Reports from the Economic Front

a blog by Marty Hart-Landsberg

Inequality, Economists, and Capitalism

Most economists now recognize that income and wealth inequality has significantly increased over the last few decades. Many, however, refuse to see it as a problem.

Several sessions at the January 2015 annual meeting of the American Economic Association [AEA] addressed French economist Thomas Piketty’s book Capital in the Twenty-First Century which highlighted both the growth of inequality and its negative consequences.  Piketty works within the established framework of mainstream economics and his call for a global wealth tax is far from a challenge to the existing system.  Yet his argument that capitalism left unchecked produces a steady and destructive growth in inequality doesn’t appear to sit well with many leading economists.  [Useful reviews of the book are here and here.]

A case in point: one panel at the AEA meeting was organized by the influential Harvard economist Greg Mankiw, the author of widely used introductory and intermediate economics textbooks.  Chuck Collins, from the Institute of Policy Studies, described the panel session as follows:

Three neoclassical economist critics, assembled by Mankiw, embarrassed themselves by quibbling with the incontrovertible evidence of growing concentrations of wealth and surging plutocratic trends.

As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.

We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.

Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.

There can be little doubt as to the growth in inequality as the following charts demonstrate.  The first chart shows that the top 1 percent of households boosted their share of all pre-tax income from 8.9 percent in 1976 to 22.46 percent in 2012.


The second shows changes in real family income between 1979 and 2012.  While the top 5 percent saw their real incomes grow 74.9 percent, the bottom 40 percent suffered actual declines.

While those at the top may not find these trends problematic, I don’t think that long arguments are needed to establish that those suffering from declining living and working conditions do.

At issue is the cause of these trends and the appropriate response to them.  One obstacle to clarity is the fact that most economists, even liberal ones, refuse to acknowledge the limits or perhaps better said blinders of mainstream economics.  See here for an example.  And Piketty’s work for all its benefits in documenting inequality trends suffers from the same limitations. As the economist Michael Roberts explains:

The real problem is that Piketty’s explanation for rising inequality is faulty and his proposals for action either utopian or ineffective. This is where the heterodox/Marxist view of inequality comes in. While the likes of Piketty and Joseph Stiglitz entertained thousands in the big halls at [the AEA meetings], heterodox economists (including me) in the Union of Radical Political Economics [URPE] presented papers to about 30-40 on Piketty exposing the flaws in his explanation. My paper argued that by deflating productive capital into a wider definition including property and financial wealth, Piketty cannot really explain rising inequality. Indeed, when housing and financial assets are stripped out, Piketty’s rate of return on assets becomes Marx’s rate of profit. And, instead of being steady and invariable as Piketty claimed, it falls.

Two main arguments have been presented by Piketty, both based on mainstream economics, to explain why the ratio of capital (wealth) to income has been rising. Piketty relies on neoclassical marginal productivity theory. This theory suggests that the more capital invested should lead to falling returns but Piketty claims there is a high rate of substitution of labor for capital in production, so the share of income going to capital rises. But as Fred Moseley showed in a paper at [the AEA], marginal productivity is logically incoherent and empirically false (Moseley-Piketty).

The other argument from Piketty is that, over the long term, as the savings ratios of households rises, it will eventually lead to a rising capital share. Well, a paper by Frank Thompson at the University of Michigan showed that, while this is theoretically possible, it is extremely unlikely to be achieved (URPE@ASSA Piketty presentation (n 9) and indeed, others calculated that it could take 200 years of balanced economic growth to explain rising capital share and inequality by rising savings rates!

As the URPE sessions showed, a simpler and clearer explanation of rising inequality in the last 30 years in most economies is increased exploitation of labor by capital. There has been a rising rate exploitation along with a huge switch of value into the financial sector which is owned and controlled by the top 1%, or even just the top 0.1%. Marx’s exploitation theory is a better explanation of inequality compared to marginal productivity or rising savings rates.  The so-called neoliberal period was characterized by holding down wages, globalization, a reduction in job security and privatization of public services, all of which boosted the rate of surplus value. So we entered the world of super-managers, oligarchs and top families that Piketty describes in his book.

But suggesting that rising inequality is the result of increased exploitation of labor by capital is not comfortable for mainstream economics, including Piketty, as it suggests something nasty about the capitalist mode of production, which the likes of Piketty, Stiglitz and others still support.

As to responses, if exploitation is the key explanation, organizing working people and their communities becomes the best response.  Thankfully there are signs that those suffering from capitalist dynamics well understand the situation and are beginning to challenge it.


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