Inequality

The Science of Flow Says Extreme Inequality Causes Economic Collapse

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms.

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By Sally Goerner 

According to a recent study by Oxfam International, in 2010 the top 388 richest people owned as much wealth as the poorest half of the world’s population– a whopping 3.6 billion people. By 2014, this number was down to 85 people. Oxfam claims that, if this trend continues, by the end of 2016 the top 1% will own more wealth than everyone else in the world combined. At the same time, according to Oxfam, the extremely wealthy are also extremely efficient in dodging taxes, now hiding an estimated $7.6 trillion in offshore tax-havens.[3]

Why should we care about such gross economic inequality?[4] After all, isn’t it natural? The science of flow says: yes, some degree of inequality is natural, but extreme inequality violates two core principles of systemic health: circulation and balance. 

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems (Fig. 1) connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

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In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health.

Both vicious and virtuous cycles have occurred in various economies at various times and under various economic theories and policy pressures. But, for the last 30 years, the global economy in general and the American economy in particular has witnessed a strange combination pattern in which prosperity is booming for CEOs and Wall Street speculators, while the rest of the economy – particularly workers, the middle class, and small businesses – have undergone a particularly vicious cycle. Productivity has grown massively, but wages have stagnated. Consumption has remained reasonably high because, in an effort to maintain their standard of living, working people have: 1) added hours, becoming two-income families, often with two and even three jobs per person; and 2) increased household debt. Inequality has skyrocketed because effective tax rates on the 1% have dropped (notwithstanding a partial reversal under Obama), while their income and profits have risen steeply.

We should care about this kind of inequality because history shows that too much concentration of wealth at the top, and too much stagnation everywhere else indicate an economy nearing collapse. For example, as Reich shows (Figure 1a & b), both the crashes of 1928 and 2007 followed on the heels of peaks in which the top 1% owned 25% of the country’s total wealth.

Fig. 3a Income Share of U.S. Top 1% (Reich, 2013) & 3b Reich notes that the two peaks look like suspension bridge, with highs followed by precipitous drops. (Original Source: Piketty & Saez, 2003)

What accounts for this strange mix of increasing concentration at the top and increasing malaise everywhere else? Putting aside the parallels to 1929 for a moment, most common explanations for today’s situation include: the rise of technology which makes many jobs obsolete; and globalization which puts incredible pressures on companies to lower wages and outsource jobs to compete against low-wage workers around the world.

But, while technology and globalization are clearly creating transformative pressures, neither of these factors completely explains our current situation. Yes, technology makes many jobs obsolete, but it also creates many new jobs. Yet, where the German, South Korean and Norwegian governments invest in educating their workforce to fill those new jobs, the American government has been cutting back on education for decades. A similar thought holds for globalization. Yes, high-volume industrialism – that is, head-to-head competition over price of mass-produced, uniform goods – leads to a race to the bottom; that’s been known for a long time. But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world.

So, while the impacts of globalization and technology are profound, the real explanation for inequality lies primarily with an economic belief that, intentionally or not, serves to concentrate wealth at the top by extracting it from everywhere else. This belief system is called variously neoliberalism, Reaganomics, the Chicago School, and trickle-down economics. It is easily recognized by its signature ideas: deregulation; privatization; cut taxes on the rich; roll back environmental protections; eliminate unions; and impose austerity on the public. The idea was that liberating market forces would cause a rising tide that lifted all boats, but the only boat that actually rose was that of the .01%. Meanwhile, instability has grown.

The impact this belief system has had on the American economy and its capacities can be seen in American education. Trickle-down theories are all about cutting taxes on the wealthy, which means less money for public education, more young people burdened with huge college debt, and fewer American workers who can fill the new high-tech jobs.

To be fair, this process is not just about greed. Most of the people who participate in this economic debacle do not realize its danger because they believed what they were told by the saints and sages of economics, and many are rewarded for following its principles. So, what really causes the kind of inequality that drives economies toward collapse? The basic answer from the science of flow is: economic necrosis. But, let me flesh out the story.

Institutional economists talk about two main types of economic strategies: extractive and solution-seeking. (Hopefully, these names are self-explanatory.) Most economies contain both. But, if the extractive forces become too powerful, they begin to use their power to rig the rules of the economic game to favor themselves. This creates what scientists call a positive feedback loop, one in which “the more you have, the more you get.” Seen in many kinds of systems, this loop creates a powerful pull that sucks resources to the top, and drains it away from the rest of the system causing necrosis. For example, chemical runoff into the Gulf of Mexico accelerates algae growth. This creates an escalating, “the more you have, the more you get” process, in which massive algae growth sucks up all the oxygen in the surrounding area, killing all of the nearby sea life (fish, shrimp, etc.) and creating a large “dead zone.”

Screen Shot 2016-02-14 at 9.43.56 PM

Neoliberal economics set up a parallel situation by allowing the wealthy to use their money to extract ever more money from the overall economy. The uber-wealthy grow wealthier by:

  • Paying for policy favors – big corporate bailouts and subsidies; lobbying; etc.
  • Removing constraints on dangerous behavior – removing environmental protections; not prosecuting financial fraud offenders; ending Glass-Steagall, etc.
  • Increasing the public’s vulnerability – increasing monopolistic power by diminishing antitrust regulations; limiting the public’s ability to sue big corporations; limiting Medicare’s ability to negotiate for lower pharmaceutical rates; limiting bankruptcy for student loans, etc.
  • Increasing their own intake – rising CEO salaries and escalating Wall Street gambling; and limiting their own outflows – externalizing costs, cutting worker wages and lowering their own taxes.

All of these processes help the already rich concentrate more, and circulate less. In flow terms, therefore, gross inequality indicates a system that has: 1) too much concentration and too little circulation; and 2) an imbalance of wealth and power that is likely to create ever more extraction, concentration, unaccountability, and abuse. This process accelerates until the underlying human network becomes exhausted and/or the ongoing necrosis reaches a point of collapse. When this point is reached, the society will have three choices: learn, regress, or collapse.

What then shall we do? Obviously, we need to improve our “solution seeking” behavior in realms from business and finance to politics and media. Much of this is already taking place. From socially-responsible business and alternative forms of ownership, to democratic reform groups, alternative media, and the new economy movement – reforms are arising on all sides.

But, the solutions we need are also often blocked by the forces we are trying to overcome, and impeded by the massive merry-go-round momentum of “business as usual.” Today’s reforms also lack power because they are taking place piecemeal, in a million separate spots with very little cross-group unity.

How do we overcome these obstacles? The science of flow offers not so much a specific strategy, as an empowering change of perspective. In essence, it provides a more effective way to think about the processes we see every day.

The dynamics explained above are very well known; they are basic physics, just like the law of gravity. Applying them to today’s economic debates can be extremely helpful because the latter have devolved into ideological debates devoid of any scientific foundation.

We believe Regenerative Economics can provide a unifying framework capable of galvanizing a wide array of reform groups by clarifying the picture of what makes societies healthy. But, this framework will only serve if it is backed by accurate theory and effective measures and practice. This soundness is part of what Capital Institute and RARE are trying to develop.

John Fullerton’s white paper, Regenerative Capitalism, lists eight principles critical to systemic economic health. The Capital Institute’s research group, RARE[1], uses recent scientific advances – specifically, the physics of flow[2]– to create a logical and measurable explanation of how these principles work to make or break vitality in the human networks of which economies are built. 

Originally published at the Capital Institute.

2017 February 9

[1] RARE = Research Alliance for Regenerative Economics

[2] The “physics of flow” refers to the study of flow-networks, meaning any system whose existence arises from and depends on the circulation of critical resources and/or information throughout the entirety of their being. Living organisms depend on the circulation of nutrients and oxygen. Ecosystems depend on the circulation of carbon, oxygen, water, etc. Economic systems depend on the circulation of money, information and resources. The physics of flow uses universal principles and patterns of flow to clarify what makes economies healthy over long periods of time. While “living systems” are flow networks, the advantage of using the broader-case principles is that there is no question about whether the results are merely a metaphoric extrapolation from ecosystems.

[3] https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/ib-wealth-having-all-wanting-more-190115-en.pdf; https://www.oxfam.org/en/pressroom/pressreleases/2015-01-19/richest-1-will-own-more-all-rest-2016

[4] 2013 Documentary film, http://inequalityforall.com


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  • Steve

    Philosophically, the concept most closely approximating flow is grace/gracefulness., and one of the aspects of the concept of grace is the free gift. Economically speaking gifting would be a free gift of money as in a universal monthly dividend to the individual and a free gift of price to the individual at retail sale that was reciprocally gifted back to participating merchants by an independent monetary authority mandated to distribute such monies. The concept of grace is the basis for the new economic philosophy modern economies require.

  • EmericusDurden

    The fundamental psychological mechanism for the perpetuation of these positive-feedback loops is that people generally settle for too little in their lives. They settle for crappy jobs that offer crappy salaries and benefits. If you step back and consider the economy as a set of interlocking behaviors, rather than the exchange of money for goods, you must be amazed that large-scale organizations like, for example, Wal-Mart and McDonald’s could ever exist in the first place, much less thrive. If we had a community of individuals with high self-regard, they would look at such organizations and ask, “Now why would anyone want to do such jobs at such low salaries for most of their lives? We are all far better than that. We want more out of life, and we are not so desperate to work those jobs merely to pay bills.” With such a view broadly disseminated, there would be a minimal pool of people to hire to make those businesses successful. They would not exist as they do today, and they might not exist at all.

    Only a change in psychology will ultimately change the situation in the long term. Changes in economic factors like redistributive mechanisms imposed from the top or appeals to the rich to be more generous will never work in the long run, even though they may have some value in the short-term. Why won’t they work? Well, to put it bluntly: because there is no profit in poverty. There is nothing to invest in there.This doesn’t mean the impoverished have no value, far from it, but it does mean that money cannot save them in the long-term without their becoming minions again to the rich – typically through some form of debt (since we are supposedly too enlightened these days to call such a situation indentured servitude or slavery).

    Instead, we’ve got to encourage so-called “poor people” to THINK differently about themselves, about what they want and deserve out of life. They’ve got to do this without any sense of shame or self-hatred. They’ve got to do it without resentment toward the rich. As I’ve written and published extensively, only by changing individual psychology do we change economic and political factors.

    • Svender

      The “rich” have man minions today. The poor, and the middle-class now are beholden to the top % of the wealthy in this country (and likely, worldwide).
      As we import more workers (visas, not pickers) and outsource even more, what jobs are there here? Middle-management have gone away; industry has gone away; now tech is going away. I’ve never feared in my life to earn a living, but I do now. Sad times.

    • David Whitlock

      When you are barely surviving, you can’t think about the long term.

      Desperate people are forced to do desperate things. That is part of how the hyperwealthy maintain control; by making the lives of the poor so precarious that they are barely making it.

      That is why the hyperwealthy want to do away with foodstamps, Social Security, Medicare, and other social safety net programs. Making the poor ever more desperate makes them easier to control.

  • JD

    We measure annual pre-tax household income. Every adjective in that list makes the measure dishonest.

    Households of fewer people earn less than households of more, and that is not scandalous. Pre-tax ignores the redistributive tax code and social welfare system. Annualizing and comparing by percentiles instead of tracking the same people year after year creates the illusion of inequality from simple inconsistency, which runs rampant among entrepreneurs.

    The way of measuring is designed to exaggerate inequality greatly.

    Net worth comparisons are worse. Tens of millions of Americans have a negative net worth. Some have six-figure incomes. The notion that they are “poor” is absurd. Saying that a rich guy has more money than “all of them combined” is stupid. So do you and I, because their total is negative!

    The real cause of a few people “controlling most of the world’s wealth” is a legal system that REQUIRES such control. That system is socialism.

  • What were the economists doing when they came to know of the “circular flow of income” in an economy? Are all “professional” economists this brain-dead that they cannot see something *THIS* obvious?

  • It is important to understand that healthy balance is not about balance, it about balancing. We use healthy balancing to walk, by first taking a risk – falling- and then making a successful, beneficial recovery. When we lose the ability to fall and recover safely, we are less healthy. When economic imbalances take away the ability to use the processes of economic balancing from many people, the economy is unhealthy.
    To your health, Tracy
    Founder: Healthicine.

  • Hugo Spinoso

    I agree, it is a cycle, as there is always someone that will do it for less, eventualy this same factors apply to the top too, as they siege themselves, by following the same pattern.

    The problem seems to be information and the ability to coerce someome by holding it trough it necessities, so a balance is required, so inequality becomes relative to what you want not what you need.

  • Darah

    in my opinion, the value of “money” lies in its use (yachts or roads?). Inert money has no value. The human body has about 10 pints of blood. If you extract five pints, a person will go into shock which may spiral downward to death. By analogy, wealth extraction can produce a similar result. When “money” is not put to use, circulation is inhibited and an economy goes into shock. “Money” is only good to the extent it is put to use. And then the question becomes what is the best use ? (Roads or yachts? Education or personal edification ? Scientific and technical research or hoarding ?)

  • Lotfi Belkhir

    This is very interesting, but I’m still not convinced that the analogy applies to the current state of affairs. Yes, the top 1% owns (on paper) more than the rest of the world combined, but most of that wealth is actually in publicly traded stock and hence has not been extracted from the economy. Also, this article as interesting and relevant as it is, seems to make the implicit assumption that the total wealth of the world is a zero-sum or is somewhat fixed, when in fact there’s new wealth creation happening all the time, and most of the richest people on the planet got rich because of and from new wealth creation activities and innovation, e.g. bill gates, warren buffet, steve jobs, Elon Musk, etc..

    I’d be very interested in a more dynamic study where the economic body is growing rapidly while the flow of the wealth is getting concentrated at the top while still however flowing into new part of the body that are growing.