The Cows of Finance and Us

Editorial – Middle Class and the Capitalism Crisis

The Cows of Finance and Us

by Luigino Bruni

published on Avvenire on 2/08/2011

Based on a perceived economic equity, impoverishing the middle class will unravel the social bond.

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The agreement reached on U.S. public debt must not excuse us from deeply reflecting on excessive indebtedness of North American economy and of the capitalist system. The 2009 big bank bailouts primarily moved the private sector debt to the public sector, without removing the real causes of the problem, which find themselves in the U.S. and world middle class that is progressively impoverished and in debt. Behind the large public debt there is an inequality problem in income distribution that is becoming ‘the’ crucial question in our capitalist economic system.

In the fall of 2008, when the crisis was about the explode, the 1% GDP share owned by the richest U.S population reached its peak, just as in 1928, at the dawn of the great Wall Street crash, as Robert Reich reminded us in his latest, valued book (Aftershock, Fazi, 2011). When the middle class is impoverished relative to the affluent class, it tends to borrow too much, also because now, unlike in 1929, the financial system proposes and promises magical recipes to maintain or increase, with debt, the levels of consumption.

In the past decades the attitude towards inequality had been ambivalent: part of the public and scholars’ opinion saw it basically as a transitional phenomenon, a price to be paid only in the early stages of the economic development. Albert Hirschman metaphorically expresses it with the image of the tunnel: when we are in a tunnel blocked in a traffic jam and if the lane next to me starts to move I can suppose that my lane will also start to move. The inequality, therefore, should have had an inverted U-shape: growth at the beginning then diminishes at the mature stage of capitalism.

The historical event of the West (certainly U.S. and Italy) tells us that in the last 25 years inequality has increasingly returned. How come? Were the forecasts of the economists wrong? In reality, a brand new factor was inserted, which is the financial nature of the last capitalism that send into crisis the same theory and ideology of the free market. In fact, when the helm of the economic system (and political) passes into the hands of speculative finance (here the adjective is important, finance is not all the same), some of the pillars of liberalism enter into crisis, including the market’s ability to ensure economic growth, for at least three reasons.

The first has to do with the kind of wealth that is created by financial speculations. The golden rule of the “normal” market economy (when funding is subsidiary to the real economy) is the mutual benefit of the parties that exchange; when, instead, we are often dealing with speculative finance the rule is of the ‘zero-sum game,’ just as poker: the winner correspond to the losses of the others.

This means that many of the latest generation of finance instead of creating new wealth moves it (especially by playing with time) from some individuals to others. Second, in many (not all) speculative finance happens systematically, without scandals and convictions. What we have recently seen with soccer bets: some players (large funds) bet on the outcome of the games (future value of securities) and then play in a way that their expectations (bets) will come true. The third reason directly deals with inequality. The financial turbo capitalism naturally produces high inequality because, thanks to labor and technology globalization, workers of average skills (laborers, employees, and care and service agents) always pay less. That is, the big part of the middle class, while strategically-pays the few hyper-specialists (technicians and managers) are able to exponentially increase the profits of finance.

But – and here lies the crucial point – an economic system that enriches too few and impoverish the middle class, the great majority of the population (to say nothing of true poverty, another crucial topic) does not grow. The social bond that is based on a perceived economic equity unravels and begins inexorably to the decline mainly due to a lack of “demand” (not just equity). In fact, an increase of middle and lower class income is immediately translated into a higher consumption and GDP, while increasing income of those who already have much produces very minor effects on consumption and growth. We are then realizing that when workers are poorer relative to other social groups, the inequality becomes a direct factor of growth (or recession). The rhetoric increase is no longer enough for the “size of the cake” before thinking about the ‘slices,’ because on one hand the increase of the cake may only be apparent, and on the other the squandering and the waste of the big cake eaters makes it indigestible even the smaller pieces of the others.

When one watches our capitalist system from afar, the first strong impression one can draw is that we have grown too much and evil: the environmental crisis says it with more eloquence, but it also says that this growing inequality is a result of over-milking the cows of finance, which today risks to kill the animals to exhaustion. The tool to rebalance the economic relationship is not called charity or philanthropy but tax system. That is why family-friendly tax proposals (like the “family factor”) is a purely economic matter before becoming an ethical proposal, because without rebalancing the social deal we will not have the energy to re-launch growth, reduce public debt and construct a better economic system. For this I must make my own the words of hope with which Reich concludes his speech: “In the United States, as in Italy, we will reverse the course that threatens our economies and democracies. We will do it so that this inversion is in everyone’s interest, even those in our societies who have enormous levels of power and wealth. … It is our challenge and our children’s. It is the biggest economic challenge we are facing.”

All of Luigino Bruni's comments on Avvenire can be found under Avvenire Editorial.

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