John Lennon (on the B side of “Imagine”) thought that life was hard, “really hard.” I can understand that.
But is modeling inequality really all that hard?
Paul Krugman seems to think so, at least when it comes to the size or personal distribution of income. That’s his excuse for why mainstream economists were late to the inequality party: they just didn’t know how to model it.
And, according to Krugman, not even Marx can be of much help.
Well, let’s see. It’s true, Marx focused on the factor distribution of income—wages, profits, and rent, to laborers, capitalists, and landowners—because his critique was directed at classical political economy. And the classical political economists—especially Smith and Ricardo—did, in fact, focus their attention on factor shares.
That was Marx’s goal in the chapter on the Trinity Formula: to show that what the classicals thought were separate sources of income to the three factors of production all stemmed from value created by labor. Thus, for example, laborers received in the form of wages part of the value they created (“that portion of his labour appears which we call necessary labour”); the rest, the surplus-value, was divided among capitalists (“as dividends proportionate to the share of the social capital each holds”) and landed property (which “is confined to transferring a portion of the produced surplus-value from the pockets of capital to its own”).
It is really just a short step to show that, in recent decades (from the mid-1970s onward), both that more surplus-value has been pumped out of the direct producers and that investment bankers, CEOs, and other members of the 1 percent have been able to capture a large share of that mass of surplus-value. That’s how we can connect changing factor (wage and profit) shares to the increasingly unequal individual distribution of income (including the rising percentage of income going to the top 1, .01, and .001 percents).
See, that wasn’t so hard. . .