The rich are getting richer. But what has this to do with economics?
There are two dominant aspects of economic power that have nothing to do with economic principals. The first is best explained using a well-known board game called Monopoly. The aim of the game is to own everything and in the process bankrupt everyone else. It is an excellent lesson in capitalism for children of all ages.
For those unfamiliar with the game of Monopoly, all players start on equal terms, with the same amount of money and with all property on the board available to purchase. While the rules of the game are constant throughout, the game is generally played in three stages. The first stage is acquisition. During this stage players try and buy as much property as they can hoping to secure a set of properties they can then develop. Throughout this stage the rents are small and the players rich. The next stage is consolidation, during this stage players try and invest in development so that they can boost their income and inflict higher costs on their competitors. Throughout this stage a balance needs to be achieved between investing in income generation and having the ability to pay substantially higher costs. The final stage is attrition, in which the rich generally get richer and the poor get poorer. Throughout this stage the rich are able to invest excess income to create more income generating opportunities while the poor are required to mortgage investments to pay for expenses that exceed their income.
The biggest difference between the game of Monopoly and real life is that without innovation or government intervention, capitalism is played exclusively in the attrition stage of Monopoly. No wonder the elite favour free markets and small governments. But given the elite are such a small percentage of the population, why do so many democracies keep voting in governments that agree with them? The answer: hegemony.
Hegemony is a concept introduced by Italian Anontio Gramsci in the first half of the 20th Century. He reasoned that the ruling class must gain the consent of the working class as no government could rule by force alone for long. He called this process hegemony, the means by which the ruling/dominant group wins over a subordinate group through ideas. The principal idea that democratic capitalism sells us, is that we live in a meritocracy, a social construct in which people are rewarded on the merit of their contribution. Here everyone plays by the same rules and therefore anyone can succeed if they are good enough. In principal this is true, just as the rules of Monopoly do not change throughout the game, the rules of democratic capitalist society are the same for all. And so we buy into the idea – and effectively join a game of monopoly during the attrition stage.
Most people do not see the difference between a meritocracy and democratic capitalism. Indeed our own self-interest tends to support some of the distortion. For example, most parents want to use any advantage they have gained to assist their children in some way. Throughout our lives we will try and provide our children with better opportunities through education and networking and so forth. At the end of our lives it is normal for our children to inherit our worldly possessions. All of this ensures that the next generation does not start on an equal playing field. In this way the real life game of Monopoly is never reset, and that is even without the immortal creations of capitalism: Companies and Trusts.
Without innovation or intervention, the gap between rich and poor grows over time. If the time is spread across generations, the gap becomes a chasm. Historically innovation and intervention have both played a role in reshaping this scenario. Innovation can realign the relationship between ownership and value. The establishment finds that its assets have lost value, while the innovators have created a new source of wealth generation. Unfortunately for the general population this tends to simply create a new rich, rather than spreading wealth to the poor. Intervention can range from changes in taxation or legislation through to compulsory acquisition, revolution or war. Since the global financial crisis all of these forms of intervention have been used in various countries across the world. So what does the future hold?