Differences in performance of nations in affording quality of life for their citizens lay in its institutions - economic, political, judicial, education, and all the rest. While it is beneficial to have a rich natural resource base, it is not determinant as some rich nations do not have a rich natural resource base, and some resource-rich nations remain poor. Nor can a nation's performance be attributed entirely to having highly trained people with good work ethics, for such people can be found the world over, including in poor nations.
What it takes are institutions formed over a long time period to produce a system that works to the benefit of its people. These institutions evolve and change over time. In the industrialized world, some form of democracy combined with a system of prices and markets has proven to be to be successful, with some qualifications and caveats, that is.
It is not simply a matter of "capitalism vs. socialism," as even Communist China is obviously resorting to a market system. And capitalistic America has substantial government involvement at local, state, and federal levels in economic matters, both through legislation involving the operation of markets, and direct purchases of goods and services.
We need to remind ourselves that the ultimate goal of a political and economic system is to meet the needs of its citizens. Citizens must see themselves as participants of the system, participating and contributing, as well as sharing in the benefits of the system. Furthermore, most would agree that the system should be based on merit, though stopping well short of a "winner-take-all" outcome.
During the last several decades, a confluence of forces has changed our political and economic institutions such that an ever larger portion of our citizens see themselves falling behind, not rewarded according to their contribution to production, and ever less relevant in the political process. These beliefs are buttressed by the fact that since the Great Recession, some 95 percent of economic gains have gone to a mere 1 percent of our population. Middle class incomes have stagnated over several decades while incomes and wealth of the most affluent 1 percent, and especially the upper one-tenth of 1 percent, have rocketed ever higher.
The ever-increasing influence of money in politics has left citizens feeling that their modest campaign contributions, as well as their vote, is of diminished value, or even meaningless relative to the huge sums contributed by wealthy contributors. A sense of disenfranchisement and cynicism is rampant, and not healthy for the future of our nation. A collective sense of inequity and unfairness prevails.
Equity or fairness is relative - although a hard concept to pin down, it is very real with real consequences.
Students of economics are introduced to a concept attributed to the Italian economist Vilfredo Pareto - it goes something like this: If through an economic event, transaction, or project, someone is better off, and nobody is worse off, this is known as a "Pareto improvement." After all, no one loses, and someone gains. Similarly, if someone gains a little and someone else gains a lot, this is also a "Pareto improvement." After all, since nobody is worse off, shouldn't everybody be happy?
Maybe not. A classic experiment in behavioral economics demonstrates that a sense of fairness prevails in the real world. This experiment, repeated many times in various cultures, puts two strangers in a room. The investigator enters the room and performs a coin-flip. The winner is awarded $100. The winner has to offer a share the proceeds to the loser. Only if the loser accepts the offer of the winner does either get any of the money. If the loser doesn't accept the deal, both get nothing.
Under the "Pareto" concept, the loser would gladly accept $1, or even 50 cents, since he is better off with some money, however small the amount, that he didn't have before this deal - this rather than turn down the dollar and walk out with nothing.
So, how does this experiment turn out? Investigators have found that in case after case, the "loser" of the coin-flip insists on somewhere around 35 to 40 percent of the proceeds, and would rather walk out with zero than to see the "winner" walk off with the bulk of the $100 that he won with luck of the coin flip.
How does this relate to the real world? The nation's largest employer is run by one of our nation's wealthiest families. It is known that many of its employees are paid so meagerly that they qualify for food stamps. The employee has no choice but to accept the low wage. And the employer knows that public assistance will assure food and means of subsistence to the low-paid employee, more or less any way.
But doesn't the low-paid employee contribute to the production and wealth of the employer? Shouldn't he/she be paid a wage that keeps up with inflation and makes it unnecessary to go on public assistance?
The oft-heard rebuttal to this proposition is that the minimum wage worker should "get more education," and get promoted or move to a different profession. That argument cuts no ice as there will always be workers who are working at lower skilled jobs, many of which are just plain hard and tedious. Someone must perform these tasks that are necessary for this economy to function. A sense of fairness says that they should be compensated for their labor - this in addition to the pragmatic proposition that a higher wage would add to aggregate demand that would help the total economy.
Our changing American institutions have condoned, actually encouraged, the increased disparity of wealth and income in this nation. Institutions are made by humans; they can be changed by humans, made better - or worse. It's our choice.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
What it takes are institutions formed over a long time period to produce a system that works to the benefit of its people. These institutions evolve and change over time. In the industrialized world, some form of democracy combined with a system of prices and markets has proven to be to be successful, with some qualifications and caveats, that is.
It is not simply a matter of "capitalism vs. socialism," as even Communist China is obviously resorting to a market system. And capitalistic America has substantial government involvement at local, state, and federal levels in economic matters, both through legislation involving the operation of markets, and direct purchases of goods and services.
We need to remind ourselves that the ultimate goal of a political and economic system is to meet the needs of its citizens. Citizens must see themselves as participants of the system, participating and contributing, as well as sharing in the benefits of the system. Furthermore, most would agree that the system should be based on merit, though stopping well short of a "winner-take-all" outcome.
During the last several decades, a confluence of forces has changed our political and economic institutions such that an ever larger portion of our citizens see themselves falling behind, not rewarded according to their contribution to production, and ever less relevant in the political process. These beliefs are buttressed by the fact that since the Great Recession, some 95 percent of economic gains have gone to a mere 1 percent of our population. Middle class incomes have stagnated over several decades while incomes and wealth of the most affluent 1 percent, and especially the upper one-tenth of 1 percent, have rocketed ever higher.
The ever-increasing influence of money in politics has left citizens feeling that their modest campaign contributions, as well as their vote, is of diminished value, or even meaningless relative to the huge sums contributed by wealthy contributors. A sense of disenfranchisement and cynicism is rampant, and not healthy for the future of our nation. A collective sense of inequity and unfairness prevails.
Equity or fairness is relative - although a hard concept to pin down, it is very real with real consequences.
Students of economics are introduced to a concept attributed to the Italian economist Vilfredo Pareto - it goes something like this: If through an economic event, transaction, or project, someone is better off, and nobody is worse off, this is known as a "Pareto improvement." After all, no one loses, and someone gains. Similarly, if someone gains a little and someone else gains a lot, this is also a "Pareto improvement." After all, since nobody is worse off, shouldn't everybody be happy?
Maybe not. A classic experiment in behavioral economics demonstrates that a sense of fairness prevails in the real world. This experiment, repeated many times in various cultures, puts two strangers in a room. The investigator enters the room and performs a coin-flip. The winner is awarded $100. The winner has to offer a share the proceeds to the loser. Only if the loser accepts the offer of the winner does either get any of the money. If the loser doesn't accept the deal, both get nothing.
Under the "Pareto" concept, the loser would gladly accept $1, or even 50 cents, since he is better off with some money, however small the amount, that he didn't have before this deal - this rather than turn down the dollar and walk out with nothing.
So, how does this experiment turn out? Investigators have found that in case after case, the "loser" of the coin-flip insists on somewhere around 35 to 40 percent of the proceeds, and would rather walk out with zero than to see the "winner" walk off with the bulk of the $100 that he won with luck of the coin flip.
How does this relate to the real world? The nation's largest employer is run by one of our nation's wealthiest families. It is known that many of its employees are paid so meagerly that they qualify for food stamps. The employee has no choice but to accept the low wage. And the employer knows that public assistance will assure food and means of subsistence to the low-paid employee, more or less any way.
But doesn't the low-paid employee contribute to the production and wealth of the employer? Shouldn't he/she be paid a wage that keeps up with inflation and makes it unnecessary to go on public assistance?
The oft-heard rebuttal to this proposition is that the minimum wage worker should "get more education," and get promoted or move to a different profession. That argument cuts no ice as there will always be workers who are working at lower skilled jobs, many of which are just plain hard and tedious. Someone must perform these tasks that are necessary for this economy to function. A sense of fairness says that they should be compensated for their labor - this in addition to the pragmatic proposition that a higher wage would add to aggregate demand that would help the total economy.
Our changing American institutions have condoned, actually encouraged, the increased disparity of wealth and income in this nation. Institutions are made by humans; they can be changed by humans, made better - or worse. It's our choice.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
