Economic inequality: What’s new?

"I’m a capitalist, and even I think capitalism is broken,” said Ray Dalio, the founder of Bridgewater, one of the largest private investment funds in the world. According to Forbes, Dalio ranks 60th on the list of richest people on the planet. “I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die,” he said. “This is now true for capitalism.”

Jamie Dimon, the head of JPMorganChase, is also concerned about the health of capitalism. Dimon, whose salary last year was $30 million, says: "[Capitalism] has helped lift billions of people out of poverty… This is not to say that capitalism does not have flaws, that it isn’t leaving people behind and that it shouldn’t be improved.”

The lack of consensus has a lot to do with differing opinions about the root causes of inequality

This is something new. Bashing capitalism and the inequality it generates and perpetuates is as old as Karl Marx. What’s new is that the titans of industry, whose interests are intricately tied to capitalism, are criticizing it as fiercely as the most aggrieved left-wing activists. The businessmen want to repair it, while radical critics want it replaced.

Big business leaders are not the only ones newly critical. According to a recent Gallup Poll, the share of Americans between 18 and 29 who have a favorable view of capitalism has fallen from 68% in 2010 to 45%. Today, 51% of them have a positive opinion of socialism. This is also new.

In the academic world there are the same concerns. Paul Collier, for example, is a renowned economist and professor at the University of Oxford who published The Future of Capitalism last year. In his book he warns that modern capitalism has the potential to lift us all to an unprecedented level of prosperity, but nowadays it is morally bankrupt and is heading toward a tragedy.

Criticisms of capitalism are many and varied and, most of them, very old. The most common is that capitalism condemns the masses to poverty and concentrates income and wealth in a small elite. This criticism was temporarily tempered by the success of countries such as China, India, and others in reducing poverty. This was due, to a large extent, on the adoption of liberalizing reforms that stimulated growth, employment, and increased incomes, creating the largest middle class in history… another novelty.

Criticisms of capitalism are many and varied and, most of them, very old

But the financial crash of 2008 brought back concerns about inequality and revived people’s skepticism against capitalism. For countries like Brazil and South Africa, economic inequality had been the norm, but for others it meant the return of a painful reality that many thought had been overcome. Several European countries as well as the United States joined the group of nations that saw inequality grow.

With the recent eruptions of populism and political instability, a widespread sense of urgency over the need to reduce inequality became a fixture of national conversations in many countries. But the agreement on the need to intervene has not been matched by agreement on how to do it. The lack of consensus has a lot to do with differing opinions about the root causes of inequality. For Donald Trump there is no doubt: China’s imports and illegal immigrants are the reasons for the economic suffering of those “left behind” and also the explanation of why so many Americans can’t reach the American Dream.

But that’s not true. Studies show that the main drivers of inequality are the new technologies that destroy jobs and keep salaries low for blue-collar jobs. A variant of this theory is that a growing number of sectors are dominated by a small number of very successful, large companies whose business strategies inhibit wage increases, inflation, and economic growth. In the United States, the financial and health sectors – with their disproportionate economic weight and political influence – are often cited as examples. For economists such as Thomas Piketty, Emmanuel Sáenz and others, economic inequality is mainly caused by the unequal ownership of capital, both private and public.

But these generalizations are deceptive. The causes of the increase in inequality in India are different from those of the United States, and the culprits in Russia are different from those in Chile or China. In some countries, the main cause of inequality is corruption, in others it is not.

Most likely we are simply re-fighting the ideological wars of the last century and these new challenges will require new ideas. The impact of Artificial Intelligence on inequality, for example, is still uncertain, but there’s good reason to believe it will be large. And this one innovation can make all our received ideas about the causes of inequality and its consequences obsolete. This and other changes of the 21st century will create new and powerful sources of inequality that will require new and equally unprecedented policies to close the gap between rich and poor.

@moisesnaim