Inequality

Or perhaps: Inequality, So What?

David Ruccio has pointed to the sudden outbreak of a discussion about inequality amongst some of our leading left of center economists, notably Joe Stiglitz and Paul Krugman. I will not reprise their debate, you can track it down for yourself.

My purpose is somewhat different.

The distribution of income and wealth was a subject that vexed and exercised the minds of more than a few old school economists. This was particularly true in the immediate post-war era when real Keynesianism was in its heyday. Kaldor, for instance, produced a very simple model of distribution that still appeals to me simply because it had a neat political ramification: in his model there were zones of discomfort. One was when profits fell too low and thus provided a disincentive for investment and a consequent slowing of growth. The other was when profits gulped up too much and gave rise to worker unrest and a reaction against plutocratic excess. There is much to criticize in Kaldor’s model – he is still operating within the confines of an equilibrium mindset – but at least he makes a solid point: economics cannot ignore political consequences.

Nor can politics ignore economic consequences.

This is a point well made by John Schmitt, and one that I agree with.

Our current extraordinary level of inequality, whether it has theoretical impact for economists or not, and whether it is important for the operation of the economy or not, is by no means accidental. It is deliberate.

The problem I have with the Stiglitz/Krugman discussion is that while neither can be accused of being deaf to progressive causes, neither is willing to challenge the deeply anti-social stance of their own discipline. Mainstream economics, and both Stiglitz and Krugman operate within the mainstream albeit whilst being heretics in some ways, is still riven through with error derived from its ideological origins. Put that another way: I disagree with the importation of that ideology and to the subsequent attempt to mask the result as science.

When pressed Krugman, for instance, will still revert to the claim that wages reflect outcomes of the workings of a giant economic machine untouched by human hand. They are he says the result of the interplay between the marginal input and the marginal output of a worker. So the return to wages, the part of the Kaldor system that so agitates profit seekers, is set by market magic not by arbitrary human decision making. Yes he will admit, there may be short term aberrations, but in the long term – and how economists love to chat about the mythical long term – the magic of the margin will set the level of wages. It will also set the returns to capital and thus profits.

I find this all very odd.

I doubt that anywhere in the real world there is an employer who has a clue about the true marginal return of labor. There are clearly local competitive wage structures, but there is nowhere a clear idea of the marginal purity mainstream theory requires. I suspect that old ‘mark-up’ model is a more sensible replica of real world decision making. In which case wages are subject far more to arbitrary and socially sourced pressures than mainstream theory allows.

And then there is the small matter of defining capital in any way that can be accommodated within a marginal analysis, and the follow on problem of how returns to capital would be calculated even if we were able to define capital adequately. In this regard the entire mainstream community acts as if the [in]famous capital debate just after the war never happened. Perhaps that’s because the mainstream lost and had to choose between sweeping the episode under the carpet or re-evaluating its theories. Naturally it chose the easy option. But that means it has no theoretical equipment, no lens if you like, with which or through which to evaluate the consequences of inequality.

Most mainstream economists are reduced to a shrug when pressed on inequality. It either doesn’t matter, doesn’t concern them, or it matters, but is an unfortunate and unintended side effect of making the economic machine hum the way their theories argue it ought.

From what I can tell both Stiglitz and Krugman fall into this latter category. For them inequality is a nasty thing and ought to be mitigated, but economic theory is agnostic on both fronts.

I have a different view, and I think Schmitt would agree.

Inequality was deliberately created.

It is not a design flaw. It is a design objective. The entire Reagan/Clinton/Bush era has been characterized by a series of policies designed to ‘liberate’ the economy from structural ‘impediments’. That is to say we set out to deregulate, remove blockages, increase incentives, and allow the chips of wealth distribution to fall where they may. But we did this knowing full well that an truly open economy – with openness being defined as highly deregulated – would end up being distorted. History is full of examples of such economies. The best and most recent American case being the so-called Gilded Age. Our current attempt at plutocracy outdoes even that abomination.

Much has been made also of the effect of technology in the discussion about inequality. I would agree that the rise of information technology has had an impact. In particular low end wages have been suppressed even more by the elimination of clerical and blue collar jobs that have been replaced by automated processes.

I differ in that I see this impact as designed. We know full well that business will always opt to substitute the lower cost means of production. I don’t argue with that pressure. I understand it. I took part in the discussions that lead to those kinds of decisions being made. Where I see a difference stems form that derivation of the returns to wages I mentioned earlier.

If you accept the marginalist school notions, then substitution can drive down wages, boost profits, and generally re-allocate ‘resources’ – in this case labor- to more efficient use within the economy. That this creates short term inequality doesn’t matter because the entire goal is to get to be more efficient. The consequences of that efficiency are inconsequential to the theoretic thrust.

If you accept that wages are socially constructed you are driven down an entirely different path. Then inequality does indeed matter because it is a subject to be considered within the theoretic construct and is not simply an unintended consequence of a search for efficiency. You don’t find yourself trapped advocating an anti-social pursuit of purity for the sake of purity, you find yourself arguing for a more balanced distribution of the socially determined wealth generated by the cooperative efforts of us all. You end up defending social programs, not only because they are morally worthy, but also because they act within the economy as a bulwark against systemic failure. They place a firm limit on the encroachment of uncertainty into our everyday economic interaction, and they do it in a socially acceptable way. They lift the economy by adding structural impediments to downside risk. Yes they come at a cost to pure efficiency, but that purity is an ideal that can never realized in the real world and is thus an unworthy policy goal.

For instance, the impact of technological change, which is a well known and pervasive theme in economic development, ought to be mitigated by a parallel set of structures designed, not to defeat technology, but to ease its anti-social consequences. It is one thing to encourage technological change, it is another to abandon a generation or two to comparative poverty because of it, or to allow only a few to benefit from its implementation. It always behooves capitalists to share the wealth. That way they can perpetuate their system. Unbridled inequality is an assured route to social instability, which is what Kaldor was trying to illustrate in his simple model way back when.

The pursuit of purity is the pursuit of an idiotic chimera. It is a mirage. It only acts as a veil to mask the darker agenda of an ideologically committed few to skew the economy for their own benefit.

Which is what has happened, and is why inequality is such an important topic.

Rectifying this, of course, assumes that you are predisposed towards a social or community spirited approach to the entire economic ‘problem’ and don’t define that problem in the manner of Lord Robbins, Milton Friedman, or any other of the many economists who have sought to eliminate the element of politics from the subject matter of economics.

Mainstream economists, sympathetic or not to the our plight, are still stuck in the Robbins rut. They need to get out a bit. Then their discussion would have more relevance.