Home > The Economics Profession > Harvard, economists, and inequality

Harvard, economists, and inequality

from David Ruccio

Just the other day, I explained to students that, until quite recently, mainstream economists mostly ignored the grotesque levels of economic inequality that have emerged in the United States. Now, the problem of inequality is so glaring, it’s even gotten recognition at Harvard!*

According to Jonathan Schlefer [ht: sb], while mainstream economists are finally paying attention to the trend of increasing inequality that has characterized the United States for the past three decades, they still don’t understand it. They continue to teach and write on the assumption that “markets determine wages, and any social or political tampering just creates inefficiency.” His own alternative view is that  

Somehow, minimum wages, personnel departments, union bargaining — social custom, in other words — decide earnings.

Somehow, indeed. For Schlefer, the problem can only be solved by “negotiating more equitable wage structures.” Why? Because, for him, production is simply the place where managers use the existing technology (since “real world managers rarely have any sure idea how to use more capital and less labor, or vice versa”) to produce outputs to be sold on markets.

What Schlefer doesn’t understand, or doesn’t want to understand, is that production is where value is created—and, when one group that produces no value is able to appropriate the extra value created by others, the distribution of income turns out to be unequal. Not because the wage structure is unequal but because, after the wage bargain is struck, a profit is generated that flows to groups other than those who produce it in the first place.

What this means is that abolishing the wages system, not “negotiating more equitable wage structures,” is the only way of effectively solving the problem of inequality in the United States.

*In the Harvard Business Review, mind you, not the Harvard Economics Department.

  1. November 19, 2012 at 11:20 am

    This highlights one of the biggest problems that we face in the economy: too many people take it as a given fact that markets ALWAYS produce efficiency when left alone, and any kind of government intervention ALWAYS produces inefficiency. Despite all of the real world evidence to the contrary.

    The truth is that the concept of markets being efficient is based largely on the assumptions behind the model of perfect competition. Perfect competition does not exist in the real world, and never has. The model is a simplified version of reality used to highlight concepts and certain relationships. If you want to relate it to the real world, you have to consider the ways in which the assumptions behind the model are unrealistic.

    I teach students to be wary of arguments about the economy that use words like “always” and “never”. Those arguments tend to be examples of the fallacy of composition. I also teach that in the real world, the health of the economy depends on the health of the buyer/seller relationship. Anything that supports that relationship helps the economy, and anything that takes away from that relationship hurts the economy. This means that other players in the economy, including the government, can either help or hurt. The concept of “always” falling into one category or the other doesn’t apply. Inequality definitely is something that hurts this relationship; this is not equilibrium, and the disequilibrium is being prolonged due to wide differences between players in the global economy (“if Americans can’t afford to buy, we’ll just sell to emerging markets”).

  2. Mike Meeropol
    November 19, 2012 at 12:19 pm

    And just to follow up on David’s post, the most important inequality is the inequality between those who have sufficient wealth-producing property to live off of it (if only for a short time) and those who do not and therefore, must work for one of those other guys.

    [Bringing in the government as a place to work in such a system only complicates it, it doesn’t change it — the government needs revenue from somewhere — if it gets it from those with sufficient wealth producing property, its revenue depends on their economic health — if it gets it from the rest of us, it pushes us closer to the margin of survival, making the inequality worse.]

    That inequality of POWER creates the entire superstructure of inequality that has finally been so manifest, even mainstream folks (like the IMF economists) have “gotten the picture.”

    What is particularly interesting (when we compare European Social Democracy with the pale American “version” of it circa 1945-1978 [end date unclear]) is that the Piketty-Saez data shows that the super-rich in the US had the lowest percentage of total income and wealth by the end of that period. And they revolted with all the political and economic tools at their disposal — winning a complete political victory by the time George W. Bush took office, The European elites, I think (without much knowledge) pretty much accepted their relative loss of power (Thatcher’s — now Cameron’s — Britain being the exception) though following the US example, some may have made a comeback just in time to impose austerity in the wake of the recent financial crisis.

    The victory of the American elites can be demonstrated by the fact that unlike the Great Depression — which arguably led to the long period (again following P and S) where the super-rich did relatively poorly (and the rest of the people did relatively well) after World War II — the recent financial crisis (because it was “stopped” by vigorous financial intervention) left the political power structure completely in place and if anything INCREASED the inequality of wealth, income and power between the 1% and the rest. Obama’s electoral victory has merely been a bump on the road to complete dismantling of the remnants of the American (pale — weak — nonexistent??) version of Social Democracy.

    Let’s hope that one of these days, a growing proportion of the American population will see the wisdom of David’s main point. And let’s also hope that there will be meaningful political actions that they can take to further that understanding.

    (I put my vote in favor of not permitting foreclosures — and more generally towards wholesale debt forgiveness. It might not solve the macro problem but it sure would be a great political organizing tool.)

  3. Robert Locke
    November 19, 2012 at 12:42 pm

    It cannot be stated too often, because of the limitations of economics, that what fixes wages in firms is not economics but law. In American firms, which operate under a system of director primacy, the CEO and his minions set wages abd enmoluments. Not even the stockholders have a decisive voise in these matters. If there is an increasing gap between the top, middle, and bottom, it is because those losing out have no reak voice in determining salaries and wages. The legal basis of the constitution of the firm has to be changed, not the markets. How? By setting u0ncompensation committees in frms and giving emloyees representation on them.

  4. November 21, 2012 at 10:02 pm

    INEQUALITY is not a problem, it is a natural part of human nature.
    All men were created equal but from that first moment on because of their ability to create change they become no longer equal.
    The problem lies in the gap between the stages of inequality. If a gap is a result
    from one group having an unequal opportunity for change over another group then
    that should be ajusted so as to become a fair gap.
    Having the most powerful force in the universe working for the betterment of one group
    is the cause of great inequality gap of modern time. 10% of the world population own 60%
    of the wealth of the world. 20% of the world population survive on less than $2 a year.
    Read what justaluckyfool, albeit a fool has put togetther:
    “The Wealth Of A Nation Is In How It Redistributes Its Wealth”
    or better yet, read: “The Role Of Money” by Frederick Soddy.

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