Capitalism Corrupts the Inclusive Market Mechanism

panthera logoMarkus Schuller, founder of Panthera Solutions

The Brexit debate in the United Kingdom shows that archaic drivers of our societies can emerge again, even in the cradle of democracy. The opponents in this fight are not the UK vs Brussels, but the disenfranchised vs the elite. And even this only represents the outcome of false premises and their validating concepts. As former Labour Party minister Tony Benn put it: “This country and the world have been run by rich and powerful men from the beginning of time.”

The development of capitalism from the 18th century through to the 20th saw radical and sometimes rapid change not just in technologies and production processes, with the invention of the steam engine or mass production, for example, but also in philosophical and political concepts. The humanist project of the liberation of the individual was strengthened during the Enlightenment, but a new idea emerged too, that the whole of society could improve – social progress. The political translation of this included the fight for universal suffrage, human rights, minority rights, etc. The attitudes and actions that flowed from this were not always coherent with the ambitions they exemplified. Remember the euphoric belief in technology before WWI or the social/national questions during the second half of the 19th century in several monarchies and empires.

Despite all the upheavals the transition to the modern industrial age entailed, the process also produced stabilising social phenomena through the self-empowerment of the individual, such as labour unions or the new property-owning, entrepreneurial middle class. Twin phenomena were at work again, this time economic and political rather than philosophical and political.  The mass consumerism the new economy that would allow the new socioeconomic system to emerge and flourish depended on a widened participation of the individual in both the economy and society. It was only through this widened participation that narratives like the American Dream could manifest themselves – the prototype of social mobility driven by an inclusive market mechanism.

Society benefitted from increased social mobility not least because of the stark contrast it presented with anachronistic injustices like slavery, discrimination against women, oppression of ethnic or religious minorities, and inequalities of income and wealth. This in turn benefitted the economy by expanding the consumer base, for instance through increased labour market participation by women throughout the 20th century.

In short, social mobility was a necessary condition for political and economic self-empowerment of individuals, combined with an inclusive market mechanism that allowed them to live this self-empowerment in many different ways. And this remains the case today. Through social mobility, an inclusive market mechanism and equality of opportunities enable the best in our societies to get a chance to make it to the top. At the same time, the best are forced to compete responsibly for the best solutions of the problems of our times on a level playing field.

Here, the “false premises and their validating concepts” becomes visible. In the early 1980s, when Margret Thatcher and Ronald Reagan began to increase the competitiveness of their economies for the upcoming globalization on the basis of the theories of the Chicago School, their reforms were labeled as liberalisation, deregulation and privatisation. The claim was that this trinity would strengthen the individual in their societies and the competitiveness of their economies. The “victory” of capitalism over communism in 1989 reinforced the reform agenda. The interpretation of capitalism that dominated this agenda however shows a lack of congruence with an inclusive market mechanism. As Noam Chomsky said in September 2015): “Progress requires puncturing the bubble of inevitability: austerity, for instance, is a policy decision undertaken by the designers for their own purposes. US capitalism also benefits from ideological obfuscation: despite its association with free markets, capitalism is shot through with subsidies for some of the most powerful private actors.”

The game plan that would play out as globalisation was designed in Bretton Woods in 1944 and through GATT in 1947. Since the 1980s, the dynamics of this process has led to a massive reduction of extreme poverty worldwide, especially since the economic convergence of emerging markets gained momentum in the 1990s. In parallel, those dynamics damaged the social cohesion of developed economies as productivity gains and participation through gainful work became decoupled, while employees were tamed by increasing their consumption not through higher income in return for their productivity gains, but by getting into debt. Paraphrasing Margaret Thatcher: “You may not be able to get a wage increase, but you can get a loan.”

This development led to a weakening of the inclusive market mechanism through an oligopolisation of market-based allocation processes and a plutocratically-biased political decision making process.

This development also led to a weakening of equality of opportunities through a disintegration of the middle class and its stabilising factors like democratic participation or solidarity movements like labour unions.

Altogether it led to a weakening of social mobility in our societies. And a return to business as usual as described by Tony Benn. The debate is not about political ideologies and their partisan views on whether more public or private sector dominance is better.  The question is how to make sure our societies stay competitive in an evidence-based, innovation-driven search for democratically legitimized solutions for the challenges of our times.

Useful links

This article is based on Kapitalismus gefährdet Marktmechanismus by Markus Schuller

The economic consequences of Brexit OECD Insights

OECD Centre for Opportunity and Equality (COPE)

Going down? Probably not

Tim
Tim

One of the more memorable characters from British television in the 1990s was Tim Nice-But-Dim – a “thoroughly nice bloke” with good manners, money in his pocket and a job in the City. Tim was also as thick as a plank, but he sailed through life thanks to one thing – his family were rich.

Tim bounced back into the headlines last month following the release of a report on how family wealth affects children’s prospects. Here’s how the Daily Express summed it up: “Nice but dim: Posh but stupid children do better than poor yet gifted.” True, the language won’t win any prizes for subtlety, but it does get to the heart of the matter, which is this: Children from wealthier families, even if have only modest skills, tend to be protected from sliding down the social scale by a “glass floor”.

None of this is all that surprising – most of us have probably met or worked with a Tim Nice-But-Dim. But the report, by Abigail McKnight of the London School of Economics, does offer some hard evidence on how and why the Tims of this world do so well. Her research looks at the economic performance of a group of people in the UK whose cognitive abilities were tested in the 1970s at the age of 5. By the age of 42, people from poorer families who had scored well were less successful at “converting this early high potential into career success”. By contrast, children from wealthier families who had scored poorly at 5 did better in their careers than might have been expected.

What’s happening? Parental education (which is closely tied to family income) is a key factor. Parents with higher levels of education are better equipped to help children overcome early learning problems; better able to provide career and education advice and guidance; likely to encourage children to go to university; and able to invest in private education and coaching, and so on. They also typically have access to useful social networks, and so can pass on job tips and arrange internships. And they’re more likely to encourage a range of “soft skills” in their children, such as self-confidence, presentation and appropriate behaviour.

The glass floor is not restricted to the UK. In the United States, a 2013 report by Richard Reeves and Kimberly Howard for the Brookings Institution also provided evidence that it’s harder to rise up than it is to fall down. The authors estimated that around 250,000 college degrees were awarded in the US in 2011 to modestly skilled children from comfortable backgrounds – the “nice but dim”. By contrast, 400,000 high-skill youngsters from poorer families were unable to complete college. “From a mobility perspective,” they argued, “it would be better if college slots currently taken up by modestly skilled kids who remain at the top were filled instead with the smart, motivated kids who remain stuck at the bottom.”

All this research feeds into the bigger question of how widening income inequality is affecting the life chances of people from poorer families. One impact can be seen in parents’ investment in their children’s education and human capital development. Recent research from the OECD showed that as the gap between rich and poor grows, poorer families are able to invest less in education and skills development (which has serious consequences for economic growth). The gap is also visible in the area of “enrichment,” or broader spending on activities and out-of-school learning. While all families are spending more on enrichment now than in the past, the gap between how much rich and poor parents spend looks to be growing ever wider.

So what’s to be done? Sadly, discussion of these issues can get a little heated. Mention the glass floor and some people assume you’re attacking parents themselves. “Parents should be commended for trying to give their less talented children every chance to succeed,” writes one contributor to The Daily Telegraph. Indeed they should. On the other hand, as Dr McKnight points out in her paper, “A society in which the success or failure of children with equal ability rests on the social and economic status of their parents is not a fair one.”

In response there are a number of obvious policy areas, such as greater investment in early childhood care and improving equity and fairness in education. But there are other issues that matter too, such as the growth of unpaid or low-paid internships. The challenges facing young interns were highlighted recently by the story of David Hyde, a 22-year-old New Zealand graduate who’s currently doing an unpaid internship in Geneva. Every morning, David walks to his office in a suit; every evening, he goes back to his “home” – a leaky tent on the banks of Lake Geneva. In the pricey Swiss city, and without a salary, that’s all he can afford. Speaking to the French-language Tribune de Genève, David summed up his frustration at how such unpaid internships can limit the opportunities of young people whose parents aren’t rich: “In the end, only those with parents who can pay have a chance.”

Useful links

OECD work on inequality, education and early childhood care and education

In It Together: Why Less Inequality Benefits All (OECD, 2015)

PISA 2012 Results: Excellence Through Equity: Giving Every Student the Chance to Succeed (OECD, 2013)

Equity and Quality in Education: Supporting Disadvantaged Students and Schools (OECD, 2012)

Interns are people, too” by Ben Lyons of Intern Aware (OECD Yearbook 2013)

Kate and Will vs Charles and Diana – how the times they are a changing

These days, most couples can afford a car

For today’s cut out and keep Royal Wedding Special, our court correspondent Spencer Wilson took some time off from polishing his top hat to tell us what the OECD’s evidence-based horoscope says about the young couple.

They’d be likely to have two children. The same as Charles and Di. But having a university education, there’s still a 50% chance Kate won’t have any children. Over 60% of UK households have no children.

Kate, at 29, will be an older first-time mum than most women in the UK – the UK average is 29.4 years, above the OECD average of 27.8.

There’s a two in three chance that Kate will take a job, slightly more than in 1980.

 If she works, she’s likely to earn 20% less than Will: the gender gap in earnings is higher in the UK than in most OECD countries (17.6%).

 They’re among only one in five UK couples where both spouses have a university-level education.

If they have children after getting married, they’ll be among the 6 in 10 couples who do. Four in 10 births in the UK are outside of marriage, a rate which has nearly quadrupled since 1980.

Kate’s very likely to put her child in childcare from the age of 3. Nine in 10 UK mothers do, compared to an OECD average of 7.5 in 10.

Kate’s likely to spend two more hours a day doing housework than Will, below the OECD average of 2 hours and 28 minutes.

Kate’s likely to spend twice as much time looking after children than Will: 1 hour 40 minutes a day compared to 40 minutes, based on OECD averages.

Kate’s likely to spend 83 minutes a day cooking and cleaning up, nearly four times more than Will at 21 minutes, based on OECD averages.

Useful links

Doing better for families Useful data, analysis, and advice for Her Majesty’s, and other, governments

Society at a glance 

I’d like to be a dancer or a doctor, but I won’t

It’s OK to punch a woman in the face if she’s having an affair according to children interviewed by Nancy Lombard of Edinburgh Napier University as part of a study on children’s attitudes to violence against women.

Dr Lombard’s research included questionnaires and in-depth interviews with 89 pupils aged 11 to 12 years old at schools in Glasgow.

Most of the children thought it was wrong to be violent, but also agreed that if a wife didn’t have the dinner ready it might be acceptable to push her. Only 20% suggested the husband could have made it himself.

Violence is the main focus of the study, to be presented today at a conference organised by Scottish Women’s Aid, but it also gives some indications as to how the children see their prospects.

“At the moment I want to be a dancer or a doctor. When I grow up I’m going to have two babies and work part-time in the shop down the road” said one girl.

The fact that at 11 or 12 years old she already thinks that moving up the social ladder is only a dream is sad. The fact that she lives in the UK means she has less chance of escaping from a dead-end job than a child from a similar socio-economic background in other countries.

It is easier to climb the social ladder and earn more than your parents in the Nordic countries, Australia and Canada than in France, Italy, Britain and the United States, according to a new OECD study, Intergenerational Social Mobility: a family affair?

The study finds, as you’d expect, that there is a “virtuous circle” in which the children of better educated parents in higher earning jobs do well.

It also finds that increasing the social mix within schools appears to boost the performance of disadvantaged students without any apparent negative effects on overall performance.

Segregating pupils too early on the basis of academic ability undermines social mobility. By delaying selection until age 16 instead of 10 as is currently the case in some countries, the influence of the school socio-economic environment on academic performance could be reduced by as much as two-thirds.

The study also finds that social mobility between generations tends to be lower in more unequal societies. Tax and benefit policies aimed at providing income support or access to education may reduce the handicaps of a poorer or less well educated background.

Like father, like son? The higher the bar, the more likely are a son’s earnings to reflect his father’s

 

Useful links

Chapter 3 of the OECD Insights on Human Capital discusses children and families 

OECD Directorate for Employment, Labour and Social Affairs

OECD Directorate for Education