Edward Hadas

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

These adjustments are almost certainly large enough to offset the reported decline. So the middle class doesn’t need a lecture on the virtues of making do with less. The adjustments also explain the lack of massive political indignation, even if there is evidence of minor irritation, at declining incomes. The placidity is not a sign that the American middle class has found stoic fortitude in the face of adversity. Rather, it is a reasonable response to consumption which is not really falling.

On the left, the common view is that the rich, or more precisely the widening gap at the top of the income ladder, is the nation’s leading consumption problem. For the top 1 percent of earners, income – after taxes and government transfers and adjusted for inflation – has multiplied four-fold since 1980, while the median has not even doubled. The disparity might be reduced by statistical adjustments, but the trend is real. The rapid increases in pay for celebrities, top executives and financial professionals are typical.

Revolution was not on the agenda when the Second Vatican Council of the Catholic Church opened on Oct. 11, 1962, almost exactly 50 years ago. However, the gathering marked the start of a new era, not only for the world’s largest centrally-run religion. During the following years, the hope for a better, freer world led to everything from the sexual revolution to the Prague Spring, from African independence to the hippie culture of Woodstock. A half-century on, it seems a good time for an economist to take stock.

The economy was not the top concern of the ’60s would-be revolutionaries, but calls for a new society had two revolutionary economic implications.

First, like so many other parts of the established order, the economic “system” was to be overthrown. The target was clear enough in Eastern Europe – the Communist planned economy. Elsewhere, the economic villain was harder to pin down, although it was often assumed that “capitalism” was intrinsically evil – heartless corporations and excessive materialism in the West and post-colonial exploitation in the Third World. It was time for radical change; if not a return to some imagined pre-industrial communal paradise then at least a massive refusal to become cogs in the machine. It hardly seemed to matter then that dissidents in the East were longing for what protesters in the West were loathing.

Economic development is not a simple matter. If it were, the comforts and security of developed economies would be enjoyed by more than one-seventh of the world’s population. Political extremists, especially successful ones, help explain why development has benefited only a minority.

Over the last two centuries, many groups which started out tiny, extreme and persecuted ended up in power. Think of radical socialists in many nineteenth century European nations or the colonial freedom fighters in much of Asia and Africa. The rebels varied in their beliefs and sophistication, but they shared the conviction that the pre-existing social order was irredeemably corrupt. The groups were typically built around a hard core of true believers, with larger groups of fellow travellers and vague sympathisers, some of whom rose to quite high positions.

It is much the same for economic revolutionaries in very poor countries. At first, small bands of devotees emerge. These are people dedicated to the capitalist work ethic – discipline at work, innovation in enterprise and efficiency in production. These dreamers also aim to overthrow the economic arrangements that went before – the feudal hierarchies, economically stultifying social restrictions, aristocratic waste and primitive technology. Economic revolutionaries are invariably more selfish than their political counterparts, but they share the desire to turn everything upside down.

Speeches by Chinese Communist Party leaders are great opportunities to play “buzzword bingo”. Hu Jintao’s July 23 policy summary was replete with such phrases as “socialism with Chinese characteristics”, “Deng Xiaoping Theory” and “Scientific Outlook on Development”. But the sloganising is more than empty rhetoric. The speech, echoed elsewhere, shows the outgoing leader wants the CCP, and the country, to escape from might be called a Marxist trap.

The trap has three parts. The first is the core Marxist belief that economic considerations come first while culture and everything else lag far behind. These days, many non-Marxists also put the economy first, but Chinese leaders are especially loyal to the simple claim that GDP growth equates to progress. Hu’s focus on scientific development, for instance, is shorthand for putting higher production before all other goals. His other big buzzword – harmonious development – is not a tribute to the traditional Confucian notion of cosmic harmony, but a call not to let inharmonious social disorder slow material progress.

The second part of the Marxist trap is the Communist Party’s monopoly of power in government and its final authority over everything in society. That predominance has been taken for granted by virtually everyone in the top leadership since the foundation of the People’s Republic in 1949, although the thinking comes less of Marx himself than his teacher G.W.F. Hegel. Hegel believed that the state would and should eventually take over the roles traditionally played by the various organisations of civil society: family, church, guild, cultural and special interest groups. Lenin added the claim that the Communist Party is the vanguard of this all-encompassing state, so there is neither need nor space for other voices.