With all the talk about a bubble in investment in so-called ‘AI’*, I have taken a moment to reread the classic on the 1929 Wall Street bubble bursting, US economist John Kenneth Galbraith’s The Great Crash 1929, first published in the 1950s.
Speculative market bubbles do come and go. As Galbraith notes, the reason that 1929 is most remembered is not so much that the speculative bubble had grown so large before bursting (though it was unusually large) but that there were such broad real economy impacts from the bursting of the bubble – the lost years known as the Great Depression. A pair of Galbraith datapoints start to capture the scale of the Great Depression in the US and its searing impact on ordinary people: unemployment in 1933 was 13 million, one in four of the labour force; and even in 1938 still one in five were out of work.
So trying to understand why the Great Crash sparked the Great Depression is of real interest and seems like a timely thing to consider. Galbraith has no patience for the Wall Street apologists who argue there was no connection between Crash and Depression, but he does see that there were vulnerabilities in the economy that made it particularly susceptible to the crisis.
The first of these is of most interest to this blog, and Galbraith headlines it ‘The bad distribution of income’, noting that in 1929 the top 5% received around 35% of all personal income, and that interest, dividends and rental income (the almost exclusive preserve of the wealthy) represented fully 22% of total family income.
“This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitably, to more erratic influences and to wider fluctuations than the bread and rent outlays of the $25-week workman. This high-bracket spending and investment was especially susceptible, one may assume, to the crushing news from the stock market in October 1929.”
Readers will recognise some of our current distortions in these reports of the imbalances of pre-crash 1929 (also see Is enough enough? Addressing the problem of the super-rich, and The centre cannot hold). Significant inequalities – especially unfair ones – make economies less robust, more risky and more prone to crisis.
That is the first of Galbraith’s linkages between Great Crash and Great Depression. The others are as follows (deploying my brief characterisations of his comments):
Bad corporate structure. A business sector including many swindlers and fraudsters.
Bad lending. Profligate lending to unsound businesses and investments.
Imbalanced trade positions. Long-term trading imbalances, sometimes exacerbated through the application of tariffs, with the resulting deficits sometimes filled by corrupt, or at least grey, payments.
Poor economic insight. Shonky economic data riddled with holes.
So clearly, we’ve nothing to worry about now.
I will leave Galbraith with the last words of this blogpost, without comment from me. In the last pages of the book, he writes: “during the next boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices – indeed, almost any price – to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith.”
* Seasoned readers may remember that I am an ‘AI’ sceptic – see A just AI Transition, for example
I am happy to confirm as ever that the Sense of Fairness blog is a purely personal endeavour – and also that I do not give, and am not authorised to give, personal financial advice. This blogpost should not be construed as such advice.
John Kenneth Galbraith, The Great Crash 1929. Hamish Hamilton 1955
“To make the poor richer, you have to make the rich poorer.”
It’s one of the bolder early assertions made in a new book, Enough: Why it’s time to Abolish the Super-Rich, from my friend Luke Hildyard, who leads the High Pay Centre, the think tank dedicated to considerations of pay and employment rights. Given the hours he put into it, he’ll hate that I note it’s a short book, but that means it is a quick read – which its brisk and energetic style greatly assists. It includes extensive references to the evidence of academic and other studies, but Hildyard doesn’t let them weigh down his central messages and arguments.
Much of the book is dedicated to demonstrating the truth of this early assertion. Beyond that, Enough also aims to show that there would be benefits from a more equal income and wealth distribution and that much current income and wealth is unearned and undeserved. It argues that it is possible to address the issue of the super-rich, both politically and practically – but that at present the political will isn’t there and the social pressure for change isn’t yet great enough. “The super-rich are tragically unloathed,” says Hildyard in one of his typically crisp and blunt phrases.
As is perhaps obvious, this is a polemic, using vigorous and direct language to make its points – and it is none the worse for it. It’s also funny. I didn’t expect to laugh out loud at the book, but its dogged pursuit of a thought experiment of carpeting the nation in £5 notes is only one among its amusing moments.
Hildyard also charts a path for addressing the issue of the super-rich, one part of which would be wealth taxes. That particular path became potentially much easier just yesterday when a UN committee of tax experts agreed to develop a clear map for it: the Committee of Experts on International Cooperation in Tax Matters approved guidance for the creation of wealth taxes. This will not be called a ‘model law’ but rather an ‘example law’, but the intent is clear, and the idea of international cooperation in this area is aimed to reduce incentives for individuals to move to avoid such tax burdens. We’ll see how far these proposals progress in practice.
There is clearly some political will, and indeed some general willingness to engage in these issues. If the interest shown by those seeing me reading Enough on public transport are anything to go by, this is a book whose time has come. I would certainly heartily commend it. It was formally published this last week.
In many ways, vigorous and blunt as it is, Hildyard’s language is less hardline than others’. For example, the authors of the wonderful Spirit Level, Kate Pickett and Richard Wilkinson, both professors of epidemiology at York University, recently wrote a comment piece published in venerable journal Nature entitled Why the world cannot afford the rich.
As well as noting the disproportionate greenhouse gas emission impacts of the lifestyles of the wealthy (as previously noted in this blog), Wilkinson and Pickett state: “large differences in income are a powerful social stressor that is increasingly rendering societies dysfunctional”.
They continue:
“bigger gaps between rich and poor are accompanied by higher rates of homicide and imprisonment. They also correspond to more infant mortality, obesity, drug abuse and COVID-19 deaths, as well as higher rates of teenage pregnancy and lower levels of child well-being, social mobility and public trust.”
Most strikingly, the epidemiologists argue that “Even affluent people would enjoy a better quality of life if they lived in a country with a more equal distribution of wealth”. They complain about the wastefulness of unfair distributions: “Inequality also increases consumerism…Studies show that people who live in more-unequal societies spend more on status goods.” It’s certainly clear that this is happening. For example, ultra-luxury carmaker Bentley recently revealed its financial results, making revenues of €2.9 billion on sales of just 13,560 cars (or over €200,000 per vehicle), with margins improved by a record of nearly 10,000 of those vehicles including personalised features costing upwards of €40,000. For these buyers, it appears, it’s not enough to be able to buy a car that costs more than many houses. They also want the additional status of a still more expensive and truly unique vehicle.
The wealthy also buy other trappings of status – like the arts building branding that was part of the focus of the Sackler family in deploying their immoral earnings from Purdue Pharma’s role in the opioid crisis, or political donations. Evidence shows that rarely are such gifts really generosity – something is expected in return (as the reliably brilliant Tom Burgis amply shows in his excoriating new book Cuckooland). Sadly, rarely do the super-rich now feel the need to be genuinely generous in sharing their wealth in the ways their predecessors in earlier generations did. Alms houses are among our most beautiful old buildings, mostly built by our wealthy Tudor or Victorian forbears, but there seems to be no modern equivalent being created now.
This urge towards status skews our whole business sector. When you now look at the market capitalisations of major businesses, it is notable how much more valuable are the luxury goods companies that cater to the demands of a tiny minority than those that provide much larger markets with less luxurious versions of the same products. Germany’s Porsche is valued at more than $90 billion and Italy’s Ferrari (actually listed in the Netherlands to benefit from rules allowing unequal voting rights) is touching a valuation of nearly $80 billion; Ford and General Motors hover around the $50 billion mark, while producing orders of magnitude more vehicles. In a similar way, the valuation of Hermes (around $270 billion) is nearly double that of Inditex, whose major brand is Zara (valued at some $150 billion). The mass market isn’t where the money is made any more: even collectively, the centre doesn’t hold as much spending power.
Pickett and Wilkinson capture their findings in a striking chart that sets the Gini coefficient measure of inequality against an index the authors created of environmental, health and social issues (including measures such as air pollution and recycling; infant mortality, life expectancy, and obesity; and educational attainment, teenage births, social mobility and trust). As they say, “There’s a clear trend, with more-unequal societies having worse scores”:
As an earlier editorial in Nature raged, Reducing inequality benefits everyone — so why isn’t it happening? Essentially, that’s the challenge that Hildyard is attempting to rise to, and he provides some useful answers, and relevant solutions, as well as amusing challenge to the status quo. Do we need to make the rich poorer in order to make the poor richer? Probably, yes. The greatest political challenge on this issue though is likely to be defining what amounts to ‘rich’ or ‘super-rich’ for these purposes. One hindrance to action may be that definitions of what is too much are hard to draw. It’s hard to build a coalition of the willing among those who fear they may be next to face reductions (even if intellectually they might accept the idea that they would benefit from less inequality), and that – for the present at least – seems to limit the political pressure for change.
Hildyard himself blurs these lines, at times railing only and specifically at the truly (absurdly) super-rich, the billionaires, and at other times focusing on broader wealthy groups, including all public company bosses, top lawyers and bankers, and anyone earning in the top 1%, or having wealth among the top 1%. He quotes income of £183,000 and wealth of £3.7 million for the UK, and $400,000 and $11 million respectively for the US, as placing people into the respective 1% groups. These are huge numbers, clearly, but not close to being in the same league as the billionaires. A focus on a loosely defined super-rich elides this challenge – and while Hildyard demonstrates just how much might be available from the individuals at the very top of the income and wealth distributions, were they taxed more effectively (a simple function of their extreme wealth), he leaves open the question of seeing changes lower down the income levels too. This doesn’t undermine his arguments, but clarity is likely to be helpful in garnering political support and leveraging real change.
Hildyard ends the book saying:
“Indeed, it will be impossible to achieve our full potential to build a fairer, happier, more prosperous society without a major rebalancing of incomes and wealth. This ought not to be a question of partisan ideology – the logic, feasibility and urgent importance of the issue are clear. It is time to abolish the super-rich.”
I’d argue that all of this but the final sentence is unarguably true – that last sentence probably remains open to some debate, not least as to where the threshold for super-richness lies.
As the phrase goes, the poor are always with us. It is less clear that the super-rich need to be.
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