Vijay K. Mathur
“We can have democracy in this country, or we can have great wealth concentrated in the hands of few, but we can’t have both.”
— Louis D. Brandeis
In the U.S., we find the emergence of winner-take-all capitalism (WTA) in markets. In WTA markets, capitalists become prosperous and labor’s share of income declines. There are winners and losers in such markets. Professor Robert Frank states in “Winner-Take-All Society”: “The top prizes in many winner-take-all markets, however, significantly overstate the social value added by top performers.” Hence they attract undue amount of resources.
WTA markets create income and wealth inequality. Pew Research (January 9, 2020) reports that median income of high-income households was seven times the median income of low-income households in 2018. Wealth inequality was even greater. Median wealth of high-wealth households was 75 times the median wealth of low-wealth households in 2016. These inequalities are rising and may get worse.
Professor Frank notes that the extraordinary reward structure, common in entertainment and sports, has become more widespread in the economy as illustrated by a couple of examples here. Nobel Laureate economist Joseph Stiglitz, in “The Price of Inequality,” finds that “the six heirs to the Wal-Mart (sic) Empire command wealth of $69.7B, which is equivalent to the wealth of the entire bottom 30 percent of the US society.” Chrystia Freeland states, in “Plutocrat,” that during the deepest recession in 2007, Blackstone, a large private equity firm, raised $4 billion by creating a publicly held company worth $31 billion at that time (now worth $554 billion). And one of the cofounders, Steve Schwarzman “came away with personal stake worth $8 billion at that time, along with $677 million in cash.” Now, he is worth $18.3 billion.
One probable result of WTA markets is that the growth of elites with substantial resources undermines democracy. Theoretical and empirical evidence show that in the early beginning of a democracy, income inequality increases, but in more mature democracies, income inequality decreases. However, Stiglitz wonders why pre- and post-tax income inequality, even including transfer payments, is greater in the United States than in other advanced countries with similar technologies and per capita incomes.
Stiglitz hypothesizes that laws and regulations through institutional political framework govern the nature of market forces, and I may add, the trajectory of the distribution of the social product. Political scientists Jacob Hacker and Paul Pierson, in “Winner-Take-All Politics,” also share similar views. WTA markets affect not only income and wealth inequality but also political inequality, where the political process works for the superstars who control most resources. WTA creates crony capitalism, where the capitalists engage in rent-seeking behavior (using political process to seek economic benefits such as subsidies, less market competition, lax laws and regulations, and favorable tax laws). This ultimately distorts the distribution of income and wealth.
WTA markets also affect overall productivity, hence growth rates. Stiglitz argues that the decline in the productivity of low-wage workers is more than the increase among high-wage workers. He also adds that experimental evidence shows that “raising wages of workers who felt that they were being treated unfairly had a substantial effect on productivity.” Productivity affects economic growth. WTA markets misallocate resources due to less labor mobility and competition in markets, therefore creating inefficiencies in the economy. Concentration of resources in few hands and less market competition also creates disincentive for innovations, a hallmark of economic growth. WTA markets and politics also reduce trust and create uncertainty in the overall economy, as we are going through now, and hence decreasing investment.
It appears that the COVID-19 pandemic may further lead to the concentration of resources and power in the hands of a few capitalists, since there is an incentive to substitute capital for labor in production. Capital cannot get infectious diseases, hence reducing the threat of production shutdowns. However, as a result the consumer base may dry up, thus worsening the effect of WTA. Democracy and social justice for all cannot survive in a society that consists of winners and losers.
Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden.
