Home > The Economics Profession > Inequality: The silly tales economists like to tell

Inequality: The silly tales economists like to tell

from Dean Baker

Some economists don’t get paid to know about the economy, but to justify the trickle-up of wealth.

There is no serious dispute that the United States has seen a massive increase in inequality over the last three decades. However there is a major dispute over the causes of this rise in inequality.

The explanation most popular in elite and policy circles is that the rise in inequality was simply the natural working of the economy. Their story is that the explosion of information technology and globalisation have increased demand for highly-skilled workers while sharply reducing the demand for less-educated workers.

While the first part of this story is at best questionable, the second part should invite ridicule and derision. It doesn’t pass the laugh test. 

As far as the technology story, yes information technologies have displaced large amounts of less-skilled labour. So did the technologies that preceded them. There are hundreds of books and articles from the 1950s and 1960s that expressed grave concerns that automation would leave much of the workforce unemployed. Is there evidence that the displacement is taking place more rapidly today than in that era? If so, it is not showing up on our productivity data.

More germane to the issue at hand, unlike the earlier wave of technology, computerisation offers the potential for displacing vast amounts of highly skilled labour. Legal research that might have previously required a highly skilled lawyer can now be done by an intelligent college grad and a good search engine. Medical diagnosis and the interpretation of test results that may have previously required a physician, and quite possibly a highly paid specialist, can now be done by technical specialists who may not even have a college education.

There is no reason to believe that current technologies are replacing comparatively more less-educated workers than highly educated workers. The fact that lawyers and doctors largely control how their professions are practiced almost certainly has much more to do with the demand for their services.

If the technology explanation for inequality is weak, the globalisation part of the story is positively pernicious. The basic story is that globalisation has integrated a huge labour force of billions of workers in developing countries into the world economy. These workers are able to fill many of the jobs that used to provide middle class living standards to workers in the United States and will accept a fraction of the wage. This makes many formerly middle class jobs uncompetitive in the world economy given current wages and currency values.

This part of the story is true. The part that our elite leave out is that there are tens of millions of bright and highly educated workers in the developing world who could fill most of the top paying jobs in the US economy: Doctors, lawyers, accountants, etc. These workers are also willing to work for a small fraction of the wages of their US counterparts since they come from poor countries with much lower standards of living.

The reason why the manufacturing workers, construction workers, and restaurant workers lose their jobs to low-paid workers from the developing world, and doctors and lawyers don’t, is that doctors and lawyers use their political power to limit the extent to which they are exposed to competition from their low-paid counterparts in the developing world. Our trade policy has been explicitly designed to remove barriers that prevent General Electric and other companies from moving their manufacturing operations to Mexico, China or other developing countries. By contrast, many of the barriers that make it difficult for foreign professionals to work in the United States have actually been strengthened in the last two decades.

If economics was an honest profession, economists would focus their efforts on documenting the waste associated with protectionist barriers for professionals. They devoted endless research studies to estimating the cost to consumers of tariffs on products like shoes and tires. It speaks to the incredible corruption of the economics profession that there are not hundreds of studies showing the loss to consumers from the barriers to trade in physicians’ services. If trade could bring down the wages of physicians in the United States just to European levels, it would save consumers close to $100 billion a year.

But economists are not rewarded for studying the economy. That is why almost everyone in the profession missed the $8 trillion housing bubble, the collapse of which stands to cost the country more than $7 trillion in lost output according to the Congressional Budget Office (that comes to around $60,000 per household).

Few if any economists lost their 6-figure paychecks for this disastrous mistake. But most economists are not paid for knowing about the economy. They are paid for telling stories that justify giving more money to rich people. Hence we can look forward to many more people telling us that all the money going to the rich was just the natural workings of the economy. When it comes to all the government rules and regulations that shifted income upward, they just don’t know what you’re talking about.

See article on original website

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  1. Steve
    November 3, 2012 at 2:47 pm | #1

    So true. And could not such corruption of economists and economics be rectified by changing its Primary intention from the will to power of the current economic, financial, corporate and political entities within it to the will to freedom of the individual?, by changing the money system from the current perpetually corrupt PRIVATE, RE-DISTRIBUTIVE one to a pragmatic and intelligent DISTRIBUTIVE one? and by changing basis of our economic, financial, corporate and political systems from the inadequate PRIMARY purposes of profit and/or employment to the self developmental wisdom of the ideas, values and experiences of Faith as in confidence, Hope, Love and a sense of Grace while making profit and/or employment perfectly legitimate SECONDARY OR TERTIARY considerations?

  2. November 3, 2012 at 2:49 pm | #2

    The above article and the article referenced would be humorous if it were only for the incompleteness of each side and the desire to for ideological reasons to focus only on certain relationships as if they were Axioms and to be taken for fact. There are server issue here on both sides and ignor(ing)(ent) of the complex interrelationships present and the completeness (not) of the arguments.

    Does anyone out there really know how and why you have to solve a set of Linear Simultaneous Equations in a careful manner and WHY.

    How about what dependent and independent variables are? Why you have to solve the full SET Simultaneously AND why you can do this?

    If you understand this so far how about how time order effects things? What happens when the sequence determines the possible outcomes by removing or enabling some?

    How about what orthogonality and the variables?

    What about ideas of Completeness?

    While not a science, economics tries to use the methods of science and mathematics – or at least the conceptual arguments – while not having a real understanding of why and how and when and when not they work.

    Completeness is a big thing to ignore and looking for and at the interrelationships including those that might not seem relevant intuitively just seems to not be done often because of ideological necessities. Sad this is.

    In a complex and adaptive systems time order is often, but not always, extremely important and time delays and how these are effected and effect the outcomes is something that a few simple relationships pulled out of the darkness and taken as facts because of ones axioms of ideology are just DUMB. I am reminded of a section/scenes in the TV miniseries done in the late 1990′s that was based upon Swift’s “Gulliver’s Travels” – this was the one that was a spoof on India and the flying magnetic rock and the institute

    pardon the long quote but it certainly applies here and is from:

    …….The residents of Laputa spend their time doing theoretical mathematics and playing music. Their language is based entirely on these two disciplines. “If they would, for example, praise the beauty of a woman, or any other animal, they describe it by rhombs, circles, parallelograms, ellipses, and other geometrical terms, or by words of art drawn from music,” Gulliver says. However, they despise practical geometry. Consequently, their homes are poorly built, having not a single right angle. They are quick to put forth their opinions about politics and public affairs even though, as in Europe, mathematicians have little knowledge of such matters. All of the residents of Laputa live in constant fear that the earth and their island will one day crash into the sunu0097or that the sun will burn out, resulting in destruction of everything that depends on its light.

    …….After requesting to leave the island, Gulliver is lowered to the continent of Balnibari and enters its metropolis, Lagado, where the crops are poorly managed, people wear ragged clothing, and the houses are in bad conditionu0097except for the house of the governor of Lagado. He tells Gulliver that 40 years before, some Lagado residents visited Laputa and came away with a smattering of mathematics that caused them to undertake bold scientific projects and other heady enterprises. They even built an academy in which to carry out their projects. Now every town in Balnibari has an academy, and the people spend most of their time conducting experiments. For example, at the Academy of Lagado, scientists are attempting to extract sunbeams from cucumbers, turn human feces back into food, erect buildings from the roof down, plow farmland with pigs, make marbles soft enough to stuff pillows and pincushions, breed sheep whose entire bodies are bald, and have students learn mathematics by swallowing wafers on which formulas are written.

    …….So absorbed in these enterprises are the inhabitants that they avoid taking part in almost all other activities.

    • November 3, 2012 at 4:47 pm | #3

      Well, Joe, as my professional training and interests started like those you describe at “Gilded Age” #2, my answer to your questions is “Yes”. In fact the mis-use of orthogonals despite what we have learned about relativity was what my lost macro response to Clemens Lampe’s’ claims on micro-aggregation was all about.

      Be encouraged by the thought that Gleick’s ‘Genius’, the great physicist Richard Feynman, started off repairing his neighbour’s radios. One needs to do something like that to get a feel for what’s important and what not in dynamic systems. Accuracy is not, given 20% tolerances on component values, but the two-dimensionality of power, the maximum power transfer theorem and the value of approximately matching transmission lines surely speak of intelligent effort, diminishing returns and the disvalue of extreme inequality.

  3. November 3, 2012 at 3:16 pm | #4

    To complete my last comment – here is the youtube miniseries part II – the first and second stories this part II video are what the quotes/review of the original book cover in tv production license screen play, but they do it well. the first 25 or 26 minutes cover this and just seems to be so relevant to todays world. http://www.youtube.com/watch?v=ko3AJD4PNho

    enjoy and ponder…..

  4. ezra abrams
    November 3, 2012 at 3:17 pm | #5

    Dear Dr Baker:
    this is def not one of your better pieces.
    What you are trying to say – I think – is that:
    Automation doesn’t seem to have replaced jobs; this worry has been ongoing for a long time and we just don’t see it in the data. (see below)
    Globalization can , def, replace jobs, but what we have is a political structure that allows only low wage jobs to be lost to globalization.
    Low wage workers now have to compete with India and China and Vietnam (think clothing, furniture).
    However, high wage workers – Doctors, Lawyers, etc don’t ; there are de facto trade barrier that prevent doctors and lawyers in India and China from competing

    Two problems with this argument: Clothing can be physcially outsource – you can make pants in China, it doesn’t matter that much, wheras you can’t do , yet, medicine from china

    Second, there is the immorality of stealing hi wage workers from poor countries; desperately poor countries like Pakistan,India, Vietnam, etc spend a lot of scarce resources to train Nurses, Software Engineers, etc, and when we allow them entrance visas to the us we are basically stealing all that training money and time; the least we could do is reimburse these countries.

    The idea that automation is causing unemployment and in equality seems obvious: telephone operators and stenographers have all lot their jobs.
    A generation ago, all mighty lithographers were gods who walked the earth, and with whom no newspaper dared mess.
    Today they are only a memory.
    yet, and it is hard to believe, for the last 150 or so years, new jobs have appeared; this is not to say that loss of a skilled job isn’t incredibly painful, but for the last 150 years, new jobs have appeared – we have, on average, no more automation loss today then in 1950 or 1920 or 1880.
    So it is hard to make an argument that this time things are sudenly different

  5. Steve
    November 3, 2012 at 4:31 pm | #6

    Yes, if we simply utilized the higher order level of integrative thinking that is human wisdom, the condensation of which can be expressed in the ideas, values and experiences of Faith as in Confidence, Hope, Love and Grace….we could have an economy and a society that matched our actual species designation of homo sapiens, wisdom discerning man instead of continuing to wallow in the folly of homo economicus. And all you really have to do is change the ideas and intentions of society. That is even easier to do than changing one’s own ideas which paradoxically is simultaneously the easiest and most difficult think to do in the entire universe. Easiest because after all it’s only an idea (personal reality) which we change constantly throughout the day anyway, and most difficult because one’s pre-conceived notions, un-examined orthodoxies and personal ego are involved in that thinking and so resist change. Economics and finance themselves need to be utterly de-constructed and then the ultimate integrative discipline in both ethics and pragmatism, human wisdom, needs to replace them as the basis for ALL of our systems. Oh, and by the way the clock for doing this is ticking for you, your family and your grand children. Try thinking about it. It may be helpful.

  6. justaluckyfool
    November 3, 2012 at 4:40 pm | #7

    The condition know as inequality is by human nature a nessesity of any economy of any nation.Inequality must exist in each nation and among nations. The true question becomes,
    how does the gap between the upper level and the lower level enlarge or deminish?
    How does 1% have 60% of the total wealth of a nation while 99% share the other 40% within that nation? And this percentage is one of a “wealthy nation”, whereas many poorer nations
    have 40% of their citizens existing on less than the equivalent of $2 a year.
    So how does a group of 1% gain such an advantage?
    Perhaps you should consider, as Michael Hudson wrote, “The most powerful force in the universe is being used against mankind,rather than for the benefit of mankind.”(Justaluckyfool), and as Michael Hudson wrote,”
    “…. The Mathematics of Compound Interest ….
    A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at five per cent per annum.”

    Why does this go unchallenged?
    Why do you not want prosperity for yourselves and your children?

    Read more: “The Wealth of a Nation is in How it Redistributes its Wealth”
    by Justaluckyfool.
    Prove a fool to be just that, a fool! http://bit.ly/MlQWNs

  7. justaluckyfool
    November 3, 2012 at 4:47 pm | #8

    Please read, challenge, improve ,
    Frederick Soddy, “The Role of Money”. “What he said (1926,1933) about, “True” lending and ” Fictitious” lending.
    William Black, What he has to say about banks.
    Michael Hudson, compound interest.

    RWER, you may have the power to help “set our people free”.

    • Steve
      November 3, 2012 at 6:05 pm | #9

      The ongoing dynamic and systemic cancellation of debt by the breaking up of the current monopoly on credit via a change in the consumer financial paradigm of loan ONLY to Dividend and loan if desired and creditable, is more important than interest…..because it would prevent compounding.

  8. Steve
    November 3, 2012 at 5:54 pm | #10

    One of our most basic problems and misunderstandings is in looking at finance as just another garden variety business model like women’s under garments or the manufacture of Trojans. As important as these may be finance deals with the life’s blood of the economy and the individual personal means of survival in the world, ITSELF. Therefore it cannot be left without an ethical or more aptly with a false and inadequate ethical base. Neither religion nor science alone can be trusted to bridge the gap between the eternal and the temporal. Only wisdom is up to that task. Religion fails because it too easily morphs into intolerance, or apathy when action is most needed, and science fails as well because its fundamentals require the exclusion of subjectivity. Wisdom however is both pragmatic and ethically based thinking. It IS the fusion we require at this moment and at all times. True Human Wisdom, the appropriate and necessary basis for BOTH individual development AND human systemic policy.

  9. tim
    November 4, 2012 at 2:41 am | #11

    bottom-line: we need a better monetary system. i tried explaining our corrupt banking system to a stubborn friend and with my limited debate skills, i couldn’t make her understand the immoral/corrupt banking system that most nations use. anybody that doesn’t understand how the banks end up with all the money most watch this video: http://www.youtube.com/watch?v=Zx0vrR2BFp8

  10. Camus
    November 6, 2012 at 4:41 pm | #12

    What you need is a financial system that is tied to real values and not to vague expectations about rising prices for soya, oil or whatever the pundits come up with next. I don’t advocate going back to the gold standard by the way. The pressures exerted by the bankers and their slaves force governments to pretend that they are truly able to control them. But the truth is, they don’t even begin to understand the math.

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