You are on page 1of 66

ESSAYS

ON
INEQUALITY
IN
MODERN
ECONOMIES
by
Michael Roberts
Contents
Inequality in Britain
Inequality of opportunity
1% versus 99%
Inequality, poverty and riots
Inequality: the cause of crisis and depression?
Inequality theres no stopping it!
Defending the indefensible
The story of inequality
Global wealth inequality
Workers of the world cannot unite
Davos and the Chinese princelings
Is inequality the cause of crises?
Inequality and Britains oligarchs
How much inequality?
Unpicking Piketty
Inequality: the mainstream worry
The Waltons, John Cochrane and the road to serfdom
Inequality in Britain
It is truly shocking. The just published report of UKs National Equality Panel, called An
anatomy of Economic Inequality in the UK, could not be more devastating as an indictment of
the inequalities bred by the capitalist system. The report shows what Marxists already know:
that the capitalist system of production enables a very small minority to live in luxury,
privilege and enjoyment, while the majoritys chances of a good quality of life are stunted,
restricted and destroyed.
But the report is also an indictment of the failure of the New Labour government that has
been in office since 1997 to change this in any significant way. According to the report,
inequalities of income, wealth and opportunity rose sharply during the Thatcher years of
1979-90. But as of now, these inequalities are as bad as they were when Labour came to
office in 1997.
Moreover, inequalities between rich and poor and the middling in Britain are greater than in
most other leading capitalist economies and are even worse than they were at the end of
second world war in 1945. As the report explains, these inequalities under capitalism make
sure that it is impossible for those down the pyramid of income and wealth to better
themselves and take advantage of so-called equality of opportunity.
In my book, The Great Recession, I took up the bogus arguments of the current Chairman of
the US Federal Reserve, Ben Bernanke, who argued that you did not need equality of income
or wealth to make a better society for all. You just needed equality of opportunity through
good education etc.
The UKs Equality Panel Report annihilates that argument with the facts and the
figures. Without decent wages and enough wealth, hardly anybody will fulfil their potential,
because they wont get a good education, have good health, or obtain better jobs. And
without good education and a good job, you wont earn a good income or accumulate wealth
its a vicious circle. Indeed, as the Labour minister responsible for equality had to admit:
class was much more important than gender or ethnic origin in affecting life chances.
Let me just list some of the conclusions of the report (and there are many more). The top 10%
of earners have four times as much income than the bottom 10%. The top 10% of wealth
holders (property, investments and cash) have 100 times the wealth of the bottom 10%. Of
the top seven capitalist economies, only the US has a higher measure of inequality of income
These inequalities ensure that children from poorer backgrounds do not achieve as much as
educational success, get poorer paid and more difficult jobs, live in worse housing and grow
up to be poor again.
This cycle of luxury living on the one hand and deprivation on the other, with many in the
middle struggling to make things work, has been unchanged for generations (or centuries)
under capitalism. And New Labour after 13 years in office has done nothing to change that.
28 January 2010
Inequality of opportunity
In my book, The Great Recession, I refer to one of the major features of capitalism the
inequality of income and wealth. Its not just that capitalism suffers from slumps in
economic activity at regular intervals that destroy jobs and peoples livelihoods and waste
investment and production. Even in the good times of boom, capitalism generates
inequality in the incomes earned by people during capitalist production and in the wealth
owned and controlled through the means of production under capitalism.
This inequality is exhibited between rich and poor countries and within countries. In my
book, I cite several devastating studies that reveal the extent of these inequalities both
globally and within the richer countries like the US and the UK (see chapters 16 and 21),
where the data are most freely available. And see the posts in this blog (Inequality in
Britain, 28 January and Unfair society, unhealthy lives, 11 February)
The gist of it, by the way, is that the differentials of wealth and income are very large and
have hardly altered (except for the worse) since the days of Karl Marx sitting in the British
Museum in the 1850s. Democracy, economic growth, better health and more schooling under
capitalism in the last 150 years have not altered the huge relative advantage that the rich have
in life (both in its length and its quality) over the middle and poor sections of society.
In my book, there is one chapter (21) that deals with a speech by Ben Bernanke, the current
head of the US Federal Reserve, in which he recognises that there are inequalities of wealth
and income in the US. He explains that this is basically down to education; with equality of
educational opportunities for all, inequalities of outcome in income; health, life expectancy
etc can be reduced, Bernanke says.
Well, here is yet another piece of research that throws a heavy bucket of cold water over
Bernankes espousal of the American dream of equal opportunity. The OECD has published
a report called Going for Growth, in which OECD researchers look at whether opportunities
for a better and prosperous life improve over generations in other words, on average, will
you do better than your parents and will your children do better than you? Can we move up
or down the social ladder with ease under capitalism?
What does the OECD find? First, that a young persons educational attainment, future
earnings and life expectancy depend more than anything else on whether that youngster was
born into a rich or poor family. The ability to improve on your parents status and wealth if
they are poor is very low in France, Italy, the UK or the US (its slightly better in the Nordic
countries, Australia and Canada).
The OECD finds that the more your parents earn or own, the better the children will do. This
matters much more than the school that kids go to or the job opportunities there are in their
area indeed, childrens chances of going to a good school or college or their future earnings
depend most on their parents status. This situation has persisted over generations
unchanged. Capitalism generates inequality and different outcomes for peoples lives on the
basis of wealth and income and still overwhelms the effects of improved and progressive
education and better health.
7 April 2010.
1% versus 99%
We are the 99% is the slogan of the Anti-Wall Street campaign in the US. This refers to
the sheer inequality of income and wealth which exists in America. According to the latest
figures, the top 1% of income holders in the US receive over 20% of all income and own
nearly 35% of all Americas wealth.
According to the latest estimates of Arthur Kennickell at the US Federal Reserve (Ponds and
Streams: wealth and income in the US 1989 to 2007), in 2007, the top 1% of wealth holders
had net worth (thats total wealth net of any debt) of nearly $22trn, or 33.8% of all net wealth
in America ($65trn). He also estimated that the top 1% of income earners had 21.4% of all
income received in 2006 or $2trn each year out of $9trn in total. If we add in the next 4%
of wealth holders, then the top 5% have over 60% of all wealth and 37% of all income.
It is increasingly fashionable to argue that inequality is the cause of the crisis in capitalism
right now (for just one example among many, see Nouriel Roubinis The instability of
inequality.. This is odd. The cause of recessions and instability in capitalism in the 1970s
was not assigned to inequality of income or wealth. Indeed, many mainstream and heterodox
economists argued the opposite, namely that it was caused by wages rising to squeeze profits
in overall national income see chapter 20 in my book, The Great Recession. But now,
many Marxist economists argue that this current crisis is a product of wages being too low
and profits too high. This leads to low wage earners being force to borrow more and thus
eventually causing a credit crisis. So it seems that the underlying cause of capitalist crisis can
vary. The trouble with this eclectic approach is that it becomes unclear what the cause of
capitalist crisis is is it wages squeezing profits as in the 1970s or is it low wages leading to
a collapse of demand in the noughties?
Inequality of wealth and income may not be the cause of capitalist crises, but it is certainly a
product of capitalism. Capitalism, or the private profit society, is increasingly inefficient in
delivering our needs and increasingly unstable. But it has always been unjust and
unequal. Actually, inequality of incomes and wealth in a society is a feature of all class
societies, whether it is slavery, Asian absolutism, priestly castes, feudalism or capitalism. By
definition, inequality accompanies a class society. After all, why would anybody want to be
a member of the ruling elite if they did not enjoy the fruits, namely extreme wealth and
income as well as power and status. Indeed, even priestly castes, supposedly engaged in
waiting for the rewards of the after life and telling their flock that they must also wait, were
not slow in coming forward to benefit from the material life? Just take a look at the Vatican
and other Christian churches, the mosques of the Middle East, the synagogues and going
further back to the priestly rulers of Ancient Egypt, of the Aztecs and Incas of south
America. Class society means that the ruling class controls the surplus generated by the
labour time of the non-rulers, in whatever form. That means inequality is a consequence in
all class societies and is not a specific feature of capitalism that could explain its continual
boom and slumps.
How unequal in wealth and income is the world (not just in the US) right now? Well,
Branco Milanovic at the World Bank has studied global inequality over the years carefully in
a series of books and papers. His measure of inequality is not a measure between nations but
between individuals, even though inequality is decided more by which country you live in
than by inequality within a country. Global elites (the top 10%) take 57% of all the income
created in the world and this ratio has hardly moved in 100 years. As Milanovic explains,
this flies in the face of the predictions of mainstream economics that argues inequality should
decline as economies get richer.
Simon Kuznets developed what is called the Kuznets curve in the mid-1950s. This tracked
the idea that in pre-industrial societies where everybody is poor, inequality is low. When
industrialisation takes place, as in the UK in early 19th century and in the rest of major
capitalist economies later in that century, then inequality grows between the urban and rural
populations. Then, as an economy matures, the urban-rural gap narrows and the welfare state
kicks in and inequality falls. So the Kuznets curve of inequality is an upside down U. The
other mainstream theory is that, as global trade expands, the demand for low-skill labour in
poor countries rises and so their incomes rise relatively to those in mature
economies. Inequality should decline.
Well, the evidence refutes both those theories. Global inequality of income i.e. between
world citizens is high and has stayed high. The Gini coefficient (which measures the ratio
of income or wealth held by cohorts of individuals) has remained very high globally, near
70. It has risen in the US and the UK over the last 30 years and it has also jumped in
China. So the richest 1% of the worlds population now receive nearly 15% of all the
worlds income, while the poorest 20% receive only just over 1%!
Since the 1980s, inequality in incomes has grown in nearly all the major capitalist economies,
but particularly in the so-called Anglo-Saxon, deregulated free market economies like the
US and the UK (the top 1% had about 10% in the early 1980s and now have nearer 20%). In
Continental Europe, inequality has been static the top 1% had about 10% in the 1980s and
now have much the same ratio. In the US, average real incomes grew at a 1.3% rate between
1993 and 2008, but if you exclude the top 1%, the rate of increase was only 0.75% a
year. The incomes of the top 1% achieved a 3.9% a year rise, taking 58% of all the increase
in real incomes between 1993 and 2008. Indeed, in the great US booms of 1993-2000 and
2001-2007, the top 1% achieved annual growth in their incomes of over 10%, while the
bottom 99% achieved only 1.3-2.7% a year.
The most comprehensive and up-to-date analysis of inequality in the capitalist world has been
published jointly by the most eminent researchers in the field recently Anthony Atkinson,
Thomas Piketty and Emmanuel Saez. In their recent piece in the Journal of Economic
Literature, Top incomes in the long run of history, they looked at top income shares for more
than 20 countries. They concluded that top income shares have increased substantially in
the last 30 years. The top incomes share fell somewhat in the early part of the 20th century,
mainly during two world wars and the Great Depression. Inequality declines in wars and
recessions because profits collapse more than wages. Also, as wealth in industry and in
stocks and shares fall, the income from them falls for the richest and thats a bigger part of
their income than for rest of us. In the last 30 years, the authors find that in all of the
Western English-speaking countries and in China and India, the share of income going to the
top 1% and 5% rose, with the US leading the way. While southern Europe and the Nordic
states also saw a rise in inequality, the change was small and from a lower level. In mainland
Europe (France, Germany and the Netherlands), there was no increase at all. Atkinson also
looked at the global rich, defined as those with more than 20 times the mean world
income. In the early 1990s, they constituted just 0.14% of the world population or 7m
people, with more than 2m in the US. These very rich earners had doubled in size in the US
between 1970 and 1992.
The top 10% of income earners in the US, with incomes over $110,00 a year, now receive
half of all the income each year. The top 1% with incomes over $400,000 a year received
nearly 25% of all income in 2007. This 1% constitutes 1.5m earners out of 150m earners in
America. One of the stats that the authors reveal is that, in the Great Recession, the bottom
99% of income earners in the US suffered a 7% fall in their incomes, the largest drop since
the Great Depression. The other discovery is that it is the top 1% and even more, the top
0.1% of earners, who gained the most, compared with the top 5%. The inequalities are rising
within the rich to create a super-rich elite. Whereas the top 1% took 9% of incomes in 1978
and the top 5% took the next 12% , to make 21% in all; by 2008, the top 1% took 21% while
the top 5% took another 15% (making 36% in all). So the top 1% have reaped the biggest
gains in the last 30 years. Also the top 0.1% took only 1% of incomes in 1978 but now take
6%!
The main reason for this higher concentration is the massive rises in the incomes going to the
very top chief executives in the banks and big corporations. Its the same story in the
UK. The UKs High Pay Commission found that bosses salaries rose by 63% since 2002,
but total pay packages for top company executives had gone up by 700% since 2002. In
contrast, pay levels for the average worker in Britain rose only 27% before inflation and
taxes.
These extremes of inequality and the particularly fast rise in that inequality in the last 30
years is now beginning to worry the strategists of capital in an environment of depression in
the mature capitalist economies. It is not that they think inequality causes crises (although
some are beginning to argue that), it is because they fear a social backlash from the 99%
towards the 1%. And how right that fear now appears to be, given the global campaign
developing against the super-rich.
As one City economist , Jeremy Grantham put it: My worst fears about the potential loss of
confidence in our leaders, institutions, and capitalism itself are being realized. We have been
digging this hole for a long time. We really must be serious in our attempts to resuscitate the
fortunes of the average worker. Wouldnt it be better for us to decide deliberately and by
ourselves that income distribution which creates the best balance of social justice and
incentive to work? How about going back to the levels of income equality that existed under
the Presidency of that notable Pinko, Dwight Eisenhower? And dont think for a second that
this more equal income distribution somehow interfered with economic growth: the 50s and
60s were the heyday of sustained U.S. economic gains.
The rise of the super rich implies the expansion of the poor. In the UK, the Centre for
Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises
means that household disposable income will fall by 2% this year, more than double last
years fall of 0.8% and the biggest drop since the savage 1919 to 1921 post-First World War
recession. In the current recession/depression, the ranks of Americas poor (as officially
defined) swelled to nearly 1 in 6 people last year. The overall poverty rate climbed to 15.1%,
or 46.2m, up from 14.3% in 2009. The US poverty rate from 2007-2010 has now risen faster
than in any three-year period since the early 1980s recession. Measured by total numbers, the
46m now living in poverty is the largest on record. The poverty ratio is now as high as in
1993 and the highest since 1983. Americans without health coverage now number 50m
people.
But it is not just the very poor. Americas so-called middle-class, in fact, the bulk of the
working-class, have seen no rise in real earnings since the mid 1970s, and indeed from 2000
to 2010, real incomes fell. For American households in the middle of the pay scale,the real
median household income peaked at $53,252 in 1999 and then fell to $49,445 last year, a
level not seen since 1996. For male workers in the US, the long-term trends are even
bleaker. When part-time workers are included, the median wage for the US man has dropped
28% since 1970 in real terms, back to levels not seen since the 1950s! According to a recent
survey, one-third of Americans are living paycheck to paycheck, and if they lost their job,
they would not be able to make their next rent or mortgage payment. Also, unlike the richest
Americans, average families have most of their wealth tied up in the equity of their homes,
which took a beating in the recession. Also the price of a college education still
considered the ticket to higher wages and a better lifestyle has surged over the last
decade. Census data showed about 14.2% of all young people aged 25 to 34 are still living in
their parents homes this year, compared to about 11.8% before the recession began in 2007.
1% versus the 99% plus ca change, plus cest la meme chose!
Inequality, poverty and riots
I have argued before that the cause of capitalist crises (slumps and recessions) does not lie
with rising inequality in the advanced capitalist economies over the last 30 years or more. But
it is certainly one of the more grotesque features of modern capitalism. A new report from
the OECD called, rather startingly, Divided we stand on inequality in 18 leading capitalist
economies, finds that in the three decades prior to the recent economic downturn, wage gaps
widened and household income inequality increased in a large majority of OECD countries.
As the report concluded, this put the final burial rites on the mainstream economics idea
prevalent in the 1990s that if the rich got richer, their income and wealth would trickle
down the income scale so that a rising tide lifted all the boats. That idea was best summed
up by that leading ideologist of the New Labour government in the UK, Lord Mandelson,
who said we are intensely relaxed about people getting filthy rich, as long they pay their
taxes. Well paying their taxes, which they didnt in many cases, made not a blind bit of
difference, such was the largesse the filthy rich earned and such was the reduction in the
effective tax burden for the rich over the last 30 years.
The OECD report finds that, in all the major capitalist economies, the rich getting richer just
meant that they got further away from the rest of us and it did not matter if you lived in a so-
called free market Anglo Saxon country, such as the US and the UK, or supposedly in more
egalitarian countries such as Denmark, Sweden and Germany. The pay gap between rich and
poor just widened: from five to one in the 1980s to six to one today. In so-called BRICs (
Brazil, Russia, India and China), the ratio is an alarming 50 to one.
It is not just that the top 10% of the income distribution that has moved away from the bottom
10%. The top 1%, and even the top 0.1%, has accelerated away from everybody
else. Income inequality has risen faster in Britain than in any other rich nation since the mid-
1970s. The annual average income in the UK of the top 10% in 2008 was just under 55,000,
about 12 times higher than that of the bottom 10%, who had an average income of 4,700.
The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in
2005. The very top of British society the 0.1% of highest earners accounted for a
remarkable 5% of total pre-tax income, a level of wealth hoarding not seen since the 1920s.
Some economists have argued, and that includes the OECD report, that inequality has risen
because of technological change as low-paid manufacturing jobs were moved to developing
countries and craft and non-craft jobs were replaced by machines while computers do the
work of filing clerks. Other arguments are that it is due to the lack of education skills. But
the evidence reveals that the real reason is the power of capital. The growth of an elite in
finance capital has been the result of the expansion of that sector in modern capitalism. And
this financial services elite have concentrated wealth into the hands of a tiny minority.
It brings into focus the truly grotesque set of figures revealed by the UKs High Pay
Commission. The commission found that chief executives of large companies are often paid
70, 80 or over 100 times the salary of their average worker, when three decades ago the ratio
usually stood at 13 to 1. According to the UKs Financial Services Authority, 1800 bankers in
the City still earn more than 1m a year after the banking collapse. So income rewards are not
related to performance, but to the power of capital. The UKs Institute of Fiscal Studies
found that bankers bonuses had played a large part in creating this divide. If you look at
who is racing away, then half the top 1% of high earners work in financial services, said the
IFS researcher. Mark Stewart, a professor of economics at Warwick University, has shown
that almost all the increase in inequality has come from financial services in the past 12
years.
This rise in inequality worries the OECD. The social contract is unravelling, said Angel
Gurra, OECD secretary-general. The OECD warned of sweeping consequences for rich
societies and pointed to the rash of occupations and protests, especially by young people,
around the world. Youths who see no future for themselves feel increasingly
disenfranchised. They have now been joined by protesters who believe they are bearing the
brunt of a crisis for which they have no responsibility, while people on higher incomes
appeared to be spared, the OECD said.
To rebalance society for the 99%, the report calls for a series of measures focusing on job
creation, increased redistributive effects and freely accessible and high-quality public
services in education, health and family care. Thats a rather sick joke when the British
government plans is cutting public sector jobs by 710,000 and hiking university fees. The
report urged governments not to cut social investments. And yet that is exactly what the
economists of OECD are proposing that governments in the major capitalist economies do in
order to get public sector deficits and debt under control cut public spending and services.
The level of youth unemployment is now at record highs in most capitalist economies. That
means millions of disaffected youth with no future and ready to lash out at the system. Last
summers riots in the UK demonstrated that (see my post Criminality pure and simple, 8
August 2011). So a comprehensive report on the UK riots is opportune.
In a detailed survey of the riots, the London School of Economics found that four out of five
participants in summer unrest think there will be a repeat, with most believing poverty to be a
factor. Of the 270 questioned in the Reading the Riots study, 81% said they believed the
disturbances that spread across England in August would happen again.Two-thirds
predicted there would be more riots before the end of 2014. Despite more than 4,000 riot-
related arrests, and harsher than average sentences in the courts, many of those interviewed
said they did not regret their actions. The research found they were predominantly from the
countrys most deprived areas, with many complaining of falling living standards and
worsening employment prospects.
Those questioned as part of the study were pessimistic about the future, with 29% disagreeing
with the statement life is full of opportunities compared with 13% among the population
at large. Eighty-five percent said poverty was an important or very important factor in
causing the riots. An independent panel set up prime minister David Cameron also
concluded that poverty was an important factor. It found that more than half of those who
had appeared in court proceedings relating to the riots had come from the most deprived 20%
of areas in Britain. Many said they were angry about perceived social and economic
injustice, complaining about lack of jobs, benefits cuts and the closure of youth
services. Overall, the rioters questioned had lower levels of educational attainment, with a
third of adults educated to GCSE level and one-fifth having no educational qualifications at
all.Government data reveals that two-fifths of the young people who have appeared in court
in connection with the riots were receiving free school meals a key indicator of
deprivation. Two-thirds have been identified as having special education needs a
proportion three times higher than for the population as whole. For many of those not in
education, unemployment was the norm among the rioters who were interviewed. They
repeatedly complained about their struggle to find work with some even saying they sought
out and looted shops that had rejected their job applications. Fifty-nine percent of the rioters
interviewed in the study who were of working age and not in education were unemployed.
Rising inequality and joblessness, increasing social unrest and riots. Thats modern
capitalism in 2011.
6 December 2011
Inequality: the cause of crisis and depression?
The inequality issue has risen its head again. Paul Krugman took it up big time again in his
New York Times column: Did the rise of the 1 percent (or, better yet, the 0.01 percent)
cause the Lesser Depression were now living through? It probably contributed. But the more
important point is that inequality is a major reason the economy is still so depressed and
unemployment so high. For we have responded to crisis with a mix of paralysis and confusion
both of which have a lot to do with the distorting effects of great wealth on our
society..There would have been a broad bipartisan consensus in favor of strong action, and
there would also have been wide agreement about what kind of action was needed. But that
was then. Today, Washington is marked by a combination of bitter partisanship and
intellectual confusion and both are, I would argue, largely the result of extreme income
inequality.
Krugman sees the role of inequality in policy action i.e. rich people dont want to change
anything. But there is a much bigger body of left economists including Marxists who reckon
inequality is not just unfair, it is the main economic cause of the crisis. There is a long line of
academic papers supporting this view. I cannot go through all of them in this post. Indeed, I
dont know where to start and to stop, with so many books and papers coming out explaining
that the rising inequality of income and wealth in the major capitalist economies has created
instability and depression. But let me outline some the key arguments presented.
Take James Galbraiths new book called Inequality and Instability. In this book, by the son
of the famous New Deal Keynesian economist, JK Galbraith, it is argued that As Wall
Street rose to dominate the U.S. economy, income and pay inequalities in America came to
dance to the tune of the credit cycle. Galbraith argues that the rise of the finance sector was
the driveshaft that linked inequality to economic instability.
And the ex-chief economist of the World Bank, Nobel prize winner and now scourge of
mainstream economics, Joseph Stiglitz, takes the same position. Why might widening
inequality lead to a banking crisis? Stiglitzs theory is that growing inequality in most
countries of the world has meant that money has gone from those who would spend it to those
who are so well off that, try as they might, they cant spend it all. This flood of liquidity
then contributed to the reckless leverage and risk-taking that underlay this crisis, he
asserts. In a related view, called the Stiglitz hypothesis, Sir Anthony Atkinson and Salvatore
Morelli propose that in the face of stagnating real incomes, households in the lower part of
the distribution borrowed to maintain a rising standard of living, and this borrowing later
proved unsustainable, leading to default and pressure on over-extended financial
institutions. And in previous posts, I have noted that the great guru of crisis economics,
Nouriel Roubini, raised growing inequality as the key cause of capitalist crisis (see my post,
1% versus 99%, 21 October, 2011) in particular, see Roubinis, The instability of
inequality.
Michael Dumhoff and Romain Ranciere from the IMF argue that long periods of unequal
incomes spur borrowing from the rich, increasing the risk of major economic
crises According to Dumhoff and Ranciere, something happens to lead to income
stagnation for middle and low-income workers, while high-income households acquire more
capital assets. This increases the savings of wealthy households relative to lower-income
households. In order to keep their living standards from declining, the middle class borrows
more. Financial innovations, including new types of securitization, increase the liquidity and
lower the cost of loanable funds available to the borrowers. So the bottom groups greater
reliance on debt and the top groups increase in wealth generated a higher demand for
financial intermediation and the financial sector thus grows rapidly as do the debt-to-income
ratios of the middle class relative to the wealthy. The combination of rising middle class debt
and stagnant middle class incomes increases instability in financial markets, and the system
eventually crashes.
Its true that US aggregate debt-to-income across all income groups grew consistently with
the income share of the top 5% both before the Great Depression and Great Recession. This
increase was a considerably sharper in recent years for the bottom 95% than the top 5%.
But is this growing inequality and rising debt the cause of slumps? A paper by Michael
Bordo and Christopher Meissner from the Bank of International Settlements analysed the data
and concluded that inequality does not seem to be the reason for a crisis. Credit booms
mostly lead to financial crises, but inequality does not necessarily lead to credit booms. Our
paper looks for empirical evidence for the recent Kumhof/Rancire hypothesis attributing the
US subprime mortgage crisis to rising inequality, redistributive government housing policy
and a credit boom. Using data from a panel of 14 countries for over 120 years, we find
strong evidence linking credit booms to banking crises, but no evidence that rising income
concentration was a significant determinant of credit booms. Narrative evidence on the
US experience in the 1920s, and that of other countries, casts further doubt on the role of
rising inequality.
Edward Glaesar also points to research on the US economy that home prices in various parts
of the US did not always increase where there was the most income inequality. That calls into
question the claim that income inequality was inflating the housing bubble. He concludes:
Professors Atkinson and Morellis international data also suggest little regular connection
between inequality and crises. Looking at 25 countries over a century, they find ten cases
where crises were preceded by rising inequality and seven where crises were preceded by
declining inequality. Moreover, inequality was higher in two of the six cases where a crisis
is identified, which is exactly the same proportion as among the 15 cases where no crisis is
identified.
Now dont get me wrong. I am not saying that there has not been rising inequality of income
and wealth in most major capitalist economies during the so-called neoliberal era from the
1980s. Indeed, in various posts (Karl Marx was right (partly),16 August 2011; Inequality,
poverty and riots, 6 December 2011), I have highlighted the growing body of research that
reveals this grotesque feature of modern capitalism.
Now let me add the very latest research to that. In a working paper from the OECD, Kaja
Bonesmo Frederiksen (Income inequality in the European Union, OECD Working paper 952,
16 April 2012), found that inequality had risen quite substantially since the mid 1980s and
that the large gain accruing to the top 10% of earners was the main driver of this
inequality. The reason that the top 10% did better was down to a decline in progressive
taxation, rising capital gains from property and share ownership, so-called performance
related pay, weaker trade unions and globalisation indeed all the elements of the neo-liberal
era.
I did some analysis of the OECD paper and found that the ratio of the share of real disposable
income growth going to top 10% over growth in income going to the bottom 10% averaged
2.6 times for the European Union, 9.1 times for the UK and a staggering 21.9 times for the
US. That means the top 10% of income earners in the US got 22 times more growth in
income that the bottom 10% between the mid-1980s and 2008. Only in France and Greece
was income growth for the bottom 10% faster than for the top 10%. The most neo-liberal
capitalist economies saw the most unequal expansion in incomes. While the bottom 10% of
income earners in Europe managed just 0.87% annual increase in real disposable income
from the mid-1980s to 2008, the top 10% got 2.23% a year. And the top 10% of British
income earners did best in the whole of the OECD, experiencing 4.2% average annual growth
in real disposable income, while the bottom 10% got only 0.5% annual increase a year over
the last 3o years.
But it is one thing to recognise that inequality has rocketed in the last 30 years and quite
another to claim that this explains the credit crunch and the Great Recession. What is wrong
theoretically with this argument is that it assumes, as the Keynesians do, that the fundamental
weakness of capitalism lies on the demand side of the economy. Since many people had
insufficient income to consume they borrowed money to maintain their living
standards. Radically different conclusions follow if the problem is located on the supply side
(with the cause to be found in profitability). From this perspective, falling profitability
explains the sluggish character of the productive economy and is at the root of the crisis. If
the economy had been more profitable, there would have been less need for such a rapid or
excessive expansion of credit. From this perspective the widening of inequality is more of
a symptom than a cause of economic weakness. The rich became richer with the emergence
of the asset bubble, but the underlying economy was far from healthy in the first place.
Also it is odd to claim that the cause of the Great Recession of 2008-9 was growing
inequality. We did not hear that argument to explain the crises of the 1970s and 1980s. The
cause then was not assigned to inequality of income or wealth. Indeed, many mainstream and
heterodox economists argued the opposite, namely that it was caused by wages rising to
squeeze profits in overall national income see chapter 20 in my book, The Great
Recession. But now, many Marxist economists argue that this current crisis is a product of
wages being too low and profits too high. This leads to low wage earners being force to
borrow more and thus eventually causing a credit crisis. So it seems that the underlying
cause of capitalist crisis can vary. The trouble with this eclectic approach is that it becomes
unclear what the cause of capitalist crisis is is it wages squeezing profits as in the 1970s or
is it low wages leading to excessive credit in the 2000s and then a collapse of demand in
2008?
And then there are the policy implications. If the cause of capitalist crisis or at least this
particular crisis is due to growing inequality of income and wealth, then it easy to see what
the policies are needed to correct this faultline in capitalism: more equality. With higher
wages, more progressive taxes and more regulation of bankers and their bonuses, the current
depression can be overcome and future crises can be avoided. There is no need to replace the
capitalist mode of production, just the current structure of distribution.
That this is the policy conclusion that will be reached is confirmed by a recent post from
Robert Reich. Reich, a former advisor to Clinton, has been a tireless fighter against the
bankers, the neo-liberal Republicans and injustices of modern capitalism. He wrote a book
arguing that inequality was the main cause of crisis (Aftershock, 2010). In a recent post, he
drew the following policy conclusions: Socialism isnt the answer to the basic problem
haunting all rich nations.The answer is to reform capitalism. The worlds productivity
revolution is outpacing the political will of rich societies to fairly distribute its benefits. The
result is widening inequality coupled with slow growth and stubbornly high unemployment.
The problem is not that the productivity revolution has caused unemployment or under-
employment. The problem comes in the distribution of the benefits of the productivity
revolution. A large portion of the population no longer earns the money it needs to live
nearly as well as the productivity revolution would otherwise allow. It cant afford the
leisure its now experiencing involuntarily. Not only is this a problem for them; its also a
problem for the overall economy. It means that a growing portion of the population lacks the
purchasing power to keep the economy going.
So whats the answer? It doesnt mean socialism. We dont need socialism. We need a
capitalism that works for the vast majority. The productivity revolution should be making our
lives better not poorer and more insecure. And it will do that when we have the political
will to spread its benefit.
Inequality of wealth and income: the rich alongside a mass of poverty. This has always been
a feature of class societies, including capitalism. As Marx said, all history is really the history
of class struggle. What that means is the struggle to control the surplus created in any
society. But inequality is not the cause of crises. Booms and slumps took place before
inequality rose to current extremes. They can take place even when there is relative equality:
indeed the drive for equality of income now would eat into profit shares and could exacerbate
the crisis. And more equality will not stop slumps.
21 May 2012
Inequality: theres no stopping it!
In the New York Review of Books this week, Paul Krugman wrote a piece on why austerity
was taken up and why it has failed. In passing he commented Its also worth noting that
while economic policy since the financial crisis looks like a dismal failure by most measures,
it hasnt been so bad for the wealthy. Profits have recovered strongly even as unprecedented
long-term unemployment persists; stock indices on both sides of the Atlantic have rebounded
to pre-crisis highs even as median income languishes. It might be too much to say that those
in the top 1 percent actually benefit from a continuing depression, but they certainly arent
feeling much pain.
Indeed that is the case. In its latest update on inequality of income in the 33 mature capitalist
economies, the OECD revealed that inequality has continued to rise since the Great
Recession troughed. Income inequality in the OECD countries excluding the mitigating
effect of the welfare state increased more in the first three years of the financial crisis to the
end of 2010 than in the previous 12! Although overall take home inequality (i.e after tax
and benefits) did not rise sharply between 2007 and 2010, the richest 10% of the population
still did better than the poorest 10% over this period in 21 of the 33 countries analysed by the
OECD. The differences were most acute in those countries where household incomes
dropped the most. In Spain and Italy, the income of the top 10% was fairly stable even after
taxes, while the income of the bottom 10% fell about 14% and 6% respectively. So
government policies of austerity fell solely on the poor and not the rich.
Back in 2011, the OECD did a very comprehensive report on income inequality entitled
ironically, Divided we stand. The report concluded that the gap between rich and poor had
widened considerably over the three decades to 2008, when it reached an all-time high. The
OECD data were confirmed by the IMF in its paper last September (Income inequality and
fiscal policy) that found inequality of income has also widened in the same period.
The new OECD data now show that the global economic crisis of 2008 squeezed average
household incomes in most countries and inequality increased in the following three years to
2011, despite taxes and transfer measures by governments. Over these three years, real
incomes in the OECD fell 2% on average per year, driven down by higher unemployment and
falling real wages from work. The fall was greatest in that Keynesian poster model, Iceland,
where household market income was down 12% per year between 2007 and 2010.
Keynesian Iceland was followed by the Austerian peripheral Eurozone households like
Greece, Spain and Ireland, which took hits of 6-8% per year. US household income fell
slightly more than the OECD average of 2% a year. Just a few countries had no fall at all: the
households of Germany, Canada, Sweden and Poland.
This decline in household income was not shared out equally. On the contrary, as measured
by the gini coefficient (which is gauged at zero when everybody has the same income and 1
when one person has all the income, inequality rose across the OECD between 2007 and
2011 by 1.3% points to a new high. Indeed, market income inequality rose by more in
those years than in the previous 12 years!
The biggest rise in inequality was experienced by Ireland, Spain, Japan, Greece and France
and Iceland. Again, US inequality increased more than the OECD average. The most
unequal place in the OECD was Chile. The gap between the rich and the poor has widened
since 1980s but much more so in the UK and the US than the OECD average. Indeed, the US
gini coefficient is one of the highest in the OECD and the highest of the large capitalist
economies. The UKs is not far behind.
The UK and Italy are more unequal than the US before taxes and benefits, but after, the US is
more unequal, showing the bias of tax and welfare is towards the richer in the US.
Its the European ecom0mies that tend to have more equality as measured by the gini
coefficient. France and Germanys gini is still below the OECD average although Germanys
rose sharply after the euro was founded. But even in these economies the gini ratio is about
.28, well short of equality.
It is still the case that the top 10% of income earners receive ten times more income than the
bottom 10% in the OECD and thats after tax and transfers. That ratio is over 15 times in
the US, only surpassed by Chile and Mexico at 27 times. This inequality is also expressed in
the levels of relative poverty in the OECD. About 11% of the OECD population has less
income than half their national median incomes. That poverty measure is very high in the
US, at 17% in 2010. Poverty rates rose most in the Great Recession in the peripheral
Eurozone countries, as you might expect.
Britons have become poorer than their counterparts in a host of other rich economies, sliding
from fifth to 12th on a global list of wealth based on disposable incomes. While the spare
cash available to households in most advanced economies grew at a similar pace between
2005 and 2011, disposable incomes in countries such as France and Australia rose at a faster
rate than the UK, as price pressures weighed on the average Britons disposable
income. Households in Canada Belgium, Sweden, Austria and Switzerland also became
richer than those in the UK. The average per head disposable income in the UK was $27,927
in 2011, compared with 26,050 in 2005. In the US, the figure has has risen from $34,373 to
$39,658 over the same period.The pound lost a quarter of its value in 2008, which pushed up
prices on imports at a far faster rate here than in other large industrialised economies.
As the rich have gotten richer, people across Europe have noticed and they do not like it. A
strong majority (a median of 77%) of Europeans surveyed think that the current economic
system generally favours the wealthy. This includes an overwhelming 95% of the Greeks,
89% of the Spanish and 86% of the Italians. Even seven-in-ten (72%) Germans, who have
fared economically better than other European, think so. The vast majority of all Europeans
(85%) surveyed overwhelmingly agree that the gap between the rich and the poor has
increased in the past five years. And they are right.
I have argued before in previous posts that, contrary to the views of many leftist economists,
rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing Long
Depression now being experienced in the mature capitalist economies of the OECD.
But it is clear that the rich are not suffering from this depression, as Paul Krugman says. The
immediate crisis of the banking collapse was resolved by bailing out the bankers with
workers taxes and welfare payments. And the economic recovery is being made on the
backs of workers jobs and real incomes, while the stock markets boom and profits soar at the
expense of employment.
The graph below that US corporate profit per employee has risen dramatically since the
trough of the Great Recession (its the red line going down an inverse left-hand scale) so
that total corporate profits have reached new heights. Cutting labour costs rather than
boosting growth through investment or expanding sales has been the cause of profits boom
since 2009.
Its socialism for the rich and capitalism for the poor.
17 May 2013
Defending the indefensible
Greg Mankiw is professor and chairman of the prestigious economics department of Harvard
University. He is also author of the most widely used textbook on economics by university
undergraduates. So he could not be more mainstream. Mankiw has a blog and just
published a new paper entitled, Defending the 1%.
Mankiw is trying to be provocative and clever in this paper by arguing that there are
perfectly good economic and even moral reasons for the top 1% of income earners in the US
to have their huge share of total income. In 2010, the top 1% had 17.4% of all income earned
in the US, by any measure a very extreme level of income inequality. As has been
documented in many studies, that share of income going to the 1% has risen sharply from just
(!) 7.7% in 1973. Mankiw seeks to justify (defend) this more than doubling of the income of
the 1% against the cries and protests of the Occupy movement. He feigns to show sympathy
with their principles but his paper aims from beginning to end to refute all the arguments of
the left that this inequality is morally wrong or inefficient by using the principles of
mainstream economics and a healthy dose of political philosophy.
His first defence is the one most used, namely that the reason the top 1% have had a rising
share of income in the last 40 years has been the growing gap between the skills and
education of workers. Skill-biased technical change has increased the demand for skilled
labour and so incomes for the skilled have risen faster than the unskilled. Mankiw quotes the
usual study of his fellow Harvard economists, Claudia Goldin and Larry Katz who have
described this as a race between education and technology. But there are plenty of other
studies that argue something different has been going on. In a working paper from the
OECD, Kaja Bonesmo Frederiksen (Income inequality in the European Union, OECD
Working paper 952, 16 April 2012), found that the reason that the top 10% did better was
down to several factors: a decline in progressive taxation, rising capital gains from property
and share ownership, so-called performance related pay, weaker trade unions and
globalisation indeed all the elements of the neo-liberal era and not better technology
skills.
The differences between the pay of the skilled and unskilled is not much different in the US
compared to the UK or Europe. And yet, as the OECD working paper shows, the ratio of the
share of real disposable income growth going to top 10% over growth in income going to the
bottom 10% averaged 2.6 times for the European Union, 9.1 times for the UK and a
staggering 21.9 times for the US. That means the top 10% of income earners in the US got
22 times more growth in income that the bottom 10% between the mid-1980s and 2008,
while in France and Greece income growth for the bottom 10% was faster than for the top
10%! So the most neo-liberal capitalist economies saw the most unequal expansion in
incomes.
Mankiw wants to dismiss the arguments of Joseph Stiglitz (The price of inequality, 2012)
who argues that the top 1% have scooped the lions share of incomes because of rent-
seeking, namely the ability to appropriate incomes produced through protectionism,
cronyism and favourable regulations on tax and profits. Mankiw says that rent-seeking is
no worse than 40 years ago, but this is an assertion without evidence in the same way that he
criticises Stiglitz as making.
Mankiw insists that the very wealthy get that way by making substantial economic
contributions, not by gaming the system or taking advantage of some market failure or the
political process. Yet it is difficult to imagine that the chief executives of top companies
have done so well because they are so much more skilled than 40 years ago rather than just
because they have been able to siphon off more corporate profits through their control of
company boards. Mankiw denies that is the case because non-quoted private companies pay
their chief executives even more than the boards of quoted companies pay theirs. What that
proves I dont know, except that family companies can pay the head of their tribe whatever
they like without any reference to wider shareholders. The UKs High Pay Commission
found that chief executives of large companies are often paid 70, 80 or over 100 times the
salary of their average worker, when three decades ago the ratio usually stood at 13 to 1.
According to the UKs Financial Services Authority, 1800 bankers in the City still earn more
than 1m a year after the banking collapse. So income rewards are not related to
performance, but to the power of capital. The UKs Institute of Fiscal Studies found that
bankers bonuses had played a large part in creating this divide. If you look at who is racing
away, then half the top 1% of high earners work in financial services, said the IFS
researcher. Mark Stewart, a professor of economics at Warwick University, has shown
that almost all the increase in inequality has come from financial services in the past 12
years. But Mankiw tells us that these investment bankers are most talented and therefore
should be highly compensated. He sort of admits that the earnings of the top investment
bankers might just be rent-seeking. So what society needs is to devise a legal and
regulatory framework to ensure we get the right kind and amount of financial
activity. But thats a difficult task. Indeed it is.
Mankiw goes on: a well-functioning economy needs the correct allocation of talent. The
last thing we need is for the next Steve Jobs to forgo Silicon Valley in order to join the high-
frequency traders in Wall Street. So we should not be concerned about the next Steve Jobs
striking it rich but we want to make sure he strikes it rich in a socially productive way. If
Steve Jobs is so socially productive, how does Mankiw suggest that we ensure such people
are paid for their value contribution rather than all the income going to rent seekers in
unproductive jobs like footballers or commodity traders? He has no answer in this paper. But
anyway, who is to say that the great innovators of technology must be rewarded more than
those who do just as important jobs like nursing, refuse collecting, sewage etc. And indeed,
many of the great inventions, discoveries and technological advances have been the product
of teamwork and cooperation and not down to some hugely talented individual.
Mankiw also seeks to defend the 1% by arguing that their skills and cleverness are inherited:
smart parents are more likely to have smart children. So the reason some have more
income than others is that they inherit their cleverness from their parents and there is nothing
we can do about it. It is a genetic inequality. What Mankiw mistakes here is genetic
differences with inheritance. Genes may be passed on, but there is no reason why incomes or
wealth should be passed on from parent to child. The top 1% of income earners can
perpetuate their income status for their children, but not because of their genes but because of
their influence. Take the current scandal that internships in lucrative companies can be
arranged by rich parents working in them or knowing the contacts, while equally clever
poorer kids dont get a look in.
Okay, Mankiw says, let us assume that there are serious inequalities of income that are
unfair. What can be done about it? Apparently little. Mankiw correctly points out that the
US income tax system is already progressive. In other words, the more income you earn,
the more you pay as a percentage in income tax. The poorest fifth pay just 1% of their
income in federal taxes, the middle fifth pay 11% and top 20% pay 23%, while the top 1%
pay 29% of their income in tax. So federal taxes are progressive. So whats the problem,
says Mankiw.
But federal taxes are not the only taxes that people. People also pay sales taxes, VAT,
insurance taxes, capital gains tax and payroll taxes. And these are not progressive at
all. Then there are the subsidies, allowances and exemptions from tax usually paid to the
better off. There is every reason to conclude that the whole taxation system could be way
more progressive and so bring about greater equality of incomes.
But Mankiw appears to reject the case for government applying any redistributive policies at
all. After all, he says, if you are born with two kidneys and somebody else has two failing
ones, government should not be able to enforce the removal of one of your kidneys to give it
to the other person. Mankiw equates the forcible removal of a persons kidneys with the
democratic decision of a government to make top earners pay more to help lower earners and
to spend on public goods!
Mankiw prefers what he calls a just deserts perspective namely that a person should get
an income congruent with his contribution to society. On this perspective, there should not
be higher taxation of those earning more because they are only receiving their just deserts,
an income that matches their marginal productivity. Mankiw thus presents us with the
neoclassical concept of marginal productivity a concept hugely discredited as bearing no
resemblance to the reality of capitalism (see Fred Moseleys critique of Mankiw and marginal
productivity.
Mankiw discusses only the inequality of income in the US. But global inequality is even
greater and clearly not the result of just technology and skill differences, but instead the
product of trade and capital flows dominated and controlled by rich capitalist economies over
weaker ones.
And Mankiw only talks of inequality of income. But under capitalism, private (not common)
ownership of financial assets, real estate and the means of global production is key. So
inequality in these social assets is much more important and even greater than with
incomes. The power of capital dominates and exploits labour and thus enables the 1% to
reap the benefits of the value created by the 99%. Mankiw has nothing to say about this.
Marx never advocated equality, if we mean by that completely equal incomes or personal
wealth for each person or household unit in a society. But neither was the Marxist
perspective one of just deserts. Instead, it was from each according to his/her abilities; to
each according to his/her needs. People (Steve Jobs) may have different or unequal
abilities, but a commonwealth would provide for all according to their needs.
19 June 2013
The story of inequality
The 15th conference of the Association of Heterodox Economists took place last week. The
keynote theme of this gathering of economists who are not of the mainstream was
inequality. The worlds greatest economic expert on inequality of wealth and income is Tony
Atkinson, or should I say, Sir Anthony Atkinson. Atkinson is senior research fellow at
Nuffield College, Oxford and a distinguished econometrician.
Atkinsons address was entitled Where is inequality headed?. Inequality is back on the
economic agenda after being ignored for decades by mainstream economics. But official
spokespeople and mainstream economists everywhere are now looking at the subject, after
the financial crash and the revelation that the top 1% (bankers and top corporate executives)
have been stacking up their earnings while the 99% have been stuck with unmoving real
incomes for years.
Atkinson was careful to define inequality for his purposes: namely inequality of income
within a country, not inequality of wealth or income between countries. I have referred to the
groundbreaking work of Branko Milanovic from the World Bank who has shown that the
biggest inequalities of income and wealth are engendered by the gaps between the rich and
poorer countries rather than inequalities between rich and poor within a country. But
Atkinson concentrates on inequalities within countries. Atkinson reckons that the best
measure of inequality of income is between households, not individuals, and after tax and
benefits have been distributed. This household disposable income includes not just earnings
from work but also capital income (rent and interest and dividends).
On this measure, Atkinson has an interesting story to tell about the changes in inequality of
incomes in the advanced capitalist economies. Using the gini coefficient, which measures
average inequality across the spectrum of households, Atkinson finds that in the OECD
economies there has been a rise of about 3% pts in the coefficient from about 28 to 31 since
the 1980s, or a rise of about 10%. This confirms the evidence of the OECD that I had
previously referred to.
Adding to that OECD study, Atkinson pointed out that between 1911 and 1950, inequality of
income actually declined slightly, reaching its most equal point (still pretty unequal) in the
years immediately after WW2. But from the 1980s it rose sharply. Interestingly, the largest
rise in inequality in the UK was in the 1980s during the Thatcher years, when the gini ratio
rose a staggering 10% points, briefly exceeding the US by the early 1990s. The other shocker
was the rise in inequality in social democratic Sweden, which now no longer has a more
equal society, at least as measured by disposable household income. In contrast, inequality of
income in France fell a little during the same period.
The latest data from the UKs ONS confirm this story of rising inequality during the 1980s
and then a levelling off in the 1990s onwards
Atkinson then asked the question: why? What were the causes of the rise in household
inequality of income in the advanced capitalist economies after the 1980s? The usual reason
given by mainstream economics is that new technology and globalisation led to a rise in the
demand for skilled workers over unskilled and so drove up their earnings relatively. This is
the argument presented by Greg Mankiw recently in his defence of the top 1% of earners.
Atkinson dismissed this neoclassical apologia. The biggest rises in inequality took place
before globalisation and the dot.com revolution got underway in the 1990s. Atkinson pinned
down the causes to two. The first was the sharp fall in direct income tax for the top earners
under neoliberal government policies from the 1980s onwards and the sharp rise in capital
income (i.e. income generated from the ownership of capital rather than from the sale of
labour power). The rising profit share in capitalist sector production that most OECD
economies have generated since the 1980s was translated into higher dividends, interest and
rent for the top 1-5% who generally own the means of production. In 2011, capital income
constituted 60% of the top 10% earners income compared to just 32% in the 1980s.
Higher returns from capital have been coupled with lower taxes on capital and on the income
earned by the top earners. The total effective tax rate is the total amount paid by households
in both direct and indirect taxes as a percentage of their gross income. In the UK, the
effective tax rate grew during the 1960s and 1970s from 28.4% in 1961 to a peak of 39.4% in
1983. But from then on, under Thatcher, Major and New Labour, the trend has been
downward, reaching a low of 32.8% in 2009/10, before increasing slightly over the last two
years to 34.6%.
.
As a result, even though the rich pay more in tax than the poor because they earn more, the
bottom 20% of households now pay more in tax as a percentage of income (36.6%) than the
top 20% in the UK (35.5%)!
The other key issue on inequality is whether it is the main reason for the last global
crisis. Many leftist and some mainstream economists reckon that restricted incomes for the
lower income groups caused the Great Recession because consumption and effective
demand weakened and because households resorted to taking on more debt to compensate
for the lack of growth in the incomes from work. I have argued before in previous posts that
rising inequality was not the cause of the Great Recession of 2008-9 or the ensuing Long
Depression now being experienced in the mature capitalist economies of the OECD. But this
argument persists and many papers at this years AHE conference pressed on with this
argument with some evidence.
But the evidence for this thesis remains questionable. A paper by Michael Bordo
and Christopher Meissner from the Bank of International Settlements has analysed the data
and concluded that inequality does not seem to be the reason for a crisis. Credit booms
mostly lead to financial crises, but inequality does not necessarily lead to credit booms. Our
paper looks for empirical evidence for the recent Kumhof/Rancire hypothesis attributing the
US subprime mortgage crisis to rising inequality, redistributive government housing policy
and a credit boom. Using data from a panel of 14 countries for over 120 years, we find
strong evidence linking credit booms to banking crises, but no evidence that rising income
concentration was a significant determinant of credit booms. Narrative evidence on the
US experience in the 1920s, and that of other countries, casts further doubt on the role of
rising inequality.
Edward Glaesar also points to research on the US economy that home prices in various parts
of the US did not always increase where there was the most income inequality. That calls into
question the claim that income inequality was inflating the housing bubble. And Glaesar
refers to Atkinson on this: Professors Atkinson and Morellis international data also
suggest little regular connection between inequality and crises. Looking at 25 countries over
a century, they find ten cases where crises were preceded by rising inequality and seven
where crises were preceded by declining inequality. Moreover, inequality was higher in
two of the six cases where a crisis is identified, which is exactly the same proportion as
among the 15 cases where no crisis is identified.
It is one thing to recognise that inequality has rocketed in the last 30 years and quite another
to claim that this explains the credit crunch and the Great Recession. What is wrong
theoretically with this argument is that it assumes, as the Keynesians do, that the fundamental
weakness of capitalism lies on the demand side of the economy. Since many people had
insufficient incomes to consume, they borrowed money to maintain their living
standards. Radically different conclusions follow if the problem is located on the supply side
(with the cause to be found in profitability). From this perspective, falling profitability
explains the sluggish character of the productive economy and is at the root of the crisis. If
the economy had been more profitable, there would have been less need for such a rapid or
excessive expansion of credit. From this perspective, the widening of inequality is more of
a symptom than a cause of economic weakness. The rich became richer with the emergence
of the asset bubble, but the underlying economy was far from healthy in the first place.
What is decisive for capitalism is surplus value (profit, interest and rent), not wage income or
spending. Control of that surplus is key. The main feature of the last 100 years of capitalism
has not been growing inequality of income indeed, as Atkinson shows, inequality has not
always risen. The main feature has been a growing concentration and centralisation of
wealth, not income. And it has been in the wealth held in means of production and not just
household wealth.
A new study shows how far that has gone in the recent period. Three systems theorists at the
Swiss Federal Institute of Technology in Zurich have taken a database listing 37 million
companies and investors worldwide and analysed all 43,060 transnational corporations and
share ownerships linking them (147 control). They have a built a model of who owns what
and what their revenues are, mapping out the whole edifice of economic power. They
discovered that a dominant core of 147 firms through interlocking stakes in others together
control 40% of the wealth in the network. A total of 737 companies control 80% of it
all. This is the inequality that matters for the functioning of capitalism the concentrated
power of capital.
14 July 2013
Global wealth inequality: top 1% own 41%; top 10% own
86%; bottom half own just 1%
Despite the financial crisis of 2008 and the difficulties in the Eurozone, global wealth has
more than doubled since 2000, reaching over 150 trillion, according to the latest global
wealth report from Credit Suisse.
Economic growth in developing countries and rising populations have played a significant
part in the figures. Aggregate total wealth rocketed past the pre-crisis peak in 2010 and has
been climbing higher ever since. Average wealth per adult has reached 32,167 after a rise of
4.9 per cent during the year to mid-2013.
Change in household wealth by region 2012-2013:
Region Total Wealth 2013 (USD billion) Percentage Change 2012-13
Africa 2,711 1.2
Asia-Pacific (including China and India) 73,879 -3.7
Europe 76,254 7.7
Latin America 9,139 3.6
North America 78,898 11.9
World 240,881 4.9
The countries experiencing the largest wealth gains of over 620bn included the US, Japan,
China, Germany and France. The UK came sixth in total wealth gains with over 125bn.
A large part of the gains made in the US were due to rising house prices and a strengthening
equity market driving up the Dow Jones. The US increased the global wealth stock by 5.05
trillion, a 54 per cent increase since the downturn of 2008.
Switzerland remains the richest nation in the world, on average, with wealth rising to
319,805 per adult. Australia, Norway and Luxembourg all saw an increase in wealth per
adult and retained their respective second, third and fourth places from 2012.
In terms of global distribution, once debts have been subtracted, 2493 in assets will place an
adult in the top half of the worlds wealthiest citizens. Wealth of 46,000 is required for an
adult to reach the top 10 per cent of global wealth holders, while personal wealth of
469,422 places an adult in the top one per cent.
The report forecasts that wealth will rise by close to 40 per cent in the next five years with
emerging markets to increase their share of global wealth to 23 per cent by 2018. China is
expected to see household wealth dramatically, growing by 10.1 per cent over the next five
years.
Just 8.4% of all the 5bn adults in the world own 83.4% of all household wealth (thats
property and financial assets, like stocks, shares and cash in the bank). About 393 million
people have net worth (thats wealth after all debt is accounted for) of over $100,000, thats
10% own 86% of all household wealth! But $100,000 may not seem that much, if you own a
house in any G7 country without any mortgage. So many millions in the UK or the US are in
the top 10% of global wealth holders. This shows just how little two-thirds of adults in the
world have under $10,000 of net wealth each and billions have nothing at all.
This is not annual income but just wealth in other words, 3.2bn adults own virtually nothing
at all. At the other end of the spectrum, just 32m people own $98trn in wealth or 41% of all
household wealth or more than $1m each. And just 98,700 people with ultra-high net worth
have more than $50 million each and of these 33,900 are worth over $100 million each. Half
of these super-rich live in the US.
All this is in a new global wealth report published Credit Suisse Bank and authored by
Professors Anthony Shorrocks and Jim Davies. The professors find that global wealth has
reached a new all-time high of $241 trillion, up 4.9% since last year, with the US accounting
for most of the rise. Average wealth hit a new peak of $51,600 per adult but the distribution
of that wealth is wildly unequal.
There is nothing new in this report in one sense because Tony Shorrocks previously authored
a UN report back in 2010 that found virtually the same wealth inequality and Branko
Milanovic also found similar figures in various World Bank studies. But what is also
interesting is that Professor Shorrocks finds that there is little or no social mobility between
rich and poor over generations 87% of people stay rich or poor, hardly moving up or down
the wealth pyramid.
This inequality is mirrored within each country. In the UK, aggregate total wealth (including
private pension wealth but excluding state pension wealth) of all private households in Great
Britain was 10.3 trillion. And the wealthiest 10 per cent of households were 4.4 times
wealthier than the bottom 50 per cent of households combined. The wealthiest 20 per cent of
households owned 62 per cent of total aggregate household wealth.
Moreover, according to the Credit Suisse report, the American dream or the British idea of
rags to riches is a myth. Two-thirds of American adults are in the same wealth decile as
their parents were. Even globally, while some individuals do alternate wildly between rags
and riches, many stay for their whole lifetime in the same wealth neighborhood for people of
their age. Dividing the population into wealth quintiles, about half the population remains in
the same quintile after ten years and we estimate that at least a third would be in the same
quintile after thirty years.
Global wealth is projected to rise by nearly 40% over the next five years, reaching $334
trillion by 2018. Emerging markets will be responsible for 29% of the growth, although they
account for just 21% of current wealth, while China will account for nearly 50% of the
increase in emerging economies wealth. Wealth will primarily be driven by growth in the
middle segment, but the number of millionaires will also grow markedly over the next five
years.
All class societies have generated extremes of inequality in wealth and income. That is the
point of a rich elite (whether feudal landlords, Asiatic warlords, Incan and Egyptian religious
castes, Roman slave owners etc) usurping control of the surplus produced by labour. But past
class societies considered that normal and god-given. Capitalism on the other hand talks
about free markets, equal exchange and equality of opportunity. But the reality is no
different from previous class societies.
10 October 2013
Workers of the world cannot unite conclusive evidence
In a recent post I relayed the results of a study of the global inequality of wealth (thats
property and financial assets) recently produced by the top experts in the field, Tony
Shorrocks and Jim Davies. The study revealed that the top 1% of wealth holders in the world
had 41% of the wealth and the top 10% had 86%. Remember this is wealth across the whole
world and so reflects not just inequality of wealth within a country but also inequality
between countries. Indeed, most of the top 10% live in the top seven (G7) advanced
capitalist economies.
Now, in a new paper, Branco Milanovic of the World Bank has updated his definitive study
of the inequality of incomes (not wealth) globally. I have referred to Milanovics work
before (see my book, The Great Recession pp 255-6). Way back in 2005, Milanovic carefully
documented in his book, Worlds Apart (updated in 2007) that the global inequality of income
(and wealth), was 20:80 (i.e. that 80% of worlds then 6.6bn population could be classed as
poor) and the situation was getting worse, not better, even if you take into account the
booming so-called BRICs (Brazil, Russia India and China).
The usual measure of inequality is the gini coefficient. This measure of inequality takes its
name from the Italian statistician and economist Corrado Gini. The gini index ranges from 0
when everybody has the same income to 1, or 100 (expressed as a percentage or an
index), when one person gets the entire income of a city (province, nation, world)whatever
is the relevant population over which we calculate inequality. Milanovic uses national
household surveys from dozens of countries over time as raw data to work out his gini
indexes for each country and the world.
Milanovic concludes:Take the whole income of the world and divide it into two halves: the
richest 8% will take one-half and the other 92% of the population will take another half. So,
it is a 92-8 world. In the US, the numbers are 78 and 22. Or using Germany, the numbers
are 71 and 29. So its 92-9 world now even more unequal than he measured
before. Milanovic notes that global inequality is much greater than inequality within any
individual country. The global gini is around 70, substantially greater than inequality in
Brazil, the highest for a country. And it is almost twice as great as inequality in the United
States.
Milankovic finds that the 60m or so people who constitute the worlds top 1% of income
earners have seen their incomes rise by 60% since 1988. About half of these are the richest
12% of Americans. The rest of the top 1% is made up by the top 3-6% of Britons, Japanese,
French and German, and the top 1% of several other countries, including Russia, Brazil and
South Africa. These people include the world capitalist class the owners and controllers of
the capitalist system and the strategists and policy makers of imperialism.
But Milanovic finds that those who have gained income even more in the last 20 years are the
ones in the global middle. These people are not capitalists. These are mainly people in
India and China, formerly peasants or rural workers have migrated to the cities to work in the
sweat shops and factories of globalisation: their real incomes have jumped from a very low
base, even if their conditions and rights have not.
The biggest losers are the very poorest (mainly in African rural farmers) who have gained
nothing in 20 years. The other losers appear to be some of the better off globally. But this
is in a global context, remember. These better off are in fact mainly working class people in
the former Communist countries of Eastern Europe whose living standards were slashed
with the return of capitalism in the 1990s and the broad working class in the advanced
capitalist economies whose real wages have stagnated in the past 20 years.
Milanovic shows that, since the Industrial Revolution that accompanied the rise to dominance
of the capitalist mode of production globally, inequality in world income has risen. There
was a period of more than a century of steady increase in global inequality, followed by
perhaps fifty years (between the end of the Second World War and the turn of the 21st
century) when global inequality remained on a high plateau, changing very little. However,
Milanovic is struck by a decline in his measure of global inequality since 2002, which may
be historically important. But he explains this by the catching-up of poor and large
countries (China and India), overcoming upward pressures in inequality within countries. But
does this mean that global inequality will decline from now on? Dont bet on it for long, if
growth in the likes of China and India should slow.
Using a Theil coefficient of global inequality in two baseline years: 1870 and 2000,
Milanovic shows that overall global inequality today is greater than in 1870 (the bar on the
right for the year 2000 is higher).
Level and composition of global inequality in the 19th century and around year 2000
(measured by the Theil index)
However, Milanovic also makes some controversial assertions from his data. Global
inequality can be decomposed into two parts (see the figure above). The first part is due to
differences in incomes within nations, which means that that part of total inequality is due to
income differences between rich and poor Americans, rich and poor Chinese, rich and poor
Egyptians and so on for all countries in the world. If one adds up all of these within-national
inequalities, you get the aggregate contribution to global inequality. Milanovic calls this the
traditional Marxist class component of global inequality because it accounts for (the sum)
of income inequalities between different income classes within countries. The second
component, which he calls the location component, refers to the differences between mean
incomes of all the countries in the world. Around 1870, class explained more than 2/3 of
global inequality. Now more than 2/3 of total inequality is due to location. Over the period
since 1870, more than 50% of income for an individual has depended on the average income
of the country where a person lives or was born.
Milanovic concludes from this that the Marxist class analysis has been proved wrong. Karl
Marx could indeed eloquently write in 1867 in Das Kapital, or earlier in The Manifesto
about proletarians in different parts of the worldpeasants in India, workers in England,
France or Germanysharing the same political interests. They were invariably poor and,
what is important, they were all about equally poor, eking out a barely above-subsistence
existence, regardless of the country in which they lived. There was not much of a difference in
their material positions. But not now.
He also concludes that idea of a united global proletariat making a worldwide revolution is
out of the door because the real inequalities are between all Americans and all Africans, not
between capitalists and workers everywhere. Thus Trotskys international proletarian
revolution is out of date: This was the idea behind Trotskys permanent revolution. There
were no national contradictions, just a worldwide class contradiction. But if the worlds
actual situation is such that the greatest disparities are due to the income gaps between
nations, then proletarian solidarity doesnt make much sense.Proletarian solidarity is then
simply dead because there is no longer such a thing as global proletariat. This is why ours is
a distinctly non-Marxian world. Milanovic argues that todayis different to the situation
100-150 years ago when it made at least some sense for Leon Trotsky, the revolutionary of
deep-water greatness according to Saul Bellows Augie March, to think of a common
proletariat predicament. Today the incomes of poor people in rich countries are just so much
higher than the incomes of poor people in poor countries as the chart below suggests.
Yes, maybe imperialist countries have a working class that often is not interested in helping
the poor of the world but only in backing the exploitation of the poorest by their imperialist
bosses. But as Lenin put it, that was the interest of a labour aristocracy and not the whole
proletariat in the imperialist countries. The history of solidarity action between the rich
workers of the West and the poor people of the Third World is really quite rich.
Milanovic also misunderstands the Lenin-Trotsky view of permanent revolution. It was
precisely the development of imperialism and with it the uneven and combined development
of modern global capitalism that led to the theory that a growing proletariat in the neo-
colonial economies could move to power even before the advanced capitalist
workers. Revolutions in poor neo-colonial countries may not trigger revolutions by rich
labour aristocrats in imperialist countries, as the experience of the Russian revolution
suggests. But the accession to state power by the working-class in one or more of the top G7
imperialist countries would certainly trigger movements in the neo-colonial world.
And Milanovic reduces the impact of his own evidence that inequality of income (and
wealth) within the imperialist countries has risen in the last 30 years and is now as high, if not
higher, than in 1870. Thats a pretty Marxist class component of inequality. Back in 2011,
the OECD did a very comprehensive report on income inequality entitled ironically, Divided
we stand. The report concluded that the gap between rich and poor had widened considerably
over the three decades to 2008, when it reached an all-time high. The OECD data were
confirmed by the IMF in its paper last September (Income inequality and fiscal policy) that
found inequality of income has also widened in the same period. And see the recent
devastating evidence of Anthony Atkinson. Using the gini coefficient, Atkinson finds that in
the OECD economies there has been a rise of about 3% pts in the coefficient from about 28 to
31 since the 1980s, or a rise of about 10%.
Milanovic outlines the way out of this huge inequality, short of world-wide proletarian
revolution which wont and cannot happen, according to him. There are three ways in
which global inequality can be reduced. Global inequality may be reduced by high growth
rates of poor countries. This requires an acceleration of income growth of poor countries,
and of course continued high rates of growth of India, China, Indonesia etc. Yet, as I have
argued above, there is little sign that the emerging neo-colonial economies under the boot of
imperialism have any hope of closing the income gap with the imperialist bloc.
The second way is to introduce global redistributive schemes although it is very difficult to
see how that could happen. Currently, development assistance is a little over 100 billion a
year. This is just five times more than the bonus Goldman Sachs paid itself during one crisis
year. So we are not really talking about very much money that the rich countries are willing
to spend to help poor countries. But the willingness to help poor countries is now, with the
ongoing economic crisis in the West, probably reaching its nadir. So no prospect of that if
the existing capitalist states remain in order.
The third way in which global inequality and poverty can be reduced is through migration.
Migration is likely to become one of the key problemsor solutions, depending on ones
viewpointof the 21st century. if you classify countries, by their GDP per capita level, into
four worlds, going from the rich world of advanced nations, with GDPs per capita of over
$20,000 per year, to the poorest, fourth, world with incomes under $1,000 per year, there are
7 points in the world where rich and poor countries are geographically closest to each other,
whether it is because they share a border, or because the sea distance between them is
minimal. You would not be surprised to find out that all these 7 points have mines, boat
patrols, walls and fences to prevent free movement of people. The rich world is fencing itself
in, or fencing others out.
So there we have it. Workers of the world wont or cannot unite. So the only prospect is
mass migration to the rich countries, bringing with it racial and social conflict, growing
militarisation and periodic disasters like Lampedusa, but on a bigger scale. Wonderful.
27 October 2013
More on global wealth inequality, Davos and the Chinese
princelings
Much has been made of the headline from the recent Oxfam report on global wealth
inequality that revealed that the richest 85 people in the world are worth more than the
poorest 3.5 billion.
The Oxfam data are actually taken from Credit Suisses 2013 global wealth report. But again
this report comes from the earlier study by UN economists Tony Shorrocks (a former
university colleague of mine) and Jim Davies using the UN wealth database. I reported on
this study back in October.
Its funny that it takes a report by Oxfam, the anti-poverty charity, to cause a stir about data
that have been available for months. Ezra Klein has pointed out some of the key facts in the
Credit Suisse/UN study taken up by Oxfam. Klein notes that Switzerland leads in average
wealth, with each adult worth, on average, $513,000. Australia is in second place, at
$403,000. The US is in the $250,000-300,000 range. But when you consider median wealth
(the level that most people in a country are on), then Australia leads with $220,000, followed
by Luxembourg, Belgium, France, Italy, the UK, and Japan. The US is way back on this
measure, with a median wealth of just $45,000, so that most Americans are worth less than
most Italians, Belgians and Japanese.
The reason for the difference between the mean average wealth level and the median average
is the extent of inequality in the ownership of assets in a country. And as the UN global
study showed, after accounting for debts, assets of more than $4,000 put a person in the
wealthiest half of world citizens. Assets of more than $75,000 put them in the top 10 percent.
Assets of more than $753,000 put them in the top 1%.
All this talk of inequality of wealth and growing inequalities of income before and after the
Great Recession is getting the great and good and the masters of the universe worried. At
their annual gathering in the luxury ski resort of Davos, starting with the heads of the IMF
and the OECD and going through leading bankers and CEOs of global multinational
companies, there is always a mention of the dangers of extreme inequality in the world. And
President Obama apparently plans to make inequality the theme of his annual address to
Congress. Our rulers are concerned that these inequalities could lead to political and social
upheaval.
And there is continual talk about offshore evasion of tax and the hoarding of secret bank
accounts by the super-rich, yet again revealed in the leaked reports about the Chinese
princelings among others. More than a dozen family members of Chinas top political and
military leaders are making use of offshore companies based in the British Virgin Islands,
leaked financial documents reveal. The brother-in-law of Chinas current president, Xi
Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the
political relations making use of the offshore havens.
This is the latest revelation from Offshore Secrets, a two-year reporting effort led by the
International Consortium of Investigative Journalists (ICIJ), which obtained more than 200
gigabytes of leaked financial data from two companies in the British Virgin Islands, and
shared the information with the Guardian and other international news outlets. The
documents also disclose the central role of major Western banks and accountancy firms,
including PricewaterhouseCoopers, Credit Suisse (yes, them again!) and UBS in the offshore
world, acting as middlemen in the establishing of companies. Between $1tn and $4tn in
untraced assets have left China since 2000, according to estimates.
But nothing will be done and not just in autocratic, one-party state China. The OECD, for
example, has virtually dropped its original aim of coming up with an international agreement
on dealing with these hidden assets and accounts. See Richard Murphys brilliant blog for
this.
When just a few hundred people have more wealth (and with it) more political power than
everybody else combined, you cannot expect our current politicians to do anything.
23 January 2014
Is inequality the cause of capitalist crises?
Is inequality the cause of crises (slumps) under capitalism? Well, the majority of the left
seems to think so.
It remains the dominant view not only of left economists of the Keynesian or post-Keynesian
variety (too many to mention), but also of Marxists like Richard Wolf or Costas Lapavitsas
and even some mainstream Nobel prize winners like Joseph Stiglitz (in his book The price of
inequality) or the current head of the Indian central bank, Raghuram Rajan (as in his book,
Faultlines). And there have been a host of books arguing that inequality is the cause of all
our problems The Spirit Level by Kate Pickett and Richard Wilkinson being one thats very
popular. The varied views on this issue were summed up in a compendium, Income
inequality as a cause of the Great Recession.
But what has really excited the inequality proponents is a new paper by the some IMF
economists who purport to show that the sharp rise in inequality of income and wealth in
most mature capitalist economies since the 1980s is not only a bad moral thing, its bad
economics too. The IMF paper, authored by Jonathan Ostry, deputy head of the IMFs
research department, and the economists Andrew Berg and Charalambos Tsangarides, found
not only that inequality is bad for economic growth but that redistribution of wealth does
little to harm it. Thus it refutes the trickle-down theory on growth and inequality
propounded by neoclassical apologists for capitalism that a free market would speed up
economic growth and thus everybody would gain. As the rich prospered, their gains would
trickle down to the less rich through more jobs, more spending by the rich etc. The IMF
paper concluded: It would be a mistake to focus on growth and let inequality take care of
itself, not only because inequality may be ethically undesirable but also because the resulting
growth may be low and unsustainable,
This is not a new conclusion because the two eminent economists on inequality in capitalist
economies, Emmanuel Saez and Thomas Piketty explained: countries that [have] made
large cuts in top tax rates, such as the United Kingdom or the United States, have not grown
significantly faster than countries that did not, such as Germany or Denmark we have seen
decades of increasing income concentration that have brought about mediocre growth since
the 1970s.
Leftist Democrat, Robert Reich wrote a book, Aftershock, which also lays the blame for
crises at the door of inequality. He blogs regularly against capitalist excesses and Republican
apologia for capitalism adopted the same conclusion as The Spirit Level authors: The rich
do better with a smaller share of a rapidly-growing economy than they do with a large share
of an economy thats barely growing at allHigher taxes on the wealthy to finance public
investments improve future productivity All of us gain from these investments, including the
wealthy. Broadly-shared prosperity isnt just compatible with a healthy economy that benefits
everyone its essential to it. That isnt crazy left-wing talk. Its common sense. And it is
shared by the great majority of people.
And behind this conclusion is a theoretical analysis that the Great Recession was ultimately
the result of rising inequality in the US and elsewhere. The argument goes that the great
financial crisis was caused by debt mostly in the private sector. As wages were held down
in the US, households were forced to borrow more to get mortgages to buy homes or loans to
buy cars and maintain their standard of living. They were encouraged to do so by reckless
lending from banks even to sub-prime borrowers. And as we know, eventually the sheer
weight of this debt could not be supported by rising home prices or by the chicken legs of
average incomes and the whole house of cards eventually came tumbling down.
The credit crunch, the banking collapse and the Great Recession had nothing to do with the
classic Marxist explanation of the downward pressure on profitability. It was down to the
rapacious speculative lending of the too-big-to-fail banks the explanation that Marxist
Costas Lapavitsas has expounded in his new book (Profiting without producing) see my
post and Tony Norfields devastating review of Lapavitsas book.
The argument that inequality causes capitalist crises has been developed more theoretically
by leading post-Keynesian economist Engelbert Stockhammer from Kingston University, UK
in a new paper in the Cambridge Journal of Economics entitled Rising inequality as a cause
of the present crisis.
For those who dont know, post-Keynesian economists are those who reckon that Keynes
developed a really radical analysis of capitalism. They rely on the work of Michel Kalecki, a
Marxist economist who developed a Keynesaan-style analysis that ignored Marxs law of
value and profitability. The post Keynesians look for the cause of crises under capitalism in a
lack of demand arising from a squeeze on wages and a lack of investment.
Stockhammer argues that the economic imbalances that caused the present crisis should be
thought of as the outcome of the interaction of the effects of financial deregulation with the
macroeconomic effects of rising inequality. In this sense, rising inequality should be regarded
as a root cause of the present crisis. Rising inequality creates a downwards pressure on
aggregate demand since poorer income groups have high marginal propensities to consume.
Higher inequality has led to higher household debt as working-class families have tried to
keep up with social consumption norms despite stagnating or falling real wages, while rising
inequality has increased the propensity to speculate as richer households tend to hold riskier
financial assets than other groups.
For Stockhammer, capitalist economies are either wage-led or profit-led. A wage-led
demand regime is one where an increase in the wage share leads to higher aggregate demand,
which will occur if the positive consumption effect is larger than the negative investment
effect. A profit-led demand regime is one where an increase the wage share has a negative
effect on aggregate demand. The post-Keynesians reckon that capitalist economies are wage-
led. So when there is a decline in the wage share as there has been since the 1980s, it reduces
aggregate demand in a capitalist economy and thus eventually causes a slump. The banking
sector increases the risk of this with its speculative activities
The problem I have with this post-Keynesian hypothesis is manifold. First, surely, no one is
claiming the simultaneous international slump of 1974-5 was due to a lack of wages or rising
debt or banking speculation? Or that the deep global slump of 1980-2 can be laid at the door
of low wages or household debt? Every Marxist economist reckons that the cause of those
slumps can be found in the dramatic decline in the profitability of capital from the heights of
the mid-1960s; and even mainstream economists look for explanations in rising oil prices or
technological slowdown. Nobody reckons the cause was low wages or rising inequality.
I suppose Stockhammer would say that in the 1970s, capitalist economies were profit-led
but now they are wage-led; so each crisis has a different cause. As the title of his paper
says inequality as the cause of the present crisis. But how did a profit-led capitalist
economy become a wage-led one? Yes, wages were held down and profits rose. But
why? Surely the answer lies is the attempts of the strategists of capital to raise the rate of
exploitation as a counteracting factor to the fall in profitability the classic Marxist
explanation. Rising inequality is really the product of the successful attempt to raise
profitability during the 1980s and 1990s by raising the rate of surplus value through
unemployment, demolishing labour rights, shackling the trade unions, privatising state assets,
freeing up product markets, deregulating industry, reducing corporate tax etc in other
words, the neo-liberal agenda. As Maria Ivanova has pointed out, rising inequality was really
a side effect of financialisation.
Indeed, the empirical evidence for a causal connection between inequality and crises remains
questionable. Michael Bordo and Christopher Meissner from the Bank of International
Settlements analysed the data and concluded that inequality does not seem to be the reason
for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily
lead to credit booms. Our paper looks for empirical evidence for the recent
Kumhof/Rancire hypothesis attributing the US subprime mortgage crisis to rising inequality,
redistributive government housing policy and a credit boom. Using data from a panel of 14
countries for over 120 years, we find strong evidence linking credit booms to banking crises,
but no evidence that rising income concentration was a significant determinant of credit
booms. Narrative evidence on the US experience in the 1920s, and that of other countries,
casts further doubt on the role of rising inequality.
Edward Glaesar also points to research on the US economy that home prices in various parts
of the US did not always increase where there was the most income inequality. That calls into
question the claim that income inequality was inflating the housing bubble. And Glaesar
refers to Atkinson on this:Professors Atkinson and Morellis international data also suggest
little regular connection between inequality and crises. Looking at 25 countries over a
century, they find ten cases where crises were preceded by rising inequality and seven where
crises were preceded by declining inequality. Inequality was higher in two of the six cases
where a crisis is identified, which is exactly the same proportion as among the 15 cases where
no crisis is identified.
As I have mentioned above, French economist Thomas Piketty is one of the leading experts
on the rise in inequality of income and wealth in the major economies. His magisterial new
book, Capital in the 21
st
century, describes the huge rise in the share of income and wealth
held by the top 1%.
But actually, Pikettys explanation for this does not fit in with the post-Keynesian inequality
theory. Piketty shows that the main reason for the huge increase in the incomes and wealth of
the top 1% is not higher incomes from wages or work as such, but huge increases in capital
income, namely rising dividends from shares, capital gains from buying and selling shares,
rents from property and capital gains from buying and selling property and interest from
loans and bond holdings etc. In other words, rising inequality is the result of rising
exploitation of labours creation of value that has been appropriated by the top bankers,
corporate chief executives and the shareholders of capital. Rising inequality is a product of
capitalist exploitation.
In his book, Piketty promotes a bastardised neoclassical version of Marxs profitability law
by suggesting that this rise in capital income has diminishing returns and will eventually push
capitalism into stagnation. Thats because the owners of capital will consume more and more
of a declining rate of growth so that investment and technology will stagnate. So capitalism
will have to reduce inequality to survive. This ought to appeal to the inequality proponents
because it suggests that reducing inequality is in the interests of capitalism itself. Blogger
Steve Roth concludes that Keynes had found the answer to the pessimism of
Piketty. Keyness great contribution was to save capitalism from the capitalists by
explaining that with some judicious government policy and more equality of incomes,
capitalism would perform better and all would be well.
There is a very interesting interview with Thomas Piketty at the New York Times blog in
which he clarifies his arguments on inequality and growth. In particular, he differs from
Marxs view that there is a tendency for the rate of return on capital to decline over
time. Instead, he reckons that the return on capital will stay high and outstrip growth and this
cause even more inequality. rates of return on capital can be 4 to 5 percent over centuries,
or even higher for risky assets and high wealth portfolios. Contrarily to what Karl Marx and
other believed, there is no natural reason why rates of return should fall in the long run.
According to Forbess global billionaires list, very top wealth holders have risen at 6 to 7
percent per year over the 1987-2013 period, i.e. more than three times faster than per capita
wealth and income at the world level. Wealth concentration will probably stabilize at some
point, but this can happen at a very high level.
And it could all end in tears: The experience of Europe in the early 20th century does not
lead to optimism: The democratic systems did not respond peacefully to rising inequality,
which was halted only by wars and violent social conflicts. But hopefully we can do better
next time. At the end of the day, it is in the common interest to find peaceful solutions.
Otherwise there is a serious risk that growing parts of the public opinion turn against
globalization.
The reformist critics of Piketty make the point that a majority, of corporate profit hinges on
rules and regulations that could in principle be altered. After all progressive change
advanced by getting some segment of capitalists to side with progressives against retrograde
sectors. In the current context this likely means getting large segments of the business
community to beat up on financial capital. Dean Baker, who is a regular speaker at trade
union seminars in the UK and the US and is seen as a leading exponent of the alternative to
neoliberal policies of austerity by left leaders, reckons that Piketty gets this wrong in the
same way as Marx did. Baker says: By changing our institutions, laws, and regulations
the rules of the capitalist game we can head off that seemingly inevitable downward
spiral.
There are so many objections to this line of thinking that it is difficult to know where to
start. But lets go back to the IMF paper. It argued that inequality could be damaging the
capitalist economy and moreover more equality would not worsen things. But the papers
evidence did not show that more equality under capitalism would speed up economic growth
or even make the average household better off. You see, redistributing the income captured
by the owners of capital from the sellers of labour power through more taxes and/or higher
benefit etc may make little difference to improving investment, getting more jobs or
developing new technology.
And would it in any way start to deal with the impending disaster that is global warming as
capitalism accumulates rapaciously without any regard for the planets resources and
viability? Programmes of redistribution do little for this. And what if an economy is made
more equal? Would it stop future slumps under capitalism or future Great Recessions. More
equal economies in the past did not avoid these slumps.
Then there is the political issue: what on earth would make the top 1% and the very rich
owners of capital agree to reduce their gains in order to get a more equal and successful
economy? Stockhammer says that a broad consensus exists that financial reform is
necessary to avert similar crises in the future (even if little has yet changed in the regulation
of financial markets). The analysis here highlights that income distribution will have to be a
central consideration in policies dealing with domestic and international macroeconomic
stabilisation. The avoidance of crises similar to the recent one and the generation of stable
growth regimes will involve simultaneous consideration of income and wealth distribution,
financial regulation and aggregate demand But what political chance is there of that?
As arch-Keynesian economist Simon Wren-Lewis recognised on his blog: reversing
inequality directly threatens the interests of most of those who wield political influence, so it
is much less clear how you overcome this political hurdle to reverse the growth in
inequality. For example, what chance is there, short of revolution, that Greek capitalists,
desperate to raise profitability and reduce the costs of welfare and wages, would see the light
and save themselves by reducing, rather than increasing inequality? More inequality is a
rational response to capitalist crisis.
But it is not just the political obstacle that makes the inequality theory the wrong way to
approach a critique of capitalism. It is not a coherent explanation. It appears to apply to just
the current crisis and not to previous ones. It appears to apply to just some capitalist
economies, like the US and the UK and not to Europe or Japan, where inequality is less but
the global crisis is worse.
And if Marx is right, then capitalism is stuck with a low and/or falling rate of return on
capital over time, so crises under capitalism will reoccur even if inequality is reduced. So
maybe the inequality theorists need to look elsewhere for the cause of capitalist crises and
look at the ownership of production, not the distribution of the value created.
I ask the question to the proponents of inequality: do they think that redistributing income or
wealth is sufficient to put capitalism on the road to growth without catastrophic slumps? Or
do they agree that only replacing the capitalist mode of production through the expropriation
of the owners of capital and the establishment of a planned economy based on ownership in
common can do the trick?
I think I know their answers.
11 March 2014
Inequality and Britains oligarchs
In a recent post, I argued that the recent rise in the inequality of incomes and wealth in some
major advanced capitalist economies, like the US and the UK, was not the cause of crises
under capitalism, and in particular, the Great Recession.
A correlation between rising inequality, slower growth and economic recession does not
prove causation. Indeed, I argued that rising inequality has been a consequence of capitalism
trying to avoid slumps from declining profitability by trying to squeeze more out of the
workforce in increased surplus value during the neoliberal era.
The British think-tank Resolution Foundation published a study by Paolo Lucchino and
Salvatore Morelli that looked at all the empirical evidence on this issue. They concluded that
efforts to validate empirically the posited relationship between inequality and crisis have so
far been inconclusive. Morelli had worked with the eminent inequality economist, Sir
Anthony Atkinson on a study of 25 countries over a long period and again they did not find
conclusive evidence supporting the hypothesis that a growing level of economic disparities
leads to higher macroeconomic instability.
But that does not mean the grotesque levels of inequality of wealth and income that have
been reached can be ignored on the contrary, these inequalities exhibit the rottenness of a
mode of production that concentrates wealth in the hands of a very few while the billions
globally are poor in every sense of the word. And being poor is bad for you. The ever-
increasing gulf between rich and poor in Britain is costing the economy more than 39bn a
year, according to a report by the Equality Trust think tank.
The effects of inequality can be measured in financial terms through its impact on health,
wellbeing and crime rates. The report puts the annual cost of inequality to the UK at 622 for
every man, woman and child, with a total of 12.5bn lost through reduced healthy life
expectancy, 25bn lost through poorer mental health, 1bn lost through increased
imprisonment figures and 678m lost through an increase in murders. But it points to the
incalculable extra benefits of a higher level of community cohesion, trust and social mobility
associated with less unequal countries.
The wider economic cost of mental illness in England alone is estimated to be 105.2bn each
year, which includes direct costs of services, lost productivity at work and reduced quality of
life. The cost of poor mental health to businesses is just over 1,000 per employee per year,
or almost 26bn across the UK economy. In 2008-09, the NHS spent 10.8% of its annual
secondary healthcare budget on mental health services, which amounted to 10.4bn. Service
costs, which include the NHS, social costs, and informal care costs, mounted to 22.5bn in
2007 in England. In a more equal UK, people could expect an extra eight and a half months
of healthy life expectancy while rates of poor mental health could improve by 5%, valued at
24bn.
This sore in the side of humanity is getting worse, according to Thomas Piketty, one the
worlds experts on global inequality. Piketty recently commented: According to Forbess
global billionaires list, very top wealth holders have risen at 6 to 7 percent per year over the
1987-2013 period, i.e. more than three times faster than per capita wealth and income at the
world level. Wealth concentration will probably stabilize at some point, but this can happen
at a very high level.
I already reported on the Oxfam report that found the wealth of 85 global billionaires is
equivalent to that of half the worlds population or 3.5 billion people. These figures came
from the extensive analysis of the UN database by economists Anthony Shorrocks and Jim
Davies, who found that the top 10% wealth holders had 86% of all household wealth globally
while the bottom 41% had just 1%.
Now, as the UK government prepares to present an annual budget designed to cut welfare
benefits further for the working poor and squeeze real incomes for the average earner, Oxfam
reports the countrys five richest families now own more wealth than the poorest 20% of the
population. In its report, A Tale of Two Britains, Oxfam said the poorest 20% in the UK had
wealth totalling 28.1bn an average of just 2,230 each. The latest rich list from Forbes
magazine showed that the five top UK entries were the family of the Duke of Westminster,
David and Simon Reuben, the Hinduja brothers, the Cadogan family, and Sports Direct retail
boss Mike Ashley between them had property, savings and other assets worth
28.2bn. These are Britains own top oligarchs (aside from the Russian ones that live in
London).
Indeed, the 100 wealthiest people in the UK have as much money as the poorest 18 million
30% of all people. The total wealth of these oligarchs rose 25bn last year to 257bn to
surpass the 225bn held by the poorest 30% of British households. And remember household
wealth consists of the ownership of a house or flat, pension fund and other possessions like
cars. Total household wealth in the UK is 10trn, with the top 10% having 967bn and the
bottom 10% just 13bn. The bottom 10% really have no wealth at all except old cars and a
few personal possessions.
Imagine a room with 100 hundred people. 90 people are so short they can hardly reach the
door handle to get out. Another nine people are only high enough to get a drink from the
table. But one person is so huge that his or her head hits the ceiling and bursts through
it. Such is the scale of inequality and concentration of wealth. Even the top 10% of wealth
holders really own only their house that they live in along with maybe a reasonable pension.
Its the top 1% or even the top 0.1% who really have wealth in stocks, bonds and commercial
property and businesses etc.
You see what really matters is not personal wealth but the ownership of the means of
production. That gives you power as well as wealth this is what oligarchs have. What is
decisive for capitalism is surplus value (profit, interest and rent), not wage income or
spending. Control of that surplus is key. The main feature of the last 100 years of capitalism
has not been growing inequality of income. The main feature has been a growing
concentration and centralisation of wealth, not income. And it has been in the wealth held in
means of production and not just household wealth.
I have mentioned this before but it is worth repeating. Three systems theorists at the Swiss
Federal Institute of Technology in Zurich have taken a database listing 37 million companies
and investors worldwide and analysed all 43,060 transnational corporations and share
ownerships linking them. They have a built a model of who owns what and what their
revenues are, mapping out the whole edifice of economic power. They discovered that a
dominant core of 147 firms through interlocking stakes in others together control 40% of the
wealth in the network. A total of 737 companies control 80% of it all. This is the inequality
that matters for the functioning of capitalism the concentrated power of capital.
Britains oligarchs are part of this nexus.
18 March 2014
How much inequality?
Some inequality of income and wealth is inevitable, if not necessary. If an economy is to
function well, people need incentives to work hard and innovate.The pertinent question is
not whether income and wealth inequality is good or bad. It is at what point do these
inequalities become so great as to pose a serious threat to our economy, our ideal of equal
opportunity and our democracy.
So says Robert Reich. Reich is a progressive. He is a left Democrat that has railed against
the apologetics and greed politics of the Republicans and the extreme bigotry of the Tea party
faction. He was in Clintons cabinet as Labor Secretary and he wrote a book, After Shock,
arguing that inequality was the cause of crises in capitalism..
Now he is telling us that an economy needs some inequality to work. Really? Do we need
inequality to provide incentives for people to work hard and innovate? Reich is talking
about inequality of income here, I suppose. But think of this.
A doctor in the US or the UK earns probably at least five or six times the income of a garbage
collector. Most garbage collectors do a sterling and steady job clearing our rubbish in the
early mornings and street collectors all day long without screaming that they need a salary
like a doctor before they would do it. They would like one, Im sure, but if garbage collectors
got the same income as a doctor, would that mean doctors would stop doctoring? Maybe
some would switch to garbage collection and get up at 5am and work in mucky conditions in
all weathers until early afternoon rather and look at peoples bodies, check scans, do
operations and work night shifts in hospitals. But most would not. Doctors become doctors
because on the whole they want to do it and think they are doing something useful. Of course,
not all people do it for that reason. But I doubt that the inequality of income between doctors
and garbage collectors is necessary for either to do their jobs.
But what about the incentive to innovate? Surely, without the prospect of making huge gains
or profits from an invention or a new piece of technology or a new drug, these things would
not be discovered or developed? Well, the evidence is the opposite. Most great inventions did
not benefit the direct inventor, but only the capitalist company that developed the invention.
And most great advances in technology, social welfare, productivity and health were found
and developed by state funding. Take the worldwide web or the internet: the products of state
funding of defence and the space race.
But what about Apple, Microsoft etc and the great entrepreneurs of the recent hi-tech
revolution? Surely, Bill Gates, Steve Jobs etc would not have applied their unique skills
without the incentive of eventually making billions? Well, a recent study by Mariana
Mazzucato shows it has been the state that has sparked all that innovation. She comments
the real story behind Silicon Valley (at the centre of my new book The Entrepreneurial
State: debunking private vs. public sector myths ) is not the story of the state getting out of
the way so that risk-taking venture capitalists and garage tinkerers could do their thing.
From the internet to nanotech, most of the fundamental advances in both basic research but
also downstream commercialisation were funded by government, with businesses moving
into the game only once the returns were in clear sight. All the radical technologies behind
the iPhone were government-funded: the internet, GPS, touchscreen display, and even the
voice-activated Siri personal assistant.
She goes on: Apple initially received $500,000 from the Small Business Investment
Corporation, a public financing arm of the government. Likewise, Compaq and Intel received
early-stage grants, not from venture capital, but via public capital through the Small
Business Innovation Research program (SBIR). As venture capital has become increasingly
short-termist, SBIR loans and grants have had to increase their role in early-stage seed
financing the US Department of Health and the Department of Energy. Indeed, it turns out
that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants
or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over
the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in
2012 alone. Although venture capital entered the biotech industry in the late 1980s and early
1990s, all the heavy investments in this sector occurred in the 1950s through to the 1970s.
Mazzucato shows that none of these enterpreneurs would have done what they did without
state aid to kick them off. The taxpayer enabled them to become uber rich. Indeed, most
entepreneurs would do what they do anyway and they mostly fail. A 1997 study in the
Journal of Business Venturing found that entrepreneurs are overconfident about their ability
to prevent bad outcomes. Theyre also overconfident about the prospects of their business. A
1988 study in the same journal of some three thousand entrepreneurs found that eighty-one
per cent thought their businesses had at least a seventy-per-cent chance of success, and a third
thought there was no chance they would failnumbers that bear no relation to reality.
Mazzucato makes the point that private investment though so-called venture capital or private
equity firms is more damaging than beneficial to society. Venture capitalists entered 20
years after the state funded the most high-risk and capital-intensive parts of the industry. And
their desire to reap returns within three to five years has also done quite a bit of damage to
the industry. Today it is filled with product-less companies that produce little for the economy
beyond the returns earned by private equity in the exit stage.
As a result of the 2010 Dodd-Frank Reform and Consumer Protection Act, US private equity
firms must now register with the Securities and Exchange Commission (SEC). This, in turn,
allows the SEC to examine the behaviour of private equity firms on behalf of investors. The
SEC just completed an initial wave of 150 firms and what it found is shocking. Half of the
SECs exams find corruption in the way fees and expenses are handled. The business model
of private equity, which manages almost $3.5 trillion dollars of our nations assets, has
unique conflicts of interest built into the structure. Private equity firms use their clients
money to do leveraged buyouts of companies. Since this gives them major operating control
of both the investment and a pool of others investment money, there are significant
opportunities to shift costs and otherwise skim off their investors.
One scam is to fire employees of the private equity firm and rehire them immediately as
consultants. The investors are responsible for consultants salaries, where private equity
employees are paid out of their own pockets. Another is taking what most private equity
investors believe to be part of management fees, things like legal and compliance costs, and
billing their investors for them without the investors properly knowing it. A third is private
equity firms lying about the valuation methods they use to tell investors about the returns
they make each year. All of these are ways for private equity firms to take money from their
investors for themselves so much for innovation through private enterprise.
It is not equality either of income or wealth that should be the benchmark for delivering a
better society for all. The issue is not equality as such but the mode of production in an
economy and its social control. The benchmark is not an equal society but a classless one.
That means a mode of production that is owned, controlled and planned in common: a
social formation where in common, each contributes to production according to ability and
in common, each receives in distribution according to need.
In such a society would a garbage collector get the same living as a doctor? It depends on the
number of dependents, issues of health, location etc. There would be inequality because
distribution of wealth would be based on need. In such a society there is plenty of incentive
to work hard and to innovate if we know that all will benefit through less toil, better
health, education and living conditions etc.
Would it not be better for the people in common to decide whether how much society, a
government and an economy invests in fossil-fuel or nuclear power over renewables, whether
we build more roads or more railtrack etc? These decisions are not in the power of people
now either locally, nationally and definitely not internationally. They are decided by big
multinationals in consultation with the governments that they control and influence. And they
are decided on the basis of profits not need.
Reich reckons that we need capitalism, but we just need to make it less unequal and less
excessive. Such is also the position of the new economic star of the hour, Thomas Piketty. As
Reich puts it: Time and again, when the situation demands it, America has saved capitalism
from its own excesses. We put ideology aside and do whats necessary. No other nation is as
fundamentally pragmatic. We will reverse the trend toward widening inequality eventually.
We have no choice. But we must organize and mobilize in order that it be done.
In his book, Reich says: It doesnt mean socialism. We dont need socialism. We need a
capitalism that works for the vast majority. Capitalism that works for the vast majority? A
contradiction in terms. Its the replacement of the capitalist mode of production and class
society that is needed, not the tempering of capitalist excesses even if that was possible.
14 May 2014
Unpicking Piketty
Once upon a time, there was an obscure French mainstream economist who collaborated with
others (Emmanuel Saez, Anthony Atkinson and Gabriel Zucman) on various studies of
inequality of income and wealth in modern economies like the US. After some years of
research, this Frenchman developed a theory that the inequality of wealth in capitalist
economies tends to increase to the point where it could cause major social instability. This
tendency is the central contradiction of capitalism.
That economist is Thomas Piketty. When he published his magnum opus of 677 pages in
France last October, it was greeted pretty much with silence and even cynicism, apart from a
few French economists. But then it was translated into English and published in America.
Everything changed. It became not just the best-selling economics book, but the top non-
fiction book of the year, ahead of cook books by famous chefs and travel books by
celebrities.
There has been a profusion of reviews, debates and interviews with the man of the moment.
The book has been greeted rapturously by such as Branko Milanovi, the expert on the
inequality of wealth in the world, who called it one of the watershed books in economic
thinking, and by the guru of liberal Keynesian economics, Paul Krugman, who, writing in
the New York Review of Books, said it was truly superb. Martin Wolf of the Financial
Times called it extraordinarily important and awesome. John Cassidy, in the New Yorker,
said: Piketty has written a book that nobody interested in a defining issue of our era can
afford to ignore.
The title is a clear allusion to Karl Marxs Capital, published in 1867. Piketty seems to
suggest that he is updating (and indeed correcting) Marxs analysis of 19th century capitalism
for the 21st century. But Piketty is no Marxist.
He was brought up in Clichy, a mainly working class district of Paris. His parents were both
militant members of Lutte Ouvrire (Workers Struggle) - a Trotskyist party, which still has a
significant following in France. On a trip with a close friend to Romania in early 1990, after
the collapse of the Soviet empire, he had a revelation: This sort of vaccinated me for life
against lazy, anti-capitalist rhetoric, because when you see these empty shops, you see these
people queuing for nothing in the street, he said, it became clear to me that we need private
property and market institutions, not just for economic efficiency, but for personal freedom.
Piketty rejected what he saw as Marxism and opted for social reform. Indeed, he was an
adviser to the Blairite, Sgolne Royal, when she was the Socialist Party candidate in the
2007 presidential elections.
According to Piketty, Marx needs correcting because, despite his clever intuition that private
capital accumulation could lead to the concentration of wealth in ever fewer hands (p1), he
got the whole mechanism for this development totally wrong. Marx thought that capitalism
would have an apocalyptic end, but, thanks to modern economic growth and the diffusion
of knowledge, that has been avoided. But there is still the problem of the deep structures of
capital inequality.
Piketty goes on to inform us that the basis of Marxs prediction of an apocalyptic end to
capitalism was either the rate of return on capital would steadily diminish (thereby killing
the engine of accumulation and leading to violent conflict among capitalists) or capitals
share of national income would increase indefinitely until the workers went into revolt (p9).
Marx reckoned that wages would be stagnant or falling. This was wrong, because like his
predecessors, Marx totally neglected the possibility of durable technological progress and
steadily increasing productivity, which is a force that can to some extent serve as a
counterweight to the process of accumulation and concentration of capital (p10).
Unfortunately, you see, Marx failed to use the stats available in the 19th century and
devoted little thought to how a non-capitalist society might work. If he had done so, he
might have sorted out his mistakes.
Already, it will be clear to a student of Marxs analysis of a capitalist economy that Piketty is
unaware that Marx saw the drive to raise the productivity of labour through technological
advance as the flipside of the accumulation of capital. Instead, Piketty accepts the distortion
by mainstream economics that Marxs theory is based on an iron law of wages and a zero
rise in productivity: Marxs theory implicitly relies on a strict assumption of zero
productivity growth over the long run (p27).
It is not surprising that Piketty can write in such a way when we learn that he admits he has
never read the very book that carries the same title as his own: I never managed really to
read it. I mean, I dont know if youve tried to read it. Have you tried? The Communist
manifesto of 1848 is a short and strong piece. Das Kapital, I think, is very difficult to read
and for me it was not very influential ... The big difference is that my book is a book about
the history of capital. In the books of Marx theres no data.
Again, the view that Marxs Capital contains no data to back up his theory of the law of
value and exploitation and the laws of motion of capitalism shows Pikettys ignorance of the
work whose name he has adopted for his own book.
Pikettys book is bursting with data - and, in my view, this is all to the good. Its merit is that
it compiles evidence and tries to develop a theory and laws from there. For example, he says:
All social scientists and all citizens must take a serious interest in money, its measurement,
the facts surrounding it and its history. Those who have a lot of it never fail to defend their
interest. Refusing to deal with numbers rarely serves the interest of the least well-off (p577).
However, compiling lots of data can lead to errors of measurement, difficulties in
interpretation and bias in analysis. And this is exactly where recent criticism of Pikettys
book has concentrated. The FTs economics editor, Chris Giles, has gone through the wealth
of data used. He found that Piketty had made simple mistakes in transcribing some of it. He
also claimed that the author had made arbitrary changes in some of his estimated data
without explanation. Piketty cherry-picked his sources, using different measures in
different countries at different times. Giles made new calculations with other data sources and
found that there is no obvious upward trend in inequality of wealth in Europe.
Piketty has vigorously defended his work from Giles critique and I have sympathy with him.
Data are always inadequate and often inconsistent and it is also easy to make simple
mistakes. But it is better to try and provide evidence and, above all, release sources and your
workings for all your data, so that others can check and - even better - try and replicate your
results. That is the scientific method. As Piketty says in his reply to Giles, at least he has put
all his data and workings online for people to consider. And that is more than we can say
about the bulk of mainstream economics, which either offer no evidence to back up
theoretical claims or fail to provide any workings, or both. He has been more transparent than
most with his evidence. Piketty also argues that more recent work on inequality of wealth by
his colleagues, Saez and Zucman, using different measurement methods, confirm and
reinforce my findings. So he reckons that any mistakes or biases in his own data will not
have much of an impact on the general findings.
In my view, there are more important deficiencies in Pikettys work than inconsistencies in
the data. For one, there is the key difference between wealth and capital that he ignores. For
Piketty, Capital is defined as the sum total of non-human assets that can be owned and
exchanged on some market. Capital includes all forms of real property (including residential
real estate) as well as financial and professional capital (plants, infrastructure, machinery,
patents and so on) used by firms and government agencies (p46). In effect, for Piketty,
capital and wealth (mainly personal wealth) are the same: To simplify the test, I use the
words capital and wealth interchangeably, as if they were perfectly synonymous (p47).
This is clearly different from capital as defined by Marx. For him, capital is a social relation
specific to the capitalist mode of production. Under the capitalist mode of production, things
and services that people need are produced simply as a money-making exercise, but this
money comes from value created by the exertion of labour-power, with the surplus over and
above the living needs of labour appropriated by the owners of capital. Thus the circuit of
capital, for Marx, is M-CPC
1
to M
1
: that is, capitalists have money capital (M), which is
invested in commodities (C), means of production and raw materials, which are used by
labour in production (P) to produce commodities (C
1
) for sale on the market for more money
(M
1
). Capital (M) expands value to accumulate more capital (M
1
). But only labour creates
that new value.
For Piketty, this process of exploitation of labour and its social relations are ignored. Capital
is wealth and wealth is capital. But wealth existed before the capitalist mode of production
became dominant in the world and is not specific to capitalism. Indeed, wealth is really a
measure of accumulated assets, tangible and financial. So for Piketty the capital process is
MM
1
. Money accumulates more money (or wealth). It does not matter how and so there is
no need to define capital as different from wealth.
This is what Marx called vulgar economics: ie, failing to see the underlying process of
accumulation and just observing the appearance - indeed seeing things from the view of the
holder of wealth alone. In the book, Piketty refers us to the novels of Jane Austen and Honor
de Balzac, where all the characters who are holders of wealth live off the income from it
(p53). All they were interested in was the return on that wealth, not how it was generated
(whether by slaves, wage labour, land rents or interest on government debt).
Piketty specifically rules out the approach of the classical economists and Marx: Some
definitions of capital hold that the term should apply only to those components of wealth
directly employed in the production process this limitation strikes me as neither desirable
nor practical (p48). So I ruled out the idea of excluding residential real estate from capital
on the grounds that it is unproductive, unlike productive capital used by firms and
governments the truth is that all these forms of wealth are useful and productive and
reflect capitals two major economic functions.
Well, residential property is obviously useful to the user - it has use-value, as Marx would
say. But this form of wealth is not productive of new value (or profit), unless it is owned by a
real estate company which rents it out as a business. Nevertheless, Piketty concocts a way for
this wealth to deliver income: residential real estate can be seen as a capital asset that yields
housing services, whose value is measured by their rental equivalent. Does this matter? Oh
yes.
By including residential property, net financial assets and land in his definition of capital,
Piketty reaches opposite conclusions from Marx on the return on capital, or what Marx called
the rate of profit. And that matters. For a start, it means that Piketty is interested in the
distribution of wealth and not on how it is produced. For him, the former provides the key
contradiction of capitalism, while for Marx that contradiction lies in the latter process. For
Marx, private ownership of the means of production for profit is the major fault line in
modern society; for Piketty, private wealth is accepted forever; it is just too unequal.
This brings us to what Piketty designates grandiosely as his first fundamental law of
capitalism (p52). Capitals share of national income () is equal to the capital income ratio
() in an economy, multiplied by the net rate of return on capital (r). So inequality of wealth,
as expressed by capitals share of income, will rise if the rate of return on the existing wealth
ratio (the capital income ratio) rises. Alternatively, the wealth ratio will rise if capitals share
of national income rises.
According to Piketty, his law is better than Marxs law of the tendency of the rate of profit to
fall. As he says, the rate of return on capital is a central concept in many economic theories.
In particular, Marxist analysis emphasises the falling rate of profit - a historical prediction
that has turned out to be quite wrong, although it does contain an interesting intuition (p52).
Marx was wrong because he reckoned that r would fall over time and this caused recurrent
crises. Instead, Piketty tells us that actually r does not fall over time, but rises or at least stays
pretty steady. So the issue for 21st century capitalism is: if r (the rate of return on capital) is
greater than g (net real national income growth rate), then capitals share of income will grow
and the global capital/income ratio will eventually reach socially unacceptable levels.
The central crisis for capitalism is thus a distributional one. When the net rate of return on
capital outstrips the growth of net national income - ie, when r is greater than g - the
inequality r>g in one sense implies that the past tends to devour the future: wealth originating
in the past automatically grows more rapidly even without labour than wealth stemming from
work which can be saved. So even an apparently small gap between the return on capital
and the rate of growth can in the long run have powerful and destabilising effects on the
structure and dynamics of social inequality (p77).
There is little or nothing in Pikettys book about booms and slumps, or about the great
depression, the great recession or other recessions, except the comment that the great
recession was a financial panic (as claimed by Ben Bernanke) and was not as bad as the
great depression because of the intervention of the central banks and the state. There is
nothing about the waste of production, jobs and incomes caused by recurrent crises in the
capitalist mode of production.
Instead, Piketty adopts the usual neoclassical explanation that these events, like wars, were
exogenous shocks to the long-term expansion of productivity and economic growth under
capitalism (p170). Crises are just short-term shocks and we can revert to his fundamental law
instead, as it allows us to understand the potential equilibrium level toward which the capital
income ratio tends in the long run when the effects of shocks and crises have dissipated.
Keynes might retort: We are all dead in the long run.
For Piketty, r>g is a tendency that is sometimes overcome by counter-tendencies, or a
divergence sometimes countered by convergence. For example, between 1913 and 1950, r
fell sharply and so in the period after the war g was higher than r and inequality fell. The
other side of the coin is Pikettys forecast that r will exceed g for the rest of this century and
thus increase capitals share of income and inequality.
This is because global growth will slow. Output per head has increased on average by 1.6% a
year since 1700 - half due to population growth and half to productivity growth. Growth rates
of 3%-4% only existed for brief periods. Also population growth is slowing from 1.3% a
year to 0.4% by the 2030s and there is no historical example of a country at the world
technological frontier whose growth in per capita output exceeded 1.5% over a lengthy period
of time (p93). The 20th century saw emerging economies like Japan, Korea, China and India
catch up with slowing advanced economies and so keep the global rate high by historic
standards. But in the 21st century there are no catch-up economies of any size left (p97).
Economies have reached the end of the technology frontier. In contrast, Piketty claims that
his r is pretty much steady around 4%-5% (p55).
But is Pikettys r steady and likely to stay so? Part of it is made up of returns on financial
capital (stocks and bonds). The long-term return on interest-bearing and dividend-bearing
financial capital has been falling, not rising, since the 1930s. On current trends, it is heading
for zero by 2050 - not over 4%, as Piketty projects. But then, Pikettys r also incorporates a
return from property, synthetically generated as equivalent rents from housing services.
This assumes that if you own your house you are making an income from it, even though you
just live in it!
Without that, Pikettys r would be falling, not rising. That is because the share of housing in
capital in Pikettys data was more than half by 2010 compared to much less than half in
1940s. This is what affects r. The overall value of r has not changed because land has been
replaced in Pikettys capital mostly by housing (p118). Farmland was two-thirds of capital
in the 18th century, but hardly more than 2% in France and UK now: once it was mainly
land, but has become primarily housing plus industrial and financial assets (half in half)
(p122).
This has concerned other reviewers. If capital includes property and net financial assets, as
well as tangible assets like industrial plant, offices, machinery and technology, then capital
values can be volatile and deliver a net rate of return that is not steady. Pikettys data show
that the biggest reversal of the inexorable rise in the capital income ratio in the 20th century
took place during the great depression and the ensuing world war. This delivered a U-shape
to the movement of the global capital-income ratio. But from the 1950s the capital income
ratio began to rise inexorably.
Piketty admits that a financial asset price bubble accounted for one-third of that increase in
national capital to national income in this period (p91). From the 1980s onwards, where there
is a big jump in inequality, is precisely when financial asset prices boomed. Piketty dismisses
the argument that financial speculation will distort his steady rate of return, because, over
the long run, he expects financial asset prices to be in line with the value of tangible assets.
But it would have to be a very long run, because in the last 60 years that has not been the
case.
This brings us to what Piketty, again rather self-importantly, calls the second fundamental
law of capitalism. This is =s/g. In words: the capital/income ratio () is equal to the savings
rate (s) divided by the growth rate (g) over the long run. Piketty reckons that his second law
provides the explanation of why the global capital income ratio will rise: net income growth
(g) will slow, while the net rate of return (r) will stabilise at a significant level above the
growth rate and the net savings rate will reach an equilibrium level over time that is much
higher than now.
Here, Piketty turns to the traditional neoclassical aggregate production function model
developed by Robert Solow. In this model, all factors of production make a contribution to
growth. If there is an increase in one factor relative to another in contributing to output, then
its marginal productivity will fall. An abundance of a factor, capital, will lead to
diminishing returns on that factor: Too much capital kills the return on capital it is natural
to expect that marginal productivity of capital decreases, as the stock of capital increases
(p215). This would suggest that r should fall. However, Piketty reckons that r will not drop
fast enough to stop the share of capital income from rising: This implies that the capital
share in income is rising faster than the net rate of return is falling (p173). In the
neoclassical model, this assumes an elasticity of substitution between capital and labour
greater than one - namely that labour will be replaced by capital quicker than the
accumulation of capital will lead to a fall in its marginal product. Actually, as other
reviewers have pointed out, there is not one empirical study that shows such a high elasticity
except Pikettys. They all show that r starts to fall after a while. Pikettys answer is that over
the very long run it will not.
Anyway, this neoclassical model of growth was debunked a long time ago. Piketty refers to
the great debate between the Cambridge economists of Massachusetts (Robert Solow, Paul
Samuelson) and those of Cambridge, England (Joan Robinson, etc), which ended in defeat for
the former. The latter group showed that, if capital is a physical entity in machines, plant, etc,
it cannot be valued in money and it cannot be infinitely substituted for labour.
14
So the theory
bears no relation to reality. Pikettys answer is to turn to the facts. The Cambridge debate
could not be resolved because of a lack of data. It does not matter who was right because
the capital-income ratio has been rising in recent decades and that is all we need to know.
In effect, Piketty dispenses with the aggregate production model that he started to use to
explain his second law: The main problem ... is quite simply that it fails to explain the
diversity of the wage distribution we observe in different countries at different times (p308).
Instead he adopts an institutional explanation - that the wealthy control government and
companies and so ensure that they collect more than their just marginal return on capital:
There is every reason to believe that r will be much greater than g in the decades ahead
because of oligarchic divergence (p463). This divergence is even greater because the rich
hide their wealth in tax havens (p466).
Piketty concludes that Top managers by and large have the power to set their own
remuneration - in some case without limit and in many cases without any clear relation to
their individual productivity (p24). These super-salaries are very often just pay for luck
(p335). So the marginal productivity of capital has nothing to do with it. In effect, Piketty is
agreeing with Marx that these obscene wages of superintendence of labour (Marxs term)
are a concealed portion of surplus value extracted from wage labour.
Piketty argues that Marxs law of the tendency of the rate of profit to fall was based on an
assumption that there was an infinite accumulation of capital and ever more increasing
quantities of capital lead inexorably to a falling rate of profit (ie, return on capital) and
eventually to their own downfall, while growth in net income (g) falls to zero (p228). Here
Piketty imposes the marginal productivity theory of capital accumulation on Marx - the very
one that he rejects for himself: namely, that an abundance of capital leads to diminishing
returns.
Actually, for Marx, the movement in r is to be found not in infinite accumulation, but in the
rise in value of the means of production relative to the value of labour (-power). Piketty says
that after World War II, capital was scarce and so the return on capital was high. Marx would
have said capital values had been destroyed (both physically and in value), so the rate of
profit was high. It was not scarcity of capital, but the destruction of its value (by war or
slump).
We can check if Marxs law of the tendency of the rate of profit to fall bears out in reality
over the long run against Pikettys steady state r.
Unlike Piketty, Maito leaves out residential property and financial assets, and correctly
categorises capital as the value of the means of production owned and accumulated in the
capitalist sector. The result is not some steady r, but a falling rate of profit la Marx. There is
a long-term decline, but there are various periods when the rate of profit rises or consolidates.
I used Pikettys own voluminous data for Germany to compare his rate of return with Maitos
Marxian rate of profit for that country since the 1950s. Pikettys data produce a similar result
to Maitos. The rate of return for Germany falls from 1950 and then stabilises from the 1980s.
This is because Germans have a much lower ownership of residential property. Only 44% of
German households own their own homes, compared with 70%-80% in Greece, Italy and
Spain. When residential property is not a large share of capital, Pikettys and Marxs r move
in much the same way.
Piketty shows compellingly that inequality of wealth and income is getting higher in most
capitalist economies. The reason is a rise of income going to capital in the form of profits,
rent and interest and not due to the more skilled labour getting higher income than the less
skilled. And the rising capital-income ratio is driven mainly by inherited wealth. From rags
to riches is not the story of capitalist wealth: it is more From father to son or From
husband to widow.
But then Piketty tries to develop some fundamental laws of capitalism and comes a
cropper. He conflates capital into wealth by including non-productive assets like housing,
stocks and bonds in his measure. In doing so, he loses sight of how wealth is created and
appropriated, as Marx shows with his law of value. And his net rate of return on capital
becomes separated from the capitalist process of production. Indeed, if you strip out housing
and financial assets from his measure of the rate of return, you get Marxs rate of profit and it
falls (and moves up and down), unlike Pikettys steady r.
As a result, Piketty has no theory of crises in capitalism and assumes they are passing
phenomena. So his policy prescriptions for a better world are confined to progressive taxation
and a global wealth tax to correct capitalist inequality. Yet Piketty recognises that it is
utopian to expect the wealthy (who control governments) to agree to a reduction in their own
wealth in order to save capitalism from future social upheaval. He never thinks of suggesting
another way to achieve a reduction in inequality: namely, to raise wage income share through
labour struggles and to free trade unions from the shackles of labour legislation.
And he does not raise more radical policies to take over the banks and large companies, stop
the payment of grotesque salaries to top executives and end the risk-taking scams that have
brought economies to their knees. For Piketty - in true social democratic fashion - the
replacement of the capitalist mode of production is not necessary.
Inequality the mainstreamworry
The argument that rising inequality in the US and the other major capitalist economies, as
expressed in the work of Thomas Piketty and was the major cause of the global financial
collapse and the Great Recession, continues to gain traction. As Paul Krugman put it only
last week: there is solid evidence that high inequality is a drag on growth and redistribution
can be good for the economy.
Now even mainstream economics and financial institutions have taken up the idea. In a new
report, economists at Standard & Poors, the US credit agency, reckon that unequal
distribution in incomes (they dont refer to wealth as Piketty does) is making it harder for the
nation to recover from the recession.
That the S&P, at the heart of Wall Street, should take up this theme, shows that the near-
record levels of inequality of income in the major economies is becoming a serious worry for
the strategists of capital. They fear a social backlash and/or a breakdown of economic
harmony unless this is reversed or at least ameliorated. Indeed, Pikettys main worry about
his forecast of rising inequality in wealth was the social consequences.
But the argument of some on the left and now the S&P is that inequality is not just a threat to
social harmony, but actually damages the capitalist economy and is the main cause of
crises. Our review of the data, as well as a wealth of research on this matter, leads us to
conclude that the current level of income inequality in the US is dampening GDP.
(S&P). Beth Ann Bovino, the chief economist at S&P, commented: What disturbs me about
this recovery which has been the weakest in 50 years is how feeble it has been, and
weve been asking what are the reasons behind it. She added: One of the reasons that
could explain this pace of very slow growth is higher income inequality. And that also might
also explain what happened that led up to the great recession.
Then she expounded the usual Keynesian argument that, because the rich tend to save more
of what they earn rather than spend it, as more and more of the nations income goes to
people at the top income brackets, there isnt enough demand for goods and services to
maintain strong growth and attempts to bridge that gap with debt feed a boom-bust cycle of
crises. Its a similar argument to that used by Atif Mian and Amir Sufis in their recent book,
House of Debt.
As usual, the S&P economists have no real answer to this problem, except to call for more
investment in education to improve the skills of the workforce and thus raise their income
potential. That lack of education and skills is the cause of inequality has been refuted on
many occasions. It is not the differences in income between the skilled and the unskilled, but
the sharp rise in income from capital (dividends, rent and interest plus bonuses for top
management) and above all huge capital gains (in the value of property and stocks) that is the
cause.
The S&P report outlines all the failures of the US economy and expects its weak growth
recovery to continue. But it offers little in the way of solutions. Reducing inequality would
at the very least require huge increases in wealth and income taxes on the very rich, along
with raising wages for the lowest paid. None of this, of course, is advocated by our newly
found Keynesian economists of the S&P. Any clear-headed consideration of these options
must recognize that heavy taxationsolely to reduce wage inequalitycould do more damage
than good. Also the solution of greater investment in education is a joke in most post-Great
Recession economies, where state spending on education is being reduced to meet fiscal and
debt targets.
But anyway, is rising inequality the main cause of the Great Recession and the subsequent
weak growth since it ended? I have argued against this thesis as the cause of capitalist. The
argument presented by Joseph Stiglitz, Paul Krugman, and now by the S&P, is that the US is
a consumer economy, with 70% of spending by households. So if the rich have most of the
money, then spending will slow or fall and we get a crisis through a lack of effective
demand. Well, the actual evidence for a causal connection between rising inequality and
consumer spending is very weak. In the period leading up to the Great Recession, consumer
spending raced along and so did rising inequality.
In the Great Recession, consumer spending fell a little, but nothing compared to
investment. And in subsequent recovery period, consumer spending as a share of GDP has
hardly altered. This suggests that both consumer spending and GDP change according other
factors and there is no causal link between the two directly.
Capitalist booms and slumps and ensuing financial crashes have taken place even when
inequality was much lower than now. As I said in a previous post, surely, no one is claiming
the simultaneous international slump of 1974-5 was due to a lack of wages or rising debt or
banking speculation? Or that the deep global slump of 1980-2 can be laid at the door of low
wages or household debt? Every Marxist economist reckons that the cause of those slumps
can be found in the dramatic decline in the profitability of capital from the heights of the mid-
1960s; and even mainstream economists look for explanations in rising oil prices or
technological slowdown. Nobody reckons the cause of the 1970s and 1980s crises was low
wages or rising inequality.
Inequality experts, Professors Atkinson and Morelli, found little regular connection between
inequality and crises. Looking at 25 countries over a century, they find ten cases where crises
were preceded by rising inequality and seven where crises were preceded by declining
inequality. Inequality was higher in two of the six cases where a crisis is identified, which is
exactly the same proportion as among the 15 cases where no crisis is identified.
Rising inequality is a product of the recent rising rate of exploitation in the process of
capitalist production. It does not cause crises of capitalism but is inherent to capitalist
production as capitalists own the means of production and build up their wealth and income
from profit while trying to keep wages to a minimum.
And yet inequality continues to rise not just in reality, in the economies of the major capitalist
economies, but also in the thoughts of economists as the cause of crises. I suspect this is
because, if rising inequality were the cause of crises, it may be possible to avoid crises in
future by a judicious set of tax and spending measures that do not threaten the basis of
capitalism. Up to now taxation has made very little difference to inequality as the S&P
graph below shows.
This shows that the rich will not concede even the slightest loss of their gargantuan wealth
and incomes without a fight.
But the likes of the S&P, the IMF, Thomas Piketty et al to want stick with changes in
inequality in income and wealth (distribution) rather than the drive for profit and the
accumulation of capital (the capitalist mode of production) as the cause of all our misery. For
them, there is nothing wrong with the capitalist mode of production, its just the unfair
distribution of the value created that is the problem.
13 August 2014
The Waltons, John Cochrane and the road to serfdom
As the World Bank and the IMF meet for their semi-annual meeting this weekend, in a
speech, World Bank Group President Jim Yong Kim underlined the importance of
addressing inequality in the world. Kim told students and faculty at Howard University
that a recent Oxfam International report had found the worlds richest 85 people have as
much combined wealth as the poorest 3.6 billion. And this compared to around a billion
people who still live on $2 a day, have no electricity, drinking water, or even latrines.
The evidence of growing inequality of wealth and income globally is now overwhelming. In
a new report, the OECD finds that global income inequality is now back at 1820 levels
OECD researchers studied income levels in 25 different countries, charted them back in time
to 1820 and then collated them as if the world were a single country. The enormous increase
of income inequality on a global scale is one of the most significant - and worrying -
features of the development of the world economy in the past 200 years, concluded the
OECD in its 269-page report. Interestingly, the OECD noted that global inequality rose once
globalisation took root after the 1980s.
And within the US alone, the latest triennial Survey of Consumer Finances (SCF) from the
Federal Reserve, reveals how the rich have got richer compared to the rest of us, even after
the Great Recession. In the Great Recession, net wealth for the average American household
fell 39%, but just 16% for the top 400 American families (as measured by Forbes magazine),
while net wealth actually rose for the Walton family (who are part of the 85 Oxfam people),
the owners of the cut-price, anti-labour American retailer, WalMart (up 45%!). Recession
was good for the Waltons.
It was the collapse of home prices that hit the average American household the most, while
the fall in stock priced affected the richest 400 more. In the recovery since 2010, the
average household has experienced a further fall in wealth (-2%), but the top 400 have gained
an extra 45%, while the Waltons have added another 50%! Typical US family wealth in 2013
was $81,200 which is about the same as it was in 1992 at $80,200 (in real terms). The
cumulative wealth of the Forbes 400 was about $2.1 trillion, or roughly the same as that held
by the entire bottom 60% of American families. The combined worth of the Walton Six was
$145 billion in 2013, which equalled the total wealth of the bottom 43%!
The Fed and OECD studies confirm a myriad of others, including the most comprehensive by
Anthony Atkinson and, of course, the best-selling book on the rising inequality of wealth in
the major economies by French economist Thomas Piketty, Capital in the Twenty-First
Century.
FT columnist Martin Wolf in his latest book (The shifts and the shocks) also launches the
idea that inequality is the main problem of capitalism. It is increasingly recognised that,
beyond a certain point, inequality will be a source of significant economic ills. Wolf cites
the Federal Reserve study above on inequality of income where the top 3% income earners
got 30.5% of total incomes in 2013. The next 7% received just 16.8% and this left barely over
half of total incomes to the remaining 90%. The upper 3% was also the only group to have
enjoyed a rising share in incomes since the early 1990s. So inequality keeps rising.
Wolf also cites the Morgan Stanley study which lists among causes of the rise in inequality:
the growing proportion of poorly paid and insecure low-paid jobs; the rising wage premium
for educated people; and the fact that tax and spending policies are less redistributive than
they used to be a few decades ago. According to the OECD, the US ranked highest among the
high-income countries in the share of relatively low-paying jobs. Moreover, the bottom
quintile of the income distribution received only 36% of federal transfer payments in 2010,
down from 54% in 1979. The poorest are getting a smaller share of available welfare
benefits.
Wolf then trots out the argument still dominant among leftist and Keynesian economists that
rising inequality is not only unjust but that it is the principal cause of crises and stagnation
under capitalism. The argument goes: up to the time of the crisis, many of those who were
not enjoying rising real incomes borrowed instead. Rising house prices made this possible.
By late 2007, debt peaked at 135 per cent of disposable incomes. Then came the crash. Left
with huge debts and unable to borrow more, people on low incomes have been forced to
spend less. Withdrawal of mortgage equity, financed by borrowing, has collapsed. The result
has been an exceptionally weak recovery of consumption.
The argument that the Great Recession and the weak recovery were due to a collapse in
consumption just does not hold. But Wolfs propositions are now the conventional wisdom
of the left or liberal wing of mainstream economics.
I have argued before that there are two reasons for this. First, the powers that be (IMF,
OECD, World Bank etc) are genuinely worried that growing inequality could lead to a
political and social backlash by the poor against the rich that could threaten the capitalist
system itself. Second, claiming that growing inequality is the real cause of slumps in
capitalist production is a comforting theory because it suggests that, with a judicious policy
of redistribution of wealth and incomes, crises could be eliminated without the need to
replace the capitalist mode of production. So nobody on the left (let alone the mainstream)
pays any attention to the causal explanation of crises provided by Marxist economics.
Inequality may be seen as the issue by the liberal left and Keynesians, but it is certainly not
by the hardline neoclassical mainstream. John Cochrane is a leading University of Chicago
neoclassical economist. He is a strong critic of all this liberal fuss about inequality. At a
recent panel on inequality organised by the Hoover Institution in memory of another
neoclassical great, Gary Becker, Cochrane commented that asking for the redistribution of
wealth and income was pointless because we all know there isnt enough money, especially
to address real global poverty and yet the liberals keep insisting on trying to. I think it is
a mistake to accept the premise that inequality, per se, is a problem needing to be solved
and to craft alternative solutions. Inequality is a symptom of other problems.
Cochrane starts with the argument that the top wealth owners, like the Waltons or the Steve
Jobs at Apple, have earned their wealth. Its the same view expressed by Greg Mankiw, the
doyen of economics textbooks, in his (indefensible) defence of the top 1%. You see, some
people are more skilled than others or luckier than others and so get better-off. It is nothing to
do with cronyism, or rent-seeking i.e. the ownership of capital. The answer to inequality is
thus more education for the unskilled, not more taxation of the rich.
But be careful, says Cochrane, state funded education would be a bad idea as people will train
up as art historians or such rather than in skills useful for jobs in the capitalist economy and
we cannot have that. And education must be directed to those where it will work. At the
lower end, we just have single mothers, criminals, druggies and other low lifes and no
amount of education or redistribution of income in benefits etc will change them. After all,
70% of male black high school dropouts will end up in prison, hence essentially
unemployable and poor marriage prospects. Less than half are even looking for legal
work. Thus Cochrane drags up the old argument that incentives (money, status etc) really
only works for those who are already rich to make them do productive things, while
incentives like benefits or free education and health etc are useless for the poor.
Anyway, Cochrane goes on as rich people mostly give away or reinvest their wealth. Its
hard to see just how this is a problem. So thats all right then. But it is also not true. There
are many studies that show poorer people give more to charities as a percentage of their
income that the richest. And most of the giving by the rich philanthropists is for tax
avoiding purposes and the kudos of supporting the arts or universities like Cochranes
Chicago. The Waltons are noted for their lack of philanthropy.
Cochrane then comes up with the well-versed argument that actually global inequality has
been declining, not rising. This proposition is based on looking at inequality between nations
not within nations, as the OECD or Fed studies above do. Branco Mankovic, formerly of the
World Bank, has done the work and shown that the gap between an average household in the
emerging economies and those in the rich countries has narrowed over the last few decades
But this is only for one reason: China. The huge growth in the Chinese economy and the rise
in living standards there explain nearly all of this improvement strip that out and it is the
same old story no change. Cochrane has to admit that China is the reason but argues that
China succeeded by not taxing its rich people but by growing. Yes, fast growth is the factor,
but it is also the case Chinas inequality ratios have rocketed so that inequality of income
there now matches the levels in the US.
Nevertheless, Cochrane tells us that Bill Gates being a super-rich billionaire is hardly a
problem for the body politic of human civilisation compared to murderous dictators who
killed millions like Mao Tse-Tung or Joseph Stalin. Poor people dont worry about rich
people getting richer as long as their own living improves just what problem does top 1%
inequality really represent to them? Well, as the global financial crash has exposed, it is the
greed of the bankers, hedge fund speculators making their billions that eventually caused the
huge loss in wealth for the average American recorded by the Fed above. So just letting the
rich do what they want with our money is a problem.
And as for the poor revolting against capitalism because of rising inequality, dont worry,
Maybe the poor should rise up and overthrow the rich, but they never have. Inequality was
pretty bad on Thomas Jeffersons farm. But he started a revolution, not his slaves. Perhaps
Cochrane ought to be more cautious: the poor have not always docilely accepted the
extravagances of the rich. History is the history of class struggle as just three examples show:
the Peasants Revolt of 1381 in England; the French revolution of the late 18th century and the
Russian revolution of the early 20th century. Indeed, if the Waltons and the super rich have
nothing to fear from the rest of us, why do they spend so much effort stopping trade unions,
using police and other forces to crush any protests and intervening around the world against
regimes and people who appear to object to their rule? The rich appear more worried than
Cochrane.
Finally, we get the Hayek argument to defend inequality. Just after 1945, Friedrich Hayek, a
right-wing market economist and main protagonist in opposition to Keynesian views, argued
that more regulation and redistribution would put everybody on the road to serfdom under an
all-powerful state, Orwellian-style. Cochrane says that liberals that advocate higher taxes
and regulation on the rich would so the same. The problem with this argument is that Hayek
was wrong. Tax rates on the top 1% reached 90% under Eisenhower in the 1950s but the
economy kept on growing fast by historic standards and dictatorship medieval style did not
appear. The golden age of the US economy was in the 1960s when economic growth was
4%-plus a year, inequality declined (according to Piketty) and living standards of the poor
rose sharply. Growth was much lower when corporate taxation and income tax for the rich
was cut in the 1980s onwards, inequality grew and living standards stagnated.
So lets sum up. The liberal Keynesian wing of mainstream economics is pushing the
argument that rising inequality of wealth and income is the issue for capitalism and the globe.
It is generating social instability and is the main cause of crises under capitalism. The
neoclassical right-wing of mainstream economics dismisses this as rubbish. Inequality is part
of capitalism, sure, but is not a social or economic problem and indeed any attempt to correct
the market forces at work that have created will make things worse by helping state-run
dictatorships to develop. Its the road to serfdom.
In my view, both sides are right and wrong. Yes, inequality appears to be getting worse as a
result of the neoliberal counterrevolution and it is not a product of better skilled or educated
workers earning more, but because those who own or control capital have been taking more.
But inequality is not the cause of crises but a consequence of them as the latest evidence of
the Fed shows. Yes, redistributing wealth and income through heavier taxation etc may make
things worse for capitalism as Cochrane suggests, but only because it would lower
profitability at a time when it is near its historic post-war lows. It would not if profitability
was high and rising as it was in the 1950s and 1960s. The idea that inequality is a fact of life
that cannot be changed is just apologia for the rich. Serfdom would not flow from the ending
of the capitalist mode of production and the expropriation of the super-rich and their capital.
We are already serfs compared to the Waltons. With ownership in common, we could plan
for need not profit the best incentive of all.
7 October 2014

You might also like