There’s a really funny thing about economic conferences. They just let you in, if you sign up.
I attended the 2019 Inequality of Opportunity conference in Brisbane. I paid the entry fee, registered under Wholesome Rage as my company name, and they just… let me in. There I was, some random blogger, in a room full of people either with doctorates in economics or political science, or actively getting one. Many were presenting their papers.
A lot of fun. Absolutely terrifying. I spent most of the last two months cramming economics textbooks and lectures in preparation. I knew the difference between a Nash equilibrium and a market equilibrium, a Phillip’s curve from a Laffer curve, a Giffen good from a Veblen good.
The problem was I had a major conflict in my soul. One, to not be found out by these people as wholly underqualified to be there. Two, to ask as many questions as possible.
The second one won out, because I was too excited to be there.
The first keynote was by a World Bank policy adviser, who talked about his early work in Ecuador. I was actually familiar with it: When learning the difference between ‘cost’ and ‘marginal cost’, the example I worked with was that the World Bank charged marginal cost of electricity to poor Ecuadorians as stipulation for World Bank loans. This meant that cheap hydroelectric power was being charged to locals at the rate of world oil prices - $60 a month electricity bills to people making $150 a month in wages.
His speech: Inequality Is Like Cholesterol.
There’s good cholesterol and bad cholesterol, which the models he was presenting classed as ‘effort’ and ‘circumstances’. Inequality due to sexism and racism, that’s circumstance. Working harder than someone else, though, was effort. His presentation was about providing new, better measurements for the ratio of ‘good’ to ‘bad’ inequality.
My question: “Would rent seeking activities - such as buying and owning land, since real-estate is the largest driver of generational inequality - be classified as ‘good’ inequality?”
The answer, after an awkward pause: “Well, it would have to count as investment, so yes… I suppose we justify it, though, by saying that investors have to take on risk.”
Now, there’s the rub, isn’t it?
The United States is uniquely useful for looking at generational inequality, because of the large black population and the history of racialized inequality. Specifically, in this case, we can see the long term effects of redlining laws keeping black people from owning property. Even fifty years after the civil rights movement, the wealth gap between black and white families is unchanged.
Maybe individual investors accept risk, but when we see such a divide between those who had access to the property market and those that didn’t, we see that as a broad group, owning property is very attractive.
Looking at the UK, it’s one thing to say that house prices outpace wage growth by 11%. It’s another to know that average city earnings are about £34,366, and according to FT Adviser, house prices increased from £180,548 to £248,233. This really emphasizes how being locked out of owning property can cause inequalities: A landlord makes passive income both from the renter, and the increasing value of the property over time.
This very flaw was expanded upon greatly in a later keynote by Dr Lars Osberg, who underscored the limitations of the income inequality graphs used in the cholesterol speech, with one particularly damning line: “If you’re only measuring income inequality, then you’re ignoring half of all GDP.” Dividends, stock returns, the increase in value of owned property, none of that had been included.
Probably because it leads to uncomfortable questions about the ethical nature of profit.
It’s worth saying that his keynote came at the end of a day of lectures which had been very meticulous in their ways to measure and quantify inequality, but had very little to say about what to do about it.
I had spent the entire first break arguing with a doctoral student of economics that homeless people aren’t just lazy, that they can’t just go and get a job. That the homeless didn’t ‘deserve it’ for not trying hard enough.
There seemed to be a lot of truth in the idea that economics was simply math with a human component, ignoring the human component. The ethics of wealth inequality had not been discussed at all.
Osberg’s keynote speech, then, was electrifying after all that. It did directly address these issues, and he said that the debate on inequality goes back to at least the aristocracy of the 1700s.
I’ll come back to Dr Osberg for a contemporary perspective, but we can find this debate goes back much earlier than that, if we know where to look. Much earlier.
Let’s go back to Deuteronomy 23:19-20, which the King James Bible translates as; Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury. Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
As a major pillar of Judaism, Christianity, and Islam, this has pretty wild implications.
The first is, what’s the difference between a brother and a stranger? Many traditional interpretations put “stranger” to mean someone you’re at war with. Consider Psalm 137:7-9, and I’ll use the English Standard translation as the historical translation is less necessary here:
Remember, O LORD, against the Edomites the day of Jerusalem, how they said, “Lay it bare, lay it bare, down to its foundations!” O daughter of Babylon, doomed to be destroyed, blessed shall he be who repays you with what you have done to us! Blessed shall he be who takes your little ones and dashes them against the rock!
Such passages make it clear that God plays favourites about which commandments apply when. “Thou Shalt Not Kill” doesn’t apply if your people burned Jerusalem to the ground – in that case, it’s perfectly just in God’s eyes that your babies get spiked like an end zone football.
The Jewish interpretation of this was simple enough, because ‘brother’ could be interpreted as ‘Israelite’. Don’t charge at interest to other Jews, but everyone else is fair game.
Christianity and Islam had to work out more complicated answers.
One of the biggest divergences between Christianity and Islam is in how they came to view Deuteronomy 23:19. The Prophet Muhammad was a merchant, which made merchants a sort of religious institution. The markets were the will of God, and currency was divine.
We can see the impact of this outlast the Middle Ages. Our term ‘adventurer’ comes from ‘merchant adventurer’, which was someone who left the country to do business, which inspired a rich storytelling tradition, inspiring works like “Sinbad”.
Anthropologist David Graeber argues in “Debt”:
Islam also took seriously the principle, later enshrined in classical economic theory but only unevenly observed in practice, that profits are the reward for risk. Trading enterprises were assumed to be, quite literally, adventures, in which traders exposed themselves to the dangers of storm and shipwreck, savage nomads, forests, steppes, and deserts, exotic and unpredictable foreign customs, and arbitrary governments. Financial mechanisms designed to avoid these risks were considered impious. This was one of the objections to usury: if one demands a fixed rate of interest, the profits are guaranteed. Similarly, commercial investors were expected to share the risk. This made most of the forms of finance and insurance that were to later develop in Europe impossible.
From this, I can’t help but find the modern notion of investment ‘risk’ laughable. But reading about the financial history of the Middle Ages, it seems like this sense of real risk was what made profit ethically justified.
What’s especially interesting is how this evolved differently in Christendom. Without a merchant prophet, Christians had the buck stop with the New Testament. This meant that the ethical debate came down much harder against any form of profit whatsoever, naturally concluding in the vow of poverty.
This led to a problem. The church, as an institution, needed money to fund… well, everything. Ornate churches tended to be a big sink for valuable metals like gold and silver. But the monks themselves had to be poor.
So, who owned the churches, if not the monks?
In 1250, this led to Pope Innocent IV creating the concept of a ‘persona ficta’, a person who was a legal fiction, to own the property of the church. Thus was born the limited liability company, or the corporation.
So from these beginnings we can see the three different approaches to Deuteronomy play out in three different ways:
The Jewish doctrine put the emphasis on being allowed to lend to strangers, which they took to mean gentiles. This resulted in Jews not only being able to lend money, but often being the only people who could lend money. This had the lasting implication of not only Jews being associated with bankers, but with the persecution that could only come from being the ethnic group that kings were indebted to - famously Edward I’s Statute of the Jewry in 1275, which said Jews could not practice usury and condemned them to wearing a yellow patch, and the Edict of Expulsion in 1290, which led to a pogrom of British Jews.
Usury was treated as an act of war.
The Christians found that the workaround was to externalize it to a higher power - not to God, but to the corporation. In this we see that the persona ficta was held as responsible for the crimes, or sins, and not the people who it represented. Originally this was meant to allow monks to have property, but it came to become a much more useful concept.
The Islamic faith, with its merchant prophet, found it to mean that the problem was in guaranteed, ‘riskless’ returns. There was no sin in being rich if you had earned it through peril and adventure! Jeff Bezos could still get into heaven if he had gotten his money from looting Mayan temples, dodging pit traps and swinging blades. This would be the ethical justification behind Scrooge McDuck.
The last I find the most interesting, here, because it has the richest tradition of addressing what the World Banker deemed ‘risk’ in investment. Under the scrutiny of centuries, it rather falls apart.
This isn’t a small detail either. The field of modern economics is largely credited to Adam Smith and “The Wealth of Nations”. However, Adam Smith and his ‘invisible hand of the market’ have a lot of roots in Islamic philosophy. We know that work was influential to him: Smith’s personal library included Latin translations of these philosophers. In fact, Smith’s argument about the ‘eighteen steps of a pin factory’ matches the 11th century Islamic philosopher Al-Ghazali’s ‘twenty five operations of a needle factory’.
So what changed in the move from Islamic thought to Smith’s, in the Enlightenment?
Before writing Wealth of Nations, Smith had written Theory of Moral Sentiments, in which he addressed Hobbes’ thoughts on the natural state of man. There’s an implied agreement on it.
The full Hobbes quote I am addressing, which is usually condensed to ‘nasty, brutish and short’, is this:
“Whatsoever therefore is consequent to a time of Warre, where every man is Enemy to every man; the same is consequent to the time, wherein men live without other security, than what their own strength, and their own invention shall furnish them withall. In such condition, there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continuall feare, and danger of violent death; And the life of man, solitary, poore, nasty, brutish, and short.”
This is what they believed the natural state of man to be, before society emerged. A terrible free-for-all.
It’s also utterly untrue. What we know now of prehistoric societies suggest they were happy, long-lived and communal. Barter was only to be done with people who might otherwise be enemies - otherwise all things were shared. A lot of this is beautifully summarized in illustrated form by Nathan Burney.
But it’s important to know that this is what Smith thought when adapting the Islamic arguments. While both held that the marketplace could be seen as the ultimate expression of man’s freedoms, it was Smith who came to filter it through the lens that all people are rational, self-serving actors seeking material advantage.
As well, because prices were ‘set by God’ in the Islamic understanding, there had been little room for state enforcement in their marketplace. Most of the value of a check or promissory note was in the good name of the person who wrote it—checks could bounce, after all, but there was no debtors prison to enforce signing good checks.
Islamic society did not fall apart without that enforcement. The Enlightenment understanding of Man, however, would insist that without the State to directly intervene, nobody would be able to rely on a check. Social consequences are a secondary consideration to material advantage.
In the context of Smith’s reading, the argument changes profits from investment needing to be justified. to being seen as the main driver of human motivations.
No anthropologist has reported seeing Homo Economicus in the wild, however.
Smith came from the society that had invented the corporation, and from the Enlightenment. The argument for ‘risk’ in investment changed from a more aggressive definition, to a more figurative one like gambling. This is the argument for ‘risk’ as a justification for profit we still see, stripped of its original context.
Looking at it in that sense, we can see that this newer idea of ‘risk’ falls apart as a justification for further inequality. Thanks to Pope Innocent IV’s brilliance, and bankruptcy laws, it is a fictitious person that takes the brunt of losses when a business does poorly, not the investor himself.
When a business does so poorly that it has to lay off workers, we feel sorry for the people who have lost their livelihoods to forces and decisions outside of their control, and not for the shareholders. That is risk.
This is how Donald Trump famously maintained his lifestyle while being billions in debt. Or how he got his lifestyle in the first place as the result of inherited wealth. From that we see that even bad decisions, and failed risks, are insufficiently punished to accomodate for the inequality that investment causes.
Looking at the information presented at the Inequality Of Opportunity conference, it would be reasonable to say that Hobbes and Smith seemed to have gotten it backwards. It has been industrialization, even with the abundance it created, that had seemed to make life nasty, brutish and short for so many people.
Dr Osberg did not cover the old arguments in his speech. They’ve largely been forgotten to time, and are having to be discussed as if for the first time as global inequality reaches crisis levels, both between and within nations.
He wrote in the introduction to his book “The Age of Increasing Inequality”: “Thirty-five or forty years ago, it was possible to summarize the international literature on economic inequality and all the available data on Canadian inequality in a little over 200 pages of text.” This is certainly true, if we ignore that many of these medieval debates about usury that included strong arguments against wealth inequality.
The modern work on inequality has recently exploded. Dr Osberg’s speech specifically cited Piketty’s “r > g” equation as influential—as long as return on capital (r) is greater than the rate of economic growth (g), inequality will increase. The formula is only as old as 2013, when Piketty’s book Capital in the Twenty-First century was published.
That equation is important when much of the work on inequality only looks at income inequality. By only looking at inequality from that context, it’s easy to ignore the great body of work on usury and its theological origins. But the theologians made philosophical arguments about why usury would be considered sinful, arguments that influenced the founders of contemporary economics. The starting point may have been religious, but the arguments were often ethical, not theological.
While I didn’t get to attend the second day of the conference, I did get access to the PowerPoints and notes of the speakers, including those of Professor Stephen Jenkins of the London School of Economics. I’m sorry I missed out on his presentation.
In it he stresses: “Most public discussion about inequality focuses on income (an economic flow), but wealth (an economic stock of assets) is a more fundamental indicator of people’s social position and opportunities, and its distribution goes to the fairness and stability of a society.”
This is important, because owning wealth has not historically been the guarantee of future income that it is today. It is only through what’s historically called usury that wealth persists, increases, greater than someone else’s ability to earn it.
All this really begs the question, then, of why it was up to Adam Smith to modernize the Islamic philosophy for the Industrial revolution.
I think it’s fair to argue that the Islamic world would not have precipitated the industrial revolution - and it’s not just because of the lack of steam engines. The industrial revolution was more than just a technological movement, but a social one as well.
The ideas that Adam Smith added to the older philosophies, along with his contemporary philosophers like John Locke and David Hume, also tie into the birth of liberalism - with Locke summarizing the natural rights of people as “Life, Liberty and Property”.
It is these new conceptions of property rights that would be critical to the industrial revolution, not the free market. That would be why material inequalities persist long after the initial causes have been resolved.
In the next part of this, I’ll talk more about primitive accumulation, and the difference in how Adam Smith and Karl Marx envisioned it, Roman legal definitions and how people were envisioned as property and the triangle trade and why African and Islamic slavery was nowhere near the brutality seen in the Americas.