Class Warfare

I spoke recently at a conference where I was followed to the podium by Fox's Tucker Carlson, who, among other things, railed against the instigation by the left of “class warfare”, pointing out that doing so is little more than singling out an unpopular minority group, (i.e., the rich), for higher taxation. (Though the minority group that happens to have the largest share of the item that is the war's objective). Tucker said we are seeing an ever shrinking number of people paying an ever greater portion of the taxes. (Though they also are the ever shrinking number of people acquiring an ever greater portion of the wealth).

There is little that matches the artfulness in waving off criticism of the widening income gap as “class warfare”. And there is little that matches the gullibility of those who follow along. There seems to be agreement all around that action to change the situation, for the poor to improve their lot at the expense of the rich, is an affront to civil society. I am not picking sides in this, but I believe such a "war" can be justified, and indeed ultimately is inevitable. 

It is hard to discuss class warfare without referring back to the industrial revolution. Then class warfare centered on the length of the working day. A tightly defined working day only appeared with the advent of the industrial revolution. Before then laborers worked when they needed money, and then quit for a time once they fulfilled their needs. But regimentation and a dependable workforce became necessary once there was machinery to run and capital invested, and so with industrialization came an enforced workday. So it is not surprising that Marx stated the central battle of class warfare at the time in terms of the working day:

The capitalist maintains his rights as a purchaser when he tries to make the working-day as long as possible, and to make, whenever possible, two working-days out of one. On the other hand...the laborer maintains his right as seller when he wishes to reduce the working-day to one of definite normal duration. There is here, therefore, an antinomy, right against right, both equally bearing the seal of the law of exchanges. Between equal rights force decides. Hence is it that in the history of capitalist production, the determination of what is a working-day, presents itself as the result of a struggle, a struggle between collective capital, i.e., the class of capitalists, and collective labour, i.e., the working-class. – Marx, Das Kapital

Marx begins with an acknowledgement of the perception of rights on the part of both the capitalist and the laborer, but then argues that the question of the length of the working day cannot be solved by an appeal to rights, but only through class struggle, wherein “force” decides between “equal rights”. (Force can mean physical force, but can also mean the force of the political process).

The central point is that there is no way that this question of the working day or any number of other social questions, though posed as rights by the groups in conflict, can be resolved without being reformulated in terms of class struggle or class warfare. Unlike civil rights – the rights which our society regards as inalienable – it is difficult to do much more than simply take sides when it comes to economic rights, because what we call economic rights are really nothing more than the bargaining in an exchange between those providing labor and those providing capital, those creating jobs and those taking the jobs, or whatever. There is class warfare because the social and economic pie has to be split, and there is no objective way to do so. The war can be active or passive, the sides can have a truce, one side can temporarily be resigned to its lot or be held in check through force, but the conflict never ends. A change in generations or in social consciousness, and things will flare up again. There are some areas of fairness in the civil sphere – freedom from slavery, torture and piracy – but what are the rights inherent for a particular term of exchange between the parties in a trade?

Given this, we are left in a quandary because we don't know what to make of class warfare. And we don't know because we are not trained to make anything of it. It is not part of any self-respecting course of economic study. The introduction of class warfare marks a radical departure from the tenets of contemporary economics because as far as economics goes, the terms “class”, “warfare”, and “struggle” are, well, radicalized. Yet there has been an epic, historical struggle over the length of the working day writ large, extending to issues like retirement, the definition of the time worked, and the share of economic rents, and this is the struggle that is still with us. Clearly fundamental to our economic history and our capitalist system, this is ignored in our economic studies.

The time spent working and the share of that labor that accrued to the capitalists during the emergence of the industrial revolution is akin to the taxes and redistributions from the entitlement programs and government subsidies that are in the cross hairs today. Indeed, the timeline extends back even further. The benefits that we call entitlements are similar in our more advanced society to the rights of subsistence for the serfs during Feudal times – rights which were implicit in the social contract between lord and serf, and which were broken at the peril of revolt. The social contract between the lord and serf, as with any contract, had obligations on both sides. The serfs paid a portion of their production and provided service to the lords. The lords organized the serfs to defend against invasion, enforced a rule of law, and assured the serfs, as much as possible in that age, of subsistence. Is this so different from social contracts of today?

Even admitting to the term “class warfare” concedes a lot. To warn against class warfare only makes sense if there are classes, and more than that, if there might be a reason to be answered for one of the classes to do battle. (For otherwise there is the simpler course of pointing out that no differences exist). There is only so much to go around, and the efforts of one group or the other to assert a claim to a larger share can be called class warfare. It can be a war waged through changes in the taxes, in a restructuring of incentives and pay scales, an increase in the benefits given to the poor, or revolt. The first three are legitimate battlegrounds in a democratic society such as ours, and it is really taking a good joke to far to suggest it is damaging to the body politic for members of society to look at the differences in income and take action to redistribute in their direction.


The views expressed in this post are strictly my personal views. 

Foxconn and China's Capitalist Revolution

The promises of reform at Foxconn are the latest of many as China painfully adjusts to the inevitable social realignment that comes with a capitalist economy. What is occurring in China now happened in Europe during the transition from feudal to industrial society. That transition is more germane than it might appear at first blush because over the past two generations China has been emerging not from a Marxist, but from a feudal state. Indeed, if one were to take Marx's view, China could only arrive at communism through capitalism, and only arrive at capitalism through feudalism. For in Marx's view, as Schumpeter writes, “it is essential for the logic of capitalism, and not only a matter of fact, that it grew out of a feudal state of society”. Marx's vision flows from feudalism through capitalism to a post-capitalist society that can only arise once capitalism has run its course, after it has not only provided the necessary social and economic foundation but also has become unsustainable.

European feudal society was governed by what is termed “extra-economic” means, namely by the power of culture to determine and maintain rank, by the social contract between the serfs and the lords – a contract that by its long custom became imbued with the power of law – and, of course, by military might. Economic production was dictated – though obviously in a much simpler economy than today – by the lords, who parceled land to tenants. The serfs put up with their lot because of a small carrot and large stick, a backstop for subsistence and the threat of force.

The uniformity of the feudal classes can be overstated, (though Chinese society can be overstated in a similar way). There was gradation in economic status among the serfs, and enough freedom for some to engage in commercial capitalism and become relatively well off in their station. And there were lords who, though landed and of superior rank, declined economically to the point of life as paupers. There were also times of labor shortages, such as shortly before the ravages of the Black Death in 1348, and of course far more thereafter, when the lords bid for the loyalties of the serfs. And in other times the serfs would threatened mass revolt or burn down structures and fields if the relationship between serf and lord was not respected. (Knights also could vacate oath of allegiance in the case of certain defaults in the social contract).

Early capitalist society spawned by the industrial revolution of the late 18^th and early 19^th century experienced many of the same social phenomenon as we are now seeing in China. (Note: Although we use the term “capitalist”,  “industrial” may be a better term because capitalism has been around in one form or another since the 12^th century). In the early period of the industrial revolution as in China today,  overworked masses toiled mindlessly in hazardous conditions for close to subsistence wages while a politically connected bourgeois seized the reins of the capitalist plant. In England it was largely due to the conscience of those within the political system who recoiled at the human toll that pro-labor reforms and regulations were forced upon the new capitalist class. In the case of China, although there are protests and the simmering of revolt, the internal pressure is far less of a factor than the conscience and economic force of the international community.

If the momentum from Foxconn carries through, it will have effects beyond increases in prices and wages. If it progresses along the lines of the West's transformation, it will also have an effect on social and economic mobility. That change will alter Chinese society from what some have argued is currently a different sort of capitalism from that practiced in the West, but is really much like the loosening of the bounds of feudal society that appeared in pre-industrial Europe. (Which was not such a backwater; there was entrepreneurial commerce, power plants, specialization of labor, large-scale mining and of course a well developed financial sector supported by laws and accounting well before the industrial revolution took off).

Mobility through the ages

There are a lot of metaphors thrown around for economic and social mobility: Schumpeter compared the mobility of economic classes to people shuffling around different quality accommodations in "a hotel or an omnibus, always full, but always of different people". More common is moving up and down the economic ladder, more novelistic, the Horatio Alger stories. Here I will use a topographic metaphor.

Feudal Economy.

The feudal society was a subsistence one for most of the population. Even when the serfs were not at subsistence levels, they were always a poor harvest away. The serfs had little opportunity to improve their prospects. The contrast was great between the serfs and the feudal lords, who lived substantially above subsistence, who could extract extra-economic rents from the serfs, and who were protected by the legal rights and station of being landholders.

In terms of mobility, the serfs inhabited the land in the marshes of bare subsistence while in the distance, above impassible cliffs sat the lords' manors. The stability (or stagnation) of this feudal society was rooted in the fragility of life and fear of famine. In such an environment the strict oversight of the lord could be justified, though no such justification was necessary nor put forward. Still, serfdom was not slavery, and the lords control was limited. The potential for famine also formed the basis of restrictions on free trade and capitalist enterprise for the most basic of commodities. These restrictions were not only justifiable out of concern about the masses welfare, but also out of concern for the revolts that could be precipitated by scarcity, especially if perceived as coming from mismanagement or corruption. Because of this, the growing and marketing of grain was a sociopolitical rather than economic endeavor.

Sales were consummated based not on a notion of the best price, but rather the just price, which was often determined by the Church. As early as the 12th century English law dealt harshly with free market acts, especially for foodstuffs. Engrossing, (cornering the market by buying up large quantities of goods and holding them off the market); forestalling, (buying up goods before they reached the market, i.e. before they reached the market stall); and regrating, (buying up goods in a market only to then resell them in that market at a higher price), were all felonies. The farmer, whether serf or tenant or yeoman, did not have unfettered ownership of his crop. He could not store it, nor could he sell it to a distant market or to a middleman. He sold it to the local market for the just price. And further up the production chain the same held true. The miller and the baker were similarly constrained to sell their product at the just price, and could not enrage in any market activities that might distort that price. 

In terms of China, this should ring a bell for those with memories of the sixties. 

Industrial Economy.

The feudal relationships loosened to allow more economic and social mobility. A financial system developed to support the merchants and international trade, and land that had been locked up by primogeniture was freed to become the collateral for loans or to be sold to finance new enterprises. With the industrial revolution came a degree of production and efficiency in agriculture that lifted most people above subsistence. In fact, having a large population above subsistence was an essential condition for industrialization. No one could man the factories if they were just scraping by on their plot of land. And, conveniently for the labor needs of the factory system, the efficient methods of agriculture came with the policy of enclosures, which brought the land into fewer and fewer hands. It is ironic that one of the conditions for the oppression of labor at the start of the industrial revolution was for them first to be freed from the shackles of feudal subsistence.

But once early industrial society took root through the early part of the industrial revolution, the landscape for the serfs-turned-proletariat was not much different than it was for feudal society. The factory workers still occupied a plain below the cliff, but now above that cliff was the manor of the bourgeoisie rather than of the lords. Then, over time, the industrial revolution gave way to increased economic and social mobility, as well as more variation in income and ability to consume. The class distinctions of serf and lord, and then of worker and capitalist began to blur as the factory system gave rise to the company, and as the steam engine gave way to the less centralized electric motor, allowing smaller units of production. It also created more equality as uniform, mass produced goods were consumed across society. As Mumford has pointed out, there is no difference between the light bulb of the very rich and the very poor; more than any political system, it is the industrial process that is a communist.

The cliff began to erode into a hill which most of the population could ascend or descend. This is the world where there is an expectation of one's children doing better, not just because the economy grows, but because the slope is easily traversed. And it remains the world of today, though the topography is beginning to shift again.

Post-industrial Economy.

The time is coming when we will meet ourselves standing at the door, China's masses entering into the more socially conscious industrial society that we came to with the "second" industrial revolution in the late 19th century. And as that time comes we will then be heading out the back, into a virtual society.

We are seeing a world that is qualitatively different from the past. Many product that we consume in our everyday lives were not in the realm of imagination even a generation ago. We may not know what the virtual, post-industrial society will become anymore than someone living during the first glimmers of the industrial revolution could envision the world of today, it may be a world that is still relegated to science fiction. But thinking back to the difference between the feudal and the industrial, the long time of that transition and the dislocations that lay in store for society, what we have seen in the last twenty years has the same feel.

I have already discussed my view of the implications of this world for income distribution and for economic mobility.  In a nutshell, the more we move into caring about the virtual, the more the hill will turn into a plain, at least for the large subset of the population that is secure in the essential needs of life.  

Adam Smith and Joseph Schumpeter on the Issues of the Day

On the issue of the bifurcation of society and the widening income gap in the U.S., and the strains appearing from the factory system in China that have recently been highlighted, there is useful commentary that comes from a surprising quarter, or perhaps not surprising in itself, but in the view taken on the subject: Both Adam Smith and Joseph Schumpeter, defenders of capitalism as the source of “universal opulence”, see a road leading from capitalism to the disenfranchisement of the worker and the vaulting of the elite.
  
Adam Smith
Adam Smith is a social philosopher grounded in the search for what is moral and what provides man with the greatest good, with universal opulence. It is to this end that he promotes self-interest as the core of economic exchange, and division of labor as the core of efficient production. But he also admits to unintended consequences of human action and recognizes that government action is required to dampen these negative consequence.
 
Smith: Political influence
We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. – Adam Smith, The Wealth of Nations

Smith recognizes that workers and employers would jostle for an advantage by using political influence, and he also recognizes that this would be an unfair fight, with the employers having stronger influence and, because they were a far smaller group, being better able to do their lobbying behind closed doors. This was already evident; as he points out, the law prohibited workers from unionizing but allowed employers to organize to keep wages low:

Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades, and in particular places. Thus the 8th of George III. prohibits, under heavy penalties, all master tailors in London, and five miles round it, from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a-day, except in the case of a general mourning. Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Competition was stifled through legal restrictions on the freedom to sell commodities and to supply labor. The government legalized monopolies that gave exclusive rights to sell products, and to limit the supply of labor for some occupations through guilds. Smith repeatedly observes that self-interests would be promoted legislatively at the expense of the public whenever and wherever possible, and this would be more successfully accomplished by the wealthy and well-connected “masters” who could peddle their influence largely unseen: Masters...enter into particular combinations to sink the wages of labour....These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people.

Smith: Regulation
...the clamour and sophistry of merchants and manufacturers easily persuade them, that the private interests of a part, and a subordinate part, of the society, is the general interest of the whole...everywhere finally paid by the landlords, farmers, and labourers.– Adam Smith, The Wealth of Nations

Adam Smith recounts many failings of the market: price fixing (“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”); trade restrictions and duties extending from towns to international trade; and influence peddling to Parliament.
  
But it was not the gaming of the economic system, but rather the imposition of the factory system with the resulting long hours of monotonous labor that rose to the issue of greatest concern. Smith holds the view, later expounded by Marx, that men find their individuality and strongest link to society through their labor, and sees in the conditions of the worker a debilitating effect on intellectual and social vitality:

The man whose whole life is spent in performing a few simple operations . . . has no occasion to exert his understanding. . . . He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgement concerning many even of the ordinary duties of private life. . . . It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.

Here Smith points to the need for government intervention:  the alienation of the masses may be remedied if the “government takes some pains to prevent it”. In particular, Smith proposes universal public schooling, a proposal at variance with the view at the time that education would foment rebellion.

Joseph Schumpeter
Like Adam Smith, Schumpeter views capitalism in positive terms, as a force for improving society and making men better off. And like Smith he sees the emergence of a capitalist elite that will by their economic force ride over the mass of workers. (The growing pains of the Industrial Revolution with farmers and artisans displaced and then engulfed by the factory system was an object lesson that was still only a few generations old when Schumpeter began his academic career). Indeed, his view is that this ultimately will be the demise of capitalism and the rise of socialism. Thus he sees the same end for capitalism as does Marx, but through a path that is largely opposed to Marx's: Not the failure but the success of capitalism, success that is concentrated on the innovative elite, will lead to social revolt.

Schumpeter: The elite
That lambs dislike birds of prey does not seem strange: but that is no reason for blaming the birds of prey for taking the little lambs. And if the lambs say among themselves, "These birds of prey are evil, and whoever is the least like a bird of prey, indeed whoever is its opposite, whoever is like a lamb ―would he not be good?" then there is no reason to find fault with this as an ideal, though the birds of prey may view it with some irony and say to themselves, "We bear no grudge against these good little lambs, we even love them: nothing is more tasty than a tender lamb."  – Nietzsche, On the Genealogy of Morality

Schumpeter's view is rooted in the prevailing social philosophy of his day, a philosophy founded on that of Nietzsche, that supports the role of the elite: Society and capitalism depend on the elite, and the social and political environment should protect the status of the elite, nurture their activities, and even extend their influence in government policy. Schumpeter extolls the elite, the force for capitalist growth, while anticipating the effect of their success on the masses – the implications of the resentment of the many against the wealthy few.

Nietzsche's theme of the elite he thus naturally pairs with another, that of “Ressentiment”: the resentfulness of the inferior for the superior, and the tendency of the many to devalue and even revolt against the successful. (A revolt that in its least disruptive and passive form Nietzsche sees taking the route of Christian faith – Nietzsche argues that Christian meekness and humility is a means for the weak and inferior to feel comfortable in their lot, even to feel morally superior to the elite).  Schumpeter portrays Ressentiment as having an inescapable result; the success of the elite, especially levered by the capitalist system, leading to an increasing disparity with the masses still stuck in the status quo with their condition perhaps improving in absolute terms, but not, as is most important for the survivability of capitalism, in relative terms.

Thus, like Marx, Schumpeter argues that capitalism creates its own opposition. But according to Schumpeter, that opposition comes not from the existential impoverishment and alienation of the worker but from the resentment created by the successes of the very wealthy. It is in this way that Schumpeter, though through an argument in opposition to that made by Marx, comes to same conclusion, that capitalism sows the seeds of its own destruction:

Every social system is sensitive to revolt and in every social system stirring up revolt is a business that pays in case of success and hence always attracts both brain and brawn. It did in feudal times—very much so. But warrior nobles who revolted against their superiors attacked individual persons or positions. They did not attack the feudal system as such. And feudal society as a whole displayed no tendencies to encourage—intentionally or unintentionally—attacks upon its own social system as a whole.

 
Schumpeter: Education
Broadly speaking, conditions favorable to general hostility to a social system or specific attack upon it will in any case tend to call forth groups that will exploit them. But in the case of capitalist society there is a further fact to be noted: unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.  – Schumpeter, Capitalism, Socialism and Democracy

In contrast to Adam Smith, who advocated for universal education at the expense of the state as a means of lifting up those alienated by the enclosures movement in agriculture and the factory system in industry, Schumpeter sees non-vocational education as a spur to resentment and a threat to capitalism.  “The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” University education “may create unemployability of a particularly disconcerting type” with graduates that are not well trained for any vocation, and end up with jobs and at salaries that they find beneath them. They become discontented, and “discontent breeds resentment” that in turn can lead to revolt. Schumpeter's observations echo those of Voltaire and others in Adam Smith's time who were concerned that education would lay bear their lot and thus magnify the discontent of the lower classes.

Note: This post heavily draws from The Mind of the Market.

The Twilight of the Leisure Class

Conspicuous leisure, conspicuous waste, conspicuous consumption. Veblen coins these terms in Theory of the Leisure Class to describe the strategies the noble and priestly classes employ to assert their status. Veblen observes that a life of leisure is the readiest evidence of the superior class, while anything having to do with the work-a-day world of earning a living is the occupation of the inferior class.

This argument does not ring true for today's society. If someone gave you the advice, “If you want to show that you are better than everyone else, then hang around obviously doing nothing productive, and even better, waste resources.” you would think they were utterly pathetic. And the fact that it doesn't ring true means we are different from many societies that have passed before us. We are seeing the twilight of conspicuous leisure, and of conspicuous waste and conspicuous consumption as well.

For the first two this is almost immediately evident. Leisure, conspicuous or not, is no longer viewed with envy.  Late-night infomercials might depict a life on a yacht free from work and worry as the ideal end result of the various get-rich-quick schemes, but the wealthy in society no longer are a class at leisure. The “one-percenters” work for a living, and the extremely wealthy who do not work for a living instead work for philanthropy. (So maybe we can add conspicuous philanthropy to the list, though the wealthy could then fairly complain that they can't win no matter what they do).

What goes for conspicuous leisure goes even more so for conspicuous waste. In our ecologically-conscious world, the notion of treating resources with disdain no longer signals pecuniary superiority, but rather boorishness and profligacy.  Our antipathy towards waste reflects in us being more frugal in what we consume. Veblen made a tight connection between conspicuous consumption and conspicuous waste – the former almost necessarily leads to the latter, so an end to the latter cannot help but reduce the former.

For conspicuous consumption, all you have to do is look around using a perspective from the consumption and advertising over the past decades when advertising appealed to being the pride of your family and the envy of you neighbors, to projecting success and culture, to commanding respect.  In the snail’s pace of social change, it wasn’t so long ago that we had the literal unveiling of the new year's automobiles, the adding and decreasing of chrome bumpers and ornaments, the rising and falling of tail fins, with the conspicuous consumer trading in for the new model every year. Now, with the exception of a smattering of high-end goods and designer labels, advertising focuses on the qualities of function and design; how much fun you can have with the product, how it will make your life easier or make you more attractive. If it is appealing to any image, it is not the one of “If you buy this, people will see that you must be rich and important” that was so dominant in the past. 

The end of the consumption arms race
The decline in conspicuous leisure knocks at least one leg out of the the relationship between tax breaks for the rich and job creation, because this relationship depends on the notion that if the rich, who are taken to be the job creators, are taxed more they will work less. But if status is evoked through work rather than leisure, then that relationship does not hold.  I do not know of the empirical work that has established this link in the past, but even if it exists, I question its relevance today. It is hard for me to imagine a CEO walking away from his job because his $25 million salary payday just nets him $15 million rather than $18 million.  Or for that matter not working as hard.  But in any case, one reason to walk away, the prestige of conspicuous leisure, has disappeared with the changing ethos of our society.

A reduction in the demand for conspicuous consumption also has implications for the economy. A drop in conspicuous consumption, not to mention in conspicuous waste, means a reduced demand for consumption. Even more than that, it means a change in the shape of the demand curve. As Veblen points out, “if the incentive to accumulation were the want of subsistence or of physical comfort, then the aggregate economic wants of a community might conceivably be satisfied at some point in the advance of industrial efficiency; but since the struggle is substantially a race for reputability on the basis of an invidious comparison, no approach to a definitive attainment is possible”. An end to conspicuous consumption means an end to a consumption arms race where demand can never be sated. There really is only so much you can eat, wear and drive, or click and stream, so if we take the “conspicuous” out of the equation we have a society going down a much different economic path.  I don't know how much of our production was geared toward deliberate but unnecessary discrimination of products, but whatever it was it is lower now.  And the higher end meant higher profit margins.  As everyone makes do with the functional commodity item, then by the definition of a commodity item the profits shrink.

Add to that a reduction in conspicuous leisure, and indeed more than that, having conspicuous work be what matters, and you have both lower demand for products and more people wanting to work.

Why Veblen's world is waning
Much of what we now demand simply does not fit in the conspicuous consumption equation. In particular, the tools of the virtual world, the iPhones and iMacs, the software and Internet, do not lend themselves to conspicuous consumption, any more than do light bulbs or electric outlets. Granted those on the lower rungs spend more of their income on the consumption of real goods than do those on the top rungs. And the share of income on goods that by nature are in limited supply, private goods, land, wine and art, even social status, is greater for the top rungs than for the lower. But for both, on the margin (and increasingly so over time ) consumption is becoming oriented more toward virtual goods – consuming YouTube videos, tweets and social networks, games and reality TV shows – and the hardware to access them. I suppose someone could come out with designer label, jewel-encrusted iPhones, but that just doesn’t seem to be the way things are heading. And how do you conspicuously consume what is out there for ready for the taking?

More important is that we now have better ways of establishing people’s positions in the social or pecuniary pecking order, for example by Googling them. And if you want to make a statement you don’t have to do it through invidious consumption of real goods, you can do it more effectively by leveraging the virtual world – YouTube, any of the various forms of social media, or a blog. Not that Gucci and Chanel are going to go out of business, but for most people that sort of status statement is becoming increasingly irrelevant. No matter what you are wearing and driving, a far better picture of you and your status is just a few clicks away. You don't have to drive a Ferrari to let everyone know you are rich and successful. If you are driving a Ferrari, what it will convey is that you – who as everyone who cares to Google you knows is worth tons of money – must like Ferraris.

(And, in any case, is the class distinction today the one that Veblen observed, one of direct overlord and humble worker? Do people give the same deference to those who can demonstrate the ability to indiscriminately buy whatever they want, to hang around the yacht club while others are working, to waste resources without a thought? In some quarters the objective is inconspicuous consumption).

The consummation of the industrial age
This is the way the Industrial Revolution was set up: Mass production of cheap, identical goods replacing the work of the artisan.  The entire point of industrialization, and what made the industrial revolution successful, was having production turn from luxury items for the rich to common-day products mass produced for the common masses.

As Mumford points out, industrialization changes what society values. The industrial society values what is new and fresh. Age goes hand-in-hand with rarity, but the industrial age puts an emphasis on the technologically advanced, the brand-new rather than on the rare. The industrial society also values conformity, (though at the same time decrying conformity and the resulting alienation of the crowd). This is because the industrial process is at its best, with the lowest cost and highest quality, when it is humming along producing many of the same product. There are those who will prefer a Rolls for other than purposes of conspicuous consumption, but even so will have to admit that any number of computer-designed, robot-welded cars rolling off the assembly line – and many cars must roll off to amortize the costs of development and production – are functionally superior. This is all the more true as we move into the technology space, to computers, phones and software, where newer and conforming products are not only better, but necessary. These are products that simply do not relate to the notions of sentimentality and well-worn comfort. 

Advertising post-conspicuous consumption
Industrialization is leading to a continuing convergence between the products that are consumed by the wealthy and the common man. To generate the fodder for conspicuous consumption, advertisers and marketers have waged a valiant battle for several generations against the process of industrialization by maintaining distinctions between functionally equivalent goods. Now advertising is beginning to pick its fights elsewhere.  One reason is that increasingly the medium of advertising is the Internet, either directly or because the next stop when an ad catches someone’s eye is to go to the Internet, and the Internet, and thus the ads, is more about information than about conveying status or image. Another reason is that unless the marketers try very hard, many goods are clearly going to be identical between the very rich and the not so rich. There was a time when cars were the focal point for conspicuous consumption; having a car singled out the wealthy, then having a car with chrome and fins. Now I drive an Acura TL-S and so does Mark Zuckerberg. Having a refrigerator was once the province of the wealthy, now you and I can have the same kitchen appliances as an ostentatious Donald Trump – minus the gold trim. 

In some areas, most notably and importantly in electronics, the push to spur conspicuous consumption has been given up without a fight. In the sphere of the Internet we are egalitarian. The wealthiest of the one-tenth of the one percent are holding the same iPhone and using the same applications as my babysitter. As I write this I am sitting in the walkout basement of my son’s house, using a computer that is identical to that of one of my former billionaire bosses. And another of my sons has a big-screen TV and sound system that is indistinguishable from his. Because we spend so much of our time on our phone and in front of out computer and TV, in the new age there is not much difference between how my son spends time versus the very rich, one in a twelve-thousand square foot mansion in Greenwich while the other is in a starter home, both sitting in the corner of some room staring into a 21” screen.  So as we spend more and more of our time on the Internet and virtual world, we become accidental egalitarians. As far as this goes, and granted it has not yet gone that far, it is a commendable result for society even it is not so useful for the economy.  

Taken to its end, industrialization class distinctions as revealed by conspicuous consumption.  This points to the objective of industrial production: goods in the realm of common consumption become removed from social distinction. This is what Mumford meant when he stated that the machine is a communist. Products bear the same impersonal imprint. They either function or do not. There is no difference between the light bulb – or phone, or computer, or Kindle – of the common and the wealthy to signal a difference in status. The consummation of the industrial revolution, and insofar as we link the industrial revolution to capitalism, of capitalism as well, will occur when the same can be said in all areas of production.

The Bifurcated Society

Unless there are slaves to do the ugly, horrible, uninteresting work, culture and contemplation become almost impossible. Human slavery is wrong, insecure, and demoralizing. On mechanical slavery, on the slavery of the machine, the future of the world depends. – Oscar Wilde

An article in the New York Times last week made note of the lower mobility in the work force: “Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage”. So add another to the economic woes; not only unemployment, but less mobility if you are employed.

There is less mobility in the work force because the computers are not simply displacing jobs, they are taking out the middle. Computers are good at routine cognitive tasks in the middling white-collar range, the desk jobs, the jobs that require keeping track of things, making arithmetic calculations. They are not so good at motor tasks, the blue collar jobs that require coordination, manual dexterity and sense-of-the-world adjustments. Computers can crunch numbers but they can't drive a truck or make up a hotel room. When it comes to computers taking on human tasks, as Steven Parker notes, the hard problems are easy and the easy problems are hard.

Because they take out the middle, it is a lot harder to pursue the American dream by working your way up the ladder. Climbing up rung by rung, you will find a machine staring down. And it won't retire or move up the ladder to make room for you. Once in place, a retirement or promotion is not going to happen, it isn't going to be opening up a spot.

Futurists have seen this coming for along time, sort of. As automation got started, they saw robots taking over the manufacturing tasks and our day-to-day activities (serving us our dinner and the like), leaving people to do other things – leisure activities or getting jobs making the robots. Futurists always get it wrong because they take the present and multiply it by some number to get the future, and they have the essence of the issue wrong here as well. Although there are robots in industry, the biggest effect of computer technology is in an the area no futurist imagined. It is not improving the production of industrial goods, it is supplying the increasing demand for virtual goods. So the picture is not one of producing what we have always produced, but doing it with less labor, it is that we now want things produced that have not been produced in the past, and those things by their nature require less labor. That is, we are meeting the computers halfway by increasing our demand for the very things that they do best.

When God closes one door, He opens another
Ironically, even as they effect a widening of economic classes, robots, computers and automation are answering the bane of the industrial revolution, freeing many from the mind-numbing, routine jobs of the specialized factory floor that Marx reviled against as the source of worker subjugation and alienation. (Along with many of the modern-day clerical equivalents). The problem is that we are not seeing enough new, more productive and satisfying jobs rolling down the pike. So we might be seeing an end to worker alienation, but we also are seeing an end to work.

We have had an axiomatic view that when technology uproots us from jobs it opens up new ones, and the new ones are even better in pay and in job satisfaction. After all, somebody has to make all those robots. It is a comforting thought, but it is not really an axiom, perhaps just a lucky result that has obtained over the course of the industrial age. There was always a West where the workers could go, an expanding population, undeveloped countries, and new products and demand. The same may continue, but it doesn't look like it is.

Which sort of makes sense if we are moving toward living in a virtual world with virtual industry taking on increasing prominence, and with those industries not particularly labor intensive (or for that matter capital intensive – at least nothing like the era of steel and railroads), or not labor intensive for those with motor as opposed to cognitive skills. We aren't thinking too much about this right now. We focus on running out of resources, not on running out of new markets, more specifically new markets – both of new consumers and new products – that bring as many new jobs with them as are being displaced by machines. (Though this is all starting to get attention, for example in recent books by Erik Brynjolfsson and Andrew McAfee and by Tyler Cowen).

The Outsourcing Masses

Though we are not as unemployed as we might think. We just are not being paid for our work. Much of what we enjoy from our technological progress is a new sort of outsourcing. How much time do you spend on things that are made easier and that you now do for yourself with the help of computers? You do them now because computers have made it possible for you to do them. You take care of your appointments and a lot of the service issues, you get yourself directed via various phone prompts. You don't  employ anyone when you do these things.The book “The 4-Hour Workweek” suggested, among other things, outsourcing day-to-day tasks to people in India. But the largest area of outsourcing is not to India, Sri Lanka or China. Our jobs are being outsourced to us. The jobs are moving from the producer to the consumer side of the ledger. And some of that work comes as the guise of entertainment. How much of your work is being done as you do your e-mails and surf the web, keep yourselves busy with your apps as you commute to work? So it is not only that computers are replacing workers, they are turning consumers into unpaid workers.

Bifurcation and classes

In the earlier epochs of history, we find almost everywhere a complicated arrangement of society into various orders, a manifold gradation of social rank. In ancient Rome we have patricians, knights, plebeians, slaves; in the Middle Ages, feudal lords, vassals, guild-masters, journeymen, apprentices, serfs; in almost all of these classes, again, subordinate gradations. The modern bourgeois society that has sprouted from the ruins of feudal society has not done away with class antagonisms. It has but established new classes, new conditions of oppression, new forms of struggle in place of the old ones. Our epoch, the epoch of the bourgeoisie, possesses, however, this distinctive feature: it has simplified the class antagonisms. Society as a whole is more and more splitting up into two great hostile camps, into two great classes, directly facing each other: Bourgeoisie and Proletariat. – Karl Marx

Slave and Master for the Romans, Lord and Vassal in Feudal times, Bourgeoisie and Proletariat for the industrial capitalists. What is emerging now? Because computers allow us to lever our creativity and cognitive work in the same way that capital plant allowed those in the industrial revolution to lever their production of real goods, perhaps , as Murray and Herrnstein hypothesized when they proclaimed the emergence of a new “cognitive elite”, class division will increasingly be based on education and intelligence.

But although a bifurcation is occurring in jobs, the opposite is occurring in consumption. Granted those on the lower rungs spend more of their income on the consumption of real goods than do those on the top rungs. And the share of income on goods that by nature are in limited supply, like land, wine and art, even social status, is obviously greater for the top rungs than for the lower. But for both, consumption is increasingly oriented toward virtual goods – consuming YouTube videos, tweets and social networks, games and reality TV shows. These take little in terms of labor – or for that matter, capital – to produce. And the labor that is required is largely supplied by us as the consumers. Another instance of outsourcing.

And one notable area of consumption that by definition differentiates the classes, that of conspicuous consumption, is going by the wayside. Yes, I believe we are seeing the twilight of the era of conspicuous consumption. Not that Gucci and Chanel are going to go out of business, but for most people that sort of status statement is increasingly becoming irrelevant. No matter what you are wearing and driving, a far better picture of you and your status is just a few clicks away. You don't have to drive a Ferrari to let everyone know you are rich and successful. If you are driving a Ferrari, what it will convey is that you – who as everyone who cares to Google you knows is running a hedge fund and is worth tons of money – must like a Ferrari.

The Day the Earth Stood Still

A recent New York Times article critiquing of popular music for 2011 came away with the view that “2011 may well be remembered as the most numbing year for mainstream rock music in history. The genre didn’t produce a single great album, and the best of the middling walked blindly in footprints laid out years, even decades, earlier.”

The same could be said for the genre over much of the recent past.  And could be said for music in general, art in general, and culture in general. And for the basic structure of our lives in general, as well. A teenager today thinking back to the 1960 is peering into a past as removed in time as when I as a teenager looked back from the 1960s to the world of the 1910s. For me this was a distant and remote world shrouded behind World War II, the depression, and World War I, a world with which I shared little. Not so for today's teenager looking back to the 1960's, still listening to the Beatles and familiar with the epochs of James Bond movies running from Sean Connery to Daniel Craig. The conveniences of daily life were much changed from the 1910s and the 1960s, but not so from my teenage years to today. We had a refrigerator, TV, telephone and dishwasher. I drove my friend's Mustang. The refrigerator didn't have an ice maker, the phone was rotary, but then again, living in Nevada at the time, where the speed limit on the highway was whatever "is safe and sane" meant  I could drive the Mustang a lot faster then than we do today.

Given the amount of time we spend on-line and the ubiquity of computer chips in mediating our lives, you would think that we would have less connection with the fifty-year past. One reason we maintain this connection is that we have recordings and movies, while all we have from the 1910’s are books and grainy photographs. But there is another reason. Think of what we are really getting from the Cloud that might differentiate us from the past. For all the 4-G networks and iPads, what we have produced are differences in quantity, speed, and access, not differences in kind. Through on-line search we basically have a faster and more extensive encyclopedia, through on-line shopping we always have the latest catalog at our fingertips with operators always standing by, through e-mail we have a cheap personal telegraph.

Jaron Lanier makes this point: “Suppose that back in the 1980s I had said, ‘In a quarter century, when the digital revolution has made great progress and computer chips are millions of times faster than they are now, humanity will finally win the prize of being able to write a new encyclopedia and a new version of UNIX!’ It would have sounded utterly pathetic.”

What these new, improved modes of telegraph, encyclopedia, and retail have done for overall efficiency is a popular topic of debate. But the debate doesn’t end there. The effect that this has had on our lives is not only one of economics and productivity, but of culture.

In his 1985 book Amusing Ourselves to Death, Postman looks at the changes for our culture and our mode of thinking as we moved from relying on the written word to the instantaneous connection of the telegraph, then to the sound-bite laden, visual medium of television. Among many desultory effects one stands out: we became preoccupied with “news”, with knowing what is happened even when those things had not even the most remote value to us, and when, in any case, the speed of receiving that information was inconsequential. Postman asserts that the news of the day is a figment of our technological imagination. It is literally a media event.

This preoccupation actually started even before television. Television just leveraged the effect of the telegraph, which already had unleashed the demand for immediate reporting of irrelevant information from distant locations, by making it more entertaining and accessible.

Now we can add the internet, social networking, and email to the telegraph and television. We are getting better and better at keeping the serious at bay while wrapping ourselves in the absurd. Postman, perhaps reflecting on the founding of USAToday, considered the emergence of paragraph length news reports as "an astonishing tribute to the resonance of television’s epistemology". Now we have Twitter. Look at what are we seeing in a recent commercial from AT&T: Two tailgate heroes, eyes glued to their cell phones, turn such "breaking news" as a player's sprained ankle and a stolen mascot into something “so 42 seconds ago”, not to mention posting videos to Facebook with blazing speed.

News becomes a guiltless form of entertainment because we view news as weighty and worthy of attention. We get to have our chocolaty treat while arguing it is actually nutritious. But the ubiquity of the Cloud extends this beyond the six O’clock news. While the leading edge in the old media was entertainment masquerading as news, now we have entertainment masquerading as just about every component of our waking lives. Entertainment masquerading as social lives as we keep on top of what our friends (including all of our celebrities friends) are thinking about and doing at the moment. Entertainment masquerading as work as we e-mail colleagues incessantly and check out anything on the web that is even remotely related to work.

There is only so much that is really happening in the world at any moment, so to have sufficient content to fill our demand, we recycle and remix. We can see the same news in dozens of different venues, second hand links to a few original news items and thoughts. Or forgo the notion of news or thought altogether and simply follow someone as they go about their daily lives (which ultimately could become self-referential if they are going about their daily lives doing the same thing).

It seems that we are awash in information, but the actual information has hardly changed, it is just repackaged in many forms. Lanier also points this out: "It is astonishing how much of the chatter online is driven by fan responses to expression that was originally created within the sphere of old media and that is now being destroyed by the net. Comments about TV shows, major movies, commercial music releases, and video games must be responsible for almost as much bit traffic as porn. There is certainly nothing wrong with that, but since the web is killing the old media, we face a situation in which culture is effectively eating its own seed stock".

So for all the apparent newness we have become a culture of the remix. We think that we are in a technological revolution, but what we really have is more of the same, just faster, ever-present, and in color. We are mistaking high resolution and portability as an advancement of culture.

The Volatility Paradox

Volatility tends to drop when market risk is building up and leverage is rising, luring investors into complacency. Indeed, the lower volatility justifies investors taking on more leverage; if volatility has dropped by a third, why not take one and a half times the leverage? This pro-cyclical dynamic arising from lower volatility in times of increasing risk-taking is the volatility paradox. The main take-away from the volatility paradox is that we shouldn't use shorter-term, contemporary risk measures when they are very low.

But there isn't really a paradox, and we shouldn't ignore the low volatility. Unusually low volatility has value, it is just that if it is being viewed as a typical volatility measure it is being looked at in the wrong way. We can rely on short term volatility as a risk indicator, not as an exogenous measure of risk, but rather as endogenous manifestation of the dynamics of the market because low volatility may be telling you that everyone is levered to the hilt and is willing to snap up any asset that moves, that everyone is casting aside negative information with hardly a second thought.

When viewed as endogenously determined by the behavior of the market, the relationship between risk of crisis and unusually low levels of volatility is simple: If people are levered and are at the ready to snap up positions, if they are ready to arbitrage out price differences and make markets oblivious to risk at razor thin margins, then it won't take much of a price move to find the other side of a trade. If people don't care about negative information, then the information flows will hardly move prices. The result is low volatility, and this in turn leads to more leverage and then another round of the dynamics that feed the low volatility. The result will be a descending level of volatility that is telling you that the market had been lulled into complacency, or worse, is in full-speed-ahead risk taking fervor, and hence is vulnerable.

Of course even if it is more the latter, it still will be the case that a low volatility derived from recent history will likely reflect low volatility in the near future, because if people are levered and ready to buy anything, if they are at a level of exuberance that leads them to discount anything negative in the market, the odds are high that that the same behavior will persist for the next while. But then suddenly it won't. There is the chance that the floor will fall out and a crisis will be unleashed, and more than anything else, that is what we need to know for risk management.

We can see this when we think look at things from the other direction: what happens to volatility when the crisis finally hits. At that point no one wants to take on any risk, delevering has led to a reduction in liquidity, and so prices have to move a lot to entice buyers. The market is skittish, and so any news or rumors find everyone scurrying for cover. So for both liquidity and information reasons, prices move a lot more and thus volatility rises to the point that it is again not a useful measure for risk, but for the opposite reasons..

The diversification paradox

Related to the volatility paradox is what we can term the diversification paradox, which I discussed in a post some time back. As with volatility, correlations are low pre-crisis. So as is the case with low volatility, the low correlation and resulting apparent potential for diversification will lull investors into taking more risk. And because of the dynamics that create the low correlation, this in turn will feed into further reductions in correlation, thus adding to pro-cyclicality.

At least this is what will happen if we take the correlations as exogenous – that is if we say “they correlations are what they are, so let's throw them into our variance-covariance matrix and then let the optimizer rip”. But as with volatility, if we look at the correlations as being endogenous to the dynamics of the market, they give us warning signs. Low correlation tells us that everyone is evaluating the most subtle differences between assets – for example, are the transportation costs for the Ford's supply chain dropping relative to those of GM's – and is also searching out opportunities in hinterland, esoteric markets. One asset is being finely differentiated from the other, correlations are therefore low, and investors take more leverage and more exposure because of the apparent potential for risk reduction through diversification.

Of course we all know that when the crisis hits the correlations suddenly rise and the benefits of diversification go out the window. Thus, as I wrote in my earlier post, diversification works all the time, except when it really matters.

When the crisis finally hits, correlations shoot up from the same endogenous dynamics. Suddenly, the only thing that matters is risk, not the subtleties of earnings and the opportunities in Malaysian onyx mines. It is like high energy physics, where matter become an undifferentiated white-hot plasma; assets that are risky are all viewed the same way, all of the risky assets meld together. So correlations rise.

The Paradoxes and Risk Management

There are two points from this discussion of the volatility paradox and the related diversification paradox.

The first and well-known point is that if investors take these measures as exogenous – that is, if the data are treated as a given in the computation of the statistics and the statistics are then applied based on their statistical interpretation – then they will lead to pro-cyclical behavior. Higher leverage and risk taking in general will be apparently justified by the lower volatility of the market and by the greater ability to diversify as indicated by the lower correlations.

The second is that just because the volatility is not a good indicator of the risks lurking in the market doesn't mean it is not useful. If we recognize that volatility and correlation are endogenous measure that are a manifestation of market dynamics rather than exogenous statistics of market risk to be thrown into our risk management engines, if we dig deeper into the dynamics that are generating them as endogenous parts of the market dynamic, we will find that they actually are telling us far more about the markets.

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This post expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. Similarly, this post expresses the author's views and does not necessarily reflect those of the Department of Treasury or its staff.

Managing the 99 Percent

“And that,” put in the Director sententiously, “that is the secret of happiness and virtue—liking what you’ve got to do. All conditioning aims at that: making people like their un-escapable social destiny.” – Huxley, Brave New World

From: The McCourtny Consulting Group

To: The Endowment for the Preservation of the One Percent

Subject: Managing the 99 Percent

Whether or not it is put in sound-bite terms of “class warfare”, the “one percent” pitted against the “ninety-nine percent”, the fact of the matter is that the data showing a widening of income levels are undeniable, as are the push of a segment of the middle class to the near poor, the realization of lower social mobility, income levels that have broken the string of increasing standards of living from parents to children, and new doubts about education as a road to opportunity.

We are witnessing a simmering backlash in the face of the widening class distinction. It is wise to address the fundamental issues behind the backlash and consider approaches to deal with the problem, especially given that these conditions may be persistent and structural. Therefore, we have prepared a brief overview of approaches to the problem.

What to do

In the Feudal societies, class distinctions were determined by lineage, in the capitalist society by wealth, and more generally by the notion of a power elite that controls the key levers of society, be it in industry, government or the military. Whatever the source of the class distinctions, historically the ongoing concern of the dominating class has been to contain the pressures of alienation that can lead to the revolt of the masses.

What are the public relations strategies to control and manage this situation? We have considered a campaign based on the following messages to hoi polloi.

We are just like you. Hide wealth and then take a cue from the Mormon public relations campaign: washing the car, playing basketball, with the tag line “I'm a one percenter”. Some members of the Endowment are already primed for this approach, having explicitly told their highly compensated employees to cool it in terms of flaunting their wealth.

You are just like us: Create the perception of shared power and mobility, that hoi polloi influence the system and can change it if they want to. Point out that this is the connotation behind the term “hoi polloi” in ancient Greece. Maybe you haven't hit the daily double this time around, but you still have a shot. This approach already seems to be in play and working. Helped along by a long-running media campaign, many of the 99 percent who are unemployed as well as the growing number who are descending into the ranks of the nearly poor are ardent defenders of the wealthy and their historically low tax rates.

You are not like us, and you don't want to be like us. Make wealth appear unattractive. Money only causes problems, miserable lives; the upper class are a harmless bunch. England maintained class distinctions and the Crown where other countries were hit by revolution in part because the upper class wrapped itself in eccentricity and generally appeared harmless, if not even amusingly befuddled. However, although this worked for an aristocracy at leisure, it is not a good strategy to appear befuddled while running corporations.

You are not like us, but who is keeping track. This appears to be the most sustainable route for managing the situation, especially because technology is making it an ever more achievable strategy. Entertainment, keeping busy on the trivial. It worked for Rome, at least for a while. So it will be a constant theme in our proposal.

Too bad, just live with it. Given that, all else equal, people probably won't just live with it, eventually this requires the authoritarian, police state approach. As Dahl's Mr. Wormwood put it, : “I'm right and you're wrong, I'm big and you're small, and there's nothing you can do about it.” 

Proposal for the Campaign

We propose a campaign based on these multiple fronts that will leverage existing channels:

Reality TV. We have had the vicarious exploits of spectator sports for a long while, and now have created vicarious lives through Reality TV. This not only serves as a distraction. Properly employed (such as with the “Real Wives” series) it supports a “You wouldn't want to be like us” message.

Computer games and virtual lives. Add to the vicarious lives of spectator sports and reality TV the opportunity for virtual lives through computer games; everyone is building their own virtual mansions and fighting their virtual wars, in combat with their own Eastasia. This provides both distraction and empowered “You are just like us” moments.

Social networks. Talk about keeping people distracted on trivia. And we can have people feel socially connected with us by being our friends by creating carefully managed Facebook accounts. We can hire a staff to maintain these Facebook pages in a way that the joint messages of “We aren't having a lot of fun” and “We are just like you” are both kept at the fore.

Those on Facebook already blur the real with the fantasy; many create alternative lives on Facebook just as they do in their virtual games, and it turns out that the Facebook fantasy helps get our messages across. The Facebook personae are not exactly “Just like us”, but are more like us than is the reality. The average Facebook self depicts someone more wealthy and happy than the actual person. So it is not quite cohorting with the one percent, but on the other hand there is rarely any evidence of the economic struggles that seem to occupy the pages of the New York Times.

Open media. Just as there can be the sense of power in various combat games, for the disenfranchised there can be the sense of power, a sense that “You are just like us”, through their access to blogging, twittering, and other channels of open media. These can be manipulated to give the impression that their voices are being heard, that they matter. In this regard, we recommend that a team be hired to comment on various posts – perhaps outsourced to India or Sri Lanka – in order to give the appearance that people are listening, that the trivia is substance. 

And these are channels to burrow into so that the realities of the world and their place within it are obscured. Just as Facebook gives us the impression of a large community of friends and colleagues, Twitter allows the 99 percent to feel connected to the world at large, to believe that people out there somewhere hear their voices.

Viral hits buttress the “You are just like us, but just haven't hit your daily double yet” message. It doesn't matter that the viral hits have nothing more than fleeting entertainment value. The simple fact that a 99 percenter can draw the attention of millions is the exception that proves the rule.

Education-lite. Education poses a dilemma because it is essential to have a skilled workforce while at the same time preventing the side effect of heightened awareness of alienation. So the ideal educational system is one that provides the requisite work skills while inhibiting thought.

Adam Smith writes that such a path is possible, indeed that the working man “has no occasion to exert his understanding. . . . Of the great and extensive interests of his country he is altogether incapable of judging; His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues". Smith proposed that the way out of this is for the government to provide public schooling for the working class. But what is a bane for Smith is a blessing for us: his working man is the man we want. 

Those in the upper-class in his era did not share Smith's interest in universal education. Rather, they saw the world as we do: education diminishes deference and fuels disobedience. And this same sentiment is echoed a century and a half later by no more ardent a defender of capitalism than Schumpeter, who argues that education in the face of manual labor and underemployment sows discontent, and “discontent breeds resentment”. The solution to this is to give the impression of education while in fact providing little more than the essentials of vocational training. Focus on accounting, computer science and the like while eschewing the impractical liberal arts. Have college be party time, the soma, sex and endless recreation that Huxley envisioned for the populace at large. If the majority of the ninety-nine percent can be herded down this path, then "sex, drugs and rock and roll" serves its purpose.

Open personal information. While we strenuously object to any of the “Too bad, just live with it” Orwellian tactics (and therefore also stress that any discussion along these lines be by phone and not by e-mail), there happen to be technologies that allow the requisite monitoring. Indeed, hoi polloi already provide this information voluntarily, often to the public at large. Between tweets, blogs, and our Facebook friends, not to mention those who write comments where registration with real names and e-mails is required, we have a treasure trove of data for any future efforts to manage the situation more directly. 

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This post expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. Similarly, this post expresses the author's views and does not necessarily reflect those of the Department of Treasury or its staff.

Class Warfare and Revolution (Circa 1850)

In a recent post I discuss six policies that spurred the Industrial Revolution in England – opening up immigration, weakening the guilds, investing in infrastructure, privatizing agricultural land, forcing a move to new energy sources, and policies for bringing capital to the new, capital-intensive technologies – and suggest that these policies have their analogues today as we face what history may view as another industrial revolution.

But that is only one part of the story of the Industrial Revolution. Another part is not always very pretty, but might also be instructive.  

Class Division in the New Economy

The rise of the capitalist class during the Industrial Revolution is well known, with a select few, the barons of industry, be it steel, rail, or textiles, catapulting to a level of wealth rarely known before. But less considered is the other tail of the distribution, the downward spiral of what today might be termed the middle class.

The story of the steel-driver John Henry’s race with the steam hammer is a type for the plight of English laborers overrun by the Industrial Revolution. Labor was caught in the sea-change of new technologies and economic organization. 

Hand work could not compete with the machines, no matter how great the workers' skill and determination. A whole generation of hand laborers kept up a desperate struggle, but with an inevitable end. The same occurred for the small farmers, who were squeezed out by the consolidation of farms that had been initiated by the policy of privatizing enclosures. Some gave up their land and drifted away to the towns to keep up the struggle a little longer as hand-loom weavers, but then became part of the factory labor class, just as others gave up their looms and devoted themselves entirely to farming for a while, but eventually sold their land and dropped into the class of agricultural laborers. 

The result was the same in either case: Household manufacture gave way to that of the factory and the small farms were consolidated. For the many who did both farming and hand work, their work, subsistence farms and homes were all lost.The farmers who lost access to the commons due to the policy of enclosures frequently failed to find alternative employment near home and became paupers and vagabonds.

Just as the factory system disenfranchised and commoditized the industrial workers, the farm workers became separated from the land. Three classes emerged in agriculture: the landlords, the tenant farmers, and the farm laborers. The landlord class was a comparatively small group, a few thousand, of nobility and gentry who owned by far the majority of agricultural land. Another class, the yeomen who owned and cultivated their own small farms, disappeared entirely, descending into the class of laborers.

Obviously, the Industrial Revolution ultimately increased prosperity, but for a time it made a wide swath of the populace worse off. The period of transition from the domestic to the factory system of industry and from the older to the new agriculture was one of almost unrelieved misery for those who could not integrate into the new economy, whether due to lack of capital or lack of physical or mental adaptability.

New Routes to Job Creation

While the hand-loom weavers kept up a hopeless struggle in the attics and cellars of the factory towns, their wages sinking lower and lower until the whole generation finally died out, and while the small farmers bowed to the competition with the larger producers, the plight of the farmers and hand laborers descended with a vengeance on their children. Many landed in parish poorhouses, and it didn’t take long before the factories discovered this fresh new source of labor. They began taking the poorhouse children as “apprentices”, signing indentures with their stewards, agreeing to give their wards room and board – and the promise of training – and then put them to work.

Children as young as seven years old worked in the cotton spinning factories. The children began work while extremely young and worked the same hours as the grown men and women. They could do many jobs in the factories just as well, and in some cases, such as when working with spindles and fine thread, even better than adults. They were remotely situated in apprentice houses built near the factories, the burdens of unrelieved labor and the harshness of their masters unnoticed by the community. The actual working hours in the factories in the earlier part of the 19th century were a technology-assisted twelve to fourteen hours a day; gas lights illuminated the factories and steam power worked without tiring. When the factory was running at full capacity the children were employed in two shifts, one in the day and another in the night. It was said that "their beds never got cold," one shift climbing into bed as the other got out. There was no effort to provide them with any training, nor education, nor time for recreation.

While the conditions were harsh in the factories, things could be worse. Here is an account of child labor in the mines. It is so heart-wrenching that it might be dismissed as sensationalism were it not based on the findings of an 1842 report of a Royal Commission charged with investigating the conditions of child labor in the mines:

Children began their life in the coal mines at five, six, or seven years of age. Girls and women worked like boys and men, they were less than half clothed, and worked alongside of men who were stark naked. There were from twelve to fourteen working hours in the twenty-four, and these were often at night. Little girls of six or eight years of age made ten to twelve trips a day up steep ladders to the surface, carrying half a hundred weight of coal in wooden buckets on their backs at each journey. Young women appeared before the commissioners, when summoned from their work, dressed merely in a pair of trousers, dripping wet from the water of the mine, and already weary with the labor of a day scarcely more than begun. A common form of labor consisted of drawing on hands and knees over the inequalities of a passageway not more than two feet or twenty-eight inches high a car or tub filled with three or four hundred weight of coal, attached by a chain and hook to a leather band around the waist.

(Also see Lord Shaftesbury’s speech to parliament).

The job creators, with the prosperity of England no doubt foremost in their minds, lobbied against the hand of regulation and labor reform. Their points were three-fold:

First, that abolishing child labor would harm those who promoted job creation and productivity. Manufacturers opposed the child labor laws as an unjust interference with their business, an unnecessary and burdensome obstacle to their success, and a threat of ruin to the class who provided employment to so many laborers and created the productive engine that was the source of commerce for the country.

Second, that if child labor were restricted England would be placed at a competitive disadvantage. This would not only affect the capitalist class, but affect the size of the pie to be distributed, and thus ultimately trickle down to affect the working class itself.

Third, that at a more fundamental level government regulation should be broadly cast aside because it was detrimental to competition and essential freedoms: freedom of labor, freedom of capital, and freedom of contract. If the employer and the employee were both satisfied with the conditions of their labor, why should the government interfere? How this related to children who had been indentured by their stewards is unclear.

There was, however, opposition slowly grinding out successes in one industry after another over the course of the decades, though the most oppressive industry, that of mining, being literally underground and hence less visible, was only addressed toward the tail end of the reform.

Elizabeth Barrett Browning's Cry of the Children, published in 1842, is an influential example of the outpouring of sympathy for the plight of child labor, but the most persuasive argument for reducing the hours of children did not come from sympathy as much as from economic practicality worthy of laissez faire. Work in such a stifling and harsh environment stunted the children’s growth and led to disease and degenerative conditions. Therefore, some in the capitalist class were won over, or at least muted in their opposition because they deemed it advisable to reduce the harsh labor conditions for the “physical preservation of the race”.

The Revolutions of 1848

There are different possibilities available at any historical moment; the socioeconomic sphere can adjust to change in any number of ways. In the face of the social tumult brought on by the industrial revolution, the course taken in Europe differed from that of England. In England awareness and change came about gradually through the force of government reforms. In Europe the epiphany occurred with the revolutions of 1848. As did the events in the England, these revolutions reflect some of the stresses and some of the glimmers of political and social activity we are seeing today.

The 1848 revolutions were the culmination of a number of stresses, some similar to those felt in England, which had been building over the course of decades. There were social costs incurred as the small farms and guilds of the artisans were replaced with larger, impersonal agricultural and industrial plants. There had been a decline in the standard of living compared to that of the previous generation.  The problems reached a crescendo in the years immediately preceding the 1848 revolutions because of the interrelated crises of years of poor harvests, a credit crunch brought on in part by the need to borrow in the face of the resulting high food prices, and an economic downturn precipitated by, among other things, a banking crisis. These all combined to lead to lower income and high unemployment. 

The revolutions of 1848 spread by force of ideology, spurred on by new modes of communication that, ironically, were facilitated by the concentration of the masses due to the factory system. The  revolutionary events began in January 1848 in Palermo, the provincial capital of Sicily. Uprisings were a regular occurrence there and in southern Italy in general, but this time they found more success and quickly spread from there to the Italian mainland. From there they moved on to Paris, where there were street demonstrations and clashes between demonstrators and police, with the demonstrators erecting barricades throughout the city. By March demonstrations and clashes between the demonstrators and police spread to Munich, Vienna and Budapest, and then to Milan and Berlin.

In most all cases the confrontations led to constitutional changes, dissolution of monarchies, and boarder political representation for the masses. But these changes ended up being short-lived; within a few years a counterrevolutionary wave washed many of these gains away. However, the 1848 revolutions represented the first time that there was such a broad outpouring of popular support, with the masses, mostly participating in non-violent protests, spanning many countries, religious groups and classes.