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The 1% and the Rest of Us

by Tim Di Muzio on May 11, 2015

The growing gap between the 1% and the rest of us is perhaps one of the most significant political challenges faced by humanity.  To think about it in allegorical terms, imagine for a second that you were invited to a birthday party. Instead of buying a cake, your host asks you to bring a share of the ingredients to make one.  When you arrive you see that there are 99 people at the party including your host.  They are all adults.  Everyone has brought more or less an equal share of the ingredients according to their means and are put to work in collective fashion making and decorating a large cake that will be served at the party.  People have different skill sets, but no one is overwhelmingly or noticeably superior to any other.  However, when it comes time to serve the cake, the host immediately takes 48% of the cake.  Another 9 people approach the cake and take 38% of it, leaving the remaining 90 guests with just 14% of the cake.  Perhaps not surprisingly the majority are shocked to witness the disparity between guests but there is no open revolt, just quiet whispers about the inequality in the face of what seemed to be a shared project.  The remaining 90 guests divide the remaining cake, albeit also in uneven slices, with those at the bottom receiving a few crumbs.

Although you did get a tiny sliver of cake, you decide to decline all future invitations of your host.  However, a few years pass and you receive another invitation.  You decide to forgive and forget and arrive at the party under the same terms as before.  When the cake is served, it is even more unevenly distributed than it was a few years ago.  Now your host takes 50% of the cake, another 9 guests 40% of the cake and leave the remaining 90 with 10% of the cake.  You have a feeling that barring some sort of discussion about this trend, it is unlikely to change.

dimuzioThis scenario is a bit like what’s happening in the world of wealth (and income) – a small minority increasingly owns more of society’s income generating assets.  This is what a number of studies on high net worth individuals have revealed over the last few years, including the recent report by Oxfam, Wealth: Having it all and Wanting More based on a Credit Suisse report.   It is also the subject of my recent book, The 1% and the Rest of Us.  Oxfam’s study proposes some initiatives to reverse this trend and all of them are worth serious study and vigorous debate.  But one of the key obstacles to change that must be overcome is how this disparity in the accumulation of wealth is justified.

Originally, this was the purview of political economists who did not separate political power from the ‘economy’, a sphere which really only entered the minds of the neoclassicals in the late 1800s and came into its own thanks to the World Wars of the early 20th century.  Early on, many answers were provided, but they were largely unconvincing and contradictory and certainly not grounded in any provable observations.  Today, there are both popular and academic explanations for this gross division of wealth.

Let’s start with the academic justification that only students of mainstream economics will likely be familiar with.  Mainstream economists argue that ‘capital’ is a productive entity and therefore that the owners of capital (they usually mean machines, equipment and to some extent technology) deserve to make profit.  But how much profit should they get?  According to the theory, they should receive an amount of profit equal to their (marginal) contribution to production.  The problem is that this theory doesn’t square with the actual practices of capitalists and modern finance.  Real capitalists are conditioned (by taking courses in Finance, not Economics) to think of capital as a future flow of income discounted into a present value and adjusted by some factor of risk.  Readers who watch Dragons’ Den in Canada and the UK and Shark Tank in the United States and Australia will be familiar with this process when potential entrepreneurs have to value their companies – particularly when they are pre-revenue.  This idea that capitalists are forward-looking, ultimately means that mainstream economics cannot explain the distribution of income in any scientific or convincing way.  For those who are interested, the technical details and a more elaborate explanation can be found in my book and in Capital as Power by Jonathan Nitzan and Shimshon Bichler.

The popular justification (mainly trumpeted by the rich themselves and their fans in the corporate media) goes something like this: some individuals are so radically different in brain power, skill and talent that they are truly extraordinary and therefore entitled to higher rates of compensation. These higher rates of income will eventually lead to ever greater wealth as these people come to own more income-generating assets.  I call this the superman theory of wealth or the idea that superhuman individuals are the source of all wealth.  In some versions, there is room for luck, ‘hard work’ and the tech-revolution, but in general the popular explanation more or less says that evolution somehow worked quicker for some humans – mainly, it seems, for old white men from the United States (where the most HNWIs are).

The problem with this argument is that it is utter nonsense and in no way scientifically valid.  Take for example, the tech-god (really a marketer) Steve Jobs. When he died, Apple shares were worth US$422 in October of 2011. But rather than plummet in value after his death, shares actually appreciated to a high of US$691.28 in September 2012.  Today, Apple is the world’s largest company by market capitalisation.  This is not to suggest that Jobs did not contribute to – and perhaps significantly – to Apple (Google: Bill Burr Night of Too Many Stars).  But if the superman theory of wealth were true, the death of this ‘genius’ should have sent the share prices tumbling.  Yet we witness the reverse – rising confidence and capitalisation of the company.  This suggests that (at least from the superman theory’s perspective) maybe Steve Jobs was actually an impediment to capitalisation?   Either way, this is just one example of many to illustrate that any theory of wealth based on individualism is scientifically false.  There are plenty more examples explored in The 1% and the Rest of Us. So if individuals do matter, but do not generate wealth themselves, what explanation might be more convincing?

A more plausible thesis about the generation of wealth is that, like language and knowledge, it is socially generated but appropriated by the few.  How does this happen? The answer is obviously complex and political power, corruption and a history of colonial ruthlessness are certainly a big part of the story.  But this appropriation can primarily take place because of the legally sanctified institution of private ownership.  Ownership allows a small minority to exclude the majority from gaining any significant income-generating assets let alone sharing society’s resources in a more equitable fashion.  Two other factors are of note: 1) how we create money in our societies and who has access to credit and on what terms; and 2) the fossil fuel revolution which provided pockets of humanity with the capacity to do more work.  But for an elaboration on these two points and how they are understood from the perspective of capital as power, you’ll hopefully read my book.

In the meantime, attacking the mistaken justifications for the mass inequality of wealth is a crucial political task, if only for the reason that in the coming years, the 1% will take more cake.

Tim Di Muzio
Tim Di Muzio is an Associate Professor in International Relations and Global Political Economy in the School of Humanities and Social Inquiry at the University of Wollongong, Australia. His research focuses on issues of social and environmental justice from a critical political economy perspective.

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