EXCERPTS
Book Three
INEQUALITY AND DEMOCRACY
The books in this series contain some unique analyses of the troubles with the western economic and political systems, and unique proposals to overcome these troubles. Excerpts from such analyses and proposals are not included below, as they can be misunderstood out of the full context of the books.
Additionally, Book Three introduces a unique dynamic model of the welfare of the society in Chapters 1 and 2, excerpts from which are also not included below.
The model includes many graphics, which are presented in high-resolution colors in this website, for those readers who preferred print copies that permit only grayscale and limit the size of any graph to one page.
There is no need for miracles for one society to significantly surpass the others in the long run. All that a society needs is a sustainable small difference in growth rates in the short run, accumulating through compounding to create a huge difference in its overall economic size in the long run. - Section 1.1
When inequality rises or falls too much, the growth rate falls. Maximum growth rate is achieved at moderate inequality levels. - Section 1.2
The welfare of the society eventually depends on two variables, namely the economic growth rate and the level of inequality within the society. To maximise its overall welfare, a society needs to balance its growth rate and inequality, staying away from either a too low growth rate or a too high inequality. - Section 1.3
Decreasing excessive inequality towards moderate levels through the establishment of Fair Competition is a much better way than decreasing excessive inequality through more taxation and redistribution. - Section 2.2
Acceptable inequality can be defined as the level of inequality that is rationally and morally acceptable relative to the level of fairness in the economic and political systems. The fairer the competition the higher will be the society’s tolerance to inequality, thus the higher will be the level of acceptable inequality. As the level of Fair Competition increases, acceptable inequality rises while actual inequality falls, thus minimizing the gap in between and resulting in a higher stability for the social order of the society. - Section 2.2
When the complexity of the economic and political environment rises as a result of a major game changer, the Social Intellect of the society falls in relative terms. - Section 2.3
If the society jumps on Artificial Intelligence without analysing the potential consequences, where it ends up after the implementation of such technologies will be a matter of luck at best. And if the end result is not loved afterwards, it will be too late to reverse the process. A similar argument can be made regarding the emergence of Global Warming. Many other cases can be found with the common denominator that the Social Intellect of the society becomes and remains inadequate to handle the game changer properly in time. - Section 2.3
The western social order has the implicit assumption that economic developments will have political consequences. - Section 3.2
The tolerance levels of the society for adverse economic developments are inversely related to the Social Intellect of the society: the higher the Social Intellect, the lower the tolerance for a rise in inequality or a fall in growth rate – and vice versa. - Section 3.2
When a major game changer emerges, the abrupt weakening of its Social Intellect will cause the society to mis-diagnose the source and thus the cure of the trouble. The society concentrates its attention on marginally related issues in search for a cure, consequently delaying the diagnosis of the real cause and the implementation of the appropriate cure, and letting the uncured trouble get even worse in the meantime. - Section 3.3
Any major economic issue that requires deep analysis and demands long-term solutions that are difficult to understand and painful to accept, is an opportunity for the populist politician to create misconceptions utilising non-economic issues, and present some shallow (and naturally wrong) analysis with simple (but useless) short-term solutions. - Section 3.3
Any political opinion has to be marketable to the society in order to attract political support. A marketable opinion, in turn, should be understandable with respect to the adequacy of the Social Intellect of the society, and should be likeable when understood. Many major economic troubles of our day happen to be complex and require short-term sacrifices for long-term benefits, making their remedies neither easily understandable nor much likeable. If a Politician insists on giving the right messages and presenting the painful but correct long-term solutions, he simply can not get sufficient political support to win an election. - Section 3.3
A too strong and widespread social security system, together with the mis-belief on its sustainability, makes many individuals in the society feel that their financial wellbeing will not be effected much by the developments in the economy, and thus they may enjoy the luxury to distract their attention to non-economic issues. - Section 3.3
If a society still has many major economic and political issues to be solved, all with a potential to go worse if left untreated, then, spending too much time and material resources on entertainment activities and sparing too much attention to them practically becomes a distraction of attention from the major issues that need to be solved. And to pour fuel to the fire, the advances in digital communication technologies facilitate the spread of all sorts of entertainment. - Section 3.4
There is a need for a gradual dilution in the social security for the elderly in societies with currently over-generous systems. This economic necessity is not well understood by many voters who are currently in their working-ages, who tend to believe that they can keep intact the current over-generous system for themselves in case they politically oppose it. - Section 4.3
An individual’s fear of the stick is stronger than his desire for the carrot. Because of the non-linear relationship between welfare and income, when the taxation-and-distribution is made stronger, the stick weakens much more than the carrot, and an individual’s overall motivation will decrease much more than commonly assumed, and consequently, economic growth will fall. Although some social security system needs to exist for the working-aged, it is best to keep it at weaker levels, provided that it can still sustain social peace. - Section 4.4
In dealing with too high inequality, the most intellectual approach would have been analysing the causes (like widespread cheating and/or concentrations of power within the economy) and introducing the cure (namely Fair Competition) that would prevent the rise of pre-tax inequality towards excessive levels. An easier alternative solution seems to be trying to cure for too high inequality after it arises, namely by decreasing after-tax inequality through some taxation-and-distribution. But that is not a feasible solution by itself, at least in the long run. - Section 4.5
Even in cases where the social security for the working-aged, for the elderly and for the young, are all kept at their optimal levels, if pre-tax inequality is persistently too high, it is practically very difficult -if not impossible- to sustain the social security system in the long run. What the society definitely needs is Fair Competition to decrease pre-tax inequality and to fuel economic growth. - Section 4.5
An unfortunate case for a society is a period when high growth is achieved due to overly-positive external conditions while having a strong social security system in place. A natural reaction under such cases is further strengthening the social security system, naively believing that such conditions will last forever and the stronger system will remain sustainable. The price for this misunderstanding is paid in the long run, in the form of a lower economic growth first and a collapsing social security system next. - Section 4.5
In an intellectual society any issue regarding any major changes in the state budget, must answer three questions: who will benefit from the proposed change in the budget, who will pay for those benefits, and why this re-allocation of resources will increase the overall welfare of the society. - Section 5.1
The reason for direct taxation should not only be the financing of the state budget, but should also include the prevention of the over-concentration of economic power that may eventually turn into or support concentrated political power. - Section 5.2
Success-based-only-on-superior-merit has practical limits in a competitive environment. And those limits are definitely lower and stay within rational boundaries when there is Fair Competition. Contrary to common understanding, in cases of extreme-success based partially on merit but fundamentally on extreme-good-luck, there is some misallocation of resources and the resulting value created for the society is not optimal in the long run. And the worst case, from the viewpoint of both social justice and allocation of resources, is where cheating is involved in attaining extreme-success. - Section 5.3
The fact that there are just a few winners in an open competition among a very large number of competitors, does not necessarily mean that the winners have won on merit. By the nature of probability, sometimes events may align in such a way that the reason behind the extreme-success is pure good luck. - Section 5.3
Contrary to common understanding, any sort of extreme-success is not fair, as it is based on either natural-extreme-good-luck (sometimes coupled with merit), or self-fabricated-extreme-good-luck, namely cheating, and creates a misallocation of resources that harm the welfare of the society in the long run. Therefore, from the economic perspective, it should be taxed much heavier than common success. - Section 5.3
Extreme-success usually results in a concentration of economic power in its market. This concentrated economic power will have to get political support to keep and strengthen its status, and for that purpose, needs to influence political decision making or even cooperate with concentrated political powers, and eventually harm the welfare of the society. Therefore, from the political perspective, its economic power and thus its potential political influence should be diluted through further taxation. - Section 5.3
The definition of a real middle class needs to be based on two vital attributes. First, each member of the middle class should have an income level much above that of bare-survival, so that the middle class can develop a demand for social values like individual rights and freedoms, fairness, dignity, etc. beyond basic material needs. And second, each member of the middle class should have an intellectual level much above that of being intellectually-childish, that enables them to develop some social awareness on economic and political issues. Only a middle class that fits into this advanced definition will serve as the guardian and the stabiliser of the western social order. - Section 6.1
In today’s economic, political and social environment, where technology develops and global integration continues at breakneck speeds, Social Intellect has a natural tendency to fall. It follows that, cheating has a natural tendency to spread and consequently create concentrations of power in both economics and politics, which will eventually harm the interests of the society. And the primary remedy, namely, developing Social Intellect and Awareness on economic and political issues, is neither easy nor guaranteed to end in success. However, there is no other way. - Section 6.2