THE BLOG
01/22/2015 05:25 pm ET Updated Mar 24, 2015

Wealth: Legitimate and Illegitimate

Andy Roberts via Getty Images

Legitimate wealth is acquired in compliance with societal norms. In the United States, there is a broad expectation that hard work can lead to wealth. It serves as a central motivator of economic pursuits, rewarding hard work and creativity that benefits society as a whole. The legal system supports this by embodying specific norms, keeping the economy in a state that balances individual and societal benefits. Major laws (such as the anti-trust laws) regulate large-scale economic behavior as well as blatantly anti-social activities (such as drug trafficking). Thousands of lesser laws and regulations restrain individual commercial actions for the benefit of society as a whole, such as caps on interest rates, charges for public grazing lands or mineral extraction, and clean air regulations.

Social expectations embodied in these laws and regulations generally address ways in which an individual or organization can extract assets from others or from society as a whole. Naturally those directly affected often object to restrictions and can forcefully lobby against them. The public interest, on the other hand, is often diffuse and there are many fewer individuals or organizations to speak for it. And at any rate, the balance between individual and social benefits is often unclear and can change over time. And the legal system also changes over time, adjusting to maintain a sensible balance. Traditionally, this has worked reasonably well.

Now the Twenty-first Century raises a whole range of challenges for the system to adapt to, including:

  • Rapidity of change. Spurred by the Internet and new modes of communication, the pace of change has significantly increased. Among other effects, this makes it much more difficult for the legal system to keep up with new conditions.
  • An increasingly complex financial system. In the traditional financial system, banks paid interest to customers and used the money collected to make loans to both businesses and individuals. The stock market provided a further source of capital for businesses. Together, they greatly facilitated commerce. Now the system is becoming steadily more complex and susceptible to manipulation. Its focus has shifted from facilitating commerce to extracting wealth, often with minimal benefit to society as a whole.
  • Corporate responsibilities. The corporate focus has also heavily shifted from benefiting society to operating specifically to benefit shareholders, at the expense of workers and of society as a whole.
  • Market access. The internet has made it possible for even new ventures to sell to millions of individual buyers. One result is that even small transactional charges can rapidly result in a major accumulation of wealth, even for minor social benefits.
  • Social complexity. An increasingly complex society requires increasingly complex regulation. It becomes more and more difficult to measure impacts and easier to manipulate outcomes.
  • Education requirements. Good education is increasingly important for good jobs, but getting it is increasingly difficult for many individuals in the lower levels of society; economic stratification becomes self reinforcing.

Democratic sclerosis. It has always been difficult to assess the impact of special interests on legislation. Millions of people have vested interests in specific aspects of legislation and can respond with loud campaigns (often orchestrated by major interest groups) in regard to some specific legislative effort with few, if any, voices speaking for broad public interests.

The overall result is that more and more individuals are able to extract more and more wealth from society with less and less social benefit. Fewer assets are left for society as a whole. This concentration of wealth in the hands of a few is a main reason why the American Dream is fading for the many. Wealth accumulation itself has shifted from motivating economic development to impairing society as a whole.

Wealth accumulation becomes illegitimate when it begins to undermine society, to drag overall economic benefits down. We are seeing many such unfavorable trends, including:

  • The American Dream of being able to work hard and build a comfortable life is fading for millions. In its place is an American Nightmare with millions of families living in difficult economic circumstances beyond their control. This exacerbates a wide range of social ills including petty crime, youth gangs, medical and mental problems, racial frictions and an outsized prison population.
  • Infrastructure deteriorates at both national and local levels.
  • Resource constraints undermine the social resiliency needed to respond to emergency situations (floods, wildfires, storms, and epidemics) as well as broader challenges such as terror threats and climate change.
  • The education system struggles to give youngsters the skills they need to function in an increasingly complex economy.
  • Government oversight of food, drugs, national parks, the environment and the financial system deteriorates even as the systems become more difficult to monitor effectively.
  • Health care remains a challenge for millions of Americans despite the fact that the nation spends considerably more per capita than any other nation.

The nation has the assets to address many of these challenges, but they are held tightly by those at the very top level of society and are not available for everyday individuals to build their own lives or for governments at all levels to provide necessary services.

The economy has to be structured to work for everyone. Society as a whole has to decide just what this means, what pattern of wealth distribution is legitimate. There are a number of standard indicators, particularly the Gini Coefficient which provides an overall measure of wealth distribution. For the United States, this coefficient has deteriorated steadily; the CIA now puts it at around 45, compared to the low 20's for the most egalitarian countries, placing the United States well down in the bottom half of 136 countries surveyed. Clearly the nation is moving in the wrong direction, and the unfavorable trends listed above are the result.

There is obviously no simple solution. Two general approaches can help address the problem:

  • Regulation of specific economic activities so that the outcomes better favor society as a whole. A number of such efforts are currently being considered, including minimum wages levels, improved work conditions, shorter work weeks, broader support for education, and internet neutrality. Unfortunately, economic complexity means that many positive changes come with negative side effects, so it is often difficult to project how positive results will be. In addition, the rate of change is now so rapid that focused government responses cannot keep pace.
  • Progressive taxation can make higher levels of wealth more difficult to attain and can compensate to some degree for inadequate controls on specific economic activities. Such measures can include higher tax levels for upper tax brackets, reduction of favorable treatment for capital gains, and more stringent inheritance taxes.

But the biggest challenge is not specific actions but the overall attitude that wealth itself is legitimate. Excessive wealth accumulation is the result of permissive conditions that allow and even promote it. These conditions are heavily influenced by the wealthy for their own benefit. Lobbying efforts and campaign contributions are major avenues of influence. But these ultimately depend on public acceptance of rationales which facilitate wealth accumulation. The concept that higher profit levels would trickle down to the general public has been largely discredited, but the idea that corporations are only responsible to their shareholders is widely accepted, as are notions that the shiftless poor are responsible for their own situation, that any government redistribution of wealth is only stealing from the rich, and that inheritance taxes are inherently wrongful. Large economic projects are typically promoted with an emphasis on jobs created; how long-term or desirable the jobs will be is downplayed, as are any health or environmental impacts. Little attention is given to the overall distribution of economic costs and benefits; the people promoting the project are not the people who will be getting jobs, but often people who will have strong financial benefits from the project.

The fundamental requirement is to recognize that the current wealth distribution undermines social well being; wealth accumulation can indeed be illegitimate. Any assessment of new legislation or regulations needs to incorporate the old adage, Follow the Money: who benefits and how much. Will results worsen wealth inequality or improve it? That is the key question.