value, and the less productive lose their livelihood. The 19^th century had coal, steam and electricity to drive it, the 20^th had oil, internal combustion and electronics. In both cases productivity was multiplied, drew in wealth that was succeeded by credit. There are more technological leaps ahead but, for the time being, the credit phase is in its final stages, close to the brink.

August 1914 tolled the bell for rentiers and initiated a period of wealth destruction that opened the way to a new technological age. The first to suffer were those “who owned neither buildings, nor land, nor businesses, nor precious metals, but titles to an annual income in legal tender money.” Inflation took from their incomes “about one-half of their real value in England, seven-eighths in France, eleven-twelfths in Italy, and virtually the whole in Germany and the succession states of Austria-Hungary and Russia.” (3) During the following decades, the owners of buildings would suffer from carpet bombing, the owners of land from global food prices, the owners of businesses from the Great Depression, and though precious metals keep their value, they do not generate income. As the capitalist system of production for profit is in the same jammed situation it was in a hundred years ago, it is probable that the same exit mechanisms will take over. However, total war has reached such a degree of destructiveness that it cannot be envisaged with the care-free attitudes of 1914/17/39/41. Already, new methods of wealth destruction are being experimented in cities such as Detroit (Michigan) and Aleppo (Syria), and climate change will certainly help. Meanwhile, inflation, the end of subsidies and a collapse in demand seem inevitable. The old technological age must step aside for a different one to take its place, and so must its owners. But it cannot occur without a struggle, as they consider the world’s ownership to be their birthright. Ruling classes must be brought down to leave room for new people and ideas. This is not the eve of a gala dinner.

1. World top incomes database http://www.parisschoolofeconomics.eu/en/expertise-dissemination/wtid-world-top-incomes-database/

2. Essays in Persuasion

II, 2, Social consequences of changes in the value of money (1923)

Classic House Books p. 56

3. Same p. 49/50