Edward Hadas

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

These adjustments are almost certainly large enough to offset the reported decline. So the middle class doesn’t need a lecture on the virtues of making do with less. The adjustments also explain the lack of massive political indignation, even if there is evidence of minor irritation, at declining incomes. The placidity is not a sign that the American middle class has found stoic fortitude in the face of adversity. Rather, it is a reasonable response to consumption which is not really falling.

On the left, the common view is that the rich, or more precisely the widening gap at the top of the income ladder, is the nation’s leading consumption problem. For the top 1 percent of earners, income – after taxes and government transfers and adjusted for inflation – has multiplied four-fold since 1980, while the median has not even doubled. The disparity might be reduced by statistical adjustments, but the trend is real. The rapid increases in pay for celebrities, top executives and financial professionals are typical.

President Obama sometimes criticises this increase in income inequality in favour of the rich. That may be politically astute, but it dodges the ethical question of whether, and why, this change is undesirable. For egalitarian purists, it is, on principle, but the gains of the wealthy do not necessarily imply that the less well-off have fewer economic opportunities. For those who worry that the country is becoming a plutocracy the increased concentration of wealth is clearly a step in the wrong direction, but the wealthy have always had a great deal of political power in the United States.

There are good reasons not to worry too much. The actual increase in consumption which comes with an increase from very great to awesome wealth adds almost nothing to an already high quality of life. Further, more people have joined what might be called the luxury class. In 2011, 4.2 percent of American households had a pre-tax income of more than $200,000. In 1968, the proportion above that threshold (in 2011 dollars) was a mere 0.7 percent.

Another increase in inequality – against the poor – receives much less attention. For four decades until 2000, poverty was waning; the proportion of households with an income under $15,000 dollars (at 2011 prices) fell steadily. In the new century, though, the trend has clearly reversed. That is a real problem, even though the typical consumption of America’s poorer families is high by global standards.

The median cash measure understates the poor families’ decline. They have also lost out on cost-free services. Compared to richer Americans, today’s poor receive worse health care, leave their free public schools earlier and have less effective police protection. It is also worrying that today’s poor are also socially needier than the poor of their parents’ generation; overall they are less able – or, as some Republicans would have it, less willing – to help themselves.

Only a major social commitment could address this problem, but fixing poverty is low on the agenda of both candidates. Their indifference is politically sound – the bottom of the economic heap will not win them the election – but morally regrettable. Complaints about the supposed income losses of the middle class sound self-serving. Whines about the gains of the rich are often tainted with envy. A serious commitment to the poor would show that generosity still thrives in the world’s richest country.

Revolution was not on the agenda when the Second Vatican Council of the Catholic Church opened on Oct. 11, 1962, almost exactly 50 years ago. However, the gathering marked the start of a new era, not only for the world’s largest centrally-run religion. During the following years, the hope for a better, freer world led to everything from the sexual revolution to the Prague Spring, from African independence to the hippie culture of Woodstock. A half-century on, it seems a good time for an economist to take stock.

The economy was not the top concern of the ’60s would-be revolutionaries, but calls for a new society had two revolutionary economic implications.

First, like so many other parts of the established order, the economic “system” was to be overthrown. The target was clear enough in Eastern Europe – the Communist planned economy. Elsewhere, the economic villain was harder to pin down, although it was often assumed that “capitalism” was intrinsically evil – heartless corporations and excessive materialism in the West and post-colonial exploitation in the Third World. It was time for radical change; if not a return to some imagined pre-industrial communal paradise then at least a massive refusal to become cogs in the machine. It hardly seemed to matter then that dissidents in the East were longing for what protesters in the West were loathing.

One of those 1960s dreams has come true. Communism is gone, save for Cuba and North Korea. Otherwise, the “system” appears well entrenched. Corporations, larger and more impersonal than ever, have extended their reach in a globalised world. Developing economies may be less in thrall to the former colonial masters, but indigenous entrepreneurs are just like their western exemplars. The communes are closed or have gone commercial. Alternative careers are rare, money and finance ubiquitous.

The second economic revolutionary demand was for the abolition of poverty in the midst of post-War plenty. This sentiment led to the foundation of the United Nations World Food Programme in 1961 and the U.S. government’s war on poverty in 1964. The post-Vatican II Catholic Church was one of the keenest promoters of global economic “Justice and Peace”.

That dream has come closer to reality. True, hunger still plagues a billion people, but abject poverty has diminished as GDPs have risen around the world, and safety nets have helped the needy in richer countries. Nonetheless, the 1960s’ revolutionary and religious fervour made only a minor direct contribution to these improvements. Developing countries primarily copied the practices of rich countries while the welfare state mostly expanded existing programmes.

It might sound like “the system”, which was not overthrown, has actually been good for the world. Was the rage against the machine all in vain, and the idealism unnecessary? I think not, and not only because of the collapse of the Soviet economic model.

While most of the children of the 1960s eventually signed up for work within the system, many did not completely abandon their higher aspirations. As a result, the counter-culture spirit has infiltrated the corporate world. Capitalism has proved flexible enough to change in response to its critics. In the 1960s, theory Y management – the idea that employees should be encouraged more than disciplined – looked original. It is now obvious. Corporate claims to “social responsibility” may often sound hypocritical, but executives would not even bother to pretend if they didn’t believe that companies should do more than merely provide profits for shareholders. “Don’t be evil”, as Google’s founders put it, is a 1960s-style slogan that most bosses would now endorse.

The 1960s commitment to the elimination of poverty has also borne fruit. Without it, companies would be less willing to offer better conditions for their employees in poor countries, or to demand better conditions for their suppliers’ employees. Without it, western politicians would be more hostile to the expanding power of China and former colonies. Without it, there would be even more hostility to economic immigrants struggling to earn a decent living in rich countries.

Of course, history does not repeat itself. Last year’s global Occupy Movement didn’t amount to much. In a way, that failure is a sign of the greater success. The decade’s economic idealism has had enough influence that calls for radical change now sound silly.

Nonetheless, idealistic dreamers are still valuable. They can remind the world that the ultimate purpose of a prosperous society is not wealth for its own sake, but something better. I would suggest three goals for the grandchildren of the 1960s. First, the battle against pollution is not yet won in rich countries and has only begun in the developing world. Second, there is an urgent need for a financial system which doesn’t have greed as its only engine. Finally, the gulf between rich and poor is still too wide. It is too often forgotten that a poor man’s rise from wretched poverty does more good for the world than a rich man’s latest bauble.

Economic development is not a simple matter. If it were, the comforts and security of developed economies would be enjoyed by more than one-seventh of the world’s population. Political extremists, especially successful ones, help explain why development has benefited only a minority.

Over the last two centuries, many groups which started out tiny, extreme and persecuted ended up in power. Think of radical socialists in many nineteenth century European nations or the colonial freedom fighters in much of Asia and Africa. The rebels varied in their beliefs and sophistication, but they shared the conviction that the pre-existing social order was irredeemably corrupt. The groups were typically built around a hard core of true believers, with larger groups of fellow travellers and vague sympathisers, some of whom rose to quite high positions.

It is much the same for economic revolutionaries in very poor countries. At first, small bands of devotees emerge. These are people dedicated to the capitalist work ethic – discipline at work, innovation in enterprise and efficiency in production. These dreamers also aim to overthrow the economic arrangements that went before – the feudal hierarchies, economically stultifying social restrictions, aristocratic waste and primitive technology. Economic revolutionaries are invariably more selfish than their political counterparts, but they share the desire to turn everything upside down.

Industrial prosperity has fed the growth of these hard cores over the last few decades. Most poor countries have developed some industries and spawned at least a few billionaires. Nearly everyone in power now claims to be a sympathiser with the capitalist urge. Few speak out directly against industrialisation and economic modernisation.

Still, many countries which have escaped the most wretched poverty seem incapable of moving up to the highest level of prosperity. Only a few have emerged from what economists call the middle income trap. Mario Pezzini of the OECD describes these countries as ones with “a myriad of institutional and socio-economic deficiencies”. There are shortages of trust, skills, law enforcement and honest politicians, while social structures which restrict economic change remain firmly ensconced. In these countries the professional culture which is normal in developed economies remains revolutionary.

Indeed, a good way to describe this trap is as an incomplete economic revolution. There are three problems, each with corresponding political failures.

First, core revolutionaries have a hard time. Trotsky, the most idealistic leader of the Russian Revolution, was exiled (and eventually murdered) by the unimaginative Stalin. In a very different context, Lakshmi Mittal left his native India to build his steel empire in less hostile lands. Inside developing economies, powerful but inefficient incumbents often thwart the plans of the most imaginative industrialists. When economic fervour is allowed to flourish, it is often limited to groups identified as outsiders, for example among the overseas Chinese in many Asian countries.

Second, the hard core often softens when it gets into power. There is a long litany of once-idealistic leaders who led their countries into stagnation or worse. The list grows of businessmen in China, Brazil and India who have decided there is more to be gained from playing along with the powerful rather than disrupting existing arrangements. Managers at Brazil’s Petrobras, once considered a global quality operator, now find it easier to yield to the counter-revolutionary cash demands of its government owner.

Finally, revolutionaries often play establishment roles badly. The African National Congress in South Africa is the latest to discover that injustice is easier to condemn than to correct. Many industrial leaders in developing economies find it hard to move from subverting established economic structures to the construction of the open networks of trust and skills which underlie full industrial prosperity.

What can be done to complete economic revolutions? The political analogy suggests there are many bad paths, from the French Revolution’s terror to Mao Zedong’s proclamation of a Cultural Revolution after almost two decades in power. The rise of social democracy in continental Europe provides a more encouraging precedent. A tiny group of radical Marxists somehow metamorphosed into respectable politicians who could win democratic elections, neutralise old aristocracies and soften up new industrialists without compromising their hard core goals of social safety nets and universal public services.

The Social Democrat example suggests that the middle income trap may only be temporary. Perhaps the better educated children of today will find the values of the capitalist work ethic less alien. They could become economic revolutionaries with much less of the rebellious spirit than was required a generation ago. The critical challenge, though, will be to avoid the economic equivalent of the two great European wars which helped destroy the old and bring in the new order. Perhaps today’s economic authorities will yield more gracefully to this revolutionary force.

Speeches by Chinese Communist Party leaders are great opportunities to play “buzzword bingo”. Hu Jintao’s July 23 policy summary was replete with such phrases as “socialism with Chinese characteristics”, “Deng Xiaoping Theory” and “Scientific Outlook on Development”. But the sloganising is more than empty rhetoric. The speech, echoed elsewhere, shows the outgoing leader wants the CCP, and the country, to escape from might be called a Marxist trap.

The trap has three parts. The first is the core Marxist belief that economic considerations come first while culture and everything else lag far behind. These days, many non-Marxists also put the economy first, but Chinese leaders are especially loyal to the simple claim that GDP growth equates to progress. Hu’s focus on scientific development, for instance, is shorthand for putting higher production before all other goals. His other big buzzword – harmonious development – is not a tribute to the traditional Confucian notion of cosmic harmony, but a call not to let inharmonious social disorder slow material progress.

The second part of the Marxist trap is the Communist Party’s monopoly of power in government and its final authority over everything in society. That predominance has been taken for granted by virtually everyone in the top leadership since the foundation of the People’s Republic in 1949, although the thinking comes less of Marx himself than his teacher G.W.F. Hegel. Hegel believed that the state would and should eventually take over the roles traditionally played by the various organisations of civil society: family, church, guild, cultural and special interest groups. Lenin added the claim that the Communist Party is the vanguard of this all-encompassing state, so there is neither need nor space for other voices.

The final piece of the trap was set by Deng Xiaoping, the second leader of communist China. His endorsement of rapid and chaotic capitalist development, later know as socialism with Chinese characteristics, may not sound Marxist – Deng’s doctrinaire opponents in the CCP were certainly horrified. But Marx himself believed that only bourgeois capitalists had the fervour and motivation required to industrialise a predominantly agricultural economy. In Marx’s day, the bourgeois and the communists were enemies, but the CCP has tried to co-opt the private sector by admitting leading industrialists into the Party.

By some standards, the Deng version of Marxism has worked very well, far better than the Leninist approach, adopted in the Soviet Union and its satellites, which gave the state control of all the means of production. China’s GDP has increased remarkably rapidly for almost four decades. There has been little social discord and the Party remains in firm control.

Still, as the Party prepares for the arrival of a new generation of leaders, its Marxism looks far more constraining than liberating. The narrow focus on production has led to the neglect of such important matters as corruption, environmental depredation and quality control. The Party’s suffocation of civil society has neutered campaigns against abuses. It has also impoverished intellectual discourse, an important failing in a society still in the throes of the dramatic transition from poor to rich; from traditional to contemporary. And the Party’s acceptance of capitalists, careerists and opportunists has accelerated a decline in ideological fervour.

Hu is certainly aware of the challenge. He noted that the country will soon be “a well-off society” with a more demanding and restive population. However his new buzzwords are unpersuasive. The all-encompassing Communist Party is incapable of building China into “a power of socialist culture” or of ensuring “the people’s extensive rights and freedom”. The Party is trapped because it can neither let civil society flourish nor do what civil society does.

If the Marxist trap is not sprung, China will be left lame and angry. The government will become more oppressive and more of a kleptocracy, stultifying society and depressing the economy. Escape, however, requires a truly revolutionary change. In buzzword-speak, the CCP and China should no longer remain “unswervingly on the socialist path”.

What new path should the Middle Kingdom take? There are some bad ideas about, for example militaristic nationalism and a reversion to more Leninist economics. The western way, towards the European and American social model, is much more attractive. China, much like its Asian mentor and rival Japan, could end up with a mixed economy, a pushy but not omnipotent state and a society in which any lack of higher values is largely a private concern.

In a way, a choice to follow the conventional path to multi-party democracy would be regrettable. China would become less distinctive and its indigenous cultural traditions would become less relevant. More significantly, this looks a bit like a road to nowhere. Apathy blights politics in rich countries while idealism is in short supply and civil society often seems stunted. However, in China no better alternative is available. For its own good, the Communist Party should abandon Marxism.