Thursday, September 3, 2015

Income Inequality in the New Gilded Age

Everyone believes, quite reasonably, that America is suffering from an advanced case of income inequality. It remains to be seen whether it is acute or chronic. In our new gilded age a few people control massive amounts of wealth while the many are barely subsisting.

Moreover, many of those who have vast fortunes are prone to flaunt it. They fly around in private jets, vacation in the most expensive locales and buy whatever they want, regardless of price.

Of course, they self-segregate. It goes beyond the gated communities. When a student of modest means encounters the children of the superrich in college, he will know that he can never really hang out with them, because he cannot spend with them. It feels strange, even immoral for college students, the children of the superrich, to spend massive amounts of money that they did not earn, but such is life.

The superrich buy massive homes in San Francisco and New York, eschewing the modesty of a Warren Buffett who still lives in a modest abode in Omaha, NE.

Naturally, there has been something of a political uproar about the problem. But, even the superrich are trying to solve the problem, by the way that makes the most sense to them: income and wealth redistribution. It seems strange to many, but the tech titans of Silicon Valley and many hedge fund billionaires often support Democratic, socialist redistribution schemes.

In truth, when you are that rich, a few hundred million here or there is not real money. Besides, by buying Democratic politicians they are buying protection, as it used to be called. They are ensuring that it will not all be confiscated by the government.

Back in the day, when the Republic was founded by great moral teachers like Benjamin Franklin, conspicuous consumption was considered to be vulgar. One did not flaunt one’s wealth. It was poor form.

But, why did this central tenet of the Protestant work ethic take root? And what did it mean?

In the first place, Franklin believed in investment, not in spending. He believed that the rich had a duty to invest in new businesses, the better to give others the chance to work their way up. His was not an ethic of redistribution or handouts.

Second, if the superrich flaunt their success through profligate spending, then other members of society, prone by human nature to emulate their betters, will try to spend money in order to have a lifestyle that resembles that of the superrich. Since they, as opposed to the billionaires, do not have the means to support their spending habit, they are more likely to go broke. Thus, the wealthy man who is modest in his expenditures and who invests and saves his money will be setting a good example.

In addition, flaunting your wealth is vulgar and shameless. It is also decadent and wasteful. Not everyone has the capacity to be immodest about their wealth. Shamelessness sets a bad example.

Finally,  gross income inequality, especially the kind that flaunts success as a way to make everyone else feel like losers, will make people become demoralized or angry. If the gap is too great people will become demoralized; they will know that there is no way for them to attain what the superrich have attained. If that is the case, why work at all.

This to introduce a short essay by John Paul Rollert, an adjunct associate professor in the University of Chicago business school. Rollert sometimes regales his students with the thought of Benjamin Franklin, a set of ethical principles set out in his Autobiography. The book was wildly popular in colonial America and still contains enough wit and wisdom to make it required reading.

For today’s business school students, Franklin’s precepts appear to set down the road to middle management. And they, of course, are far more ambitious than that.

In a world where all MBA students want to become billionaires, quite a few of them are going to be disappointed.

Rollert explains that Franklin retired from his printing business at 42, thereupon to become “a man of leisure.” Many people today think that leisure is the best that life can offer. Yet, what Franklin meant by leisure was not at all the same as what we call it:

When he retired from the printing business at the age of 42, Benjamin Franklin set his sights on becoming what he called a “Man of Leisure.” To modern ears, that title might suggest Franklin aimed to spend his autumn years sleeping in or stopping by the tavern, but to colonial contemporaries, it would have intimated aristocratic pretension. A “Man of Leisure” was typically a member of the landed elite, someone who spent his days fox hunting and affecting boredom. He didn’t have to work for a living, and, frankly, he wouldn’t dream of doing so.

Having worked as a successful shopkeeper with a keen eye for investments, Franklin had earned his leisure, but rather than cultivate the fine arts of indolence, retirement, he said, was “time for doing something useful.” Hence, the many activities of Franklin’s retirement: scientist, statesman, and sage, as well as one-man civic society for the city of Philadelphia. His post-employment accomplishments earned him the sobriquet of “The First American” in his own lifetime, and yet, for succeeding generations, the endeavor that was considered his most “useful” was the working life he left behind when he embarked on a life of leisure.

For Franklin, leisure meant having the time to become a scientist, a statesman, a political leader and a wise man. He set out to contribute the nascent American Republic, using his wit and wisdom and industry. He did not try to assuage his guilt by setting up philanthropies that would give away his money.

And naturally, he dressed modestly and did not indulge in profligate spending.

Franklin wrote his Autobiography because he wanted to improve:

the features of private character, and consequently of aiding all happiness both public and domestic

Good character was civic virtue.  Franklin was not aiming at moral transcendence or the form of spiritual fulfillment that would have raised him above the mass of humanity. He wanted to get along with others, to be able to look them in the eye, to show them respect, not to cause them to lose face.

In Franklin’s words:

I took care not only to be in Reality Industrious & frugal, but to avoid all Appearances to the Contrary. I drest plainly; I was seen at no Places of idle Diversion; I never went out a-fishing or shooting; a Book, indeed, sometimes debauch’d me from my Work; but that was seldom, snug, & gave no Scandal: and to show that I was not above my Business, I sometimes brought home the Paper I purchas’d at the Stores, thro’ the Streets on a Wheelbarrow. Thus being esteem’d an industrious thriving young Man, and paying duly for what I bought, the Merchants who imported Stationary solicited my Custom, others propos’d supplying me with Books, & I went on swimmingly.

Franklin composed a set of ethical principles. Among them were frugality, industriousness, order, sincerity, justice, moderation and humility.

Rollert concludes with a prophetic remark made by America’s Secretary of the Treasury, regarding the decadence and profligate spending of the twenties:

In 1929, Treasury Secretary Andrew Mellon wrote that, thanks to Franklin, “America early learned to spend her surplus earnings on further production rather than selfish enjoyment.” The decade when this tribute was issued doesn’t seem coincidental. The behavior that made Franklin, in Mellon’s words, the “Father of Thrift” must have seemed quaint to so many Jazz Age arrivistes who regarded conspicuous consumption as not simply the evidence of commercial success but, when it came to looking the part, the very catalyst for that condition.


David Foster said...

Runaway credentialism is a huge problem. When the junior people at the bank know that if they're not MBAs from an Ivy League school they will never get VP jobs...regardless of is very bad from a cultural standpoint. (In general, credentialism is worst in academia and the "nonprofit" world, also bad in consulting, pretty bad in law and financial services, less prevalent in manufacturing, technology, and distribution/logistics.)

Peter Drucker, writing in 1969, said one of the key American success factors (as opposed to Europe) was the absence of a distinction between "schools for leaders" and "schools for followers." This has changed substantially since then.

Ares Olympus said...

A good essay. Franklin could easily be considered the true "father" of our country, not famous for his battles, but his skills at making friends and avoiding unnecessary battle, like this story of psychology. As a young publisher, he might also be considered America's first blogger.
The Ben Franklin effect is a proposed psychological phenomenon: A person who has done or completed a favor for someone is more likely to do another favor for that person than they would be if they had received a favor from that person. Similarly, one who harms another is more willing to harm them again than the victim is to retaliate.

In his autobiography, Franklin explains how he dealt with the animosity of a rival legislator when he served in the Pennsylvania legislature in the 18th century:

"Having heard that he had in his library a certain very scarce and curious book, I wrote a note to him, expressing my desire of perusing that book, and requesting he would do me the favour of lending it to me for a few days. He sent it immediately, and I return'd it in about a week with another note, expressing strongly my sense of the favour. When we next met in the House, he spoke to me (which he had never done before), and with great civility; and he ever after manifested a readiness to serve me on all occasions, so that we became great friends, and our friendship continued to his death."

I find all 13 virtues listed here:
The eight personal virtues relate to your attitudes toward activities and their challenges. Good personal character traits will better your chances of success in achieving your goals.

* Temperance: "Eat not to dullness; drink not to elevation."
* Order: "Let all your things have their places; let each part of your business have its time."
* Resolution: "Resolve to perform what you ought; perform without fail what you resolve."
* Frugality: "Make no expense but to do good to others or yourself; i.e., waste nothing."
* Moderation: "Avoid extremes; forbear resenting injuries so much as you think they deserve."
* Industry: "Lose no time; be always employed in something useful; cut off all unnecessary actions."
* Cleanliness: "Tolerate no uncleanliness in body, clothes, or habitation."
* Tranquility: "Be not disturbed at trifles, or at accidents common or unavoidable."

Note that some of the items in Franklin's list of virtues are not strictly behavior traits, since they may depend on personality or genetic inclinations. For example, some people have genetic inclinations toward eating or drinking alcohol in excess. Try as they may, it might be extremely difficult for them to follow the temperance guidelines.

However, it does not mean such a person has poor personal character or would not succeed in his or her activities. But it does mean that the person fails to follow Franklin's guidelines.

Social traits

These five social virtues that Franklin stated concern attitudes you should have toward people with whom you have dealings. Good social character traits result in other people wanting to do business with you or to have relationships with you.

* Silence: "Speak not but what may benefit others or yourself; avoid trifling conversation."
* Sincerity: "Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly."
* Justice: "Wrong none by doing injuries, or omitting the benefits that are your duty."
* Chastity: "Rarely use venery but for health or offspring, never to dullness, weakness, or the injury of your own or another's peace or reputation."
* Humility: "Imitate Jesus and Socrates."

Following to these principles shows good social character traits.

priss rules said...

Shampoo is better.

John Paul said...

I think that Stuart makes a very important point about flaunting one's wealth. The rich have always been with us -- they certainly were in Franklin's time; he was among them -- but what has changed is not only the degree to which wealth is openly displayed (which is one thing) but flagrantly so. As Ares notes above, Franklin's final virtue was humility. He confessed himself that he wasn't always the best at it, but the fact that he held it up as a trait worth emulating is significant. Even if he occasionally acted in a greedy fashion, Franklin would never have proclamed that "Greed is good," or anything like it. No doubt, times have changes.

Ignatius Acton Chesterton OCD said...

"… the features of private character, and consequently of aiding all happiness both public and domestic"

We don't care about character anymore. We don't teach it, we don't develop it. Currently, our entire American value system is based on what is useful. Money is useful to buy stuff. Who needs character? Character is for squares who obviously need to get laid.

Ignatius Acton Chesterton OCD said...

David Foster @September 3, 2015 at 9:24 AM:

Absolutely correct on credentialism. It's a disgrace. Intelligence (and certificates to document it) is the currency of the emerging American aristocracy. As much as it is inheritable, or developed in upper income communities, the more we're back to "blood" as the standard of wealth, status and power in our society. Look at the highest levels of our government: all IvyLeague. Are these the "best and brightest" of our Republic (if we can keep it)? We don't reward for character anymore, we reward for cleverness, educational pedigree and the connections that come with being a part of those elite communities. The SAT has become an unmitigated disaster. We are ruled by an analytical class. We don't reward industry and ingenuity as the basis of social mobility. Instead, we analyze problems (both real and fictional) and seek to control people. We're becoming ossified by creeping credentialism, licensure, degree requirements, etc. This trend will only get worse as people seek legislative, legal and regulatory means to protect their tenured professional advantages, insulating them from competition. I realized this about a decade ago when I heard about the first attempts to license interior designers in several states. It's out of control. I say this as someone with a master's degree in a business field.

Nick said...

This post is one of my favorite of yours I have read. I'm no socialist, but having grown up as a poorer member in a very wealthy society, I have seen and experienced many things that disgust me with the wealthy in this country.

What was it Jesus said about the difficulty the rich will have entering the Kingdom of God?