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Wed, Feb. 19

Column: Wealth gap trips up free market system

The free market does wonderful things when certain conditions are met. I think we need to add one more condition.

Advocates of a free market, including myself, can tell you the theory of how it's all supposed to work out well, and sometimes it does. The self-reinforcing cycle, or virtuous circle, is when wage-earners have jobs and decent pay, and businesses can make good profit because there are so many people with money wanting to buy things. So more businesses start or expand and that creates demand for employees, which keeps wages at a decent level because workers are in demand. The nation grows in wealth both privately and publicly, in things like better roads and upgraded power and communication grids, and thriving institutions of culture and education, and the resulting innovations keep taking the whole cycle up to the next level. There's little demand on the safety-net. And flowers bloom and skies are blue.

Right now, skies are gray and thunder rolls. Why? We know there are a few conditions that have to be met for the virtuous circle to work. There have to be enough natural resources to meet the needs. Adam Smith, an 18th-century pioneer of political economy, pointed out that the people generally have to be acting within moral bounds. There has to be a way to either prevent or break up monopolies.

Add to that one more.

It all just kind of comes apart if there is a ridiculous wealth gap. Actually, it's not so much about how wealthy the wealthy are as it is about how everyone else is faring. Politically, a small super-wealthy top tends to get too much influence over government and threaten democracy, but economically, if there can be super-wealth and not harm democracy, fine. But what's happening to everyone else? If at the same time the wage-earners and middle range are doing good, then that virtuous circle will work. But what is more likely, when there is a huge wealth gap, is it has come about because the plumbing of the economy has gotten distorted and most of the money is flowing to the top, which is why there is a gap. Then not enough is going to the wage-earners, and managers, and small-business people to keep that virtuous circle from slowly winding down and failing. As when the same types of wage-earners doing similar work as in the past get relatively less for it, a smaller slice of the pie. Though many of the high-earners may have no intention of being part of a problem - for many far from it - they're part of a system that has gotten distorted over time.

But doesn't the free market control these things? There is never a truly pure free market. Places like China and India have industrial policies and programs to steer their economies toward growth; it's not just the free market doing it by itself. Even doing nothing has its consequences. If China and India have aggressive industrial and trade policies and we try to be neutral, then we're at a disadvantage. There are quirks of nobody's choice, like a baby boom that affects the need for healthcare. Or new pools of global labor that drive up the number of workers per job which makes the same job as last generation worth less in this generation - things the market could work out over many decades if there were no additional surprises, but what are the odds of that? And what about the state of people in the meantime? There are also chunks of corporate welfare that get in the system over time, so that the success of many companies is a combination of genuine success, and success at getting preferential treatment. It's never a pure free market.

Since it's never a pure free market, the question is how does ours - our particular variation of a free market, in our time, in our place in the world - how does it do for wage-earners and middle-income people? Setting aside, for the moment, disagreements about how we get there, we need to be fixed on the fact that for the virtuous circle to work it needs to either be doing well by them or be firmly on a path to doing better by them. Otherwise it's like mixing cement. Mix it right and it's amazing what all we've built with cement. Use the exact same ingredients but get the proportions off, and you get what we have now. Everything gradually crumbles apart. When the gap is as big as it is now, and the middle on down are getting pushed down, all the benefits of the free market are just not going to come about.

P.S. Thanks to my friend John Stevens for writing with some criticism and a question about a previous column. The answer to his question is in the references that are with the online column at dCourier.com. For most factual statements I make I try to provide links to credible sources, and those are online.

Tom Cantlon is a longtime local resident, business owner and writer. Contact him at TomCantlon@TomCantlon.com.

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