2014 February 22 Saturday
Is The Decline Of The Middle Class A Crisis Of Capitalism?

David Brooks of the New York Times and Arthur Brooks, head of the American Enterprise Institute believe capitalism faces a crisis because capitalists need very few workers in order to make huge amounts of money.

But now capitalism faces its greatest moral crisis since the Great Depression. The nature of that crisis can be captured in two statistics. When Facebook entered a deal to buy WhatsApp this week, it agreed to pay a price equal to $345 million per WhatsApp employee. Meanwhile, the share of the economic pie for the middle 60 percent of earners nationally has fallen from 53 percent to 45 percent since 1970.

Um, no. It is not capitalism that faces this crisis. It is the middle and lower classes that face this crisis. The capitalists will find ways to move more of their productive assets out of the reach of the lower classes.

Take a messed up country like Venezuela where the government just killed a beauty queen at a protest (finally an event in Venezuela important enough for most people to pay attention so) and the government restricts media coverage. The lower classes in Venezuela are so incredibly short-sighted and foolish in choosing leaders that Venezuela is doomed to dysfunction. Capitalists will do very little investing in Venezuela and the most productive and able people in Venezuela will look to escape.

Venezuela reminds me of the dysfunctional and successful American cities. Some US cities become so messed up by their lower classes that their middle and upper classes flee. It becomes a vicious cycle where the remaining voters elect even more irresponsible local political leaders and better people become even more motivated to flee. Meanwhile, some other cities get into an upward cycle where the most able people flock in, drive up housing costs, and drive out the lower classes. This is the future of the world.

How does this relate to the enormous winner-take-all trend in capitalism where the most successful companies employ only upper middle class and above? This trend concentrates wealth and enables the wealthy to flock together and drive out the least able.

What is in question about this trend: Which whole countries will remain in the winners' circle? Will some currently first world industrialized countries develop such large dysfunctional lower classes that the countries will start to drive out their upper middle and upper classes?

If the elites of the US weren't so foolish they'd try to make sure that US immigration policy turned the US into the place where the most able came to in order to escape social pathology and destructive government policies elsewhere. Those of less than high ability would be kept out.

The most innovative people and companies increasingly do not need the masses for any purpose other than as customers. The middle classes in industrialized countries should be very mindful about whether immigration policies and other policies will drive their most able to somewhere else.

There is an opening here for a few smaller countries to become niche places for the most able and productive people on the planet.

Share |      By Randall Parker at 2014 February 22 10:12 AM 

James Bowery said at February 22, 2014 3:26 PM:

The failure of the various schools of economics to properly treat economic rent and rent-seeking behavior means its downright silly to try to talk about "capital" being correlated with any kind of creative merit. The rent-seekers are hollowing out the upper classes to an extent now that it is no longer reasonable to talk about "economic classes" as ontological commitment. It misses the real dynamics that have been going on since Henry Ford predicted the conflict between finance and creative industry.

Wolf-Dog said at February 22, 2014 3:34 PM:

Randall Parker: 1) "Capitalists will do very little investing in Venezuela and the most productive and able people in Venezuela will look to escape. 2) " The middle classes in industrialized countries should be very mindful about whether immigration policies and other policies will drive their most able to somewhere else."

1) The dysfunctional countries still have the raw materials that the industrialized countries and capitalists need. Ultimately, capitalists cannot survive without real economic activity of goods and services (speculative financial trading is profitable only in the short run). Capitalism is only one form of free enterprise, in the sense that the transmission mechanism for the exchange of goods and services is money (to be more exact, other people's money). But if only it were possible to make raw materials (and for that matter all economic activity) fungible without using other people's money, this would be tantamount to free enterprise without using the capital of other people. This kind of economy might be possible when computers become capable of keeping track of all exchanges of goods and services. So free enterprise does not have to depend on other people's money, it can depend purely on the choices of the owners of goods and services.

2) Able and talented classes of industrialized countries can only escape to those countries that are not in danger of being overrun by looter countries.The "safe" rich countries that the rich might emigrate to (such as Singapore that many wealthy Americans choose after renouncing the US citizenship), happen to be safe only because of the belief that no neighboring country will annex these. It turns out that there are very few few non-European countries other than Japan and South Korea that the US is currently willing protect militarily. Switzerland is the only elite country that might accept wealthy Americans, but the safety of Switzerland is only guaranteed by powerful military powers like the US and UK. So when the chips are down, only the militarily powerful countries will protect the rich. It turns out that Singapore is a very small place, and there are very few countries the able and talented classes can escape to, unless military security is there. And if the US declines below a certain level, this protection will not be there anymore.

Randall Parker said at February 22, 2014 9:47 PM:

James, This is an easily falsifiable statement:

The failure of the various schools of economics to properly treat economic rent and rent-seeking behavior means its downright silly to try to talk about "capital" being correlated with any kind of creative merit.

So then is the correlation between capital ownership and productive work zero nor negative? You really want to defend that?

Look at the vast majority of people who own no stock or own no business. Are they are productive on average as the people who own stock or who own their own business?


Some dysfunctional countries have substantial amounts of valued raw materials. But most do not.

Look at Venezuela. It has a lot of heavy oil that is expensive to extract. The government has starved investment for extraction and production has dropped. A country can be too messed up to do much resource extraction.

Singapore: They'll probably get protected by China if the US can't do the protection.

Australia and New Zealand seem like they could become places for upper middle classes to migrate to.

Wolf-Dog said at February 22, 2014 10:43 PM:


According to this article, in Venezuela the cost of extracting the worst oil is around $30 per barrel. Given the current price of oil, and given the enormous reserves of thick oil that Venezuela has, this is not too bad. The problem is their inability to develop it. But China is very interested in developing it for them.


But my main point is that the US is still the best country for talented people to migrate to. For security-conscious middle class people, Australia or New Zealand might be interesting, but for those who want to be the forerunners of technology, the US is still the best place to be.

James Bowery said at February 23, 2014 3:54 PM:

Randall, This is very similar to the argument I have with Charles Murray's measurement of "human accomplishment":

What "accomplishments" have a negative valence?

Likewise, what "creations" of the wealthy are actually destructive of potential?

Its hard to defend any particular point of view in the social sciences since we don't sort proponents of social theories into governments that test them. We in effect, have no control groups for rational comparison. Without control groups, public policy inference of causation from correlation is largely determined by who is in power. If you're not in power, correlation doesn't imply causation. If you're in power, you can load your policies on a couple of data points trumpeted in media and academia and trash civilization before anyone questions you.

Bill Gates is a perfect example of the kind of rent-seeking behavior among concentrated wealth that is destructive:

Moore's Law had enormous potential. The network effect aka network externality of software virtually ensured that the guy who owned the copyright on the OS distributed on the IBM PC would become the world's richest man -- regardless of the quality of that OS. Anyone who was around OS design in the 70s knew, when MS-DOS hit the market, that it was a very poor exploitation of the potential of Moore's Law. There was a virtual religious cult built around the Mac as a reaction to this, but it was doomed by the network effect.

So, we have the world's richest man -- supposedly the exemplar of your "capitalist" -- being also my exemplar of destructive potential.

Under my system of taxation (no taxation of economic activity -- only taxation of liquidation value of assets) the world would have been a _very_ different place for one simple reason:

Economic rent streams would be appropriated for public use* rather than enriching the destroyers of technological civilization.

*Note that in my 1992 proposal for net asset taxation I did emphasize the need for distributing tax revenue in an unconditional basic income, rather than merely replacing private sector rent-seeking with public sector rent-seeking.

Mike Street Station said at February 24, 2014 11:42 AM:

Australia sounds like it's the most likely candidate of the Anglosphere nations to collect the people of high ability from around the world. Their immigration system already has a fairly well done point's system that favors skills and abilities that are useful. In the US, we favor law breaking. If you crash the border and set up shop, you are more likely to eventually get legal residence here than if you follow the rules and come in the right way. That could take decades depending on what country you're from.

So we are creating a nation of people who have learned that if you want anything done, break the law.

PeterDownUnder said at February 25, 2014 2:40 AM:

Interesting statement 'Mike Street Station'

Having grown up, went to university and been working professionally for 2 years, I am DESPERATE for the opportunity to live abroad.

I absolutely DETEST having to pay close to 50% tax here. And also if I work overseas I will no longer be paying my student fee debts which are tied to your tax in Australia, so as long as you're not making an income in Australia you can bypass paying your fees indefinitely.

But it seems that we are one of the few economies in the world where it hasn't tanked yet.

But I would LOVE to work in a low tax low rent environment in my youth at least. Perhaps Singapore or maybe the USA.

Mike Street Station said at February 25, 2014 7:10 AM:


As you said, your economy hasn't tanked yet, while ours has been in recovery mode for 5 years, and my well still be "recovering" 5 years from now. Anyway the US is busy shedding it's formerly low tax ways so I doubt it will remain a place of low taxes in the future. Particularly as we legalize tens of millions of low skilled workers in the very time that their jobs are disappearing, so our social support system will be on overdrive for the next few decades until it collapses.

refuguist said at February 25, 2014 12:26 PM:

Peter, I recently migrated to Australia from the US. Australia is doing _much_ better than the US. When I look around and talk to people, it becomes clear to me that the economic numbers are not revealing the extent of the gap. The taxes are scarcely higher, while the Australian public services are far better. Most Americans are working much harder than Australians and getting less for it. Australians seem to not know how good they have it. Unless you need to be in Silicon Valley or Wall Street, stay here and vote for lower taxes. Then go on a long vacation to the US and look at how people are actually living. Try taking a bus to the city centre after dark there. Try this in DC, Detroit, LA, etc. Meet some middle class parents and ask what they are paying for their kids' university tuition. If they go to an elite school, and you include the full eventual cost of loans, they are probably paying around ten times what you did for an education that is not appreciably better. I have also found the cost of living comparisons to be erroneous. For instance, the lowest quality meats and cheeses available in Australia are equal in quality to the mid-grade or better foods at an American supermarket. This skews comparisons. Lastly, it is worth a lot to have a lower class that is a blue-collar working class and not feral scum. Not just on a moral and charitable level, but in terms of the overall effect on the country and your daily life. When you go to buy groceries and you cashier is a meth mutant, it harms your emotional state no matter how wealthy you are.

Ross N. said at March 7, 2014 10:22 AM:

I would like to add more on the nature of rents. Rents are the costs above the necessary cost of production. For example, if we have a non money economy - let's say it is an island; I and my corporate band of brothers take the best fishing grounds and patrol said grounds. We then extort our island compatriots for favors for our now hard to get fish. We have limited access to the fish, driving the cost up above what is necessary. If I'm one of the in-group that controls the fishing grounds, I can extort rents from other sectors of the economy. Since this example is a non money economy, I might - say- want the best women to be mine. They might be starving and hence I'm taking very high rents. I can easily get fish.

Capitalism has a problem with capital. Usury, or interest on money, passes through the double entry ledger, to the banker's own ledger. It lands there, and he pays out some of it to appease savers, and some to pay his costs. All banker money comes into existence from loans, therfore it is an hypothecated IOU. There is no extra money to pay the usury, so this mechanism always drains the lower loop of producers. An extra to pay the usury comes from deficit spending by government, or collapsing debt contracts during depressions. In the case of depression, that is harvesting real assets (land usually# for the usury, and hence the debt contract can be ripped up - the debts disappear.

So, usury passes through the double entry ledger, and then paretos to the top of the banking pyramid. This is why the top 1% are getting so wealth. These wealth schemes are really rents, and have little or nothing to do with productivity.

When Tesla gave us the gift of distributed power, it gave labor immediate benefit - as labors muscles was amplifed by orders of magnitude. All economies are gifts of the earth + labor. Money is only a transfer medium to allow our outputs to be exchanged. When rentiers stick out their ladle and sip from the money stream, they are distorting the economy and making it inefficient. Capitalism can have dead capital and productive capital.

Trading usurious mortgage backed securities for QE money #created at the FED out of nothing#, rewards the original TBTF banks for their usurious/rent schemes. Again, it has nothing to do with intelligence, but everything to do with rigging the game for rent taking. The rentiers are stealing labors output, but most people, including those with high IQ's do not, or cannot understand the money mechanism.

It's been estimated that about 40% of our money has negative costs associated with usury. Debt mechanisms and other rents probabl add another 20%. Worldwide the transfer from the poor to the rich #dead capital) is about $7T. In the U.S it is 2-3T per year.

There is plenty of wealth and capability in our land and our people. It is the money system and defects in Capital that drive most issues today, and the elephant in the room is continually ignored.

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