Posts Tagged ‘exploitation’

Chart of the day

Posted: 17 November 2015 in Uncategorized
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The headline of this Gallup report points to the fact that the financial well-being of involuntary part-time U.S. workers (workers who are working part-time but seeking full-time work) is similar to the financial well-being of the unemployed: 46.3 as compared to 44.6. Large portions of both groups of workers are struggling or suffering in terms of their financial well-being.*

What I find perhaps even more interesting is that workers who are employed full-time by an employer only achieve a score of 60 on financial well-being (with workers who are employed part-time and do not want a full-time job just above them), which is very close to the financial well-being score for the United States as a whole in 2014: 59.7.

Together, these figures indicate that most U.S. workers—part-time and full-time, employed and unemployed—are falling far short of real financial well-being.

We can think of it as the gap between what they produce and what they receive. In another theoretical tradition, that’s measured in terms of another index: s/v. It’s called the rate of exploitation.


*To assess financial well-being, Gallup (with Healthways) asks U.S. adults about their ability to afford food and healthcare, whether they have enough money to do everything they want to do, whether they worried about money in the past week, and their perceptions of their standard of living compared with those they spend time with. Financial well-being is calculated on a scale of zero to 100, where zero represents the worst possible financial well-being and 100 represents the best possible financial well-being.


Those of us in economics are confronted on a regular basis with the fantasy of perfect markets. It’s the idea, produced and presumed by neoclassical economists, that markets capture all the relevant costs and benefits of producing and exchanging commodities. Therefore, the conclusion is, if a market for something exists, it should be allowed to operate freely, and, if it doesn’t exist, it should be created. Then, when markets are allowed to flourish, the economy as a whole will reach a global optimum, what is often referred to as Pareto efficiency.

OK. Clearly, in the real world, that’s a silly proposition. And the idea of “market imperfections” is certainly catching on.

I’m thinking, for example, of Robert Shiller (who, along with George Akerlof, recently published Phishing for Phools: The Economics of Manipulation and Deception):

Don’t get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I’ve written about these things in this column.

But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.

And then there’s Robert Reich, who focuses on the upward redistributions going on every day, from the rest of us to the rich, that are hidden inside markets.

For example, Americans pay more for pharmaceuticals than do the citizens of any other developed nation.

That’s partly because it’s perfectly legal in the U.S. (but not in most other nations) for the makers of branded drugs to pay the makers of generic drugs to delay introducing cheaper unbranded equivalents, after patents on the brands have expired.

This costs you and me an estimated $3.5 billion a year – a hidden upward redistribution of our incomes to Pfizer, Merck, and other big proprietary drug companies, their executives, and major shareholders.

We also pay more for Internet service than do the inhabitants of any other developed nation.

The average cable bill in the United States rose 5 percent in 2012 (the latest year available), nearly triple the rate of inflation.

Why? Because 80 percent of us have no choice of Internet service provider, which allows them to charge us more.

Internet service here costs 3 and-a-half times more than it does in France, for example, where the typical customer can choose between 7 providers.

And U.S. cable companies are intent on keeping their monopoly.

And the list of such market imperfections could, of course, go on.

The problem, as I see it, is that these critics tend to focus on the sphere of markets and to forget about what is happening outside of markets, in the realm of production, where labor is performed and value is produced. The critics’ idea is that, if only we recognize the existence of widespread market imperfections, we can make the market system work better (and nudge people to achieve better outcomes). My concern is that, even if all markets work perfectly, a tiny group at the top who perform no labor still get to appropriate the surplus labor of those who do.

Accepting that our task is to make imperfect markets work better makes us all look like fools. In the end, it does nothing to eliminate that fundamental redistribution going on every day, “from the rest of us to the rich,” which is hidden outside the market.


The distribution of income in the United States is increasingly unequal. We all know that. The problem is, the more we focus on the unequal distribution of income, the more we’re forced to discuss the issue of class.

And that’s a real problem for mainstream economists, who either deny the existence of inequality or deny its connection to class.

That’s the only way of explaining why Jason Furman repeats, in two recent papers (“Global Lessons for Inclusive Growth” [pdf] and, with Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality [pdf]), the same argument:

Overall, the 9 percentage-point increase in the share of income of the top 1 percent in the World Top Income Database data from 1970 to 2010 is accounted for by: increased inequality within labor income (68 percent), increased inequality within capital income (32 percent), and a shift in income from labor to capital (0 percent).

In other words, for mainstream economists like Furman who actually do pay attention to rising inequality (e.g., as measured by the share of income going to the top 1 percent), it can’t have anything to do with class (e.g., as measured by changing labor and capital shares).

As it turns out, I’m presenting Marx’s critique of the so-called Trinity Formula in one of my courses this week.* Basically, Marx argued that, if the value of commodities is equal to constant capital plus variable capital plus surplus-value, then both the “profit share” (the “profits of enterprise” plus “interest”) and the “rental share” (“ground rent”) represent distributions of surplus-value. In other words, productive labor—not independent factor services—creates, via exploitation, the incomes of both capitalists and landlords.

Marx’s critique of the Trinity Formula is still relevant today because, even if we assume (as many mainstream economists still do, against all evidence) that wage and profit shares are relatively constant, it’s still possible to show that the rate of exploitation has risen.

Consider the following hypothetical chart:


The blue and red boxes represent profits and wages in 1997 and 2007. However, as we can see, the share of income going to CEOs has risen (Furman’s “increased inequality within labor income”). If we combine profits and CEO salaries as different forms of surplus-value, then indeed it is possible for the rate of exploitation to have risen—even if the conventional measure of profit and wage shares remains the same.

In terms of actual national income data, what we’d want to do is add to corporate profits the distributions of the surplus that go to those at the top (including CEO salaries) in order to to get “capital’s share” and subtract those same distributions from wages to get “labor’s share.”

US labor share

As it turns out, Olivier Giovannoni [pdf] has made something like the latter calculation, by subtracting top 1 percent incomes from the total U.S. labor share. As we can see in the chart above, the real labor share in the United States has fallen dramatically since 1970—from about 77 percent to less than 60 percent—just as it has in Europe and Japan.

The only appropriate conclusion is that the increasingly unequal distribution of income in the United States has a lot to do with the diverging movements of the labor and capital shares, and therefore with class changes in the U.S. economy. And the only way to deal with that problem—that class problem—is not by increasing tax rates at the top or by raising minimum wages, but by eliminating the problem itself: the exploitation of labor by capital.

*For the uninitiated, the Trinity Formula is the classical idea that the “natural price” of commodities is equal to the summation of the natural rates of wages, profit, and rent, that is, the idea that the incomes of workers, capitalists, and landlords are independent of one another. The same idea was later articulated by neoclassical economists, who argue that each “factor of production” receives its marginal contribution to production.


I understand: the only relevance of Karl Marx for the likes of the Wall Street Journal is to poke fun at Marxists who bristle at the idea of paying a fee to visit his gravesite.

“The Friends” of the cemetery are also anticipating an uptick in interest in Marx and in complaints from Marxists. This graveyard, in a leafy, genteel part of north London, typically sees around 200 visitors a day. Most ask to see Marx.

As it turns out, it’s that “uptick” in interest that is, in fact, more interesting.

Clearly, if all were going well for capitalism, there wouldn’t be any interest in Marx. But it isn’t, by a long shot—certainly not when global capitalism appears to be entering a new recession [ht: ja] and a variety of liberal supporters, from Robert Reich to Hillary Clinton, find it necessary to endeavor to “save capitalism from itself.”

Chris Dillow certainly thinks Marx is relevant today, for a variety of reasons: financialization, secular stagnation, the negative effects of inequality on productivity, and the situation of workers. In fact, Dillow argues, there’s a side of Marx that is particularly relevant for us today:

If you start from Engels’ Condition of the Working Class in England and start reading Capital not from the beginning but from chapter 10, another Marx emerges – one whose thinking was rooted in empirical facts about the working lives of the worst off and in an urge to improve these. It is this Marx which is still relevant today.

Certainly, the interest shown by Marx (and, of course, Engels) in the real situation under capitalism of the working-class—aided by Leonard Horner’s “undying service to the English working-class”—puts most contemporary economists to shame.*

But there’s another side of Marx that is at least as relevant today: the critique of political economy. The fact is, Marx didn’t invent an entirely new method to analyze capitalism. He started where mainstream economists (in his day, the classical political economists, such as Adam Smith and David Ricardo) left off and then, based on their own assumptions, developed his critique of their theories. Marx started with an “immense accumulation of commodities” (what today we call GDP) and “just deserts” (that is, the idea that everyone gets what they deserve and the distribution of income under capitalism is “fair”) and then showed how the growth of the wealth of nations was based on “the vampire thirst for the living blood of labour” on the part of capitalists. Therefore, what is an incontrovertible “good” for mainstream economists (more stuff, more commodities) can be seen as a “bad” (since it means more ripping-off of surplus-value by capitalists from the workers who create it). And that class exploitation can, in turn, be directly tied to financialization, secular stagnation, the negative effects of inequality, the situation of workers under capitalism, and much more.

Both mainstream economic theory and capitalism have, of course, changed since middle of the nineteenth century. That’s why the theoretical claims and empirical observations contained in Capital can’t simply be transferred to our own time. What is relevant, it seems to me, is the example of the “ruthless criticism” of political economy—the critique of both mainstream economic thought and of capitalism itself.

That two-fold critique, as exemplified in Marx’s writings, is precisely what is relevant today.

*Of course, their own Adam Smith puts them to shame, as in this passage on the negative effects of the division of labor on workers from Book 5 of the Wealth of Nations:

In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.



In the end, it all comes down to the theory of value.

That’s what’s at stake in the ongoing debate about the growing gap between productivity and wages in the U.S. economy. Robert Lawrence tries to define it away (by redefining both output and compensation so that the growth rates coincide). Robert Solow, on the other hand, takes the gap seriously and then looks to rent as the key explanatory factor.

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants—labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

Until recently, when discussing the distribution of income, mainstream economists’ focus was on profit and wages. Now, however, I’m noticing more and more references to rent.

What’s going on? My sense is, mainstream economists, both liberal and conservative, were content with the idea of “just deserts”—the idea that different “factors of production” were paid what they were “worth” according to marginal productivity theory. And, for the most part, that meant labor and capital, and thus wages and profits. The presumption was that labor was able to capture its “just” share of productivity growth, and labor and capital shares were assumed to be pretty stable (as long as both shares grew at the same rate). Moreover, the idea of rent, which had figured prominently in the theories of the classical economists (like Smith and Ricardo), had mostly dropped out of the equation, given the declining significance of agriculture in the United States and their lack of interest in other forms of land rent (such as the private ownership of land, including the resources under the surface, and buildings).

Well, all that broke down in the wake of the crash of 2007-08. Of course, marginal productivity theory was always on shaky ground. And the gap between wages and productivity had been growing since the mid-1970s. But it was only with the popular reaction to the problem of the “1 percent” and, then, during the unequal recovery, when the tendency for the gap between a tiny minority at the top and everyone else to increase was quickly restored (after a brief hiatus in 2009), that some mainstream economists took notice of the cracks in their theoretical edifice. It became increasingly difficult for them (or at least some of them) to continue to invoke the “just deserts” of marginal productivity theory.

The problem, of course, is mainstream economists still needed a theory of income distribution grounded in a theory of value, and rejecting marginal productivity theory would mean adopting another approach. And the main contender is Marx’s theory, the theory of class exploitation. According to the Marxian theory of value, workers create a surplus that is appropriated not by them but by a small group of capitalists even when productivity and wages were growing at the same rate (such as during the 1948-1973 period). And workers were even more exploited when productivity continued to grow but wages were stagnant (from 1973 onward).

That’s one theory of the growing gap between productivity and wages. But if mainstream economists were not going to follow that path, they needed an alternative. That’s where rent enters the story. It’s something “extra,” something can’t be attributed to either capital or labor, a flow of value that is associated more with an “owning” than a “doing” (because the mainstream assumption is that both capital and labor “do” something, for which they receive their appropriate or just compensation).

According to Solow, capital and labor battle over receiving portions of that rent.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

The problem, as I see it, is that Solow, like all other mainstream economists, is assuming that profits, wages, and rents are independent sources of income. The only difference between his view and that of the classicals is that Solow sees rents going not to an independent class of landlords, but as being “shared” by capital and labor—with labor sometimes getting a larger share and other times a smaller share, depending on the amount of power it is able to wield.

We’re back, then, to something akin to the Trinity Formula. And, as the Old Moor once wrote,

the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.


Should capitalists plan on putting The Doors on their karaoke machines?

According to Paul Mason they should. Me, I’m not convinced.

Before discussing Mason’s argument, let me get a few things out of the way. First, Mason implies he invented the word “postcapitalism,” which makes as much sense as the idea that Al Gore invented the internet. (But maybe Mason gives credit to the long line of other postcapitalist thinkers in the book, which I’ll have to read when it’s published.) Second, I’ve long been suspicious of technological determinist arguments, that is, the attempt to explain history and society (mostly or solely) on the basis of changes in technology. (That’s not to say technology doesn’t matter; just that it’s a mistake to treat it as the essential cause of everything else.) Finally, the bit about Marx’s “Fragment on Machines” (pdf) represents a terrible misreading. (The passages from the Grundrisse are not, as Mason would have us believe, about “an economy in which the main role of machines is to produce, and the main role of people is to supervise them,” but a form or stage of capitalism in which laborers become appendages of machines as a condition for the existence of more, relative surplus-value.)

There is, in fact, a great deal to appreciate in Mason’s discussion. I’m thinking, in particular, of his critique of neoliberalism (which “has morphed into a system programmed to inflict recurrent catastrophic failures” and to create mostly “low-value, long-hours jobs”) and the problems mainstream economists have had in making sense of both information (since they start with the presumption of scarcity) and the rise of new kinds of economies (such as parallel currencies, time banks, cooperatives and self-managed spaces, which they mostly ignore as irrelevant to the “real” economy). I even like Mason’s discussion of the new opportunities for collaboration and the reduction of work time created by recent changes in information technology (although many of us are actually forced to have the freedom to perform more, not less, labor as a result of digital information and information-based automation).

For me, the biggest problem with Mason’s treatment is his two-part argument: that capitalism will necessarily fail when it comes to dealing with new information technologies and that such technologies will necessarily usher in a new, noncapitalist economic and social order, ushered in by “a new agent of change in history: the educated and connected human being”). I just don’t see it.

Let’s consider each of the two parts in order. First, the idea that capitalism will come crashing down as information grows. The key element, for Mason (and for many others before him, such as Jeremy Rifkin), is that the new communication technologies are reducing the marginal (per-unit) cost of producing and sending information goods to near zero, which means that if information goods are to be distributed at their marginal cost of production (zero) they cannot be created and produced by capitalist firms that use revenues obtained from sales to consumers to cover their costs and to realize profits. And that’s the rub: it is precisely the existence of private property (and the other conditions of existence of private commodity production) that keeps the cost of information from going to zero. Information may “want to be free” and capitalist property is certainly an obstacle to the flow of more information but that doesn’t mean information is or will be costlessly produced or utilized. For every Wikipedia there are hundreds of Microsofts—and thousands of other capitalist enterprises that utilize proprietary information to produce still other commodities.

The other side of the argument is thus also questionable: there’s nothing about new information technologies that necessarily lead to forms of economic organization different from or beyond capitalism. Would but that were the case! It’s certainly possible that a democratically organized, worker-owned enterprise would be able to take advantage of networking and other new forms of organizing information but the mere existence of such information technologies does not bring new forms of noncapitalist enterprise (or other socialist or communist forms of economic organization) into existence. I do think we need to pay attention to the way “educated and connected” human beings are utilizing new information technologies (as I often remind my students, they permit such activities as “stealing” the digital information in music and videos and then “sharing” that information within and between communities). But, we need to remember, lots of people have organized noncapitalist forms of economic organization long before the new information technologies were imagined, and they’ll continue to do so (perhaps in different forms) within and at the margins of “cognitive capitalism.”

But to get there—to allow such noncapitalist forms of economic organization to be imagined and put into practice—we need more than new information technologies. We need a ruthless critique of the existing economic order and forms of political organization (aka a political party) to produce utopian discourses and concrete interventions to move us in that direction.


While I’m on the topic of postcapitalism, let me also take up the case for socialist recently made by Gar Alperovitz and Thomas M. Hanna. Once again, I’m sympathetic—especially since the more talk about socialism these days the better. And Alperovitz and Hanna do make a convincing case for public ownership and control, including the fact that we already have lots of examples (from the Texas Permanent School Fund to the Tennessee Valley Authority, from publicly owned electric utilities to public internet systems) in our midst. Great! There are lots of ways for the state to distribute the surplus to meet social needs and there’s no reason to limit ourselves to tax-and-spend policies. Why not let the state take direct control of economic activities? But then let’s also talk about how the surplus is produced and appropriated within such state enterprises. If we don’t, then we’re just talking about expanding state capitalism (capitalist enterprises that are owned and/or regulated by the state) and not about eliminating capitalist exploitation itself.

Both Mason and Alperovitz and Hanna seem to overlook that particular aspect—the class dimensions—of the critique of political economy.


Do markets determine the unequal distribution of income under capitalism?* Well, yes and no.

The answer depends, of course, on the theory of income distribution one uses. Neoclassical economists focus exclusively on market exchanges and the idea that each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

Many other economists criticize this aspect of neoclassical theory and use an alternative approach. Stiglitz, for example, focuses on “rent-seeking” behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than it would be under perfect markets.

What about Marxian theory? It’s a bit different, in the sense that it relies on the assumptions similar to those of neoclassical theory while arriving at conclusions that are similar to those of the critics of the neoclassical theory of the distribution of income. The implication is that, even if and when markets are perfect (in the way neoclassical economists assume), the capitalist distribution of income violates the idea of “just deserts” (much in the way the critics argue).

Let me explain. Marx starts with the presumption that all markets operate much in the way the classical political economists then (and neoclassical economists today) presume. He then shows that even when all commodities exchange at their values and workers receive the value of their labor power (that is, no cheating), capitalists are able to appropriate a surplus-value (that is, there is exploitation). No special modifications of the presumption of perfect markets need to be made. As long as capitalists are able, after the exchange of money for the commodity labor power has taken place, to extract labor from labor power during the course of commodity production, there will be an extra value, a surplus-value, that capitalists are able to appropriate for doing nothing.

So, according to the Marxian theory of value, the distribution of income is determined partly by markets (workers receive the value of their labor power), partly outside of markets (capitalists appropriate surplus-value by extracting labor from labor power in production), and then partly once again in markets (the surplus-value is realized in the form of money if and when capitalists are able to sell the commodities that are produced).

But that’s only the first step. To make the analysis more concrete, Marx recognizes the fact that industrial capitalists don’t get to keep all the surplus-value they appropriate from their workers. They are forced to share their ill-gotten gains with others who help in various ways to secure the conditions of continued exploitation: other industrial capitalists (through competition within industries), financial capitalists (via an unequal exchange of money in the form of loans), the state (in the form of taxes), supervisors and managers (whose incomes represent distributions of the surplus-value), landlords (who are able to secure a portion of the surplus-value in the form of rent), and so on. The rest is kept as enterprise profits. Once again, then, the distribution of income is determined both inside and outside markets.

All of the preceding analysis is carried out under the assumption that all markets are perfect. Then, of course, at an even more concrete level, it is possible to introduce and explore the implications of all kinds of market imperfections, such as “political or economic power, rent-seeking, cronyism, imperfect information, monopolies,” which no doubt characterize contemporary capitalism.

The point is, the Marxian theory of the distribution of income identifies an unequal distribution of income that is endemic to capitalism—and thus a fundamental violation of the idea of “just deserts”—even if all markets operate according to the unrealistic assumptions of mainstream economists. And that intrinsically unequal distribution of income within capitalism (as determined both within and beyond markets) becomes even more unequal once we consider all the ways the mainstream assumptions about markets are violated on a daily basis within the kinds of capitalism we witness today.

Hence, my answer to the question, do markets determine the unequal distribution of income under capitalism? Well, yes (although not according to the neoclassical theory of marginal productivity) and no (since it is necessary to leave the sphere of exchange, the “very Eden of the innate rights of man,” and enter the realm of production in order to identify the existence of capitalist exploitation).


*This post is a response to Branko Milanovic’s summary of Joseph Stiglitz’s presentation at the recent American Economic Association/Allied Social Sciences meetings in Boston. According to Milanovic, Stiglitz divided theories of income distribution into two groups: market-based theories (such as neoclassical or marginal-productivity theory) and non-market theories (according to which incomes are “determined largely by exploitation, political or economic power, rent-seeking, cronyism, imperfect information, monopolies”).