Posts Tagged ‘history’

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On the eve of their presidential election, the French people and politicians continue to debate how they should respond to the end of “Les Trente Glorieuses,” a period that appears to receding into ancient history.

Except, as it turns out, for those at the very top, for whom the last thirty years have been quite glorious.

According to new research by Bertrand Garbinti, Jonathan Goupille-Lebret, and Thomas Piketty, between 1983 and 2014, average per adult national income rose by 35 percent in real terms in France. However, actual cumulated growth was not the same for all income groups:

the growth incidence curve is characterized by an impressive upward-sloping part at the top. Cumulated growth between 1983 and 2014 was 31% on average for the bottom 50% of the distribution, 27% for next 40%, and 50% for the top 10%. Most importantly, cumulated growth remains below average until the 95th percentile, and then rises steeply, up to as much as 100% for the top 1% and 150% for the top 0,01%.

The contrast with the earlier, 1950-1983 period is particularly striking. In effect, during the “Thirty Glorious Years,” Garbinti, Goupille-Lebret, and Piketty observe the exact opposite pattern: growth rates were very high for the bottom 95 percent of the population (about 3.5 percent per year) and fell abruptly above the 95th percentile (1.5 percent at the very top). However, as is clear from the chart above, between 1983 and 2014, growth rates were very modest for the bottom 95 percent of the population (about 1 percent per year) and rose sharply above the 95th percentile (3 percent at the very top).

As we know, similar patterns hold for the United Kingdom (which voted for Brexit) and the United States (which elected Donald Trump).

The key question in France, in the first and second rounds of the presidential election, is how French voters will respond to a political economy that has generated thirty glorious years only for those at the very top.

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Who’s running away with the surplus, those at the top or those at the very top?

In a new study on “income inequality in the 21st century,” Fatih Guvenen and Greg Kaplan note that recent increases in inequality in the United States need to be understood in terms of trends of and, especially, within the top 1 percent. That’s particularly true when, instead of using Social Security data (which capture labor income), they turn to Internal Revenue data (which capture all forms of income).

While I agree with Guvenen and Kaplan that historically there have been significant differences between the incomes of the top 1 percent and the top 0.1 percent—those at the top and those at the very top—in my view, they tend to exaggerate the differences and lose sight of the fact that the two groups have become one.

Clearly, as can be seen in the chart above (based on data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman), the average income of those in the top tenth of one percent has risen much more than that of the top one percent. From 1979 to 2014, the average income of those at the very top has risen 277 percent compared to an increase of 183 percent for those at the top. But, of course, the average incomes of both groups have soared compared to that of the bottom 90 percent, which has increased only 27 percent over the same period.

And while they’re right, the rise in capital income much more than labor income helps explain the rising share of income of those at the very top, especially in recent decades, the fact is both groups—whether in the form of labor or capital income—have managed to capture a rising share of the surplus.

Where do those incomes come from?

The following two charts illustrate the composition of incomes of the top 1 percent and top 0.1 percent, respectively.

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One way of making sense of the way those at the top and those at the very top manage to capture a portion of the surplus is by distinguishing between a labor component (in various shades of blue in both charts) and a capital component (in shades of green). When added together, the two components represent the total share of national income that goes to the top 1 percent (which rose from 11.1 to 20.2 percent) and the top 0.1 percent (which rose from 3.9 to 9.3 percent) between 1979 and 2014.

The labor component comprises two categories: employee compensation (e.g., payments to CEOs and executives in finance) and the labor part of noncorporate business profits (e.g, partnerships and sole proprietorships). Capital income can be similarly decomposed into various categories: interest paid to pension and insurance funds, net interest, corporate profits, noncorporate profits, and housing rents (net of mortgages).

As can be seen in the top chart above, by 2014 the top 1 percent derived over half of their incomes from capital-related sources. In earlier decades, from the late-1970s to the late-1990s, a much larger share of their income came from labor sources. They were the so-called “working rich.” This process culminated in 2000 when the capital share in top 1 percent incomes reached a low point of 49.4 percent. Since then, however, it has bounced back—to 58.6 percent in 2014. Thus, the “working rich” of the late-twentieth century are increasingly living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

Much the same trend, in an even exaggerated fashion, is true of those at the very top, the top 0.1% (in the lower chart). More than half of their income has always come from capital-related sources. They were never the “working rich”; they were always for the most part “coupon clippers.” The share of their income from capital-related sources was already 60 percent in 1979 and continued to grow (to 63 percent) by 2014.

What this means, in general terms, is the growth of inequality over decades is due to the ability of those at the top and those at the very top to capture a large portion of the growing surplus. But there has also been a change in the nature of that inequality in recent years, at least for those at the top—which is not due to escalating wage inequality, but to a boom in income from the ownership of stocks and bonds. They’ve now joined the ranks of the “coupon clippers,” who are able to use their accumulated wealth to get their share of the surplus.

It looks then as if those at the top have either turned into or been replaced by rentiers, thus joining the existing owners of capital at the very top—thereby mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.

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Just a few years ago, students at Oberlin College protested the college’s decision to fund a talk by Jeffrey Sachs, whom they considered to be a “neoliberal imperialist liar.”

As regular readers of this blog know, I am quite sympathetic with the Oberlin students’ concerns. I have called Sachs to task on many occasions (e.g., herehere, and generally here).

But it’s also true Sachs is changing his tune, at least on some issues. Here he [ht: ja] is on interventions by the United States in the Middle East:

It’s time to end US military engagements in the Middle East. Drones, special operations, CIA arms supplies, military advisers, aerial bombings — the whole nine yards. Over and done with. That might seem impossible in the face of ISIS, terrorism, Iranian ballistic missiles, and other US security interests, but a military withdrawal from the Middle East is by far the safest path for the United States and the region.

And then Sachs ups the ante: “America has been no different from other imperial powers in finding itself ensnared repeatedly in costly, bloody, and eventually futile overseas wars.”

That’s right: Sachs is accusing the United States of acting today as an imperial power—in a long line beginning with the Romans and continuing in modern times with the British, the French, and the United States itself in previous periods, from Puerto Rico, Cuba, and the Philippines through Vietnam and increasingly in the Middle East. In fact, in all these cases, the United States took up the preceding wars of other imperial powers, including Spain, Britain, and France, thereby extending imperial adventures that have been “both futile and self-destructive.”

Sachs is led therefore to conclude,

The United States should immediately end its fighting in the Middle East and turn to UN-based diplomacy for real solutions and security. The Turks, Arabs, and Persians have lived together as organized states for around 2,500 years. The United States has meddled unsuccessfully in the region for 65 years. It’s time to let the locals sort out their problems, supported by the good offices of the United Nations, including peacekeeping and peace-building efforts. Just recently, the Arabs once again wisely and rightly reiterated their support for a two-state solution between Israelis and Palestinians if Israel withdraws from the conquered territories. This gives added reason to back diplomacy, not war.

We are at the 100th anniversary of British and French imperial rule in the Mideast. The United States has unwisely prolonged the misery and blunders. One hundred years is enough.

I can only agree.

Even more: give Sachs another decade or two and he might actually become a Marxist.

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Those of us of a certain age remember the right-wing political slogan, “America, love it or leave it.” I’ve seen it credited to journalist Walter Winchell, who used it in his defense of Joseph McCarthy’s anti-communist witch hunt. But it’s heyday was in the 1960s, against the participants in the antiwar movement in the United States and (in translation, ame-o ou deixe-o) in the early 1970s, by supporters of the Brazilian military dictatorship.*

I couldn’t help but be reminded of that slogan in reading the recent exchange between the anonymous author of Unlearning Economics and Simon Wren-Lewis (to which Brad DeLong has chimed in, on Wren-Lewis’s side).

Unlearning Economics puts forward an argument I’ve made many times on this blog (as, of course, have many others), that mainstream economics deserves at least some of the blame for the spectacular crash of 2007-08 (and, I would add, the uneven nature of the recovery since then).

the absence of things like power, exploitation, poverty, inequality, conflict, and disaster in most mainstream models — centred as they are around a norm of well-functioning markets, and focused on banal criteria like prices, output and efficiency — tends to anodise the subject matter. In practice, this vision of the economy detracts attention from important social issues and can even serve to conceal outright abuses. The result is that in practice, the influence of economics has often been more regressive than progressive.

Therefore, Unlearning Economics argues, a more progressive move is to challenge the “rhetorical power” of mainstream economics and broaden the debate, by focusing on the human impact of economic theories and policies.

Who could possibly disagree?

Well, Wren-Lewis, for one (and DeLong, for another). His view is that the only task—the only progressive task—is to criticize mainstream economics on its own terms. Even more, he argues that we need mainstream economics, because there should only be one economic theory, on which everyone can and should agree.

Now imagine what would happen if there was no mainstream. Instead we had different schools of thought, each with their own models and favoured policies. There would be schools of thought that said austerity was bad, but there would be schools that said the opposite. I cannot see how that strengthens the argument against austerity, but I can see how it weakens it.

The alternative view is that the discipline of economics has a hegemonic economic discourse (constituted, at least in the postwar period, by an ever-changing combination of neoclassical and Keynesian economics) and a wide variety of other, nonmainstream economic theories (inside the discipline of economics, as well as in other academic disciplines and outside the academy itself). Reducing the critique of austerity (or any other economic policy or strategy) to the issues raised by mainstream economists actually impoverishes the debate.

Sure, there’s a mainstream critique of austerity: cutting government expenditures in the midst of a recession reduces (at least in most cases) the rate of economic growth. But there are also other criticisms, which don’t and simply can’t be formulated by mainstream economists. From a Marxian perspective, for example, austerity (of the sort we’ve seen in recent years in Europe and even to some extent in the United States, not to mention all the other examples, especially as part of IMF-sponsored stabilization and adjustment programs, around the world) often serves to raise the rate of exploitation. Feminist economists, too, have lodged criticisms of austerity, since it often shifts the burden of adjustment onto women. Radicals, for their part, worry about the effects on power relations. And the list goes on.

They’re all different—perhaps overlapping but not necessarily mutually compatible—criticisms of austerity policies. They raise different issues, precisely because they’re inspired by different, mainstream and heterodox, economic theories.

Wren-Lewis, in his response to Unlearning Economics, wants to limit the debate to the terms of mainstream economics, which is the disciplinary equivalent of “love it or leave it.”

 

*There’s also the awful song by Jimmie Helms, recorded by Ernest Tubb:

the-corporation

It is extraordinary that the hegemonic economic theory in the world today—neoclassical economics—still lacks an adequate theory of the firm.

It beggars belief both because neoclassical economics is the predominant theory that is taught to hundreds of thousands of students every year and used to make sense of the world and formulate policy in countless think thanks and government agencies and because the firm (or enterprise or corporation) is one of the central institutions of capitalism. It’s where many (but of course not all) goods and services are produced, value and surplus-value are created, and profits generated for capitalists.

And yet the neoclassical notion of the firm, even when developed by Nobel Prize-winning economists (such as Oliver Hart and Bengt Holmstrom), is not much more than an empty box—without any real history and, as it turns out, without any links to politics.

Daniel Carpenter, the Allie S. Freed Professor of Government in the Faculty of Arts and Sciences and Director of Social Sciences at the Radcliffe Institute for Advanced Study at Harvard University, certainly thinks that’s a problem in terms of making sense of how firms came to be constituted historically and what their effects are on contemporary society.

Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?

 I think it’s an immense omission. For one, we can’t even talk about the historical origins of many firms without talking about corporate charters, limited liability arrangements, zoning, public contracts and grants, and so on. To view these processes as legal and not political is a significant mistake. I’m currently writing a lot on the history of petitioning in Europe and North America, and in areas ranging from railroads, to technology-heavy industries, to extractive industries, to banking, firms (or their investors) had to bring a case before the legislature, or an agency of government, or both. They usually used petitions to do so. 

 Beyond the past and into the present, there are a range of firm activities that we can’t understand without looking at politics. Industrial organization considers regulator-firm interactions, but does not theorize the fact that now most firms have regulatory affairs and compliance offices, or the fact that firms hire not just lobbyists but lawyers to do a lot of political work for them.

 And in the future, the profitability and survival prospects of many firms in the coming years will depend heavily, in a polarized environment, on the political skills of managers. The theory of the firm was developed in an era (1950s – 2000) when globalism was the rule. What might it look like if Trump and Brexit are the new norm?

Today, of course, many citizens are concerned about the corrupt links between the capitalist firms in which they work and the governments that are supposed to represent the people. In my view, that concern was one of the causes of the Brexit vote and Trump’s victory in the U.S. presidential election.

The problem is, neither the post-Brexit British government nor the Trump administration has given any indication they’re going to solve the problem of the firm. Quite the opposite. Both have tied themselves to the very same capitalist firms that have wreaked havoc on society for decades now.

Meanwhile, neoclassical economists continue to build their models based on a theory of the firm that bears no relationship to the way firms operate in the real world, manipulating market rules and political actors to their own ends.

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