Inequality and the unfree market

The media are paying attention--for now--to the criminally unequal distribution of wealth under capitalism. Eric Ruder investigates the crime that came before that one.

Living on the streets in one of the world's wealthiest cities (Anton Bielousov)

NEWS FLASH: Economic inequality is the stuff of mainstream news flashes.

For decades, the gap between rich and poor in countries like the U.S. has been growing, but the corporate press studiously avoided the subject. Yes, said the conventional wisdom, the U.S. has its share of the super-rich, but we're mostly a "middle-class" country, right?

Then came the Occupy Movement, with its focus on the 1 Percent and their unimaginable fortunes. Then the struggles of low-wage workers at Wal-Mart, McDonald's and other businesses--and the growing calls for a $15 an hour minimum wage.

This year, Barack Obama and the Democratic Party took note of the Fight for 15--long enough to propose the not-even-half-measure of raising the minimum wage from $7.25 an hour to $10.10 an hour, but not fight hard enough to prevent Republicans from blocking the legislation in the Senate.

While the public discussion about inequality continues to gather momentum, a trio of books exploring the issue from different angles is getting a lot of attention. The most widely known is Thomas Piketty's Capital in the 21st Century--the two others are Matt Taibbi's The Divide: American Injustice in the Age of the Wealth Gap and David Cay Johnston's Divided: The Perils of Our Growing Inequality.

Looming behind both the specific cases made in each of these books and the more general discussions about inequality are questions that socialists have been focused on for many years.

Capitalism has undoubtedly produced wealth, technological innovation and consumer goods on a historically unprecedented scale, but it is also associated with exploitation, inequality and economic crisis. Are these defects the result of attempts to meddle with capitalism's free market, as the system's defenders claim? Or are exploitation and inequality an inescapable and, in fact, necessary component of actually existing capitalism, as its critics contend?

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FOR THE economists who defend capitalism, the free market itself is a realm of freedom and equality, evaluating and rewarding--or not rewarding--individuals' economic contributions on the basis of their worth. If some people can't make ends meet, that can be explained as the product of individual failings. Attempts to address social problems, if they impede the functioning of free markets, can only make the situation worse.

Why this single-minded faith in the powers of the free market? It goes back to economist Adam Smith's 250-year-old proposition that the genius of the system is that exchanges in a capitalist free market are voluntary--we don't have to work for a certain company, we're not obligated to buy their products, they're not required to deal with other companies, and so on.

Since there is no coercion, Smith and the economists who followed in his tradition assume that both parties to a free-market transaction must be better off after the exchange--otherwise, why would they agree to the trade at all?

On the surface, the point seems legitimate. No one forces shoppers to buy a new toaster or an iPhone or an airline flight they don't want or need. But the market doesn't just facilitate exchanges between consumers and the corporations that produce the goods they buy. It also coordinates and regulates the exchange between capital and labor.

In other words, the free market, with its mechanism of supply and demand, sets the rate at which workers are compensated. McDonald's may pay less than $10 an hour, but that's because there's a supply of workers willing to take jobs at that wage.

Here is where the defenders of the free market shut their eyes to the fact of very real compulsion.

For the superrich and their offspring, who enjoy more wealth than could be spent in several lifetimes, the decision to sell their labor on the open market--or not--may be a voluntary one. They could live off the wealth they already possess. For the vast majority of us, however, being able to purchase the necessities of life--food, clothing, shelter and so on--carries with it the compulsion to work.

The trio of books on inequality explain that this is a systemic consequence of the "free market"--which is not at all free, but upheld and imposed by a combination of economic, political and social mechanisms.

Piketty's book refutes the idea that capitalism spreads the wealth while protecting individual liberties. On the contrary, Piketty shows that in the absence of some redistributive mechanism such as progressive taxation, capitalism has produced ever-greater inequality throughout its history. The mid-20th century period that did see steadily rising wages and falling inequality--and gave birth to the idea of the "American Dream"--turns out to be the exception, rather than the rule.

Among other things, Piketty also exposes the myth that the free market rewards hard work and innovative ideas--by showing that a large majority of those with enough wealth to qualify as the world's ultra-rich inherited their fortunes. In other words, their only accomplishment was being born into the right family.

Johnston's book, as well as his earlier works, detail the way that government policy--implemented by Republicans and Democrats alike--has ensured that starting in the 1970s, a greater share of money has flowed to those already at the top of the wealth pyramid.

Taxes on the super-rich, for example, have been cut drastically in the last six decades. Meanwhile, corporations and their powerful lobbyists have watered down or repealed all manner of regulations, won taxpayer dollars to finance privately owned money-making ventures, and privatized everything from parking meters to municipal water supplies, in search of new areas to turn a profit at our expense.

Taibbi, meanwhile, focuses on how one particularly powerful institution--the criminal justice system--hands out leniency to the rich and powerful, while reserving the harshest punishment for the already downtrodden.

For example, Taibbi contrasts the welfare applicants whose houses are searched--with the threat of jail terms if evidence is uncovered of another wage earner at the residence--while corporate executives responsible for mortgage fraud, securities fraud and money laundering that cause harm to millions of people never get investigated or charged (and needless to say, they aren't subjected to the humiliation of their homes being searched).

"Every day on Wall Street, money is stolen, embezzled, burgled, and robbed," Taibbi writes. "But the mechanisms of these thefts are often so arcane and idiosyncratic that they don't fit neatly into the criminal code, which is written for the dumb crimes committed by common stick-up artists and pickpockets."

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ALL THESE books show in various ways that the rapid and glaring growth in inequality in the U.S. is the product of the regular functioning of the "free market" and the social and political system built up around it.

Between 2009 and 2012, 95 percent of the total increase in income in the U.S. flowed to the top 1 percent of households. Did the 1 Percent work 20 times harder than everyone else to deserve that overwhelming share of income gains?

Of course not. If anything, people making lower wages work harder and longer to provide for themselves and their families--which is the exact opposite of the idea that the market rewards hard work.

The janitors, the teachers, the miners, the bus drivers, the construction workers, the nurses and the call center employees create value, while the corporate executives and the owners milk their piles of wealth and social connections to ensure that--even though they don't expose themselves to impossible workloads or demeaning, repetitive and dangerous labor--they enjoy annual incomes equal to the lifetime earnings of millions of people.

This is no accident. It is the predictable--and desired, at least for those who benefit from it--outcome of a rigged game that rewards those who, by virtue of their already existing wealth, are able to lock in their economic and social domination.

The mythology of the free market turns this reality on its head. The free marketeers celebrate the rich and the corporations they control as the "job creators" and the "wealth producers." But it's the people who do the dirty, dangerous and difficult work for much less compensation who produce all the wealth in society.

Every labor strike illustrates this. When workers withdraw their work, production grinds to a halt. Without this labor, the rich can't produce anything. But in ordinary times, their ownership and control of the means to produce wealth entitles them, according to the rules of our society, to the fruits of other people's labor--to the "surplus value" created by the majority of workers, to use Karl Marx's term for it.

The market doesn't work to enhance freedom by coordinating activities among equals who only enter into an exchange if they benefit from it. The market--and all of the political and social institutions that accompany it--regulates and mediates the relationship between the workers who produce society's wealth and the owners of capital who profit from that work.

In previous eras--for example, when kings, lords and vassals ruled the majority of humanity--the extraction of surplus value from those who spent their lives working for others was easy to see. Peasants worked their plots, and in exchange for the privilege of working that land, they gave a share of what they grew to the aristocrats who ruled the territory. It was obvious in this situation how the wealth of society's rulers was built up by taking it from those who produced it.

In a market economy, human labor remains the source of all wealth, but the market mechanism conceals the exploitative relationship at the heart of the exchange between workers and capitalists.

Workers produce more wealth during their time at work than they receive in the form of wages. That's how the "fair" exchange of work for wages ends up producing wealth for someone other than the worker.

The market conceals the social relations that compel workers to produce value for the owners of capital. The "work ethic" ceaselessly promoted by apologists for capitalism then encourages us to believe that differences in individual talents and efforts explain why some people get more than others--even as the political system is shaped to ensure that those on top remain on top, and those at the bottom must work harder for less.

"In elevating work over other activities as our highest calling and moral duty, as a primary focus of time and energy, as what we should devote our lives to, invest our identities in, and structure our relations around, the work ethic encourages our consent to a lifetime in service to work," writes Kathi Weeks, a professor of women's studies at Duke University.

"In celebrating work as an end in itself rather than just a means to other ends, and as the central focus of our lives rather than one component among others, the work ethic teaches us to live for work instead of working to live."

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THUS, INEQUALITY isn't an unfortunate evil of an otherwise efficient system. It is the necessary outcome of an evil system that is efficient at extracting value from workers and transferring it to capitalists. The millionaires and billionaires who run hedge funds don't create that wealth, any more than the corporate executives at Microsoft and Apple do, because of the investing skills or innovative management techniques.

Their wealth depends on the ability to lay hold of and accumulate surplus value produced by workers throughout the production process--from the Chinese assembly-line workers who assemble iPhones for a dollar or two an hour, to Apple Store employees making $10 or $15 an hour while they sell, on average, $278 worth of products per hour.

Stock exchanges and the manipulation of complex financial instruments allow parasites, like hedge-fund managers and corporate executives, to lay claim to surplus value generated by workers elsewhere.

The real "genius" of the market is that it has succeeded in persuading so many people that if only they are persistent, they can get ahead. In fact, some of the most adamant defenders of the market are those who work the hardest, while just managing to keep their heads above water.

Meanwhile, all the evidence points to the opposite conclusion: workers can spend their entire lives playing by the rules, working hard and making all the right choices, and they'll still end up with the short end of the stick.

This has happened to millions of people in recent years, as pensions are taken away, retirement savings run down, home values shrink or medical emergencies plunge a whole family into debt and bankruptcy.

Reversing the staggering inequality that has come to dominate the global economy must begin with a fight for better wages, better benefits and better social services in the here and now.

But it can't end there. Capitalism itself must be challenged. Only when the products of workers' labor are commonly held and democratically controlled by everyone will society's wealth be used to ensure a dignified existence for everyone and the further development of human potential--instead of rewarding those who contribute nothing.