Posted by: Dirk | January 5, 2016

Some random thoughts on inequality

I am reading some articles on inequality to see where the debate is today. Let’s start with last year’s review of Piketty’s Capital in the 21st century by Bill Gates, the founder of Microsoft:

I very much agree with Piketty that:

  • High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

  • Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

  • Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

My feeling is that most economists – those that are on the scientific side, and not on the ideologically bound side  – would agree with Piketty (and Gates) as well. Economic textbooks of the neoclassical kind tell us that wage equals marginal product of labour. That, however, is fiercely disputed by many economists. There is an article on Crooked Timber that makes this point under the title of It’s bargaining power all the way down:

But when we realize that changes in the value of existing assets are central not just to the decline in wealth ratios in the mid-20th century, but to their whole evolution – including their rise in recent decades – then the mid-20th century decline no longer looks like a special case. It’s bargaining power, it’s politics, all the way down. The same kind of redistributive projects – the decommodification of basic services like healthcare, pensions, and education; the increased bargaining power of workers within the firm – that were responsible for the fall in the capital share in the mid 20th century were responsible, in reverse, for its rise since 1980. In which case we can learn as much about our possible futures from the 20th century decline in the claims of property over humanity, as from their recent reassertion.

This ties in nicely with my political economy course from last semester. Economics and politics are intertwined, and most of the times economic reasoning was motivated by particular interests that would gain from a change in policy. It was probably more obvious when nations sponsored state universities in the 19th century, but today the outcome might be the same. Political power interferes with the way professors are hired, and there is a serious distortion in economics.
If inequality is a problem, and I agree with Gates and Piketty, then we need a different kind of economics to attack it. The discipline seems to agree, as the NYT reports from the American Economists Association meeting:

The economic association’s meeting is something of a barometer of what concerns economists most, drawing more than 13,000 attendees from the ranks of academia, as well as research groups and the private sector. And in panels, research presentations and speeches, what was once mainly a preoccupation of ivory tower Marxists and other players on the margins of the profession is taking center stage.

This reminds me of the famous quote: “If we want things to stay as they are, things will have to change.” For good or for bad, things will change and whether they will stay as they are we will see. However, not changing is not an option. Welcome to 2016!

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