The Artificial Invention of American Class

The current bugaboo invented by the progressive/socialist Left, is on the subject of economic class in this country.  They are ginning up a kind of class envy that is supposed to divide us by income and/or wealth.  Several problems arise with this tactic.  There is no economic class in this country because there is just too much socio-economic mobility.  This subject divides people into distinctions that are artificial and arbitrary. Finally, the distinctions made are simply loaded with popular culture narratives that bear no resemblance to actual events in the world.  This entire issue is rife with strange memes, cultural inventions, and outright misrepresentations of the facts and should be tossed into the dustbin of history.

From a dialogue I’ve been having with a candidate for my local state representative seat in the legislature:

“In the interest of continuing this dialogue I have two questions for you. One is historic and the other is completely subjective. What do you believe is the cause of increasing income inequality in America since the 1980s? Do you think there is anything wrong with some people having significantly more than enough material resources and some people having significantly less than enough material resources?”

To address these questions, I must carefully navigate the loaded assumptions within it.  His first question presumes, a) there is income inequality in America. b) this income inequality is stratifying c) it is getting worse d) it is getting worse since Reagan, since that is the implied time frame.

His second question is also loaded with moral imperatives.  It suggests that material resource allocation is something that should become part of the political dialogue.  Second, it qualifies the idea that having more resources is better than having less.  It is equally as loaded, though less obviously so.

To take the first question, we must dig into the idea of class as historically understood.  Class and caste are concepts entirely driven by government enforcement of a socio-economic stratum.  When a group conquered a group of people, let’s take England as an example, the conquerors would reward their kin and brethren with offices.  These offices were powerful and rich by force of law making a small group dominant economically.  When we read the story of Robin Hood, it must be remembered when he robbed from the rich, he was robbing the government.  When he gave to the poor, he was giving to the productive class.  The economy was controlled by the ruling class through taxes and monopolies.

In North America, those offices weren’t powerful.  Labor could just leave and carve out a new existence.  As a result, we forged an entirely different dynamic. Businesses could open with a minimum amount of material resources and the new businesses could challenge and overtake old ones.  There was a churning effect to socio-economic class.  It was almost impossible to find stable classes in America except in the South.

In the South, slavery caused a specific kind of class stratum.  This institution was a governmentally enforced class.  Without the active engagement of the Democratic Party, slavery would not have existed.  After the fall of the Confederacy, the slave stratum became the black servitude of Jim Crow, once again enforced by law by the Democratic Party.  The Democratic Party and progressive movements believed they could pick and choose the winners and losers in the game of life.  They became entwined in FDR’s administration and collectivism was born.

Pres. Andrew Jackson started the idea that “to the winner belong the spoils,” giving the Democratic Party ideal of rewarding their identity groups with material resources collected from the general population and funneled to their supporters.  Progressives believed they could morally arbitrate achievement through experiments in the population and build a ‘better’ society.  Roosevelt drew these two ideas together and forged a consensus.

However, the truth on the ground wasn’t quite so simple.  While government distributed resources and progressives experimented with the population, the socio-economic strata they envisioned eluded their grasp.  Poor people became rich.  The rich bet on the wrong horse and lost both material resources and power.  The so-called economic classes never really emerged like in Europe and the former European colonies.  That’s because the United States people wouldn’t enforce the social and economic servitude as inherited by other nations.

Even today, there is scant evidence that economic classes exist in a stratified way.  When young, people have fewer resources and less experience.  As they begin to accumulate material resources and skills, they gain more income.  There are also people who start businesses and that require accumulation of capital and utilization of labor.  Since running a business requires resources to provide the tools to produce, the people who own them have more resources than labor.  Labor, needing only the knowledge in their heads and the ability of their bodies to use that knowledge, has fewer resources.  They may save and invest that money in other businesses, but they are not taking nearly the risk.  Therefore, the rewards aren’t as big as with those who own the business.  Labor can diversify their risk and this makes it more stable and therefore less productive.

When I was in college a few years ago, one of my political science professors remarked on wealth disparity by noting 20% of the population owned 80% of the wealth.  I shocked him by saying that makes a lot of sense.  Since large amounts of capital accumulation are necessary to provide the tools to create products, it seems quite reasonable that one in five people control most of the capital.  That number actually shows that America is still a country controlled by small businesses, and not large corporations.  If the income disparity were more like 1% owning 99% of the material resources, the OccupyThisandThat movement would make sense.  But it doesn’t.   Our wealth is distributed toward making products and selling them as a market economy should.

So, to answer the questions posed to me, I will answer as history informs me.  If there is any growth in disparity of income since the 1980’s, it will have occurred due to an expansion of the government sector gathering more from the middle and lower income groups and giving it to their allies.  The more government spends, the more it must collect.  This process benefits those politically connected and takes from the productive sector.  Even redistribution of resources to poorer groups only augments the rich more quickly.  Since the poor are more likely to simply buy things and not to invest or save, they contribute more to larger businesses with a larger economy of scale.  Meanwhile, larger businesses can also use that economy of scale to spread the cost of additional government cost to the masses while smaller businesses become less efficient due to the increased tax and regulatory costs.

Government experiments actually exacerbate income and wealth distinctions.  They don’t stop them.  The real problem is the size, scope, and moral danger of a large centralized government intent on picking the winners and losers.

As an answer to the second question, I believe it is answered by the necessary capitalization of a business.  Since creating products involve the accumulation of more material resources than the labor used to produce it, there will be a disparity.  This disparity will exist independent of governmental controls or experiments.  Even if government itself takes ownership of the means of production, the control of those means will still be in the hands of a small group.  That small group will enrich themselves and their own while distributing less to others.  At least a free market allows this disparity to be fluid and flow to the more efficient evening the scales while creating more wealth in the process.  Creation of more material wealth will help even the poorest among us.  It allows them to live a life of some comfort, dignity and safety.

The Churning of the Free Market

The dirty little secret is, small business is more threatened by big government than big business is.  Big business, on the other hand, is more threatened by small business.  Small businesses can take risks, respond more quickly to market needs, and operate on thinner margins for a time.  Big businesses need government redistribution to fend off small business threats to their market share.  If government is neutered, the natural churn of socio-economic strata will equalize incomes and wealth.  Big businesses will fail and small businesses will grow.  Investors in one will become poorer, while investors in the other will get rich.

Here’s another dirty little secret, the largest richest businesses now were once small businesses.  Also, most of the largest and richest businesses in the past no longer exist.  They were upstaged and replaced by smaller more efficient entities.  We need only look to the recent past to see the truth in this.

In the early 1980’s, Sears was the biggest retail company in the world.  It dominated the retail market and was able to utilize its size to demand the lowest costs and the highest returns.  But, it is no longer even in the top ten.  Sears, as of last year, is the twentieth largest retailer in the world.  Walmart, a company that was only started in 1962 and publicly traded first in 1970, is now the world’s largest retailer.  It was a mere blip on the radar screen when Sears dominated the market.

In 2000, the biggest, most powerful Internet company was America Online, AOL.  It was so big, and so ubiquitous, it merged with the venerable Time Warner but AOL shareholders retained a 55% control over the newly created entity.  AOL is now a bit player that isn’t even considered in the top ten.  It was unable to use its market share and capitalization to keep up with the market changes.  AOL is another poster child of the churning power of the free market.

The free market works to even out the excesses if allowed to do its job.  But, when we step into the process and create monopolies, virtual monopolies, excessive taxation, burdensome regulation, and bail out certain entities or sectors, we pervert the process.

Why Centralized Control Never Works

Let’s juxtapose this example of the free market working with the biggest boondoggle in American history, the government sponsored entities Fannie Mae and Freddie Mac and the forced sales of bad loans throughout the globe.

In her excellent book documenting this fiasco and the ensuing economic firestorm, Gretchen Morgenson documents the government forcing mortgage companies and banks through these GSE to market mortgages to people who couldn’t afford them.  The government policy starting with Carter and integrated more fully through Clinton, threatened mortgage businesses with legal action if they didn’t sell more loans to lower income people.  Morgenson’s book, “Reckless Endangerment” painstakingly details the process which inflated the real estate market through artificial home sales using loans that the market would have never sold without this interference.  Ranking members of Congress like Barney Frank and Maxine Waters, repeated threatened legal action against mortgage lenders if they didn’t engage in this economically dangerous behavior.

But, there’s more.  We are now watching in real time as progressive experiments in so-called Green Energy initiatives enrich political allies of the Democratic Party.  GE, using government tax credits, made a fortune on products that were made necessary by government interference in the market.  Solyndra, among others, took government loan guarantees and wasted the money.  The entire “Green Bubble” is about to burst as inefficient ways to produce energy become economically insolvent.  These are political not economic experiments.  The money flowing to these sectors is because a certain segment of the population believes enriching the experiment will be a greater good.  However, it isn’t working because instead of making economic bets, the bets are entirely political, benefiting cronies instead of efficiencies.

In order to keep our society as classless as it is, we need the free market to continue its unerring march toward greater efficiencies and effectiveness.  It is exactly the opposite approach which will lead to a stratified society with set socio-economic classes that can pass political power down to its own.  Or, as Thomas Sowell succinctly remarks in his article, ‘Liberal and Class: Part II,’

“So long as each generation raises its own children, people from different backgrounds are going to be raised with different values and habits. Even in a world with zero barriers to upward mobility, they would move at different speeds and in different directions.”

It is the universal centralization of economic power by the government which will make class stratification a reality.  It is not the free market capitalism which creates these groups.  We cannot let them have this enormous taking of our economic freedom.  It will be serfdom for us all.

Crossposted at Looktruenorth.com