Posts Tagged ‘markets’

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Will market forces solve the problem of stagnant wages and growing inequality?

Mark Thoma says no.

The idea that an improving economy will overcome the problem of stagnating real wages and rising inequality that has existed for decades is suspect. Why should this time be any different from the past? Sure, improvements in labor demand relative to supply could make some difference, and a tight labor market is certainly better for the working class than a labor market will high levels of unemployment and a large number of discouraged workers, but should we suddenly expect workers to receive a higher share of national income – income that has increasingly flowed to those at the very top of the income distribution – once we reach full employment?

The data in the chart above appear to confirm Thoma’s review. Yes, there are moments (such as in 1969 and 2000) when a low unemployment rate gave a boost—however temporary—to the share of national income going to labor. However, as a general trend, the wage share has been falling from 1970 onward (from 51.5 percent then to less than 42 percent today) across many periods of both high and low unemployment.

Today, even as the official unemployment rate continues to decrease, the falling wage share—and, with it, an increasingly unequal distribution of income—shows no sign of abating.

Hence Thoma’s reasonable conclusion:

So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality. . .inequality will continue to be a problem.

money-trick

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”).

KochBrothers_LArally

The Koch brothers continue to use their enormous wealth to attempt to reshape the teaching of economics in U.S. colleges and universities.

The latest target is the University of Louisville [ht: db], where the Koch Foundation, in partnership with Papa John’s International CEO John Schnatter, are preparing a $6 million gift to the College of Business for the creation of a “center for free enterprise” to be led by BB&T Distinguished Professor in Free Enterprise Stephan Gohmann, who would have authority to approve anyone hired with the grant money.

The Koch brothers and their well-heeled partners are able to buy such influence, in part, because professors like Gohmann are willing to do their bidding.

 

It’s also the case that public colleges and universities are being undermined by their own states’ unwillingness to fund decent higher education for their citizens.

If the $6 million gift contract is approved and made available for review, it will continue the trend away from public funding of higher education and toward financing by private parties.

“If the people of Kentucky are worried about corporate influence distorting education, they must insist that the state reinvest in public higher education,” said Avery Kolers, a U of L philosophy professor. “For 15 years now, the state has been cutting budgets, leaving universities scrambling for any dollar they can find.

“The fact is, education is the only real path to long-term improvements in the quality of life of all Kentuckians,” he said. “Kentuckians who care about this need to demand a first-rate public higher education system and must insist that the state find a way to provide the public funding that makes it possible.”

The irony, of course, is that economics education in U.S. colleges and universities remains dominated by neoclassical economics, which celebrates a system based on individual choice, free markets, and private property. That’s the basic model taught to tens of thousands of students—both graduate and undergraduate—every year, with perhaps a few sessions on “market imperfections” toward the end of the course, when students are scrambling just to survive.

But apparently that’s not enough for the Kochs, Schnatters, and Gohmans of the world. I guess they want to make sure that even market imperfections are hidden from view—and what few market imperfections they do acknowledge can be blamed on unwarranted government intervention.

And, in the process, they—and the academic administrators who accept these gifts—are willing to undermine the kinds of open, critical inquiry that define what a university is.

22up-economy-superJumbo

While we’re on the topic, I want to note three additional problems in Aaron Steelman’s recent essay on contemporary economics.

First, Steelman presumes that the goal of heterodox economists is to break into mainstream economics. While that may be the hope and goal of some heterodox economists, my sense from talking and working with many heterodox economists over the years is that is the furthest thing from their minds. They don’t want to break into the mainstream; what they want is to develop alternative approaches—in their research, teaching, service—without always having to be looking over their shoulders and worrying about being disciplined and punished by the mainstream economists who run the high-profile departments, journals, and funding sources in and around the discipline.

Which leads to my second point: why is it Steelman simply assumes that “significant differences in methodological approaches and fields of study” need to lead to a split of an economics department, at Notre Dame or elsewhere? Such differences exist in a wide variety of fields, from anthropology to zoology, and splits neither occur or are called for. In other words, what is it about mainstream economics that it simply can’t allow for or coexist with nonmainstream approaches? That’s a question I’d like to see the Steelmans of the world consider.

Finally, Steelman notes that not all departments that have encouraged the existence of nonmainstream or heterodox approaches are on the Left. He mentions the free-market or Austrian approaches that predominate in the economics departments at Florida State, Clemson, and George Mason. What he doesn’t mention is that those departments and universities have received significant funding from the Koch brothers, as documented by Inside Higher Ed and the Washington Post.

Economists at those institutions may teach the magic of the free market but there’s nothing magical about how they have grown in prominence in recent years or how other heterodox economists, many of whom have broken from mainstream economics, have been pushed to or beyond the margins of the discipline.

As many heterodox economists well understand, but Steelman apparently does not, the marketplace of ideas in economics is embedded within and structured by power, interests, and ideology. Which is what many students of economics today want to see transformed, so that they are finally able to study theories and approaches other than those of mainstream economics.

Miro Stefanovic - GP 15th PortoCartoon 2013

Special mention

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Special mention

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Poster Sydney Workshop (2)

Adam Morton and some of his new colleagues at the University of Sydney are organizing a workshop, Questioning the Utopian Springs of Market Economy, in August of this year.

The initiative for the workshop stems from the seventieth anniversary, falling in 2014, of the publication of two seminal political economy texts written respectively by Karl Polanyi and Friedrich Hayek. In 1944 both Karl Polanyi’s The Great Transformation and Friedrich Hayek’s The Road to Serfdom were published, delineating very different pathways to the utopian springs constituting and challenging market economy. These pathways focused on the ‘birth of the liberal creed’ (Polanyi) and the road to ‘security and freedom’ (Hayek) in mid-twentieth century conditions that still shape the present.

Here is a direct link to the web site for what promises to be an engaging and intellectually important workshop.