Inequality, crisis, and capital

Posted: 12 July 2010 in Uncategorized
Tags: , , ,

This is the link between inequality and capitalist crisis someone like Greg Mankiw can get behind: skill-biased technological change and unwarranted government intervention.

The attempts to make sense of the role of inequality in causing the current crises by Robert Reich and Paul Krugman look a bit better once you consider the Chicago-style explanation offered by Raghu Rajan. His latest focuses on technological change and the mismatch of human capital as the most important factors in creating the so-called 90/50 differential:

Since the 1970’s, wages for workers at the 90th percentile of the wage distribution in the US –such as office managers – have grown much faster than wages for the median worker (at the 50th percentile), such as factory workers and office assistants. . .

A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. But the education system has been unable to provide enough of the labor force with the necessary education. The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college.

In his view, policymakers responded to this growing inequality (which in his view corresponds, via perfect markets, to the existing distribution of human capital), not by creating better human capital but by expanding lending for homeownership among those who were losing out.

This is a convenient story but it’s wrong. It’s convenient to Rajan’s and Makiw’s neoclassical theory, since all the blame can be placed on two exogenous factors, technology and government policy, while markets always get it right. It’s wrong because, first, the boom in subprime mortgages was created mostly by private banks and, second, inequality was caused by the new pattern of surplus-labor appropriation and distribution that emerged in the 1970s.

So, now we have the terms of the debate about inequality and crisis within mainstream economics, between the liberal wing (Reich and Krugman) and the conservative wing (Rajan and Mankiw): it’s deregulation versus technological change, government policy influenced by lobbyists that facilitated inequality versus government policy that represented an unwarranted attempt to solve the problem through credit expansion, the growth of financial capital versus the falling-behind of human capital.

What neither side of the mainstream debate wants to look at is capital itself. It’s what caused the inequality that led to the crisis, and what is preventing a real recovery from the crisis.

In other words: it’s the capitalist economy, stupid!

Comments
  1. Tomboktu says:

    I haven’t read this yet, but I will, if only because I simply do not expect to see the word ‘deontological’ in the title of a parliamentary report. And one that deals with the operation of capitalism at that.

    [In case the link code doesn’t work:
    European Parliament: “Report on deontological questions related to companies’ management”, no. A7-0135/2010.

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