Chart of the day

U.S. income inequality, as measured by the Gini index, rose 33.2 percent between 1979 and 2007. According to a recent study by the Economic Policy Institute, shifts in the market distribution of income—especially the redistribution of income from labor to capital—were the primary factors driving the rise in inequality.

In terms of only market income, the index rose 23.2 percent, which means that roughly 30 percent of the rise in post-tax, post-transfer inequality between 1979 and 2007 can be attributed to changes in the redistributive nature of tax and budget policy. In other words, government tax and transfer policy did not effectively push back against the sharp market-based rise in inequality, and by many measures the tax and transfer system actually exacerbated pretax inequality trends, creating even less equitable growth in post-tax, post-transfer income. On net, the federal tax and transfer system reduced the Gini index by 17.1 percent in 2007, down from a 23.4 percent reduction in 1979.

One possible conclusion is that the radical shift from labor to capital income caused the extraordinary increase in U.S. income inequality in two ways: directly (via the market distribution of income) and indirectly (via changes in tax and transfer policies).

Unproductive labor

Paul Krugman [ht: br] has discovered that, under current conditions, finance may be unproductive.

Finally!

This, it seems, is the first time Krugman has recognized that the finance may in fact be a socially useless sector of economic activity—enriching a few and laying waste to the rest of the economy.

Actually, all economic theories make some sort of distinction between productive and unproductive labor. The Physiocrats, for example, argued that the agricultural sector was productive and all other sectors (such as manufacturing) were unproductive. Adam Smith, a critic of the Physiocrats, made a different distinction: between the productive labor of manufacturing and the unproductive labor of domestic servants. Karl Marx, famously, picked up Smith’s argument and turned it in a different direction: focusing on labor that was productive of surplus-value (e.g., the work performed by the producers of capitalist commodities) and labor that was unproductive because it did not produce surplus-value (e.g., the labor of those who supervised the labor of the productive workers as well as the labor performed in sectors like trade and finance, all of which was paid out of distributions of surplus-value produced elsewhere). Even neoclassical economists make a productive/unproductive distinction: in their case, between the productive labor of the private sector (including, of course, finance) and the unproductive labor of government workers.

Krugman really should have cited Marx in order to make the point that finance is an unproductive sector of the economy: it doesn’t produce surplus-value but, instead, “shares in the booty” of the surplus-value created during the course of producing capitalist commodities (whether goods or services). Instead, for reasons only he knows (neoclassical or Ivy League comradery, perhaps?) he relies on Paul Samuelson to identify finance as unproductive economic activity.

All of the various groups of economists (including Krugman) are, in one way or another relying on a distinction between socially useful and socially useless areas of economic activity and, therefore, on some sense of what society is and can be. Thus, for example, while neoclassical economists want to see a society based almost entirely on private property and free markets, Marxists want to focus on the contradictions created by the capitalist appropriation and distribution of surplus-value—and then to make the transition to a society in which those who actually perform surplus labor are the ones who collectively appropriate it.

In such a noncapitalist context, finance might actually become a socially useful activity.

The capitalist machine

I’m a little miffed Tali Kristal stole the title of an article I’ve been working on.*

But no matter: the issue Kristal investigates—the causes of the decline in labor’s wage share of national income and the rise in capitalists’ profit share—is an important one. And she moves the argument ahead in important ways.

The fact is, the issue has mostly been ignored or shunted aside by mainstream economists, who have focused their attention instead on skill-biased technological change and inequality between the remuneration to what they consider to be high-skilled and low-skilled workers. They have proceeded in that manner partly because, using the neoclassical theory of value, they presume factors of production receive incomes equal to their marginal contributions to production, and partly because they have made an ethical and political choice to do so.

So, it falls to others—academic economists outside the mainstream and noneconomist academics like Kristal—to move outside the confines of neoclassical economics and tell a different story about inequality, especially the growing divide between workers and capitalists.

Kristal’s story focuses on the role of trade unions in different industries (e.g., construction, manufacturing, and transportation as against finance and services industries). Her conclusion is that the main factor leading to the decline in labor’s share was the erosion in workers’ positional power, and this erosion was partly an outcome of class-biased technological change, namely, computerization that favored employers over most employees.

Why might computer technologies have led to a decline in labor unions? The first plausible mechanism is that automation of the production process prompted firms to utilize computer equipment in tasks previously performed manually by blue-collar, mostly unionized workers, thus downsizing many unionized manufacturing jobs. . .

The second plausible mechanism is that management’s greater control due to the computer revolution empowered employers and management, allowing them to use more legal and illegal anti-union tactics, such as illegal discharge of union activists, surveillance of union leaders, mandatory captive-audience meetings with top management, and refusal to negotiate a collective agreement. . .

An additional mechanism links computer technology to skill polarization of the work-force, which undermines established workers’ solidarity, thereby reducing the likelihood of working-class cohesion and collective action.

Thus, in Kristal’s view, the decline in unionization, coupled with a rise in unemployment and the import of goods from less-developed countries, curbed workers’ bargaining power over the past decades and led to a significant decline in labor’s share. And the decline in unionization was, at least in part, the result of computerization.

Now, my own approach to class-biased technological change proceeds a bit differently, focusing on the way technological change in consumer goods industries raises productivity and drives down the value of wage goods (as does the offshoring of consumer goods production, which itself has been assisted by computerization). The result is a decline in the amount of value capitalists need to advance in order to purchase workers’ ability to work, and thus an increase in the share of new value created that is appropriated by capitalists.

Assuming, of course, that workers are not able to bargain for a substantial increase in the amount of stuff in their wage bundle. And this is where Kristal’s analysis may dovetail with mine: the decline in unionization (which itself is partly the result of computerization) may have had the effect of undermining both workers’ resistance to technological change and their ability to bargain for an increase in the wage bundle.

The consequence (especially when we consider that the wage component of national income accounts includes distributions of profits to executives and other “workers” at the top) is exactly what the capitalist machine has produced over the course of the past three decades: a decline in labor’s share of national income and the rise in capitalists’ share.

 

*No, not the title Kristal actually uses: “The Capitalist Machine: Computerization, Workers’ Power, and the Decline in Labor’s Share within U.S. Industries.” But she does refer to “capital-biased technological change” during the course of her article, which is similar to the title I am planning to use when the article is finally finished: class-biased technological change.

The problem of inequality

Timothy Noah has one story about inequality. Mine, I think, is a bit different.

According to Noah’s story, while conservatives mostly deny the existence of inequality, liberals tend to focus on the gap between the 1 percent and everyone else and forget about the skills-based gap between those with a college education and those without.

I wonder what people he’s talking about. At least in the discipline of economics, while he’s mostly correct about conservatives (who spend a good bit of their time, when they address the issue of inequality at all, denying it’s a problem), liberal economists are the ones who have focused on the different rewards to different levels of education (which can then be solved by improving schools and encouraging higher levels of education). What conservative and liberal economists share is the idea that, in a market system, everyone gets what they deserve (at least when markets clear and there’s full employment).

As I see it, the idea that we needed to worry about the widening gap between the 99 percent and those at the very top actually came from outside the terms of that conservative-liberal debate—in the empirical work of Thomas Piketty and Emmanuel Saez and in the critique of current economic arrangements posed by the Occupy Wall Street movement. It has represented a challenge to both conservatives (based on the idea that inequality is a real problem) and liberals (since the 1 percent-99 percent gap simply can’t be accounted for by skill-based technical change).

Moreover, focusing on the top 1 percent (and, within that, the top .1 percent and top .01 percent) of the nation’s income distribution raises, in turn, the issue of class, which neither conservative nor liberal economists ever want to discuss.

Nor, as it turns out, does Noah. Until the end, when he finally mentions the divergence between the share of income going to capital (which has been rising) and that going to labor (which has been falling). But focusing on factor shares actually takes us away from skill-based inequality, even when connected to the demise of the union movement, and toward something more fundamental: the growing gap between the vast majority who produce the nation’s wealth and the tiny minority at the top who are able to appropriate a larger and larger share of that wealth.

And solving that problem means going beyond the terms of the conservative-liberal discussion of the problem of inequality and putting class itself on the table.

I guess, in the end, that’s where my story about the problem of inequality differs from the one Noah wants to tell.

Pop Keynesianism

There’s no surer sign that someone has achieved pop star status than that they are the target of a satire. And so it is with Paul Krugman.

But, according to Joshua Clover, pop has its particular tensions and contradictions:

In December, Krugman wrote two blog entries in swift succession: “Rise of the Robots” and “Human Versus Physical Capital.” Inequality, his charts informed him, was itself a consequence of the opposition between capital and labor—specifically the increasing domination of capital in the form of machines—as labor is expelled from the production process. That ratio turns out to be basically the same measure as productivity, sine qua non of economic progress.

Moreover, in a development Krugman couldn’t quite bring himself to declare, his charts suggest that a generally declining labor share since the 1970s has also spelled bad news for overall profitability outside the finance sector. The productivity race wasn’t just unfortunate for the unemployed; it was for capital a poison pill of its own making. Thus Krugman’s comedy: always on the verge of discovering the arguments of a 150-year-old book; always turning away at the last second. In Krugman’s words, “I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism—which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications.”

Does it? I suppose so. And that uncomfort is what pop, for all its pleasures, must defer. Pop must affirm the way things are, no matter how often it choruses the word “change.” You cannot be Paul Krugman, Pop Star, and at the same time discover that capital is built to break us, and itself—even if your charts so testify. So you will not be shocked to discover Krugman stepped back from this realization and continued about his business, scarcely speaking of it again. There are some things you do not say. They are not popular.

Capitalism and history

I can’t say I was aware I was participating in an intellectual fad, the history of capitalism, when I decided to teach Seth Rockman’s Scraping By: Wage Labor, Slavery, and Survival in Early Baltimore this semester.

I chose Rockman’s book for my Commodities: The Making of Market Society course because I needed a good study of the commodification of labor, as an alternative to Bruce Laurie’s classic Artisans into Workers: Labor in Nineteenth-Century America. There’s always the danger of assigning books we haven’t yet read (alongside the excitement, of course, of exploring new material). However, I’ve been pleasantly surprised by Rockman’s attempt to tell “the story of the chronically impoverished, often unfree, and generally unequal Americans whose work made the United States arguably the most wealthy, free, and egalitarian society in the Western world” (3). I’m curious to see how the students react over the next couple of weeks.

Apparently, Rockman has changed the name of his course from Capitalism, Slavery and the Economy of Early America to simply Capitalism, which next fall will become Brown’s introductory American history survey.

It shouldn’t really surprise us this area has taken off after the crash of 2007-08.

“Earlier, a lot of these topics would’ve been greeted with a yawn,” said Stephen Mihm, an associate professor of history at the University of Georgia and the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” “But then the crisis hit, and people started asking, ‘Oh my God, what has Wall Street been doing for the last 100 years?’ ”

What’s interesting about Rockman’s and Mihm’s research and teaching and the growth of this entire area of inquiry, not to mention Harvard’s new Program on the Study of U.S. Capitalism, is the fact that they’re located within history and not economics. As I’ve explained before, the mainstream wing of the discipline of economics has mostly eliminated any consideration of economic history (and, with it, of the history of economic thought), and thus has created an intellectual vacuum concerning the history of capitalist development, classes, and institutions. So, historians have stepped in to fill the gap, thereby demonstrating there’s nothing natural or inevitable about the emergence of capitalism.

Markets and financial institutions “were created by people making particular choices at particular historical moments,” said Julia Ott, an assistant professor in the history of capitalism at the New School (the first person, several scholars said, to be hired under such a title).

The real question, of course, is, will this new work contribute to the project of making capitalism history?

Neoclassical economics and the minimum wage

I often hear the argument that neoclassical economists oppose an increase in the minimum wage.

But the argument is wrong. Neoclassical economists, like Casey Mulligan, actually want to lower the minimum wage.

Market wages normally tend to increase over time with inflation and as workers become more productive. As long as the minimum wage is a fixed dollar amount, the tendency for market wages to increase over time means that economic damage from the minimum wage is shrinking. That’s one reason that economists who see benefits of minimum wages would like to see minimum wages indexed to inflation, allowing the minimum wage to increase automatically as the economic damages fell.

But these are not normal times. The least-skilled workers are seeing their wages fall over time, largely because they are out of work and failing to acquire the skills that come with working. Moreover, the new health care regulations going into effect in January are expected to reduce cash wages, as many employers of low-skill workers are hit with per-employee fines of about $3,000 per employee per year, as the law mandates new fringe benefits for other employers and low-skill workers have to compete with others for the part-time jobs that are a popular loophole in the new legislation. (The minimum wage law restricts flexibility on cash wages, by establishing a floor, but makes no rule on fringe benefits.)

To keep constant the damage from the federal minimum wage, the federal minimum wage needs not an increase but an automatic reduction over the next couple of years in order for it to stay in parallel with market wages.

The fact is, lowering the minimum wage is not what is called for by the neoclassical model of the labor market. If he were intellectually honest, Mulligan would actually have to call for the abolition of the minimum wage.

And the rest of us for the abolition of the wages system itself.

Clearly what we need are more detective stories

 

That’s because, according to Ludwig von Mises, detective stories are “the artistic superstructure of the epoch of labor unionism and socialization.”

The age in which the radical anticapitalistic movement acquired seemingly irresistible power brought about a new literary genre, the detective story. The same generation of Englishmen whose votes swept the Labour Party into office were enraptured by such authors as Edgar Wallace. One of the outstanding British socialist authors, G. D. H. Cole, is no less remarkable as an author of detective stories. A consistent Marxian would have to call the detective story—perhaps together with the Hollywood pictures, the comics and the “art” of strip-tease—the artistic superstructure of the epoch of labor unionism and socialization.

Me, I’m partial to historical mysteries (such as An Instance of the Fingerpost, by Ian Pears). Do they count?

Cartoon of the day

Special mention

 

Chart of the day

Thomas B. Edsall’s view [ht: sm] is that, after decades of pro-business policies, “The slow implosion of the Republican Party — along with the growing strength of a Democratic coalition dominated by low-to-middle-income voters — threatens the power of the corporate establishment and will force big business to find new ways to reassert control of the policy-making process.”

But a little historical perspective suggests that corporate America won’t take this shift lying down:

Although the stars are lined up in favor of the anti-corporate left, American business, when its back is to the wall, has historically proved to be extraordinarily resourceful.

Just over 40 years ago, at a similarly volatile moment, Lewis F. Powell, Jr. wrote a 6,030-word memo to the United States Chamber of Commerce that has gained legendary status: The Powell Manifesto or, as it was formally titled, “Confidential Memorandum: Attack on American Free Enterprise System.” The soon-to-be-appointed associate justice of the Supreme Court warned: “We are not dealing with sporadic or isolated attacks from a relatively few extremists or even from the minority socialist cadre. Rather, the assault on the enterprise system is broadly based and consistently pursued. It is gaining momentum and converts.”

In the face of this onslaught, business mobilized and by 1977 was back on top, defeating liberal initiatives like consumer protection and labor law reform during the Carter administration. Then, in 1980, a unified coalition of corporations and trade associations helped Ronald Reagan win the presidency, and the Republican Party wrested control of the Senate.