Is it really that hard?

Posted: 11 January 2016 in Uncategorized
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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. . .

  1. With all due respect, I’m not seeing an actual model. Specifically, what economic forces cause inequality? Exactly how much inequality do these forces create? Who specifically gets more, who specifically gets less? Why? How?

    Alternatively, what kinds of micro- or macro-economic effects (other than, c.p., rich people get more stuff than poor people) does a given unequal distribution cause? Is there any difference (other than the distribution per se) between an economy with a relatively unequal distribution and one with a relatively equal distribution? Can we represent that difference mathematically and causally? Do more unequal economies, in theory, grow faster or slower than more equal economies? Which saves more? Which invests more? Which produces more? Why? How?

    I’m a communist with a BA in economics from a freshwater school. Marx has convinced me of the underlying truth of his labor theory of value, and I am entirely unconvinced by capitalists’ rebuttals of the theory. But the LTV is not by itself a model. It does not say that given this, that, and the other, these capitalists will capture this or that much surplus value of labor.

    Marx does have some actual models, or beginnings of them, and the models show that, in the end, the capitalists will capture *all* the surplus value. But Marx is not a particularly rigorous mathematician. I’m looking into TSSI models right now, but I’m just beginning, and I don’t have a good grasp of them. Needless to say, my economics professors aren’t much help.

  2. David F. Ruccio says:

    It depends, of course, on what you mean by a “model.” But, however defined, what I presented isn’t really a model. It’s more a theory of value that can serve as the basis of a model—either at the micro level or the macro level, in terms of either the causes and consequences of inequality.

    But there’s nothing in Marx that shows the capitalists will capture all the surplus-value. The point, I think, is rather different: capitalists don’t get to keep all the surplus they appropriate, via exploitation, from productive labor; they are forced to share it with many others, both inside and outside capitalist enterprises. That’s the point at which we can begin to talk about how the 1 percent is able to capture a share of the surplus.

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