“The temptation to inordinate expressions of the possessive impulse,

                                  created by the new wealth of technical civilization…(stood) in curious

                                  and ironic contradiction to the picture of essentially moderate and

                                  ordinate desires which underlay the social philosophy of…Adam Smith….


                                 “The demonic fury of fascist politics in which a collective will expresses

                                   boundless ambitions and imperial desires…represents a melancholy

                                   historical refutation of the eighteenth - and nineteenth - century conceptions

                                   of a harmless and essentially individual life.”


                                                                                                        Reinhold Niebuhr




                                               The Behavior of Modern Economies


In 1776, Adam Smith published The Wealth of Nations where he described the two principles of the emerging modern economy:

     1) Self-interest.

     2) The division of labor, leading to greater productivity.

About the first, in a well-known passage he wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” 1 From these two principles arises the concept of a trading economy as a perpetual motion machine.

Smith wrote out of the communal Scottish Enlightenment. He was equally proud of The Theory of Moral Sentiments (1790), which supplied a natural regulator to that economy, written for those who were just emerging “…from the straitjacket of a traditional, often dogmatic social order, and must create a workable system of morality and social order in a new condition of ‘perfect liberty’.” 2

There he set forth the famous sympathy principle. “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it….As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation.” 3

Smith wrote during a time of emerging capitalism, a High Street (Main Street) world of proprietorships and small-scale enterprises, where to stay in business one had to take care of one’s reputation and one’s customers. However, he also very crucially noted in the Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” 4 In other words, business activity is also about arranging things to maximize wealth and therefore power. 5 Since our political system is democratic, the remainder of this essay will discuss the management of business power in the 21st century for the benefit of those in a democratic society.

To be clear, we obviously aren’t against business. But business has a highly constructive side, which is the provision of new goods and services, and an extractive side, which is to take advantage of people. Depending upon the character of the CEOs, a company may be like Apple Inc., producing iPhones and iPads that everyone wants (not a stock recommendation) or a company may be like Countrywide Financial, selling subprime mortgages to a leveraged Wall Street that crashed when the housing market did – destroying the finances of many unwitting borrowers and nearly bringing down the world’s financial system.

Economics is abstract. But this abstraction also allows an analysis of specific social situations, against a set of criteria and results in useful suggestions. Consider the goal of economic policy. As a philosophical branch of hedonism, or utilitarianism, the goal of economic policy is to achieve the greatest happiness for the greatest number. Smith wrote, “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” 6 We don’t quite agree with this statement, but it explains why the capitalist system of self-interest and the efficient division of labor has spread broadly around the world.

Taken from the vantage point of Smith’s statement, the goal of economic activity is to generate consumer surplus. What is consumer surplus? Consider the intersection of the classical supply and demand curves. Considering the whole economy at this static equilibrium point, supply equals demand, everyone is happy and there is no more economic activity. Considering the economics of the firm, the price of a good is determined by the amount of money the marginal buyer is willing to pay, balanced by the amount of money demanded by the producer to produce the last unit of production, after considering all his costs including capital.

Now, and this is the reason for economic activity, all other consumers willing to pay a higher price get a free ride at the lower price the market determines. The resulting consumer surplus is depicted in the shaded area of the following graph – the difference between the demand curve and the equilibrium price. Producer surplus is the excess dollars received when producers are willing to produce fewer goods at a lower price, but receive a higher one from the market. Social surplus, the sum of the two surpluses above, is maximized when the economy is operating at a perfectly efficient economic equilibrium. This is why it is important to keep the economy competitive to maximize social welfare.



Total consumer, producer and social utilities are maximized in a world of perfect information and small producers competing mightily for consumer dollars. What can go wrong? The problem is that the real world isn’t static, everyone is trying to adjust to changing circumstances and thus has imperfect information. Producers on their own often try to exert their considerable social power to change the environment in their favor – distorting both the market for goods and the distribution of the financial benefits of economic activity.

As a result, U.S economy has not performed well for most Americans.

1.     Between 2000 and 2018, U.S. real median family income increased at a rate of only .159% per year. 7

2.     During the same period, the wealth of the top 1% of all Americans increased at a rate of 5.33% per year; a rate 33X (sic) greater. 8

3.     In the 2020 election more than 73MM of the electorate (47.3%) voted for the chaotic and authoritarian Donald Trump whose campaign slogan might well have been, “I feel your anger.” In this election, 20 states/territories with the highest median family income went 85% for Joe Biden. At the same time, 20 states/territores with the lowest median family income went 85% for Donald Trump. This data (range of the 2018 data $85,203 to $44,097) 9 starkly illustrates political sociologist Barrington Moore’s observation, “No bourgeoise, no democracy.” In this election we preserved our democratic system, but just barely. Unless anyone wants a repeat of a worse Trumpian experience, something has to be done to correct U.S. income imbalances and provide a large portion of the electorate with a realistic hope for more opportunities.

In 2019 Nobel Prize winning economist, Joseph Stiglitz of Columbia University published, “People, Power, and Profits.” He discusses how market power; and the forces of globalization, finance and new technologies have resulted in massive social inequalities and low economic growth. He writes that we need to exploit the benefits of markets while taming their excesses. We agree with this, but add some caveats which might be discussed in further detail.


Market Power

Competition among many suppliers is important to keep down prices. In this case, the inverse is also true. The fewer suppliers there are, the easier to raise prices. Warren Buffet said, “The single most important decision in evaluating a business is pricing power.” Professor Stiglitz writes, “Higher prices (for instance in the telecom industry) hurt workers just as much as lower wages. In the absence of market power, the forces of competition would drive excess profit to zero, but as we shall see, it is these excess profits that are the root of America’s inequality….Market power gets translated into political power….for instance by weakening unions and the enforcement of competition policy…structuring globalization in ways that further weakens workers’ bargaining power. 10

To an economist, labor and capital costs are valid costs. Rent is not, which is the excess return that gets in the way of growth and efficiency. Reported company profits include both the costs of equity capital and rent. From an economic standpoint, growing rent results in growing social inequality because labor does not share proportionately in productivity increases. In “Declining Labor and Capital Shares,” Barkai (2020) shows that increases in industry concentration cause declines in labor’s share of economic value-added. 11 

To prevent the concentration of political power, threatening liberty, the Constitution divided power among three independent political branches. The analog to prevent the concentration of market power is anti-trust policy, whose vigorous enforcement broke up the trusts in the 19th century. An intuitive sense of the dysfunction of pervasive market power is to note that fewer firms mean less economic diversity, fewer workers and fewer jobs. This ultimately affects the stability of the political system for, “Presidents Carter and Reagan, and those following, rewrote the rules of capitalism in ways that led to a more unstable; less efficient, and more unequal economy – and an economy marked by pervasive market power. The time is ripe to rewrite these rules once again.” 12

Rent exists in all economies. Most obviously in real estate, where the motto is “location, location, location.” Value investors seek companies with moats that give pricing power and therefore the financials that exhibit steady revenue growth and steady margins. Warren Buffet’s Coca-Cola is an example of such a company, which accounts for 13.7% of the beverage market. People have favorite brands; all products aren’t commodities. But Professor Stiglitz notes the economic damage when economic rent becomes pervasive.



Professor Stiglitz writes, “Globalization sits at the center of America’s economic crisis.” 13 The main reason for this crisis is mismanagement, primarily failing to help workers adjust. “…even if there had been no change in technology, globalization on its own would have wreaked havoc on American workers – in the absence of help from the government. And with changes in technology themselves putting workers in so much stress, globalization just compounded workers’ misery.” 14

A major incentive of manufacturing companies to move is profits and survival. Consider a  discussion with the Minister of Trade of a developing country who wants to develop his country:

Company: We would like to sell to the millions of eager consumers in your country.

Minister of Trade: Fine, but in return we want a factory and a transfer of your technology.

 Company: (Thinking it over for a second.) Sounds like a good idea. It will increase our sales, reduce our labor costs and increase our profits. Besides, if we don’t do this deal our competitors will, reducing their costs; and they will eat our lunch. (So much for our American workers.)

This is how the capitalist system works. Aided by the free market system, companies shift production and jobs abroad. It is as if the Angel of Industrialization alighted first in England, then Europe, the United States, North Asia and now Southeast Asia and Africa. Leaving…well that’s the issue. We think that maintaining the productivity of a balanced industrialization is important for an economy for reasons of growth and technological progress. In contrast, both developing and post-industrial economies are primarily service economies. 15

The main question is, what can government do?

The obvious thing to do is to erect tariff barriers. But, considering the experience of the U.S. and Asia, that works only if there is some inherent advantage like low labor costs that needs to be developed. Otherwise, a tariff barrier is simply a tax on consumers that will likely succumb anyway to larger market forces.

Another possibility is to do what other countries have done. For example, for certain goods, simply make as a condition of market access the import of factories and skills, subsidizing the wages of some American workers to make them generally competitive with the ones abroad and then let evolution take its course. The multiplier effects of industrial jobs are higher than that of service jobs. The U.S. consumption economy needs rebalancing in favor of production as well, because our democracy will not survive continued income inequality.

Professor Stiglitz, formerly chief economist of the World Bank, suggests: international investment agreements to ensure that American firms aren’t discriminated against in local markets, intellectual property reform and better international trade rules arrived at through a more open and democratic process. Most important, he writes, “…whatever the rules, we have to help ordinary citizens adjust to the changing economy….Countries that have helped their people with the transition, such as some of those in Scandinavia…have a more dynamic economy, a polity that is more open to change, and a higher standard of living for their citizens. This requires active labor market policies that help people retrain and find new jobs; and industrial policies (also reducing the net production of atmospheric carbon) that ensure that new jobs get created as fast as they are destroyed and that help places that are suffering from large job losses find new economic opportunities.” 16

It would be useful to review what policies have worked and what have not.



“…finance is vitally important to the economy. We need credit to start and expand businesses and to create jobs. Finance is crucial, but there is nothing inherent about its functioning that requires the financial sector to be gargantuan as it has become.” 17

Finance has both a constructive side and a not so constructive side. The most constructive side of finance is obvious, intermediating between savers who have funds and those businesses that need funds. Such finance is long-term, forward-looking and is of significant social value.

But here are some statistics. In 1945 the (much simpler) financial sector was 2.5% of GDP. At the time of the 2008 financial crisis, it had grown to 8%.18 In December of 2019, the daily trading volume of major financial assets (U.S. treasuries, the S&P 500, Euro/Sterling) was $779.4 billion. 19 The daily GDP of the U.S., the Eurozone and the UK was $144.6 billion. In other words, the daily trading volume of their financial assets was (sic) 5.39X daily GDP, as market participants produced additional paper to control the risk (daily volatility) of their financial portfolios. 20 The short-term financial markets are excessive and every once in a while blow up when their financial models do not correspond to reality.

Professor Stiglitz writes, “The financial sector exemplifies in so many ways all that is wrong with our economy. The sector has been the example par excellence of rent-seeking-the bankers increased their wealth at the expense of the rest of society, in what clearly turned out to be a negative sum game, where what the rest of society lost was far larger than what the bankers gained. They exploited the financially unsophisticated...they also exploited each other.” 21

A major objection to the evolution of the U.S. banking structure is that the banks are too big to fail. The financial behemoths have largely (but not always) come about because smaller and riskier financial firms failed, the merger of the these with stronger institutions often arranged by regulators. An example of this, since 2008, large investment banks have disappeared, folded into or converted into commercial banks.

The above argues for:

1)    Effective and forward-looking regulation to make sure that TBF financial institutions do not.

2)    Maintaining low total asset/equity ratios to cushion inevitable problems. In this regard the leverage of large U.S banks has greatly improved from around 20X in years past to around 11X at present.

3)    A small but unavoidable tax on trading transactions, which raises funds for other more important uses. 

Professor Stiglitz notes, “In countries all over the world, the government has to take an active role in providing finance for small and new businesses, for long-term investments, including infrastructure, for high risk technology projects, and to underserved communities…” 22


New Technologies

This discussion is primarily about market power. A company exercises economic market power by restricting competition and production, increasing prices and reaping undeserved monopoly profits. But what about the social media and search companies? They provide consumers with free services: email, search and posting at zero marginal cost to them. What’s wrong with that?

With the personal data collected, companies can exert market power at both the advertiser and the consumer levels. To place targeted ads, advertisers must pay media companies their going rate. Furthermore, producers can eventually appropriate the consumer surplus, arising from charging one price for all, by discriminatory pricing, for instance in the insurance industry. “…AI and Big Data enable firms to extract a large fraction of the value of what society produces for themselves, leaving the rest of society - ordinary consumers - worse off.” 23

Further, the goal of technological media is to prolong engagement. In order to do so, providers collect large amount of valuable information that is also used for selectively assembling “news” from all sorts of sources and political communication. The result is an echo chamber, not discussing the real issues and their facts, only strengthening prejudices across the network. Call this confirmation bias; or as Virgil wrote, in the Aeneid, “Rumor flies through the city.”

The purpose of print advertisement is also to create bias, but social media is much more effective. In the process of continued engagement, people lose their privacy and the freedom of choice. Since the provision of social media products is “free”, consumers become the objects of power exercised in its simplest form of censored information. The art of political compromise (to use a political science term, “interest aggregation”), the function of political parties, is also lost making democracy just mob rule, as some ancient Greek writers feared.

Professor Stiglitz writes, “Because of their market power, the tech giants deserve the full attention of the competition authorities, who will need not just to deploy standard tools against them, but will also have to create new tools to combat their innovative ways of extending and exercising market power.” 24 This is a trailer for the Netflix documentary, “The Social Dilemma. On 11/17/20 the Senate Judiciary Committee discussed with the CEOs of Twitter and Facebook, their business practices and content moderation. Both were open to the modification of regulations.



To increase social stability and to create a better life for all Americans, Smith’s sympathy principle has to be replaced by government. For as Smith himself noted, “Society may subsist though not in the most comfortable state, without beneficence; but the prevalence of injustice (not giving each his due) must utterly destroy it.25

The late American historian, Arthur M. Schlesinger Jr., once noted that the market forces sweeping the globe cause massive changes. The above shows that they are invisible, pervasive and very abstract. For fear of invisible radiation, a minor reactor leak at Three Mile Island resulted in the national abandonment of more nuclear power. It will take a gifted and trusted message from our political leaders to cut through the fog of superstition, conspiracy theories and the abandonment of balanced reason that now pervades our politics.


                 Make sure you get a lot of different kinds of information in your own life.

                                                                             “The Social Dilemma”



                 Our intelligence changed the way in which we evolved. In the past, animals

                 had to develop some physical ability to change their lives. For us an idea

                could do that, and an idea could be passed from one generation to the next….


                To restore stability to our planet, we must restore its biodiversity….


               There is a chance for us…(to) manage our impact and once again become a

               species in balance with nature. All we need is the will to do so.

                                                           “David Attenborough: A Life on Our Planet”