Wealth and Income Inequalities are Markers of Oligarchy

Cross-posted from Real Economics. Posted on ePluribus Media at 2011-06-05 22:33:23 -0400. Bumped and promoted. - GH

At the beginning of the American experiment in self-government, concentrations of wealth and large inequalities in income and wealth were viewed suspiciously as dangerously subversive vestiges of the royalty and oligarchies of Europe. But today, conservatives would have us believe, concentrations of wealth and inequalities in income and wealth should be viewed as the natural result of a social Darwinian struggle between those who work hard, and those who do not. Thus are Americans slowly but steadily being led to acceptance of the rise of a new oligarchy,

wages vs productivity
CEO pay vs others

In one of the most famous of the Federalist Papers, No. 10, James Madison discussed the problem of factions, and noted that they most often arise based on economic interests. In preparation for the Constitutional Convention, Madison made notes of the defects of the Articles of Confederation. Vices of the Political System of the United States These short notes amplify and clarify Madison’s thinking on the formation of a new government. Here is a section dealing with the problem of emerging oligarchies:


6. Want of Guaranty to the States of their Constitutions & Laws against Internal Violence.

According to republican theory, right and power being both vested in the majority, are held to be synonymous. According to fact and experience, a minority may in an appeal to force, be an overmatch for the majority: 1. If the minority happen to include all such as possess the skill and habits of military life, & such as possess the great pecuniary resources, one third only may conquer the remaining two thirds."

I added emphasis to show that one scenario Madison feared was that accumulated wealth would achieve so much political power that republican rule would be subverted or obstructed. That pretty much sums up where are today, with a horrible skewing of income and wealth inequality to the top one tenth of one percent of the population, and with the rich enjoying political access and influence while the vast majority of Americans do not.


Article Four of the United States Constitution guarantees to each state a republican form of government. Reading the source material, there is no question that the framers sought to provide a strong central government able to intervene in the affairs of a state that had fallen into thralldom to an anti-republican faction; i.e., an oligarchy. This is exactly what happened in the Civil War, when southern slave holders became an identifiably separate economic faction whose interests could be served only by the weakening and destruction of republican self-government. When the slave holders, as a ruling elite, fomented a secession crisis that took states out of the Union against the wishes of the majority of Southern people, it became a matter of survival for the American experiment in self-government to destroy that slave oligarchy militarily.


The problem we face today is that the entire republic has fallen into thralldom to a new financial oligarchy. Or, to quote from Simon Johnson's now famous article of May, 2009, The Quiet Coup

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

But it is getting rapidly worse. The Citizen's United decision overturns Madison's conception of, and concern about, factions, by elevating the most concentrated form of economic faction, a corporation, to the same status in rights as human beings. It entirely ignores the problem Madison took note of in his preparations for the Constitutional Convention: a relatively small faction of the rich and wealthy can destroy the republic by imposing their will on the majority through their purchase of political power through the organization of their economic clout, i.e. a corporation.

As Michael Winship writes in an article on Truthout, Secret Cash: The Worst Political Scandal of All

The Greeks had a word for it -- "oligarchy" -- political clout based on economic dominance. It is, in the words of economist Simon Johnson, "an antithesis to democracy... a small group with a lot of wealth and a lot of power. They pull the strings. They have the influence. They call the shots."

No accountability, no scruples, no shame. It's the biggest scandal of all: a republic struck down by a possibly fatal malady. . .

In a recent article, Replacing Economic Democracy With Financial Oligarchy, Michael Hudson writes:

At issue is whether Greece, Ireland, Spain, Portugal and the rest of Europe will roll back democratic reform and move toward financial oligarchy. The financial objective is to bypass parliament by demanding a “consensus” to put foreign creditors first, above the economy at large. Parliaments are being asked to relinquish their policy-making power. The very definition of a “free market” has now become centralized planning – in the hands of central bankers. This is the new road to serfdom that financialized “free markets” are leading to: markets free for privatizers to charge monopoly prices for basic services “free” of price regulation and anti-trust regulation, “free” of limits on credit to protect debtors, and above all free of interference from elected parliaments. Prying natural monopolies in transportation, communications, lotteries and the land itself away from the public domain is called the alternative to serfdom, not the road to debt peonage and a financialized neofeudalism that looms as the new future reality. Such is the upside-down economic philosophy of our age.

. . . . Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attack may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

At the beginning of the American republic, it was widely recognized that great disparities in wealth and income were fatal to the health and longevity of a republic. On April 23, 2011, DailyKossak J Edward wrote in Founding Fathers and Wealth:

The new United States, as James Madison had noted, needed to become more equal, through laws that, “without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigence toward a state of comfort.” Aristocracy equals inequality, republicanism equals equality.

Aristocracy, pronounced the utopian-minded William Leggett in the 1830s, served to “concentrate all wealth and privilege in the hands of a few.” “In monarchies and aristocracies,” pronounced a far more conservative New Jersey Whig, Congressman Joseph Fitz Randolph a few years later, “there are classes of the very wealthy and of the very poor; in a Republic both extremes are avoided.” This conviction — that concentrated wealth endangers republican virtue— so dominated American political life before the Civil War that every side to every great political controversy would invariably justify its position by claiming that the opposition viewpoint, if followed, would leave America dangerously unequal.

Throughout the nation’s first century, historian James Huston notes, Americans continually celebrated “the egalitarian nature of the American distribution of wealth.” The United States, noted the economist Theodore Sedgwick, had achieved an equal division of property “such as has never been known among mankind.” Equality, made America different — and better. Unlike the European States. . . .

In a 2010 book, Unfinished Revolution: The Early American Republic, University of Texas at Arlington Professor Sam Haynes explores how early Americans were deeply conflicted about the United Kingdom they had won freedom from. While they admired and sought to emulate British industrialization, humanitarian reform, and literary accomplishments, Americans thoroughly despised Britain’s class system and feared that the mother country actively sought to transplant aristocratic ideas into the American body politic and especially the economy. Haynes writes:

When Hezekiah Niles and other economic nationalists offered the hopeful prediction that the United States would one day rival Britain as an industrial giant, they described a future that some Americans could only regard with unmixed horror. To old school Jeffersonians, the republic owed its success to its self-reliant yeomanry, who tilled the land, harvested their crops, and sought no assistance from the government. In their view, the republican nation-state had been conceived, born, and nurtured in a pastoral world; it could not properly thrive in any other environment. An industrial society might compete with Great Britain in the global marketplace, but at an unacceptable cost: the concentration of wealth in the hands of a few. Only a nation devoted exclusively to agricultural pursuits could foster the broad distribution of economic and political power that was the sine qua non of republican government.

. . . . the emergence of an urban oligarchy brought home to Americans with special force the realization that the arcadian world they had known was slipping away. It was one of the ironies of the Jacksonian period that at a time in which white society embraced the principles of economic democracy and the rise of the so-called "common man," the gap between rich and poor grew visibly wider. Rapid economic expansion had created a new aristocracy, an urban upper class that seemed oblivious to the obligations of its social position. To many Americans, the new rich seemed to exhibit all the characteristics of Britain's titled nobility, aping its manners and demonstrating a like contempt for the laboring classes.

Americans who felt the twinge of class resentment did not merely draw comparisons between the socioeconomic elites of the two countries. As earnest republicans, they hewed to the belief that aristocracy in all its forms was a foreign institution. The existence of a cosmopolitan beau monde was evidence that "a regal fungus" bearing all the hallmarks of an Old World ruling class had taken hold and was slowly eroding the principles upon which the country had been founded. The disparity of wealth and income was nothing less than "a germ of English growth transplanted here by some foreign monarchists," Jacksonians maintained. Contributing to these suspicions was the widely held belief that American commercial and financial elites were in league with monopolists and fund-mongers across the Atlantic. British banking and mercantile firms all had agents in the United States who had grown rich through their overseas business connections. Unseemly displays of luxury and affectation by the titans of commerce and banking would have rankled republican sensibilities under any circumstances. But such behavior seemed all the more deplorable because it bore the unmistakable imprint of British collusion, of wealth attained by dishonest means. In the minds of many stalwart democrats, the nation's traditional enemy had, in effect, subsidized a new ruling elite, which did not share the true interests and sympathies of Americans.

Two months ago, I argued in Economics as Cultural Warfare, that modern conservative thinking is based on the ideas of subalterns and factotums of the English and other European oligarchs, most especially economic thinking:

Simply put, [Adam] Smith was a factotum for the British oligarchy, and as such, was fundamentally hostile to the United States and its grand experiment in self-government. Is it just coincidence that a "science" of economics that holds as its guiding light an oligarchical apologist should give us a body of economic thinking that has ruined our economy, impoverished our working people, and debased our public finances? Was that the intent of "classical economics" based on Smith and Ricardo, and its ugly step-child, neo-liberalism, all along? If you get your economic thinking from oligarchs, perhaps you should expect that thinking, when put into practice, to result in the creation of an oligarchy. "By their fruits ye shall know them."

And I quoted from a 1834 book entitled Tracts on Sundry Topics of Political Economy, written by Oliver Putnam, a sickly but wealthy merchant of Newburyport, Massachusetts. To preserve his health, Putnam retired in his thirties, but busied himself with an intense study of political economy. Putnam's ideas were informed by his travels throughout the U.S. and Europe, travels he had undertaken in search of a cure for his ailments. The second part of the book is entitled "Observations on Smith's Wealth of Nations."

We have not been sufficiently awake to the mischievous effects of introducing many English writings into our seminaries of education, and of giving credence to their authors on subjects of political economy and politics. —It is a truism to say that our institutions are radically different from the English. Ours are throughout republican, theirs are substantially monarchical. Theirs are the oft-changed remnants of feudal barbarism; ours are a great political invention, which undergoes its first trial in this country.—And yet we have Blackstone and Paley for our text books in politics, who, whatever may be their excellencies on other accounts, are certainly the bigoted advocates, the courtly apologists, of whatever, in the system of the British government, is corrupt in itself, and most adverse to the genius and principles of our own government.

Free Trade Cartoon English come to US
Free Trade Cartoon English come to US caption
An American workman (on the left) confronts the British represented by John Bull (on the left): Mr. Bull, if free trade is such a blessing, why are your agricultural interests in such a wretched condition? Why do your Manufacturers cry out for 'Fair Trade' and why does your skilled English workman come to this Country instead of the American workman going to England?

Under Smith's British System, the upper classes in society which control the wealth are supposed to know better than the government how to use that wealth to generate yet more wealth, so the government “should get out of the way” as conservatives today like to say. Never mind that the wealth may have been accumulated, not by hard work, but by inheritance, thievery, war mongering, or worse. To prevent the concentration of wealth in the hands of new oligarchs, it was vitally important that the new federal government provide the conditions to encourage, and create capital for the higher purposes of the happiness and security of the population. This was the intent of the general welfare clause – which conservatives have been chipping away at in earnest hostility for decades now.

In the concluding section of his December 1791 Report to Congress on the Subject of Manufactures, first U.S. Treasury Secretary Alexander Hamilton - who was the cabinet member closest to, and most relied upon by George Washington - elaborated the concept of the general welfare:

The terms 'general welfare' were doubtless intended to signify more than as expressed or imported in those which Preceded; otherwise numerous exigencies incident to the affairs of a nation would have been left without a provision. The phrase is as comprehensive as any that could have been used; because it was not fit that the constitutional authority of the Union, to appropriate its revenues shou'd have been restricted within narrower limits than the 'General Welfare' and because this necessarily embraces a vast variety of particulars, which are susceptible neither of specification nor of definition.

"It is therefore of necessity left to the discretion of the National Legislature, to pronounce, upon the objects, which concern the general Welfare, and for which under that description, an appropriation of money is requisite and proper. And there seems to be no room for a doubt that whatever concerns the general interests of learning of Agriculture or Manufactures and of Commerce are within the sphere of the national Council as far as regards an application of Money."

The importance of the “discretion of the National Legislature” is easily seen by looking at the historical absurdity of any Congress and any President in the 1800s declaring that the United States was committed to putting a man on the moon. The then known frontiers of scientific and technological knowledge simply excluded such a program. It would have been folly and waste to expend resources on a program to land a man on the moon in the 1800s.

By contrast, by the 1950s human knowledge of aerospace technology, propellant chemistry, astrophysics, and other disciplines had advanced far enough that a national commitment to land on the moon was no longer wildly implausible and irresponsible. Always keep in mind that the proper definition of the source of economic wealth is the technological and scientific knowledge that a human society can bring to bear on the problem of transforming raw materials into useful goods and services.

This diary is rather long already, but there’s one last thing we should understand and stress as we debate policies with the oligarchic shock-troops of the wrong-wing. More equitable distributions of wealth and income are not only better for a self-governing democratic republic, they also make a BIG difference in how the economy operates. In December, 2007, I posted Not Good – We’ve Been Here Before in which I rather accurately forecast the financial meltdowns of 2008. That diary contained the following extract from the memoirs of Franklin Roosevelt’s Federal Reserve chairman, Mariner Eccles – by far the best Fed chairman this country has ever had. (Here’s a ten-minute presentation on how the Fed was actually a “virtuous institution” under Eccles during World War Two. Here’s another presentation from the same conference by Thomas Palley on how the Fed could be easily reformed to once again be a “virtuous institution” and not a puppet of the New York financial oligarchs.) In this extract, Eccles explains how the First Great Depression was caused by income inequality destroying aggregate demand generation. This excerpt has since made it to the far reaches of the tubez.

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. (emphasis in original) Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

END of quote from Eccles, pages 76 to 78

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