Developed World Economics for the 21st Century

National economic structure has been the most controversial issue over the past few years throughout the developed world.  Specifically, there has been a great deal of concern about the allocation of wealth and growing income inequality.  This is the primary reason for the Occupy movement that has spread to over 80 countries.  The occupy movements main message is completely justified and accurate; 1% of the human population has an increasingly disproportionate amount of global wealth and this is being caused by corporate influence in government.

As Nick Hanauer said in a recent TED talk (watch here), governments since the 1980s have been selling the public an empty rhetoric: reducing taxes on the richest people in society will create more jobs.  It is hard to think of how any credible economist could think this economic strategy would work, but either way, that has been government strategy in most developed countries for the past three decades and it is steadily ruining the global economy.  This has been the strategy of many countries in the developed world because over this period corporate influence in politics has grown and political candidates are more dependent on wealthy corporations than the citizenry for re-election.

In the pictures below you can see that since 1982 in the United States the average income of the richest 1% has grown disproportionately to the average income of the rest of the population (Fig. 1).  Also, as governments embrace a conservative tax policy, lowering the percentage of tax the wealthiest members of society pay, the higher unemployment becomes (Fig. 2).

What is more troubling are the affects of income inequality on society at large.  Income inequality is inherently divisive and creates more conflict and violence, disproportionate life expectancies, decreased satisfaction in life, increased imprisonment, mental illness and infant mortality, and finally decreased social mobility.

Furthermore, all recent research has suggested that above a certain income level, unnecessarily high levels of income do not make people experientially happier.  That is, as long as you are reasonably comfortable (e.g., can buy a home, feed your family, afford a few vacations), more money, on average, actually makes you no happier in the moment.

Finally, there are several successful market economies in the world (Japan, Sweden, Finland, Norway, Denmark, etc.) that have very low levels of income inequality (Fig. 3).  These countries also have the the least conflict and violence, the highest life expectancies, most satisfaction in life, low levels of imprisonment, mental illness and infant mortality, as well as the highest levels of social mobility in the developed world (Fig. 4).  This final point prompted economist Richard Wilkinson to say that “If an American wants to live the American dream, he should move to Denmark”.

It is important to note that Japan, Sweden, Finland, Norway and Denmark have had largely non-existant occupy movements.  There is just no need for them.

Insane inequality from a historic perspective

In my mind the last three decades of growing income inequality in the developed world have to be understood within an important historical context.  In many ways the 20th century was a great battle over how the emerging global economy was going to be structured.  This caused three large wars (WW1, WW2 and the Cold War).  These three wars comprise what historian Eric Hobsbawn calls the “short 20th century” from 1914-1989.

During the short 20th century three distinct worlds began to emerge: the first world, the second world and the third world.  The first world was the capitalist world, led by the United States.  The second world was the communist world, led by the Union of Soviet Socialist Republics (U.S.S.R.).  The third world was largely comprised of former western European colonies whose recently independent governments had not yet committed to either a capitalist or communist economy.

At the end of the Cold War, the second world crumbled.  There are still vestiges of the second world (e.g., China still calls themselves communist) but in practice the entire world is now operating under a capitalist economic system.  There is no economic philosophy challenging capitalist hegemony, however we are starting to see cracks in the system.

From my perspective, I have always held a moderate view on national and global economics.  I don’t believe communism can work, we all can’t expect to make the same amount of money.  People are largely motivated by accumulating wealth and there are jobs in our society that are more difficult, take more effort, benefit society more and require taking greater risks than others.  People who pursue these career paths and succeed should be rewarded.  There is nothing inherently wrong with making money.  On the other side, it is becoming evident that capitalism in its purest form (e.g., United States of America) has extremely negative social consequences.  Any country with polarized extremes of wealth and poverty is going to become a ticking time bomb for social discontent.

The middle road

However, there is an obvious middle road.  This middle road is not an illusion, it is not idealistic, it does not take a major paradigm shift and it does not take three global wars to achieve.  It already exists.  There are successful market economies that redistribute their wealth properly and as a consequence have very little social discontent.  People in these countries measure much better on any quantifiable scale of social happiness than all other developed countries in the world.  People in these countries are also, on average, safer, healthier and more peaceful than any other people in the world.  And they do not have to sacrifice wealth to achieve this.  Japan, Denmark and Norway (for example) are consistently among the most productive and wealthiest countries on the planet.  They achieve this by combining the best aspects of the two dominant economic systems of the 20th century; capitalism and communism.



About Cadell Last
Hello. I'm probably drinking coffee and reading.

One Response to Developed World Economics for the 21st Century

  1. Karl Fitzgerald says:

    A synthesis of capitalism and socialism is certainly what we need to curb the forces of speculation. Since the Global Financial Crisis, 3 major tax reviews (UK Mirlees, Australia’s Future Tax System & the NZ Tax Working Group) have all supported the switching of tax bases away from mobile to fixed assets. The fact that there is $21 trillion hidden in tax havens compounds the importance of this, as does the fact that now Germany is facing the property bubble curse. See these issues discussed in the 40 min documentary Real Estate 4 Ransom –

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