George Grosz, "Stützen der Gesellschaft (Pillars of Society)" (1926)
The existence of gross inequalities in the distribution of income and wealth, and the links between inequality and the ongoing crises, are just too obvious to ignore. Even mainstream economists are starting to pay attention.
What are also becoming clear are the limited terms of the mainstream discussion of inequality and crises, which were rehearsed during a session at the recent American Economic Association meetings—and are presented once again in a recent interview with Daron Acemoglu (the page includes a link to the hour-long podcast and a rough transcript).
For one group, including Raghuram Rajan (call them the conservative mainstream economists), inequality stems from exogenous technological change (basically, the income gap between college-educated and other workers, which corresponds to their skills), to which politics responded (by expanding housing through Freddie Mac and Fannie Mae to appease those at the bottom), which led to a housing bubble that eventually burst, bringing the rest of the system into crisis. So, the problem comes down to technological change, the lack of supply of skills on the part of low-wage workers, and misguided politicians—and the solution is education.
For the other group, including Acemoglu (call them the liberal mainstream economists), there’s a difference between labor market inequality and top inequality (the growing percentage of total income captured by those in the top 1 percent or .1 percent). Those at the top were able to buy politicians (who then deregulated financial markets), thus feeding the housing and financial bubbles, which eventually came crashing down. The problem, from the perspective of these liberal mainstream economists, is campaign finance and the lack of political competition—and the solution is political reform.
Those are the limits of the mainstream story: exogenous technological change and the lack of skills (and a reactive politics) vs. captured politics (and poor incentives in the financial industry). As Acemoglu summarizes it:
So if you kind of compare Rajan’s hypothesis to the alternative hypothesis I just laid out, politics is very important in both of them. But politics plays out very differently in the two stories. In the Rajan story, the political responses come because politicians are somehow responding to the discontent of the bottom of the distribution. Or, in response to my comments, Raghu said it’s the middle of the distribution. Whereas in the story that I suggested, politics is playing out by responding to lobbying campaign contributions and otherwise the ability of the already well-off and already well-organized to influence and guide the political process. It’s not technological change. It’s institutional change.
What is clearly missing from both stories is the changing way value is produced, appropriated, and distributed under capitalism. Certainly, the level of wages and the amount of surplus-value are affected by both technology and politics. But it’s also necessary to go in the other direction, and investigate how the changing ratio of wages and surplus affects technological change and political decision-making. And then it’s necessary to connect those tendencies—especially from the mid-1970s onward—to the bubble, the crash, and the way capitalists and the state have responded to the ongoing crises.
But that’s not an analysis mainstream economists want to undertake—because they don’t have the concepts and because it would take them beyond education and campaign finance reform to reconsider the basic structures of capitalism. Having belatedly recognized the significance of inequality, that’s still one step too far for them.