Tag Archives: economy

Rich Man, Poor Man

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Whoever takes even a cursory look at today’s media cannot escape the impression that, in almost any country one may place under the loupe, economic inequality has been growing. To the point, indeed, where it now poses a real danger not only to democracy—which stands on the threshold of turning into a simple conspiracy between politicians and capitalists aimed at robbing everyone else—but to social order and, in the not so remote future, perhaps government as such. Such at any rate are the conclusions people draw from Thomas Picketty’s Capital in the Twentieth Century which, since it was published back in 2013, has not only turned into a best-seller but attained almost iconic status among many. Now there is no question that Picketty is as good an economist as they come. But did he get it right? Is the situation really as bad as it seems? For some very brief answers, consider the following.

First, there is some reason to believe that figures on economic inequality, especially those originating in the Left but sometimes those published by the “populist” Right as well, are often exaggerated. In the words of The Economist, which in its issue of 28 November 2019 devoted a long and quite detailed article to the question, this is done –

By focusing on gross, instead of net, income; by omitting all kinds of subsidies available only to certain groups such as the poor, the old, and the young [in my own country, Israel, this includes free dental treatment for children, a system that tends to favor Orthodox Jewish and Arabs families, which often have numerous young offspring, at the expense of  secular Jewish ones]; ignoring the fact that the young and the poor are less likely to be married, with the result that their income only supports a single person rather than two or more; and a whole host of similar miscalculations, deliberate or not.

Other oft-used methods include placing the income of self-employed people under the rubric of capital rather than that of wages, thus exaggerating the share of the former in GDP; assuming that the wealthy are more adept at tax evasion while minimizing the role of “black” work which, though all but unknown among the rich, often plays a considerable role in lower-class family finances; in developing countries, ignoring the role of transfer payments made by foreign workers abroad to their kin back at home; or simply taking, as one’s starting point, 1998, or 1970, or 1945, rather than the times when Henry Ford and John D. Rockefeller each sat on more inflation-adjusted wealth than Jeff Bezos does today. Not to mention those when the Triumvir Marcus Licinius Crassus boasted that no one was truly rich unless the interest he drew from his investments enabled him to maintain an army. Had these and other factors been taken into account, says The Economist, then they might have led to the conclusion that economic inequality in the U.S and Britain in particular has increased little, if at all, since the prosperous mid-1990s—or perhaps, according to others, since the equally prosperous mid-1960s.

In the end, so plentiful (and, often enough, too uncertain) are the data as to enable any good statistician to reach the conclusion he or she was aiming at from the beginning. I therefore found it more interesting to take up another volume, Walter Scheidel’s The Great Leveler (Princeton University Press, 2017). True, on Google.scholar it got just 315 citations as opposed to over 15,000 for Picketty’s. However, in terms of academic quality it will stand comparison with the latter; proof, if proof were needed, that people tend to review and read and buy what they think will reinforce what they already believe rather than that which may throw a spanner into the conventional wisdom of the age in which they live.

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As with all great books, Scheidel’s thesis is, at bottom, simple. First he shows that, by and large, equality is a characteristic of simple, not to say primitive, societies (such as, to speak with Thomas Hobbes, have “no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short”) whereas inequality typifies more developed ones that have all those things. Second, he argues that, within societies where inequality prevails, that inequality generally coincides with periods of prosperity and economic expansion. As, for example, in the Roman Empire during its heyday—a period Scheidel, who started his career as an ancient historian, has researched at some depth—and also in pre-World War I Europe.

Such being the case, throughout history four phenomena—the horses of the apocalypse, as Scheidel, predictably, calls them—have tended to reduce inequality and make the distribution of resources more equal. The first is war which, starting in prehistoric times and extending right into the present, has often reduced the losers (assuming they survived at all) to a crowd of beggars. As the example of the Soviet Union during World War II shows, moreover, that may apply not just to the losers but to the victors as well. The second is transformative revolution; as, for example, when first the Soviet, and later the Chinese (to mention just the most important ones) revolutions deliberately set out to close the gap between the rich and the poor by first killing as many of the former as was considered necessary and then requisitioning whatever was left of their property. The third is plague, as exemplified by the Black Death of the fourteenth century; the fourth, political- and social collapse of the kind that, as in Zaire and Somalia and Libya, is quite capable of taking a society back to the state Hobbes so aptly described.

Manmade or natural, each of the four horses brought with it mountains of dead. Just recall the “killing fields” of Cambodia, a case Scheidel does not mention. Worse from the point of view of those who started number one, two and four, in no case did the leveling that took place last for very long. Partly that was because the new rulers brought to the fore by the revolution in question lost little time in enriching themselves; and partly because, once things settled down, socio-economic gaps quickly started re-establishing themselves. As, for example, happened in the wake of World War II and also after the Russian and Chinse Revolutions. To put it in the broadest possible way, starting at least 30-40,000 years ago the “natural” human condition seems to have been inequality, not equality. On the other hand, attempts to change that condition often counted their victims in the millions, and led to general impoverishment; even so, hardly ever did they last for very long.

The conclusion Scheidel draws from all this is worthy of an Edmund Burke. If, like Picketty and his followers, what you hope to achieve is equality, tread softly: or else the cure, for as long as it lasts, may very well be worse than the disease.

Where China Stands

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150610-S1609-20-Chinese-Brass-Seat-Guan-Gong-Yu-Warrior-God-font-b-Dragon-b-fontHad I posted this article even as little as eighteen months ago, the answer would have run somewhat as follows. Ever since Deng Xiaoping took over in 1979, China’s star has been on the ascendant. A backward, relatively small, economy has transformed itself. Achieving historically unprecedented growth rates, it is now the second largest in the world (in terms of GDP) and poised to become the first at some time between 2020 and 2030.

As China’s economy expanded, so did its armed forces and its foreign policy objectives. China is developing modern combat aircraft. China has started building a second aircraft carrier. China’s latest cruise missiles have the range to challenge the ability of the American Navy to assist Taiwan if necessary. China is actively seeking to dominate the huge area known as the South China Sea. And so on and so on. Such being the situation, the only question is how to manage Beijing’s spectacular rise; by seeking to “integrate it into the international system” (whatever that may mean) or by actively opposing it by every means short of major war.

A year later, what a change! By the headlines, Chinese economic growth has slowed to “only” 6.9 percent, the lowest in two and a half decades. The stock market is falling. The country’s debts threaten to overwhelm it. Thanks to the (recently abandoned) one child policy, the future of its labor force is in some doubt. China may have reached the point where Japan was back in 1990 (at that time Japan accounted for 10 percent of the world’s GDP; since then its share has been reduced by half). This state of affairs may cause Beijing to slow the pace of armament and moderate its foreign policy. Or else, to the contrary, it may force the leadership to become more belligerent by way of diverting its people’s attention from the country’s internal problems.

What is it going to be? No one knows. So here are some factors which will determine the outcome:

  1. China’s economic growth may no longer be as fast as it used to be. But it still maintains a pace that should be the envy of practically any other country on earth. Partly perhaps as a result, there are currently no signs that the Communist Party’s hold on power is weakening or that a revolutionary situation is being formed.
  2. China’s national debt is equal to 64 percent of GDP. Less than that of Germany (73 percent), the UK (82 percent), the US (104 percent), and Japan (216 per cent). In other words, among the world’s five largest economies China is the least indebted one.

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  3. Unlike Japan in 1990, China is far from being a “mature” economy. As of 2014, 54 percent of its population lived on the land. That figure is comparable to those of backward countries such as Albania, Azerbaijan, Cameroon, and, towards the end of the alphabet, Syria. In other words, there still is plenty of room for expanding the industrial labor force, should growth resume.
  4. China has more or less active border disputes with every one of its immediate neighbors. This makes it hard for the leadership to focus on a single opponent and direct the country’s military policy accordingly. The more so because, over the last few years, fear of China has caused a growing number of its neighbors to strengthen their ties with each other as well as with Washington DC.
  5. China’s economic development is absolutely dependent on imported energy and raw materials. But for them, the country would very quickly revert to its pre-1979 state. However, geography has placed China in a position where it is separated from the Pacific by a chain whose links are formed by Korea, Japan, Taiwan and the Philippines. To make things worse still, its only access to the Indian Ocean leads through the Straits of Malacca. Cutting off the sea lanes in question would be relatively easy.
  6. Given these circumstances, in any major future armed conflict designed to prevent China from changing from a regional power into a global one the country’s navy would have to play a major role. However, though China has one aircraft carrier and has started work on another, both are, in reality, only half carriers. Even when the second one is completed the two together will not represent much of a challenge to the US Navy, which has eleven full size ones.
  7. A factor which is hardly ever mentioned in this context, but whose importance in  shaping the future will be critical, is the nuclear balance. At the moment, China’s nuclear forces, as measured in terms of the number of missiles and delivery vehicles, are no match for those of the US. This is very likely to remain so in the foreseeable future. But no matter. Unless someone in Beijing, or Washington DC, goes completely bonkers, fear of escalation, which may end in nuclear escalation, will prevail—just as, among nuclear countries, it has invariably done over the last seventy years.
  8. The same logic will govern China’s relations with its two nuclear neighbors, Russia and India. The former has the ability to wipe China off the map. The latter can tear off an arm (to use the old French phrase). Border incidents with both countries have taken place in the past and may well do so again. But large scale war? Hardly.

Final prognosis: Current talk of China’s economic decline seems to be exaggerated. Growth will resume, though probably not at the rates all of us have become familiar with over the last thirty-five years. Partly building on its economic power and partly moved by the need to sustain that power, China, like any other country throughout history, will continue to seek to realize its foreign policy objectives and build up its armed forces. It will not, however, risk large sale war either with its most important neighbors or with the US.