"Until exclusion and inequality in society and between peoples are reversed, it will be impossible to eliminate violence."
- Pope Francis, in last week's "Apostolic Exhortation".
On the final Inside Business program yesterday, strategist Gerard Minack showed this chart:
Forty years ago the average wealth of the top 1 per cent was exactly 10 times the average of the rest. Now it's 29 times, and rising, while the wealth of the rest is flat. His point was that inequality is likely to be the next great challenge for the world economy.
Here's another chart, from a study by Paolo Liberati of Roma Tre University.
It suggests that overall inequality is declining, but only because of a decline in inequality between nations. "Within inequality" (that is, within nations) has risen dramatically. Liberati says that is led by the "increased level of inequality in China".
In fact both of the lines on this chart are dominated by China. According to Professor Liberati, "… total inequality receives two contrasting inputs. On the one hand, the powerful convergence force associated to the reduction of the Chinese gap with richer countries; on the other hand, the powerful divergence force associated both to the enlargement of the Chinese gap with poorer countries and to the greater weight of the Chinese within inequality."
In his Exhortation last week, Pope Francis wrote: "When a society – whether local, national or global – is willing to leave a part of itself on the fringes, no political programs or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility."
General Francis' first major piece of writing since taking over the top job was largely about economics, and was a stinging critique of consumer capitalism and free markets. For that reason it has made headlines around the world.
The statement presents an interesting challenge to right wing Catholics like Prime Minister Tony Abbott who have become used to the church supporting their views on abortion and same-sex marriage (although Tony Abbott's view on abortion has become more politically nuanced these days). Now they will have to get used to being on the other side of the debate to the Holy Father.
US radio commentator Rush Limbaugh attacked last week's homily as "pure Marxism", which is slightly ironic given that much of the inequality that the Pope is complaining about is largely coming from the world's last great Marxist state.
But it's true that Pope Francis' investigation of the causes of inequality does have a bit of lazy Marxism about it. "This imbalance," he writes, "is the result of ideologies which defend the absolute autonomy of the marketplace and finance speculation. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenceless before the interests of a deified market, which become the only rule."
Inequality, I would argue, is not caused by capitalism but by its lapses – that is, by vested interests that distort the system for their own purposes and capture more than their share. Inequality is thus caused by a failure of regulation and competition, not by the existence of competition.
In recent weeks I have been developing an idea – that is, trying it out in speeches – that inequality results when elite vested interests succeed in distorting society to their own ends, and the two great vested interests of the modern world are American bankers and the Chinese Communist Party.
It is hard to decide which of these two groups has been most successful in capturing a disproportionate share of its society's wealth. Each group has been phenomenally successful in its own way.
The bankers have had some setbacks though. They became too greedy twice in the past 15 years – during the dot com bubble of the late '90s and then the housing bubble of 2005-06. The results can be seen in Gerard Minack's chart above: big declines in the wealth of the top 1 per cent in 2001-02 and 2008-09.
But they weren't down for long. After 2003 it was the housing boom and specifically financial engineering that saw their incomes rise to even greater heights, and inequality widen dramatically once again.
In 2006-07 they totally lost faith in each other's credit quality, resulting in a collapse in inter-bank lending and a financial crisis. But they quickly regathered their political strength and persuaded Washington to use taxpayers’ money to recapitalise the banks, while wiping out shareholders' savings. Bankers' incomes sailed on, and the top 1 per cent once again saw their wealth surge, while the bottom 99 per cent went backwards.
Meanwhile the world is getting a glimpse of the immense wealth that has been captured by China's elites as they rush to get the money out of China. In Australia they are lining up to buy real estate, and Chinese buying has sent the price of Bitcoins to equal the price of gold.
The 80 million members of the Chinese Communist Party (5.5 per cent of the population, not 1 per cent) are clearly worried: as Pope Francis says, when you leave part of society on the fringes, you can't guarantee tranquility. As a result the CCP, who have captured the lion's share of China's wealth, are doing two things: exporting capital as fast as possible and, through their chosen Premier Xi Jinping, introducing reforms to allow them to export more capital more quickly, while also opening up opportunities for the masses to do a bit better through individual capitalism.
'Pope' Xi Jinping's Exhortation in November following the Third Plenum of the 18th Congress, like Pope Francis', was all about the importance of alleviating inequality – but not through redistribution, as the Holy Father was calling for, but by opening up the economy through market-based reforms.
For the Chinese, it seems, capitalism is the opiate of the masses, not religion as Marx said.