Does America need a good dose of instability?

Is the U.S. too stable for its own good? You’d think that stability would be a welcome thing, especially for a country in the midst of an economic downturn making life unstable for millions of Americans. But in a recent post, Occupy Wall Street, Social Unrest and Income Inequality (which I found via the Twitter feed of venture capitalist Paul Kedrosky), SEC official (and former financial industry insider) Rick Bookstaber makes the case that stability isn’t an unalloyed blessing when it comes to a capitalist society. I was interested in posting on this general topic, and commenting on Bookstaber’s post is as good a way to begin doing that as any.

Bookstaber is principally concerned with instability that affects an entire society, in which everyone without exception [knows] they might end up with the short end of the stick with the next roll of the dice, and that whatever they acquire will likely be transitory. Such instability encompasses the potential or actual destruction of or damage to a country’s core political, economic, and other institutions, and in the limit (as in Bookstaber’s example of Israel) can include threats to a country’s very existence. By contrast a country experiencing stability is one in which the structure and institutions of society remain relatively fixed over an extended period of time.

How does this relate to countries with a capitalist economic system? To quote Bookstaber, Absent a policy of income redistribution, capitalism plus stability leads to income disparities. To expand on this: People vary widely in their inborn and subsequently nurtured talents (including such general characteristics as intelligence, conscientiousness, and drive) and in a meritocratic capitalist system those wide differences in talents will lead to wide differences in income. Those who can accrue surplus income (i.e., beyond that needed for basic needs) have the opportunity to invest that income and build wealth, which can then in turn produce more surplus income; others who have to (or want to) spend all they make will tend to fall behind. Finally, those with enough wealth can achieve enhanced influence over the political process, influence that can be used to tilt the playing field so as to maintain or further increase their income and wealth advantage over others.

If a country’s structures and institutions remain stable over an extended period of time without any major changes, these factors have more time to work and thus income disparities will widen further: The naturally-favored can pass on their advantages to their children via inheritance of both wealth and talents, those with wealth can compound it over time, and entrenched political parties and institutions allow more opportunities for rent-seeking (to use the technical term).

One response to this is simply to say, so what? Yes, capitalism provides an opportunity for the skilled and energetic to improve their own financial situation and for the most talented to amass considerable wealth, well beyond the dreams of most; however such people have earned what they have, and in any case their entrepreneurial innovation has provided jobs for everyone else and access to better and cheaper goods and services for all, including those whom we (perhaps mistakenly) think of as poor.1

In this view of the world the existence of income disparities is not a problem and could never be a problem, no matter how wide they might become; it’s simply an indication that capitalism is working as advertised. However Bookstaber doesn’t seem to hold this view (for whatever reason), and for the sake of argument I’ll accept his premise and continue on.

Bookstaber next considers the theory of a just society promoted by the political philosopher John Rawls, and in particular the concept of the veil of ignorance, essentially a philosophical take on the commonplace observation that there but for the grace of God go I: If we imagine an ideal society but have no idea what our initial place in that society might be or what talents we might possess, we will (according to Rawls) come to conclude that for such a society to be just it must have certain features, including particularly measures directed to improve the lot of the least-advantaged within society.2

Leaving aside any philosophical issues with Rawls’s argument, the veil of ignorance idea has a major practical shortcoming, namely that it’s hard for us to imagine ourselves in the position of others. We tend to take our own talents and other personal characteristics for granted, to imagine that other people are pretty much like us (or at least could be more like us if only they tried), and to create a self-narrative in which any advantages we’ve accrued are justified as a natural outgrowth of our own hard work and self-discipline. It’s difficult for many people to accept the premise of the veil of ignorance, even as a thought experiment, and thus difficult to accept Rawls’s conclusions about how a just society should be organized.

Bookstaber proposes a modification of the veil of ignorance: Assume that we do know what talents and advantages we possess relative to others, but because of societal instability we do not know how we’ll fare in the future. (In other words, everyone, including those most favored, assumes that whatever system they put forward will be beset by occasional exogenous shocks that destroy wealth … [and] there is nothing they can do to affect the occurrence of the shocks or their result.) Bookstaber sees this having an effect similar to that of the veil of ignorance: If people don’t know that their current position is secure, they’ll be more likely to support a more egaltarian vision of society and measures to promote the same.

Bookstaber then concludes with some thoughts about this being the possible basis of a social contract: Faced with a knowledge of their current state, the people can design a political system that is unstable, thus giving them at shot at the lottery in the future. Otherwise they can opt for stability and the possibility that such a system would be dominated by entrenched wealth and privilege (in which case Bookstaber claims that people would opt for egalitarian measures, though I’m not sure how or why this necessarily follows).

So what’s the use of this? Bookstaber seems to think that he’s provided an interesting twist to Rawls’s theory, and I will concede that it does have some advantages over the classic veil of ignorance: It’s hard to imagine being other than who we are, but it’s easy (or at least easier) to imagine ourselves being adversely affected by societal instability. However in the end this seems to come back to another commonplace observation: If there are people who’ve made out well under a particular system then they’ll be very motivated to maintain that system without change. (This is humorously captured in a recent New Yorker cover, in which tycoons hold their own counter-protest, with signs stating Keep things precisely as they are, I’m good, thanks, and similar sentiments.) That will only change if circumstances change.

The question is, if we think things need to change—that America in effect needs more instability to shake up the system—how likely is that to happen, and how might it (or, for that matter, should it) happen? I’ll come back to that question in a future post.


1. See for example the Heritage Foundation report Air Conditioning, Cable TV, and an Xbox: What is Poverty in the United States Today? along with a counter-argument.

2. Rawls actually came to a even stronger conclusion, namely that economic inequalities could be justified only to the extent that they improved the life of the least-well-off compared to other alternative distributions of wealth. See the discussion of the difference principle in the Wikipedia article on A Theory of Justice.