Democracy in America

Paul Schumann at Insights and Foresight preserved part of Wikipedia's 2007 text on Democracy in America:

Tocqueville's penetrating analysis sought to understand the peculiar nature of American civic life. In describing America, he agreed with thinkers such as Aristotle, James Harrington and Montesquieu that the balance of property determined the balance of political power, but his conclusions after that differed radically from those of his predecessors.

The uniquely American mores and opinions, Tocqueville argued, lay in the origins of American society and derived from the peculiar social conditions that had welcomed colonists in prior centuries. Unlike Europe, venturers to America found a vast expanse of open land. Any and all who arrived could own their own land and cultivate an independent life. Sparse elites and a number of landed aristocrats existed, but, according to Tocqueville, these few stood no chance against the rapidly developing values bred by such vast land ownership. With such an open society, layered with so much opportunity, men of all sorts began working their way up in the world: industriousness became a dominant ethic, and "middling" values began taking root.

Key points:

• The balance of property determined the balance of political power.
  
• Any and all who arrived could own their own land and cultivate an independent life.
• Sparse elites and a number of landed aristocrats existed.
• According to Tocqueville, these few [elites and landed aristocrats] stood no chance against the masses and their rapidly developing values bred by such vast land ownership.

In hindsight, we might say it is not the sparseness of great accumulations of wealth that tips the balance of political power in favor of those less wealthy, but rather the small size of the great accumulations in proportion to the total volume of lesser accumulations. In other words: the absence of extreme concentration of wealth.

//

Concluding chapter 6 of Democracy in America, Tocqueville wrote:

and if, finally, the principal purpose of a government is not, in your view, to make the nation as a whole as glorious or powerful as can be but to achieve for each individual the greatest possible well-being while avoiding misery as much as possible; then equalize conditions and constitute a democratic government.

We already have democratic government. What we need is to "equalize" conditions. Not complete equality, but less inequality than at present. We still need our sparse elites and the modern equivalent of "landed aristocrats" -- but countably few in number.

And again, it's not the fewness of them that matters so much as it is an upper limit on the size of their accumulated wealth. In the early years of our democracy, the upper limit was provided naturally by the youthful age of our nation (as opposed to the France of Tocqueville's day, for example). But wealth has continued to accumulate in the US for near 200 years now, after Democracy in America was written.

//

Please bear in mind that the goal cannot be achieved by an aggressive policy of raising the minimum wage. Nor can we achieve the necessary growth of wealth by making conditions better for wealth-holders. The one is only a way to cope with the problem, and the other makes the problem worse. We need policies in place to limit the mechanisms that promote inequality, mechanisms like the growth and accumulation of debt.

This brings to mind Steve Keen's quote from Ben Bernanke:

Fish­er’s idea was less influ­en­tial in aca­d­e­m­ic cir­cles, though, because of the coun­ter­ar­gu­ment that debt-defla­tion rep­re­sent­ed no more than a redis­tri­b­u­tion from one group (debtors) to anoth­er (cred­i­tors). Absent implau­si­bly large dif­fer­ences in mar­gin­al spend­ing propen­si­ties among the groups, it was sug­gest­ed, pure redis­tri­b­u­tions should have no sig­nif­i­cant macro­eco­nom­ic effects.  (Bernanke 1995, p. 17)

The quote is from Bernanke's The Macroeconomics of the Great Depression: A Comparative Approach (PDF, 28 pages). In addition to the "academic" view, Bernanke describes the "agency approach, which has come to dominate modern corporate finance":

From the agency perspective, a debt-deflation that unexpectedly redistributes wealth away from borrowers is not a macroeconomically neutral event.... By inducing financial distress in borrower firms and households, debt-deflation  can have real effects on the economy. [page 18]

If I have trouble with these views it is because both of them focus on "debt-deflation" rather than on an earlier stage when the economy is still viable enough that debt-deflation can be avoided. And that this earlier stage must also be problematic, as it sets the stage for debt-deflation.

As Bernanke presents them, the academic view is that debt-deflation is no more than a harmless redistribution, except in "implausible" circumstances; and the agency view is that debt-deflation is not "neutral" and could (plausibly) be harmful. As long as economists and policymakers keep thinking in terms of plausibility and implausibility they will never adopt a mindset that allows them to understand the seriousness of the problem and drives them to work to resolve it. I note that the agency view's "domination of modern corporate finance" was not enough to prevent the financial disruption of 2007-2010.

Even at its lowest and most harmless level, debt causes a transfer of wealth or income from borrower to lender -- or sometimes, in highly inflationary times, from lender to borrower. Admit this, and take steps to limit the growth of debt, or be prepared for the Age of Capitalism to give way to the next stage in the cycle of civilization. 

It won't be an improvement.

The effects of debt are non-linear. Debt always does harm to the economy; the use of credit is always beneficial. But the cost/benefit ratio varies with the growth of accumulated debt. It's not rocket science.