Contrary to what we are taught in our basic economic courses there is no self-correcting mechanism in our markets. There is nothing that magically guarantees ethical behavior, or that the abundance created in our markets will automatically trickle-down to the rest of us. Leaving market players to work their magic is not a recipe for a prosperous economy or a healthy society.
Instead, according to French economist Thomas Piketty, when market players get their way history tells us that small groups of wealthy people come to own or control an inordinate amount of society's resources. This has been the trajectory of our markets and society since the early 1700s. Piketty argues in his new book, Capital in the Twenty-first Century (which Jeff Faux discusses here), that rather than leveling the playing field capitalism not only fails to reduce inequality, it actually increases it.
The only time this disturbing trend was not our reality was when we rebuilt the world order with an eye toward equality of opportunity during the 20th century.
But it took two world wars, a Great Depression, and a looming cold war for world leaders to turn away from the dystopic laissez-faire economic models promoted by the followers of Adam Smith. In its place post-war leaders embraced a progressive policy agenda. This included steering resources, income, and power away from manipulative market players and towards democracy's middle-class.
The immediate goal was to turn American-style democracy into a showcase for the world to see.
The long-term goal was to eliminate the economic conditions that encouraged socialist revolution in Russia in 1917, and then allowed the serpents of Nazism to rise in Germany in 1933. As I pointed out in my book (p. 164), economic recovery and global stability in the post-war era were deemed too important to be left in the hands of rogue market players.
The legacy of these post-war policies was European recovery, stability and prosperity in Germany and Japan, and the eventual collapse of the Soviet Union.
During this period market regulations eliminated the terms "market meltdown" or "economic depression" from our language. Taxes were progressive and invested in education and infrastructure projects. Safety nets helped lift people out of poverty, while reducing anxiety and uncertainty in society. At the same time organized labor was embraced by liberals and conservatives alike.
Then something happened.
During the late 1970s we lost track of history and our sense of what actually made our markets flourish after World War II. Vietnam, Watergate, and OPEC only complicated things. We panicked over a world that was both changing and challenging the West. So, oddly, we began unraveling our post-war social contract in the 1980s.
We came to believe, against all reliable evidence, that rich people needed more money, which meant generous tax breaks. The flip side of that coin was to wage war on poor people instead of attacking the sources of poverty. Bailouts and favorable legislation became the name of the game. Today compromise is a dirty word in Washington, D.C.
Economic and political storm clouds have been hanging over America ever since.
Today the financial elites have taken control, with more than half of all current members of the U.S. Congress now categorized as millionaires. Taking note of this, one Princeton-Northwestern university study argues that the United States is now an oligarchy; a democracy in name only.
One thing is clear according to Thomas Piketty. Unless we change how we look at markets and market players today - and find a way to reign them in - we are headed for more inequality and increasing wealth gaps in America. As you might expect, the oligarchs will continue to thrive in this environment.
I'll be discussing all of this in my next book, which I'm going to finish this summer.