How do the rich get richer?
How does the wealth pump work?
We are all familiar with the concept of the rich getting richer. The other side of this being the poor getting poorer. However, we don’t often take the time to consider how the rich get richer and the poor get poorer. What the mechanism of enrichment and impoverishment might be. It might be an interesting excursion to venture into that territory. If we can identify the mechanism by which the rich get richer, we can also consider if the natural corollary is for the poor to get poorer. It will also help us to examine whether or not this state of affairs could be reversed, and the means by which it could be reversed. In his book ‘End Times’, Peter Turchin introduces us to the concept of a wealth pump. This is a rather abstract concept, but it is worth bearing with because it introduces us to a mechanism to explain how the rich get richer. Armed with this model, we can then use it to explain recent events, and use it to gain an idea of how our immediate future is set to develop.
The Turchin model starts with a fairly simplistic view of society, the economy, and the resultant politics, that contains just two classes of people — the elite and the commoners. By definition, the elite are those who hold political power as a result of their position in society or their command over assets in the economy. The model says little about how the elite came to their position, by seizing power, through commercial acumen, through the luck of birth, or whatever means. The point is that they get to decide what gets done and by whom. The behavioural assumption in the model is that the elite will use their dominant position to enhance their command of resources. This need not be to the expense of the commoners, but, in many cases, it is. The elite are indifferent to the growing impoverishment of the commoners.
The model has two concepts at its core — popular immiseration and elite competition. As these concepts are fairly central to the argument, it is worth dwelling on them to understand them fully. Whilst the interests of the two groups could be cultural or social, the prime interests are asserted to be economic. In the interactions between the two groups, both are deemed to be improving their position at the cost of the other. As an example, we could consider the Marxian notion of the workers and the capitalists. For the capitalists to thrive, they need to hold back the interests of the workers. This is where popular immiseration originates. In the Turchin model, it is owing to the elite using their economic and political power to define the economic relationship to the detriment of the commoners.
This, however, is not a stable outcome. Growing popular immiseration also leads to an expansion in the numbers of the elite population. This does not create a problem as long as the outlets for the elite — positions, titles, elite employment — grow at the same rate. At some point, the number of elite positions becomes saturated. The growth in the numbers of the elite increases faster than the number of elite outlets grows. That is the point where we move into elite-overproduction. In that case, society moves into a phase of intra-elite conflict as more and more members of the elite chase fewer and fewer elite outlets. This conflict has the potential to become more and more extreme as time goes by, leading to the impoverishment of some of the members of the elite. As the numbers of the elite reduce through the loss of status and wealth, elite competition diminishes and the cycle can start all over again.
This is an interesting model in which the wealth pump plays an important role. The wealth pump is the mechanism by which the elites ensure their self enrichment through the implementation of policy. It is the means by which the rich get richer. Perhaps this rather abstract notion could become clearer with a real world example?
The global financial crisis of 2007–09 saw the transition from a normal monetary policy to an unconventional monetary policy consisting of ultra low interest rates and a monetary expansion through Quantitative Easing (QE). When first introduced, concerns were expressed about a monetary expansion leading to a more general inflation. To contain that risk, the monetary expansion was coupled with a fiscal contraction, more popularly known as austerity. The policy of austerity was a political choice made to ensure that the financial system experienced a degree of stability, at the cost of a more sluggish real economy. And so the wealth pump was primed. A general inflation didn’t occur, but a more specific inflation — that of asset prices — did occur. This policy ran until 2022, a run of 12 to 15 years, depending upon how you time it. According to the ONS, during this period property prices rose by 87.6%. The FTSE 100 index of shares also rose by 117.4%. Admittedly both asset classes rose from a rather distressed starting point, but over the same period, real wages fell by 2.4%. This is the popular immiseration suggested by the model, as the result of a policy to enhance the capital values of assets held by the elite.
This was a good spell for those with assets and a rather torrid time for those without. Much as the model suggests, policy was aimed at protecting and enhancing the interests of the elite, who tended to own property and financial assets, at the expense of the commoners, whose interests were constrained by the policies of austerity. The wealth pump of this period — monetary expansion through QE combined with fiscal contraction through austerity — ensured that the interests of the elite took precedence over those of the commoners, with the rich getting richer and the poor getting relatively poorer.
The wealth pump came to an abrupt end in the aftermath of the pandemic. This saw a supply side shock that was the result of global supply chains snarling up, the very slow return to work of furloughed staff, and then the consequence of the war in Ukraine. Suddenly, goods were in short supply, staff were in short supply, and money was relatively abundant as the forced savings accrued during the pandemic lockdowns started to bid for goods that were not readily available. The return of a general inflation has led to an increase in interest rates and a more general monetary tightening through the restriction of credit as a result of Quantitative Tightening (QT). The fiscal tightening continues as a result of tax increases through fiscal drag. This tightening has reduced the level of general inflation, but has not relieved the general labour shortage in the economy. As a result, real wages are rising after a decade or so of stagnation. It also suggests a number of pathways forward from here.
The model identifies two customary responses of the elite to periods where the wealth pump has turned off and where the commoners have the upper hand. One response is to increase the pool of labour through immigration. It is no coincidence that we are now seeing record levels of net migration into the UK as a way to deal with the current labour shortages. This is very much an elite concern and an elite strategy to tilt the balance of power in their favour. The parties that represent commoner interests are far more interested in restricting immigration.
The second broad elite response to the absence of a wealth pump has been to encourage the adoption of labour saving technology. This is normally phrased in terms of investments to improve productivity, which underpins the growth in profits to enhance the returns to the members of the elite. Once again, the adoption of labour saving technology serves to increase the pool of available labour by lessening the demand for it. To date, we have seen little in the way of an investment boom because it also creates an opportunity for the commoners to seek higher remuneration through higher levels of productivity.
If the elite are successful in increasing the supply of labour through immigration, or reducing the demand for labour through an investment boom, then a new wealth pump will be set off, creating novel means for enrichment in the years ahead. If, on the other hand, the elite are not successful, we are likely to see a period of societal conflict as those elite members on their way down struggle to maintain their living standards and those elite members not on the way down struggle to retain what they have. Both factions usually attempt to enlist the commoners to their cause and sometimes the period of adjustment can be quite violent. This might not be a problem for a country like the UK, but could pose a problem for a more violent society such as the US.
The rich get richer because they create a set of conditions that enhances their enrichment. It is not unusual for the corollary of this to be the popular immiseration of the commoners. The events of the last 12 to 15 years tend to support the operation of this model, which commends it as an explanatory vehicle. It also suggests a way ahead, in which the twin issues of immigration and productivity are likely to become core political issues. Both of these set the scene for potential societal conflict. Of course, the model could be wrong, but as a glimpse of a potential future, it has something to commend itself.
© Stephen Aguilar-Millan 2024
