Wealth Pumps

Came across a great podcast recently interviewing Peter Turchin, a social scientist from the University of Connecticut. Skimming through Turchin's bio has inspired some thoughts on the nature of the role of academics within our institutions of higher learning. So I'll start there and then get back to the podcast stuff:

Institutional change agents

Originally trained as a theoretical biologist, Turchin eventually became interested in the social sciences. Unsatisfied with the subjectivity in the field, he took on the challenge of trying to bring more rigor and determinism to the subject of history, a project that has fascinated such fertile minds as Leo Tolstoy, Isaac Asimov, and Jose Ortega y Gasset. In the process, him and his colleagues launched a whole new academic field which they call Cliodynamics, named after the Greek goddess of history. At first glance, Turchin seems like one of those maverick intellectuals who manages to strike a successful balance between the rigorous, defined expectations of a position in the Academy and the calling towards innovative, paradigm-shifting thought and child-like curiosity that inspires all great intellectuals.

People who can strike such a balance are incredibly important for society. From my own observations (both of others and myself), people who tend to get mesmerized with innovative thinking and generating fresh new ideas tend to struggle with the administrative and task-oriented functions that would be required of someone in a university professor role. They would also probably feel strait-jacketed if they are forced to follow any defined cirriculum or restricted from exploring certain avenues by the powers that be. They may also struggle with the "over-abundant mind" problem, jumping from one great idea to the next without actually seeing any of them through to completion.

Without the necessary patience and fortitude of spirit, the rules, regulations, and external expectations of an academic role may cause the creativity of such people to whither over time. Or they may turn into misfits in the institution, "independent thinkers" who are shoved into some corner to tinker with their ideas in seclusion, their creativity wasted due to lack of support. Or they may simply eject themselves from the institution entirely, seeking greener pastures elsewhere that they can roam more freely; meanwhile, the Academy, rich with resources, stagnates, lacking the supply of creative ideas necessary to evolve itself.

Conversely, people who are comfortable with the rigamarole of professional Academic life, who willingly participate in the "publish or perish" competition, and have accepted the administrivia and regulations imposed on them, but lack the creative spark, become cogs in the machine. They have the maturity to understand that a professional academic role is a job and jobs have their nature. However, they lack the vision needed to become evolutionary agents within the institution. In their steady hands, the institution is able to sustain itself without falling apart. But its vast resources are marshalled to no higher, more inspired end. Satisfied with the rigamarole of the job, they impose the same humdrum rhythm on the whole institution.

People who can muster the patience and willingness to participate in mundane institutional processes while retaining their creative spark become nourishing change agents within the organization. It is imperative for our knowledge ecosystem that our higher academies have a good supply of such people at all times in the right positions.

I don't know if Turchin actually fits this description in reality. These are just some thoughts I had while glancing over his bio for the first time. Anyway, back to wealth pumps...

Champagne dreams

In studying the rise and fall of complex societies, Turchin arrived at an interesting insight: socieites collapse when they overproduce elites. This is another example of what is turning into a bit of a theme here at Puraka (something I may need to explore more systematically in the future) - crisis-level problems arise when a society has too much of a good thing.

By "elites" he is referring to the top sliver of the socioeconomic ladder, people in positions of authority within important social institutions and people who are aspiring for those positions. Today these people tend to be fairly intelligent, dynamic, and highly educated - the graduates of top universities.

On the surface, it doesn't sound so bad to have more intelligent, dynamic, educated, and aspirational people in society. In fact, in America, practically every individual is encouraged to embody these qualities as much as possible from a young age. However, according to Turchin, it can become a recipe for chaos if not managed well.

If my understanding of Turchin's argument is correct, the problems usually begin when the ranks of the elite start to swell - from say the top one percent of the socioeconomic pyramid to two or three percent. Along with great career aspirations, elites also tend to have great lifestyle aspirations. As their ranks grow, their aggregate appetite for resources grows alongside it. Also, growth in their ranks intensifies internal competition while also creating a much larger elite bubble. The world of the elites can start to diverge from the world of the common people with the experiences of the elites becoming increasingly disconnected from the realities faced by most of the population.

These dynamics describe the basic ingredients for extreme social instability. So far, though, the theory sounds like a slightly more elaborate description of income and wealth inequality. A key idea in Turchin's model that enhances its explanatory power and, more importantly, begins to point towards potential solutions, is the idea of the wealth pump.

"The Giant Sucking Sound"

A "wealth pump" is a term for some kind of socio-economic mechanism(s) that result in wealth being systematically shifted from the bottom of the socio-economic structure to the top. In other words, it is a wealth transfer mechanism shifting wealth from the poor and weak to the rich and powerful.

Wealth pumps really refer to the way in which different aspects of the economy, or the economy as a whole, are configured. The components of nefarious wealth pumps can be consciously influenced or the result of circumstance, usually it is some mix of both. For example, a dramatic surge in population can serve as a wealth pump. Increased labor supply suppresses wages while increasing the value of real estate benefitting landowners; the elites tend to own more land.

Unbridled globalization can also be a kind of wealth pump. During the 1992 US presidential election season, candidate Ross Perot rose to prominence for his anti-globalization stance. In an iconic moment during one fo the presidential debates, he spoke about how NAFTA would lead to an exodus of manufacturing jobs to Mexico. US factories, which were subject to higher standards of employee welfare and environmental regulation while having to pay salaries commensurate with US living standards, simply could not compete with Mexican factories from a cost perspective. He spoke of a "giant sucking sound" that would be heard across the country if NAFTA was approved, the sound of jobs and capital rapidly evacuating the manufacturing base of America to head south of the border.

As it turns out, those jobs did not just go to Mexico, but rather went all over the world. But that vector of capital was not just moving out of the manufacturing towns of America into Mexico and East Asia and elsewhere. Only a fraction of it was moving there while the remainder got absorbed into corporate profits. This portion, the savings that flowed to the shareholders of the major corporations, is the "wealth pump" part of the globalization process.

As you can see, these wealth pumps can be vast in their scope, the result of various factors. But they are heavily influenced by institutional policies. And, as it turns out, the elites make the policies, by definition.

If I were to make a (very) rough list of potential wealth pumps effecting modern U.S. society, these are some ideas that immediately come to mind:

• Low cap gains tax relative to income tax, and other tax loopholes
• Restrictive building and zoning laws in certain areas
• Ill defined immigration policy
• Zero interest rate policy (in the process of being reversed)
• Regulation that is slow to adapt in the face of major new technologies (I don't know where this is at...)
• Aggressive tarriff and sanction policies protecting domestic producers from foreign competition (these have increased in the past 5 years)
• Unbridled globalization (in the process of being reversed)

Looking at this list, it's important to recognize that enacting certain kinds of policies can lead to the creation of wealth pumps. But also, failing to enact certain policies in the face of changing circumstances can also lead to the creation of wealth pumps. The job of the elites is to steward policy making so that these wealth pump dynamics don't lead to overaccumulation of wealth in their own hands. In other words, for the preservation of social stability, they periodically have to act against their own selfish interests. Heavy lies the crown...

It is also worth noting that wealth pump-creating policies can be opposed to each other. For example, protectionist tarriffs increase prices domestically which hurt the broader consumer population while supporting domestic producer profits. However, if these tarrifs can counteract the wealth pump dynamics caused by unbridled globalization by bringing manufacturing jobs back to the domestic market, these two counteracting forces may actually neutralize the underlying wealth pump dynamic itself. This tells us that policies that stem from opposite ends of the ideological spectrum (for example protecionist vs globalist trade paradigms) can both generate wealth pumps if not managed properly. It is not the specific type of policy so much as the calibration of those policies that either allows wealth pumps to persist or neutralizes them.

I am sure that there are eminently reasonable arguments for why all of these policies are in place. I may even be sympathetic to some of those arguments. For example, I understand that keeping cap gains tax low incentivizes people and companies to invest more at the margins, which is important for economic development. I also understand that restrictive zoning laws may be the result of democratic processes (called NIMBY-ism by its critics) playing out rather than an elaborate ploy by the "elites" to keep their asset values inflated.

My goal is not to point to these as proof of a conspiracy by the elites to manufacture a wealth pump in society. I'm simply claiming that all of these may have wealth pump-like effects. And some of them may not even qualify as wealth pumps technically. For example, just because tax loopholes exist which the wealthy can use to preserve their wealth, does that imply a transfer of wealth from the poor to the rich, or is it simply an example of an advantage available to the rich that the poor don't have access to? Are our current immigration policies leading to an untenable surge in population that our economy cannot absorb, hence leading to collapse of wages and inflation of prices?

I'm not sure. More thinking and study and defining of terms is required.

It is tempting to turn this conversation into a blame game, pointing fingers at the "elite" for conspiring to steal everyone's wealth through the conscious creation of wealth pumps. And there is probably some truth to that. But I suspect the picture is more complicated.

The vicious cycle and the way out

What is important to focus on is the net effect of these kinds of policies. Turchin argues that wealth pumps that are allowed to grow and function unimpeded eventually lead to social collapse.

As the elites become enriched by sitting on the right side of these pumps, the drive to become a part of the elites grows. We can see this today, for example, in the frenzied competition to get into elite Ivy League schools which are seen as the ticket into the higher stratums of society.

In this way, the cycle of elite overproduction continues. Eventually, there are too few aspirational positions available relative to aspiring elites. Turchin analogizes this to a game of musical chairs where you keep the number of chairs constant while continuously adding new people.

Meanwhile, the ranks of the elites continue to swell, disconnecting them from the rest of society. Resentment grows, both among disillusioned aspirational elites and among the general population towards the disconnected elites. Meanwhile the elites who are in positions of power feel increasingly insecure in those positions.

Generally speaking, neither insecurity nor resentment are considered qualities that produce rational, sensible behavior.

The process can terminate in violence according to Turchin unless the elites coordinate to shut down the wealth pumps in time. This would mean they have to act against their own vested class interests. The process has to be done carefully, so that it isn't too disruptive. And it usually requires time on the order of a generation or two to be totally effective. At least, those were the conditions under which the UK was able to successfully shut down its wealth pumps during the Chartist Era, an example of successful de-escalation that Turchin refers to in the podcast.

Among the potential American wealth pumps I identified above, at least two are in the process of being reversed. Zero interest rate monetary policy is over for now, the Fed seems committed to keeping the risk free rate elevated at least until they feel inflation has been completely tamed. And the paradigm of unbridled globalization has ended. While globalization will always exist in some form, the importance of growing and securing domestic manufacturing supply has more firmly established itself in the minds of policy makers.

We will see if these reversals are enough to avoid some of the worst fates that other societies have faced. For policy makers interested in preserving social stability, Turchin's "wealth pump / elite overproduction" model provides an interesting framework from which to derive creative policy solutions.

Further reading

This is just a cursory analysis of some of Turchin's ideas along with a rough application of those ideas to the US context. In his recent book, End Times: Elites, Counter-Elites, and the Path of Political Disintegration, Turchin explores this model in greater detail.