The 1 percent and marginal productivity theory

Thomas Piketty and Emmanuel Saez can be credited with supplying the data behind the 1 percent/99 percent opposition that has been central to the Occupy Wall Street movement.

We can also credit them—through Saez—for putting another nail in the coffin of neoclassical marginal productivity theory.

DG: I’m prompted by your last point to suggest that another underappreciated feature of your work is that it delivers rather provocative hints about the causes of the increase in inequality. That is, it not only lays out the descriptive trajectory of income inequality, but also suggests what’s driving that descriptive trajectory. . .

On the basis of your research, do you think that rent is an important source of the recent growth in income inequality?

ES: If we define rent in terms of situations where pay doesn’t correspond to what economists call ‘marginal productivity’—that is, the economic contribution a person is providing—I would say yes, because the evolution of income concentration over time and across countries has a number of features that are inconsistent with the story where pay is everywhere equal to productivity. The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes.

So, yes, income concentration is both economic and political—and has nothing to do with marginal productivities.

The only problem is, the marginal productivity theory of distribution is still the standard for economists like Saez. That’s why he refers to the only exception he can imagine: rent-seeking.

An alternative, of course, would be to start from a very different theory of value—according to which surplus is pumped out of the direct producers, appropriated by another group that played no role in creating the surplus, and distributed to still other members of the 1 percent who manage to capture a portion of that surplus. That’s what we can refer to as surplus-seeking behavior, which lies at the heart of the grotesque levels of income concentration we’ve witnessed in the midst of the Second Great Depression and in the three decades leading up to it.