In our last column, we wrote that ensuring economic and social stability in the coming years requires paradigm shifts in central banking in the United States, with a shift away from obsession with asset prices. The second call was for capitalists with conscience. Recent evidence is discouraging. The Federal Reserve looks all set to cut interest rates later this month when macro-economic fundamentals actually call for higher rates. The chairperson of the Federal Reserve has allowed himself to be boxed into a corner by both the President and financial markets. In doing so, he is merely acting as the safe-keeper of shareholders’ interests over that of other stakeholders in the economy. In other words, he is reinforcing the trends that have been underway in the three decades prior to—and culminated with—the crisis of 2008 that have torn nations apart since then.

A recent National Bureau of Economic Research Working Paper published in May 2019 (‘how the wealth was won: factors shares as market fundamentals’) shows that between 1989 and 2017, majority of wealth accruing to equity holders did not come from compensation for bearing risk, but from reallocation of workers’ share towards shareholders. In contrast, in the post-war period from 1952 to 1988, economic growth was overwhelmingly important rather than reallocation away from workers.

What enabled shareholders to divert income from factors of production mainly to themselves? In a way, another paper released in June 2019 (‘The failure of free entry’ by Gutierrez and Philippon) shows that lobbying and regulations entrenched the power of incumbents and prevented free entry of firms, thus inhibiting competition and a fairer distribution of economic rents. One of the pillars of modern capitalism—free entry—has been yanked out. Their analysis covered the period since the eighties in the United States. These academic papers reinforce the anecdotal and other evidence that have been piling up.

When immediately after demitting office, a President of the United States and a Chairman of the Federal Reserve—the premier executive and regulator, respectively, in the world’s largest economy and most powerful nation—accept handsomely compensated speaking tours sponsored by the very same interests who benefited the most from their policies and are arguably at the vanguard of political capture, then it is clear that the captors and the captured have exempted themselves from the social compact that held for the first few post-War decades.

The elite capture of rule-making institutions is the most disturbing trend of our times. The wheels of history have come full circle. The centre no longer holds. This is history repeating itself big time. Still, these would have been a matter of concern, but not alarm, if this were all, and importantly, the safety valves of democratic politics were active and healthy. Democracies had sought to address the problem of rent-capture by the powerful and well-connected through sufficient institutional checks and balances against egregious excesses by the dominant classes and safety-valve institutions of “countervailing power" as described by John Kenneth Galbraith. Institutions like labour unions and collective bargaining, consumer organisations, welfare state, social democracies and so on helped smooth the sharp edges of capitalism.

If we accept the aforementioned dynamics on both the economic and political realms, the scope for such safety valves to function has shrunk dramatically. They have borne the brunt of the austerity policies that governments have pursued either on their own volition or by force. Consider the direct squeeze on funding for local governments and their increasing indebtedness, pervasive and sharp across the US and UK; the pruning down of welfare programmes; the creeping privatisation of essential public services and their transfer to private interests with questionable intent. While the richest benefit by way of tax exemptions on their bloated medical insurance policies, the poorest are left to fend for themselves by shopping for opaque insurance policies from the market.

In a delightful redraft (‘What Would Karl Marx Write Today?’, Financial Times, 9 March, 2018) of The Communist Manifesto, Frank Partnoy and Rupert Younger replaced the main protagonists, ‘bourgeois’ and ‘proletarian’ with ‘Haves’ and ‘Have-Nots’, respectively, and found that three-fourths of the original prose would retain relevance today. They found remarkable similarity in the dynamics of class struggle between Marx’s times and today’s technology- and finance-dominated capitalism. Inequality and political capture stood out as the recurrent headline themes. Their conclusion, “The Have-Nots have nothing to lose but their chains. They have a world to win"!

The elite capture of institutions (thesis), resultant opposition (anti-thesis), and the re-circulation of elites (synthesis) have been a constant in history. Public revulsion in many countries in the West has rendered the “thesis" unsustainable while the “anti-thesis" is still evolving, and hence, chaotic and uncertain. In the circumstances, history teaches us that all we can expect is a tumultuous period leading to an uncertain synthesis. Brace yourself.

V. Anantha Nageswaran and Gulzar Natarajan are the joint authors of ‘The Rise of Finance: Causes, Consequences and Cures’

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