Lessons from history: Why is there a tension between freedom and income equality?

I spent the last series asking people on my podcast if we will be in a Utopia or Dystopia by 2050. Let’s be honest, that is a pretty hard question to answer unless you have a crystal ball of some description. In fact, predicting the future is so hard the US National Intelligence Council (which I think is pretty much the CIA) open sources its predictions of the future to get feedback to make them more accurate!  So predicting the future is hard, but how about instead of looking forward, we try looking backwards, as “history doesn’t repeat, but it often rhymes” Mark Twain is supposed to have said.  

Chronicling the history of time is a full-time academic job unless you are an AI.  Luckily for me, Will & Ariel Durant put their lives work of multiple volumes of history into a 100-page synopsis, boom thank you (ps I would put that book in a top 5 must-reads).  The question I want to analyse is:  

Why is there a tension between freedom and income equality?  

I started thinking about this after re-reading the following passage from Lessons from history over the last few weeks as the world was hit by Coronavirus:

“Nature smiles at the union of freedom and equality in our utopias.  For freedom and equality are sworn and everlasting enemies, and when one prevails the other dies.  Leave men free, and their natural inequalities will multiply almost geometrically, as in England and America in the nineteenth century under laissez-faire.  To check the growth of inequality, liberty must be sacrificed, as in Russia after 1917. Even when repressed, inequality grows, only the man who is below the average in economic ability desires equality; those who are conscious of superior ability desire freedom; and in the end superior ability has its way.  Utopias of equality are biologically doomed, and the best way that the amiable philosopher can hope for is an approximate equality of legal justice and educational opportunity.

This topic has driven me a little insane at times over the last week. I definitely did not write it in the 48hr time limit.  It made me question my belief systems and biases. I am not a huge follower of politics for this exact reason. It is too complicated to oversimply by blue and red coloured parties.  You are just wrong if you believe everything a political party or newspaper spouts, but in most countries, you have to be in one team or the other. I still identify as being a working-class northerner, but having spent half of the rest of my life away and running companies has clearly muddied things.  Long story short an easier topic would have been how to create world peace.

But I while try and mainly because  I am interested in this subject given the wave of populist governments coming to power around the world and because I don’t have anything else to do in lockdown.

The consensus view seems to be the rich are getting richer and the poor poorer. 

Why might that be?  2007 GREAT Recession is a good starting point.  The fact that economists use the word “GREAT” only twice when discussing economic meltdowns is pretty telling. The first was the great depression, which everyone agrees was pretty bad and was a major factor in the rise of Hitler and subsequent second world war.  The second GREAT, was the GREAT recession of 2007-2009. Yep happened just around the corner. But it was pretty bad and maybe just maybe we have been sticking band-aids over it to conceal the devastation. Here is a massive simplification of what has happened over the last 10 years as a result.  Economists central banks have more knowledge than they did in the 1930’s so they printed money (Quantitive Easing) and lowered interest rates. The result of this was a 10-year bull market for equities as consumers felt richer so spent more, in turn increasing company profits. They also felt more comfortable to increase debt so took out mortgages which in turn pushed up housing prices.  This was felt more keenly in urban areas were people suddenly want to live back in cities again, make it unaffordable to the people who had been living there for the past 50 years. The real kicker was that blue-collar jobs in manufacturing etc have over the last 20 years have been aggressively outsourced. Starting to China which saw the massive rise of the middle class there, and then to countries like Vietnam who will now do it cheaper than China because the workers are asking to much money.  In Europe thousands of Eastern block EU citizens moved to the UK and labour was also got very cheap for low skilled work. Finally, students are pretty annoyed (mainly in the US) because the $100,000 student debt (which can be 6X larget if you are a smarter enough to get into an Ivy League school. they are in being charged at 5% is like a noose around their neck if they have a degree and now in the workforce or if they are planning. (ps I find it very hard not become US-centric when thinking of these things).   What happened in Australia? Well, Aussies were pretty sweet, the banks were as exposed to sub-prime mortgages and they had a very greedy client offshore in China wanting to build lots of tall buildings with the iron ore in Australias earth. So I think is a rough approximation of the popular view on why are here now. But reading Lessons of history its made me stop and try and zoom out a bit further to try to understand where we are in the general cycle of things (markets go through cycles bear and bull, debt goes through cycles read Ray Dalio Big debt cycles for more information on that) and if this is just an inevitable outcome of the tension between freedom and equality.

 To explore this further I am going to break down the Durants passage into three areas:

  1. Are certain individuals better equipped to compete than others?  What is the moat/barriers to access? What impact is the hereditary access to genes, capital, networks? 
  2. Does freedom have to decline to ensure equality? What is the role of education and the law?
  3. What do we learn from this and what is the solution?

Are certain individuals better equipped to compete than others?  What is the moat/barriers to access? What impact is the hereditary access to genes, capital, networks? What is the role of education and the law?

“Since practical ability differs from person to person, the majority of such abilities, in nearly all societies is gathered in a minority of men.  The concentration of wealth is a natural result of the concentration of ability and regularly occurs in history. The rate of the concentration varies (other factors being equal) with the economic freedom permitted by morals and laws.  Despotism may for a time retard the concentration; democracy, allowing the most liberty, accelerates it.” Will & Ariel Durrant in Lessons from history (1968)

If we take the Durants version of history then we are left with the impression that when you leave people and markets to their own free will, then certain individuals will do a better job than others of competing for scarce resources and overtime those advantages will multiply.   So let’s take a handful of people who have done better than most at accumulating income.

Andrew Carnegie, John Rockefeller,  Bill Gates, Warren Buffett, Elon Musk, Jeff Bezos, Steve Jobs.   At first glance, I instantly grouped Carnegie/Rockefeller together because they were in the same era and also because I know that they were both pretty poor in relative terms growing up.  Carnegie came to the US from Scotland as a kid as poor as you could imagine, Rockerfellers father wild Bill basically lived a double life and had two families and would often leave John and his mother for long periods of time without money or social opportunities.  Gates and Buffett who are buddies, on the other hand, were sons of a prominent lawyer Gates Snr and a senator Buffett SNR. Gates had access in his high school two one of only two supercomputers in the country, that is an unfair advantage or the other hand Buffett had access to the richest people in Omaha and connections through his father.  Next group Steve Jobs, Elon Musk, Jeff Bezos. Jobs adopted son of a carpenter from which he famously got his attention to detail and craftmanship, Jeff Bezos was born to a 17-year-old mother, who split with his biological father and was raised by Mike Bezos who was a Cuban immigrant who came to America at 16 barely being able to speak English. Elon Musk father was rich but by all accounts, he is self-financed his education. If you strip out Buffett and Gates and then maybe Elon Musk who was kind of privileged but kind of not.  You left with about a trillion $’s of wealth accumulation from as standing start.    

Has the probability to reach the very top really gone down across the world or is just that the middle and lower classes’s have just got poorer in real terms as the spread of wealth has become decentralised?  

This has got me thinking about monarchs and how they come to power and wealth. Monarchies have a serious moat, as by definition they are hereditary. But at some point in the past were individuals and families who at some point needed to amassed wealth and power.  Yes, parts are hereditary but at some point, someone had to take power. The richest monarch in the world today is the King of Thailand who has $43bn in assets, Thailand has a GDP of around $430bn. That is less than Jeff Bezos $106bn after his divorce was $140bn, interestingly Amazon revenue is $422 bn similar to Thailands GDP but a drop in the ocean of Americas GDP of 19.39 Trillion.  It would appear Bezos is the ruler of a small country. This actually has an interesting connection and precedent. I have just finished reading the Anarchy by William Darlimple about how an independent company British East India managed to take over the control of an entire continent India with the primary purpose of the companies profit. Before being nationalised it was accounting for 60% of the British GDP. It was individuals such as Arthur Wellesley (later to become famous as the Duke of Wellington, Battle of Waterloo Napoleon and became Prime Minister), who’s military acumen and the superiority of technology (muskets vs swords and cavalry).

On reflection, I would have to agree to this point with the Durants that certain individuals just have a better aptitude to generate income.

Does freedom have to decline to ensure equality? What is the role of education and the law?

This is when things start to get tricky.  The role of government and manipulation of the law is probably the ultimate way that you can repress an individual’s freedom and at the same time ensure that they don’t have the ability to gain wealth or vice versa.  Examples that spring to mind are females inability to vote and get access to education globally, Jim Crow laws in the US and Terra Nullius impact on Indigenous Australians. The law is the ultimate circuit breaker. As someone who has never been negatively prejudiced by the law, it’s quite hard to really get your head around the impact that it would have if used against you.

Communist states from the USSR to China showed for a long time that you could create equality but you would do such by giving up basic freedoms like free speech or criticism of the government.   The opposite does seem to lead to the domination of capital and power have generally come hand in hand throughout the ages. If you think of the Triumvirate that ruled Rome Ceaser, Pompey, Crassus they were also the three richest people in the empire at the time.  The Medici bankers in Italy bankrolled the Vatican for a long time culminating in Pope Leo (Giovanni Lorenzo Medici)

I think you also have to work on the assumption that all kids in developed countries have access to basic free education.  I know that to be an oversimplification if kids are coming from abusive homes for example. Kids might not be accessing school or they could be in no state to attend school when they are there.  I think the reality is that most knowledge-based jobs today require some form of tertiary education. Having worked in the tech industry I think the one thing that people don’t appreciate is that as the market is continually evolving you have to be a student constantly.  You are constantly forced to have a growth learning mindset because things just change. Sometimes literally overnight. You really don’t need to go to college to gain that mindset. That can be taught by friends, parents, teachers, cousins, sports coaches, charities hopefully, someone before a kid turns 18.

What do we learn from this, what is the solution?  Does anywhere have the balance right?

My personal bias from my own experience of social equality in countries with high levels of freedom is worth taking into account.  I feel like I have seen both sides of the spectrum. I have been friends with people with a lot and people with little. I grew up in Widnes in the north of England in the heartlands of socialist Labour until I was 18, my family are from Liverpool which is a few miles down the road. Tory Maggie Thatcher who hated the north and especially Liverpool was a creature from the underworld, I think Axe the poll tax was my first political memory it was graffitied on a wall on the way to school.  Widnes, where I lived and my parents still live is a pretty good spectrum of blue-collar and white-collar work. I think my childhood was pretty perfect, which was down to my parents. 

One of the biggest grievances of Thatcher years in the north was the “Get on your bike” comment.  Which basically meant if you couldn’t find a job where you lived then leave and go somewhere you can.  This is where it gets complicated with me. I moved to London at 21 and to Sydney at 26, Byron Bay 37 and have done ok. At a cost though.  I see my parents in-person probably once a year. I wish it was different and appreciate that this is a deal-breaker for most. On the sunny side they now know how to use facetime.

Plus moving to capital cities (where the jobs are) is expensive especially for the first few years.  I lived off my credit card and then also managed to buy my first house there after a few years. Just in time for the property market to crash (it came back).    I have had student debt and paid close to 70% income tax after means-tested repayments were taken out. I have started companies and had employees and sold a company, started others, invested in even more.   I have also heard the challenges first hand of forced immigration. My wife Ida’s family fled Iran after the fall of the Shah in 1979 and settled in the US leaving everything behind. Ida was brought up by her Mum and sister and the help of amazing people in the local community.  Both Ida and her sister are doing incredibly well one an entrepreneur the other a Dr, literally the American dream against incredible odds. But its definitely not been easy.

So this is probably the reason I found this subject hard to confront.  It’s hard not to say well if I did it. I think this is a theme with JD Vance who wrote the book Hillbilly Elegy.  Vance grew up in the shittiest of circumstances drug-addicted single mother but was raised by his Mamaw (grandmother) seriously tough matriarch who he dared not upset.  I see parallels in the importance of role model stories of success of the Pyjama foundation a not for profit organisation that promotes numeracy and literacy for kids in the foster care system for which I am a board member, the pyjama angels act like min Mamaw’s in that they are a constant in the child’s life as they may move around from home to home.  These people show up when they don’t have to and they don’t get paid. 

I often think of Australia today like America in the 1950’s the land of opportunity, the good bits and the bad.  Its incredibly easy to start a company for example and Australia has lots of small businesses. Education is accessible to all and basic health care is covered.  Like America though Australia carries the weight of the treatment of indigenous people. I am still shocked that in nearly 12 years of living and working here my interactions with indigenous people can be counted on one hand.  I know that the foster care system over indexes with indigenous kids as do the prisons that re-creates the cycle.

I know a lot of people point to Singapore as a happy medium.  Criticism of the government, for example, is not tolerated but a meritocracy and free-market economics are embraced.  Taxes are super low and the government invests a lot in promoting business activity. Everyone has housing, hospitals are world-class, but if you want to start a company you can do so and been incentivised to make a profit with excessive taxation. 

Interestingly due to the coronavirus and the halting of the governments around the world are undertaking the biggest social spending programme in history.  That is at the same time as the Democrats could still not bring themselves to select a socialist like Bernie Sanders to run for president.  

 I’ll finish as I began with a passage from Lessons of history.  

The relative equality of Americans before 1776 has been overwhelmed by a thousand forms of physical, mental and economic differentiation so that the gap between the wealthiest and the poorest is now greater than any time since the Imperial plutocratic Rome.  In progressive societies, the concentration may reach a point where the strength of number in many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing power.  In the Athens of 594 BC, according to Plutarch, “the disparity of fortune between the rich and the poor had reached its height so that the city seemed to be in a dangerous condition and no other means for freeing it from disturbances… seemed possible but despotic power.” The poor, finding their status worsened with each year – the government in the hands of their masters, and the corrupt courts deciding every issue against them -began to talk of violent revolt. The rich, angry at the challenge to their property, prepared to defend themselves by force.  Good sense prevailed; moderate elements secured the election of Solon, a businessman of aristocratic lineage, to the supreme archonship. He devalued the currency, thereby easing the burden of the debtors (though he himself was a creditor); he reduced all personal debts, and ended the imprisonment for debt, he cancelled arrears for taxes and mortgage interest; he established a graduated income tax that made the rich pay at a rate twelve times that required of the poor, he organised the courts on a more popular basis; and he arranged the sons of those who had died in war for Athens should be brought up and educated at the government’s expense.

It does make you wonder if America, in particular, is a ticking time bomb.  Will it be peaceful re-allocation, authoritarian take over or violent revolution only time will tell.

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