Power and Inequality
What is power? It is the ability to exert some kind of force upon another thing or being, be that physical, economic, political or social. In order for that power to have effect, that force must exceed any opposing force: an inequality is necessary for meaningful power.
Critics from the traditional left and right camps of politics often focus on power. Their opponents ‘abuse’ it; they ‘get things done’. One side claims state power as the ultimate evil, the other corporate power.
The proponents of laissez-faire capitalism, from economic liberals to anarcho-capitalists, propose that the tendency of wealth to accumulate disproportionately among a tiny number of people and companies is to be embraced, as we will all benefit from the ‘trickle down’.
Of course, this in turn is a focus issue for anti-capitalists. It is not just wealth inequality alone, but again interlinked with politics and society. “It’s not what you know, it’s who you know,” has a great deal of truth to it. Political corruption, lobbying, revolving doors, racism, misogyny, sectarianism, wars, trends & fashions… there are countless factors beyond markets and financial assets.
Concerning capitalism, the fundamental tendency, the observation that Marx among many others noted rightly, is that of wealth to accumulate increasingly to those who already have it. But why so? Wealth is an increase in power, which may be used to obtain more wealth. The paradigm indeed applies to all power, and this is perhaps where the Marxists fall foul of it: socio-political power behaves in much the same way, and so bureaucratic systems will also spawn a class of elites in a so-called classless society.
Capitalism is an unstable equilibrium. If wealth is evenly spread then so is the financial power to create and gain more wealth. Once the balance starts to tip however, it just tips faster and faster.
It is not just the rich that experience the accelerating tendency. There is a great cost to not being rich. Being poor means making do for now. It means doing things today that you know aren’t the best in the long term, but that are the only option you have right now. Paying a third more for something that’s going to last twice as long is a no-brainer when you’re flush, but in a pinch you have to consider what else that third would buy that you also need right now.
Nor does the tendency only affect the very rich or the very poor. If you can’t afford to buy a house in cash — which is most people — you may well pay double in the long run. Rent and you’ll be paying even more. Have enough to buy multiple properties? Those renters loss is your gain. Start getting some serious capital and you can simply pay someone to make your money into more. As Joseph Stiglitz said, “rent is the secret tax the rich charge the poor”.
The hundreds of thousands of pounds paid by quite average people do not simply disappear: they’re going straight into the profits of a bank. Now of course, the interest does partially compensate for the devaluation due to inflation, the additional risk undertaken, but it still works out significantly profitable for the lender. Where the investor would have otherwise simply let the capital sit idle, the opportunity cost for them is nil, but they are still well rewarded. The bank, through fractional reserve, sacrifices only a small increase in risk, one that is hedged also by the taxpayer. The landlord gives up the utility of the house, but to someone who already owns one or more houses for their own use, the marginal utility of that is very small; in contrast, the rent taken on a property over several decades completely eclipses its initial cost, while its value is maintained and likely rises throughout.
If someone has an idea for a company, but does not have the money to purchase the required means of production — tools, initial wages, machinery, vehicles, buildings, legal work, &c — then they are compelled to seek the assistance of one who does. In fact, both sides know plenty well that the return for the investor will, if the venture is successful, vastly exceed the investment, and if the investor is sufficiently rich then again the money will not be missed. So for the investor, money can simply be multiplied using other people’s ideas and labour, with little direct labour required. It is by leverage of economic power that the investor taxes the innovator. It is accompanied by a risk, but hedging that risk over many investments leaves an excess beyond businesses paying for their own risk.
For the would-be entrepreneur, it seems economically irrational to give up a majority of earnings for a far smaller investment, but again, the necessity of not having that money oneself compels. It should be seen therefore that in no uncertain terms, those who happen to already have money have the power to take advantage of — to exploit — those who do not. What’s more, the fewer hands accumulated capital finds itself into in any economy, the less competition there will be among investors.
For the owners, shareholders and senior management of a company, their existing ownership of the company — its tangible and intangible assets — is leverage to gain from the workers it employs. Since workers are dependent on these things to produce effectively, withholding the ability to produce is bargaining power for employers. In some cases, this even happens with existing employees, in a ‘lock out’.
This power extends beyond the physical means into the organisational apparatus itself. As it does, it inevitably shares power with those who have socio-political power within the organisation. This again contributes to the rising of the managerial class above the worker, having more power to negotiate a better arrangement with capital. It forms a ‘trickle-up’ effect whereby managers exploit their power over their subordinates, to further their own power, and capital in turn does so over both management and labour. The negotiation and power balance between capital and management form the capital complex which negotiates in turn with labour and the market.
When the latter force of management becomes dominant over investors, the economy tends towards bureaucracy. This can occur within large corporations as well as within government. In the former, it creates a condition whereby the profit on capital is reduced, but the profit on management increased; the shift in relations does nothing to further the negotiating power of the worker. In the state, it results in the bureaucracy of state socialism. In this case also, socio-political power is used as leverage by those of a given position to further their own self-interest. Ultimately, then, the source of inequality lies in an inequality of power that cannot be remedied merely by movement between capitalism and bureaucracy.
The relative aspect of the power imbalance, and therefore relative poverty, does matter. It is the proportion of power that enables the degree of coercion and the further widening of that gap.
In conclusion then, the common problem to be solved in any system is that propensity of power to accumulate. Power cannot simply be eliminated, but what we need is a stable equilibrium, that is self-correcting rather than self-destroying.
In the next article we’ll take a deeper look at how rapidly changing technology affects markets and power balances.
