Saturday, June 30, 2012

David Nasaw, Andrew Carnegie (2006)

David Nasaw's thorough biography of the life of Andrew Carnegie  compels one to think about the subject of the distribution of wealth and income.  Carnegie was the wealthiest person of his time:  although it is fair to say that he was not a student of the subject, Carnegie certainly considered the distribution of wealth to be an important social issue of his time and he wrote about it. 

Only inferentially in my discussion of Amartya Sen's The Idea of Justice (see January 11, 2011 post) --- a fleeting reference to distributive justice ---  have I broached the subject of the distribution of wealth and income in this blog.  In that book, Sen did not dwell on the subject of income distribution since he was less focused on the rules that would describe a just arrangement and more focused on the process that would realize a just outcome.  In contrast, Sen's sparring partner on the philosophical question of justice, John Rawls, did dwell on the subject of income distribution and developed principles of justice that tolerated income inequality as long as it maximized the welfare of the least advantaged.  This is the difference principle, and it has been explained as follows

"The difference principle requires that social institutions be arranged so that inequalities of wealth and income work to the advantage of those who will be worst off. Starting from an imagined baseline of equality, a greater total product can be generated by allowing inequalities in wages and salaries: higher wages can cover the costs of training and education, for example, and can provide incentives to fill jobs that are more in demand. The difference principle requires that inequalities which increase the total product be to everyone's advantage, and specifically to the greatest advantage of those advantaged least.

"Consider four hypothetical economic structures A-D, and the lifetime-average levels of income these would produce for representative members of three different groups:

EconomyLeast-Advantaged GroupMiddle GroupMost-Advantaged Group

"Here the difference principle selects Economy C, because it contains the distribution where the least-advantaged group does best. Inequalities in C are to everyone's advantage relative to an equal division (Economy A), and a more equal division (Economy B). But the difference principle does not allow the rich to get richer at the expense of the poor (Economy D). The difference principle embodies equality-based reciprocity: from an egalitarian baseline it requires inequalities that are good for all, and particularly for the worst-off.

"The difference principle gives expression to the idea that natural endowments are undeserved. A citizen does not merit more of the social product simply because she was lucky enough to be born with gifts that are in great demand. Yet this does not mean that everyone must get the same shares. The fact that citizens have different talents and abilities can be used to make everyone better off. In a society governed by the difference principle citizens regard the distribution of natural endowments as an asset that benefits all. Those better endowed are welcome to use their gifts to make themselves better off, so long as their doing so also contributes to the good of those less well endowed. “In justice as fairness,” Rawls says,“men agree to share one another's fate.”

I mention Rawls' difference principle not to endorse it, but to tee up a discussion about whether the distribution of wealth is something we have mistakenly ignored for several decades at our peril.  Income inequality is but one parameter that can affect the stability of a society.  As previous posts on this blog have discussed, homeostasis is a life regulating principle relating to the stability of living systems, whether the system is ecological, the biosphere, the plant or animal, or components of plants or animals (e.g. circulatory system, neurological system, digestive system).  (See March 6, 2012 post and April 8, 2011 post). Living systems function within a narrow range of certain parameters.  Temperature, pressure, concentrations or ratios of certain chemicals are but a few examples of the parameters.  Homeostasis refers to the living system's ability to stay or return within the range of parameters that is often tied to survival, but certainly health and well-being. Homeostasis operates through what are referred to negative feedback and positive feedback loops.  These are essentially a combination of sensors that determine the system is trending or operating outside the range of one or more parameters triggering responses that function to reverse or accelerate the change.  There is no reason why the concept of homeostasis as applied to living systems should not be applied to social systems, which are living systems in my view.  There are many who recognize income inequality as a key pararmeter in the stability of a social system, and there are those who subscribe to the view that there is a measurement (albeit no consensus on precisely what that measurement is) that reflects the degree of income inequality that is tolerable within a stable society.  Rawls' difference principle is one example of how that measurement might be derived.  Even if one would not select the difference principle, how large of a deviation from the difference principle should be tolerated?  Is there another income group we should pay attention to?

A recent article in the National Journal about Nick Hanauer, who became incredibly wealthy as an early investor in, describes a not-uncommon view among the wealthy that tax policy should be designed to transfer wealth in the interest of the stability of the economic system. In recent times, we have heard similar kinds of statements from Warren Buffett and Bill Gates.  Hanauer argues that expanding income inequality, such as that experienced in the United States in recent years, is injurious to the middle class whose role in the economy is critical to continued economic growth.  A recent book by political pundt, James Carville, titled It's the Middle Class, Stupid, suggests that there is a political dimension to Hanauer's economic concerns about the middle class.  President Obama's re-election rhetoric has certainly latched on to this view.  If the middle class is the object of public policy's attention on the subject of income distribution --- the gruop whose welfare is to be maximized --- then Economy D in the example above, not Economy C under the Difference Principle, is selected (which, by the way, happens to maximize the welfare of the wealthiest as well).

Hanauer takes a systems approach, replete with its feedback loops to the problem, as described in the National Journal article:

"The garden is one of Hanauer’s favorite metaphors to describe a well-functioning economy. He developed it over 20 years of reading on complex systems, chaos theory, and evolutionary biology. Eventually, he says, he arrived at a place where 'you realize that the economy is characterized by the same kind of circle-of-life, natural feedback loops that characterize natural ecosystems.' The plants need the bugs need the birds need the predators. Throw off the balance, and everything wilts."

The feedback loops in a social system that "regulate" the system are communications tools active in political and and other institutional structures (e.g. religion, business, families), but ultimately political. Tax policy is one "response" that a feedback loop can trigger to make that adjustment with respect to income equality.  In a system characterized by coercion, oppression, and dominance, the feedback loops may have little chance of adjusting an out-of-balance measurement of equality, unless there is a moral lever in the hands of the benevolent dictator that would make that adjustment.  For example, we see Saudi leaders from time to time dispensing national/royal wealth to maintain stability.  A system characterized by liberty, democracy, widespread dissemination of information, and protection of individual rights arguably enables feedback loops that, albeit imperfectly, permit adjustments in key social parameters to ensure that a certain stasis is maintained. But lately, the American political system, which is supposed to be the shining example of liberty, democracy, widespread dissemination of information, and protection of individual rights, cannot seem to engage in a civil discourse that addresses this issue.  The arteries of the feedback loops are clogged with polarization.  Next year, experts say, our nation will have to address tax reform, and we will have to see whether the system is capable of making balancing adjustments "to promote the general welfare" and whether the political will exists to keep its eye on that ultimate goal rather than descending into disagreements to exploit petty political opportunity and whether inequality of wealth and income, which has been widening for several decades now, will be an element of the discussion. 

What does this have to do with Andrew Carnegie?  Carnegie was not born into wealth, but he died the world's richest man thanks to the sale of his Carnegie Steel Company for $400 million to J.P. Morgan, who consolidated Carnegie into other steel entities to create U.S. Steel.  Carnegie was a wealthy man before he disposed of his business holdings, and at a relatively early age he pledged to give away his wealth before he died.  He acquired his wealth, not just because of his own skill and acumen, but because he was invited by friends who were building the nation's railroads in the 19th century to participate in their investments and he shared in the wealth they created.  His wealth grew because he exploited insider knowledge, which may or may not be legal today, and was enlarged later because of activity that would certainly be deemed illegal today such as securities fraud and cartelization behavior such as price fixing and agreements with competitors to allocate markets and customers and curtail production.  All of this is documented in David Nasaw's exhaustive research of  Andrew Carnegie and his times.  As Carnegie gradually withdrew from the day-to-day operations of his steel business, he turned more of his attention to the disposition of his wealth, establishing libraries across the United States and Europe, supporting educational institutions and teachers, as well programs to support arbitration of international disputes.  Ironically, Carnegie's interest in preventing war and international disputes was not founded in some moral conviction, but because he found that political instability made it difficult to sell bonds and raise capital for some of his iron and steel bridge and other railroad related projects.  Carnegie advocated that government should impose significant estate taxes on wealth to encourage the wealthy to dispose of their wealth during their lifetime. He wrote a book, The Gospel of Wealth, to spread his views.   Ironically, income taxes were not part of the public policy toolkit of the time to deal with issues of equity during the late 19th century.  Shortly after the ratification of the 16th amendment that exempted a federal income tax from the constitutional restrictions on direct taxes, Carnegie told President Wilson he favored a progressive income tax.  "Citizens should pay taxes in proportion to their ability to do so.  Millionaires have undoubted ability to pay," he wrote.  Just a few years before Carnegie died in 1919, he established the Carnegie Corporation as a trust to receive and hold most of his wealth.  He could not dispose of his wealth (measured in billions of dollars in today's money) fast enough, and so he parted with it before he died and it still remains a fund for its beneficiaries today.  Carnegie was not the only wealthy person who dealt with his wealth in this manner:  the Rockefeller Foundation and the Bessemer Trust have similar origins.  Carnegie was a model a century later for today's wealthy such as Howard Hughes, Buffett and Gates.  Carnegie did not have any recommendations about income or wealth inequality for public policy; he seemed to say that a person should not be restrained in how much wealth they can accumulate during their lifetime as long as they arrange to dispose of it in a manner consistent with their own view of the public good during their lifetime.  Enlightened laissez-faire to say the least.

Despite a nearly unrivaled record of philanthropy during his lifetime, Carnegie's public persona was a mask. He was certainly generous, but he never apologized for his wealth, his company's profits or its conduct in generating that wealth, or his constant battle to reduce the wages of those who worked in his factories and mills. He was a devotee to the social philosophy of Herbert Spencer.  He practiced self-deception and he was deceitful, as Nasaw documents.  He perhaps exemplifies Robert Trivers' thesis that humans deceive themselves in order to better deceive others. (See February 4, 2012 post).   Carnegie's ego was central to his deception.   He craved public attention and sought the attention of the public and other world and cultural leaders, but almost always conveyed the impression that it was the public or world leaders who were seeking him out.  He was one of those Scots who "invented the modern world."  (See May 20, 2012 post). 

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