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Tuesday, June 26, 2012

The politics of inequality, the corruption of elites, and the decline of Venice

by John MacBeath Watkins

Karl Smith points out the forces that lead to the corruption of meritocracies, and I think this ties in with the declining mobility of America and the reasons for the decline of Venice.

First, the paradoxical fact that meritocracies are prone to corruption. I can't put it better than Smith:
Cheaters may almost never win but, given equal opportunity and a large enough competition, the winners are almost always cheaters.
Well, no one cheats because they think if that even if they get away with it they will be worse off. No, they cheat because if they get away with it they will be better off. Cheaters are taking a gamble.
Even if the system is pretty good and the odds are stacked against the cheaters, if there are enough players then some of the cheaters will get away with it, nonetheless.
When they do they will gain an advantage. Now, imagine that life is a series of such competitions played over and over again. Each time some people will cheat and some will get away with it. Each time some will gain an advantage.
If the competition is immense, say it encompasses a country of 300 Million or a global population of 7 Billion, then by the Law of Large numbers some cheaters will be lucky enough to get away with it every single time. This means every single round they gain an advantage and slip ahead of the pack.
After enough rounds the front of the pack is completely dominated by cheaters.
And of course, one way to cheat is to rig the game so that you control who has opportunity. This ties into another essay by Smith, about how societies can discourage cheating: "Boil them in oil." And because parents have been known to make nearly any sacrifice to give their children a leg up, the sins of the father must be visited on the child, so that cheating won't help your children.

It has become an article of faith in Republican circles that inheritance taxes are unjust, and that those who advocate them suffer from envy. But viewed from a Smithian perspective, inherited wealth is a way to pass on ill-gotten gains for those who cheated to get their wealth. From a different perspective, Andrew Carnegie believed that inherited wealth was a great evil, and gave away most of his money before his death. Did he object to inherited wealth out of envy?

Now, as it happens, we have some idea of the effect of their decisions on their offspring for several very wealthy people. A&E has done a series of biographies on what they call American Dynasties, including Carnegie and such other wealthy men as J. Paul Getty.

Getty, you may recall, had a grandchild kidnapped. The kidnappers demanded $17 million for the return of J. Paul Getty III. His grandfather wouldn't pay more than $2.2 million, the maximum he could deduct on his taxes. Getty's son paid most of the ransom, and Getty senior loaned him $800,000 of the money at 4% interest.

I've watched the episodes on the Gettys and the the Carnegies, and certainly, Carnegie's descendents were living better and happier lives. Yet few wealthy people would do as Carnegie did. Most prefer to establish a dynasty, and pass on their wealth.

Which is how the decline of Venice occurred. The process is described in Why Nations Fail, by Daron Acemoglu and James Robinson, and described in part by Acemoglu in this video.

Venice gained great wealth at a time when it was relatively easy for ambitious young men to join the merchant class. The commenda, a type of joint-stock company, allowed an arrangement where a wealthy merchant put up the money and stayed home, while an ambitious person of lesser wealth went on a trading voyage. The rise to economic prominence of new families lead to the creation of the Great Council, which new families could join and which was the ultimate source of power in Venice. Inclusive institutions fed inclusive institutions, and fresh blood ensured a level of competence in the ruling council and in the merchant activities of Venice.

This era ended with La Serrata (the closure.) Members of the Great Council and their families no longer needed confirmation, it became difficult for new families to rise to the top, and between 1296 and 1315, Venice came to be ruled by a hereditary nobility. The political closure was followed by an economic closure, according to Acemoglu and Robinson, including banning the commenda which made it nearly impossible for those not already of the nobility to become wealthy and influential.

This resulted in a decline in competence, in trade as well as in statecraft, and ultimately to a decline in the wealth and influence of Venice.

In some ways, the Republican Party has become the party of entrenched interests. It opposes inheritance taxes, wants to reduce the progressivity of the tax system, wants to allow the wealthy to have more influence on the politics of the nation, and wants programs aimed at helping those who have in the past been discriminated against limited or eliminated. Not surprisingly, the party has been active in trying to limit voting for the young, minorities, and others who might want to achieve the wealth its donors already possess.

Pennsylvania House Majority Leader Mike Turzai, (R), recently claimed that the state's voter I.D. law would help Mitt Romney win the presidency, according to TPM. Boasting of his accomplishments, he said, according to TPM,
“Pro-Second Amendment? The Castle Doctrine, it’s done. First pro-life legislation - abortion facility regulations - in 22 years, done. Voter ID, which is gonna allow Governor Romney to win the state of Pennsylvania, done.”
This is the way elites cement their holdings and prevent new blood from competing with their offspring. People like Turza do not plan to adopt policies that will lead to the decline of our economy, they adopt them because it is in the interest of their financial backers (and, of course, many are wealthy on their own, and share the same interests.)

Hard-headed businessmen and American chauvinists they claim to be, they pursue political and economic arrangements that could lead to the nation's economic and political decline. The point of limiting the voting franchise is to limit political power. As we've discussed before, the Republican Party is more white and more male because it represents the fears of lost privilege. Not all of these people are wealthy, but many perceive their privileged position in society slipping away. The game used to be rigged in their favor, and over the past 40 years, being white and male has lost much of its privilege.

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