Posts Tagged ‘inequality’

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Thanks to Thomas Piketty’s new book, the returns to capital are now back on the intellectual—if not the political—agenda. But, as one of my students (who just completed a wonderful senior thesis on “The Gilt and the Glitter: Thorsten Veblen, The Theory of the Leisure Class, and the Second Gilded Age”) noticed, the composition of incomes of the leisure class changed between the first and second Gilded Ages: in 1916, most of their income came from “capital”; now, a large portion comes from “salaries”—although, as we can see below (in data from 2007), that’s less true of the top 0.1 percent than of the rest of the top 1 percent.

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Robert Solow, in the clearest review of Piketty’s book to date, is the first to notice this change.

You get the picture: modern capitalism is an unequal society, and the rich-get-richer dynamic strongly suggest that it will get more so. But there is one more loose end to tie up, already hinted at, and it has to do with the advent of very high wage incomes. First, here are some facts about the composition of top incomes. About 60 percent of the income of the top 1 percent in the United States today is labor income. Only when you get to the top tenth of 1 percent does income from capital start to predominate. The income of the top hundredth of 1 percent is 70 percent from capital. The story for France is not very different, though the proportion of labor income is a bit higher at every level. Evidently there are some very high wage incomes, as if you didn’t know.

This is a fairly recent development. In the 1960s, the top 1 percent of wage earners collected a little more than 5 percent of all wage incomes. This fraction has risen pretty steadily until nowadays, when the top 1 percent of wage earners receive 10–12 percent of all wages. This time the story is rather different in France. There the share of total wages going to the top percentile was steady at 6 percent until very recently, when it climbed to 7 percent. The recent surge of extreme inequality at the top of the wage distribution may be primarily an American development. Piketty, who with Emmanuel Saez has made a careful study of high-income tax returns in the United States, attributes this to the rise of what he calls “supermanagers.” The very highest income class consists to a substantial extent of top executives of large corporations, with very rich compensation packages. (A disproportionate number of these, but by no means all of them, come from the financial services industry.) With or without stock options, these large pay packages get converted to wealth and future income from wealth. But the fact remains that much of the increased income (and wealth) inequality in the United States is driven by the rise of these supermanagers.

And Solow’s interpretation?

It is of course possible that “supermanagers” really are supermanagers, and their very high pay merely reflects their very large contributions to corporate profits. It is even possible that their increased dominance since the 1960s has an identifiable cause along that line. This explanation would be harder to maintain if the phenomenon turns out to be uniquely American. It does not occur in France or, on casual observation, in Germany or Japan. Can their top executives lack a certain gene? If so, it would be a fruitful field for transplants.

Another possibility, tempting but still rather vague, is that top management compensation, at least some of it, does not really belong in the category of labor income, but represents instead a sort of adjunct to capital, and should be treated in part as a way of sharing in income from capital. There is a puzzle here whose solution would shed some light on the recent increase in inequality at the top of the pyramid in the United States. The puzzle may not be soluble because the variety of circumstances and outcomes is just too large.

Solow seems to be onto something: the source of the salary incomes of the top 1 percent is just as much capital as are the other sources of their income, such as profits, dividends, interest, rent, and capital gains. All of them—including the salaries of “supermanagers”—represent distributions of the surplus initially appropriated by capital.

Therefore, as Solow concludes, “it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers.”

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The New York Times certainly doesn’t feature Karl Marx. And, for the most part, it wouldn’t know Marx if he showed up at the editorial office without his sunglasses.

But today is a bit different, with not one but two discussions of Marx.

First, there’s Steven Erlanger’s discussion of Thomas Piketty’s new book, in which he claims that the French economist is returning to a tradition of analysis shared by both Adam Smith and Marx (forgetting, of course, that Marx’s critique of political economy represented a fundamental break from mainstream political economy, authored by Smith and many others). It seems we have sunk so low intellectually that to focus attention on capital and inequality and to worry that grotesque levels of inequality might imperil democracy necessarily puts someone somewhere in the Marxian tradition.

Then, we have the spectacle of Ross Douhat worrying that “Karl Marx is back from the dead” and, because “Marxist ideas are having an intellectual moment, . . .attention must be paid” (to which, like Erlanger, he subsumes the self-identified non-Marxist Piketty). In end, Douhat demonstrates the sorry state of contemporary conservative thinking, failing to note the traditional conservative critique of bourgeois society’s economization of social life and then expressing his admiration for such movements as the Tea Party, Britain’s UKIP, and France’s National Front, which in his view incorporate “some Piketty-esque arguments”—although his conveniently overlooks their racism (or simply hides it under the rubric of “cultural anxieties”).

In the end, then, there may be a lot of Marx on the minds of contributors to the New York Times but they certainly don’t have a clue what they’re talking about.

Martin Rowson 14.04.14

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April 16, 2014 marketvalue

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Is there any academic economics book that has elicited as much interest in the past decade (and perhaps longer) than Thomas Piketty’s Capital in the Twenty-First Century?

All kinds of friends and colleagues have been asking me about it and sending me links. And, everywhere I turn, there seems to be a new review of the book.

To be honest, I just received my copy of the book. I haven’t read it yet and probably won’t be able to find the time to do so until the semester is over. (But, as I indicated, I will be teaching it in the fall.) So, while I’ll hold off on commenting on the content of the book itself until I’ve had a chance to carefully work my way through it, I do want to mention a couple of things.

First, my sense is the book is generating so much attention precisely because of a certain nervousness out there, the fact that capitalism is facing a legitimacy crisis right now. The capitalists’ project of becoming a universal class seems to have become derailed in the midst of the Second Great Depression, and Piketty’s discussion of the return of inherited wealth in the second Gilded Age speaks directly to that concern.

Second, many of the reviews I’ve read imply—and often explicitly state—that “our” views about capitalism are being challenged by the general rise in inequality and, in particular, by Piketty’s focus on the returns to capital. Paul Krugman’s essay in the New York Review of Books is a good example: “The result has been a revolution in our understanding of long-term trends in inequality.” “This is a book that will change both the way we think about society and the way we do economics.” “We’ll never talk about wealth and inequality the same way we used to.” (Emphasis added in all cases.) And so on.

Excuse me but who is this “we” and “our”? I expect I’ll learn a lot from reading Piketty’s book (especially since it includes such evocative phrases as “the past tends to devour the future”) but, please, there are a lot of us who have been writing and teaching about capital and inequality for a very long time. They are central to how we’ve long understood and analyzed the changing dynamics of capitalist economies. I doubt, therefore, that Piketty’s book will contribute to a revolution in our understanding of long-term trends in inequality or in how we think about society and the way we do economics.

But clearly Piketty’s book may have that effect on how other people make sense of capital and inequality—economists who have spent their careers ignoring what their less-orthodox colleagues have been writing and teaching for many, many years.

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