Home > Uncategorized > Dual economies and the vanishing middle-class

Dual economies and the vanishing middle-class

from David Ruccio

Both Peter Temin and I are concerned about the vanishing middle-class and the desperate plight of most American workers. We even use similar statistics, such as the growing gap between productivity and workers’ wages and the share of income captured by the top 1 percent.

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And, as it turns out, both of us have invoked Arthur Lewis’s “dual economy” model to make sense of that growing gap. However, we present very different interpretations of the Lewis model and how it might help to shed light on what is wrong in the U.S. economy—with, of course, radically different policy implications.

It is ironic that both Temin and I have turned to the Lewis model, which was originally intended to make sense of “dual economies” in the Third World, in which peasant workers trapped by “disguised unemployment” and receiving a “subsistence” wage (equal to the average product of labor) in the “backward,” noncapitalist rural/agricultural sector could be induced via a higher “industrial” wage rate (equal to the marginal product of labor) to move to the “modern,” capitalist urban/manufacturing sector, which would absorb them as long as capital accumulation increased the demand for labor.

That’s clearly not what we’re talking about today, certainly not in the United States and other advanced economies where agriculture employs a tiny fraction of the work force—and where much of agriculture, like the manufacturing and service sectors, is organized along capitalist lines. But Lewis, like Adam Smith before him, did worry about the parasitical role of the landlord class and the way it might serve, via increasing rents, to drag down the rest of the economy—much as today we refer to finance and the above-normal profits captured by oligopolies.

So, our returning to Lewis may not be so far-fetched. But there the similarity ends.

Temin (in a 2015 paper, before his current book was published) divided the economy into two sectors: a high-wage finance, technology, and electronics sector, which includes about thirty percent of the population, and a low-wage sector, which contains the other seventy percent. In his view, the only link between the two sectors is education, which “provides a possible path that the children of low-wage workers can take to move into the FTE sector.”

The reinterpretation of the Lewis model I presented back in 2014 is quite different:

What I have in mind is redefining the subsistence wage as the federally mandated minimum wage, which regulates compensation to workers in the so-called service sector (especially retail and food services). That low wage-rate serves a couple of different functions: it’s a condition of high profitability in the service sector while keeping service-sector prices low, thereby cheapening both the value of labor power (for all workers who rely on the consumption of those goods and services) and making it possible for those at the top of the distribution of income to engage in conspicuous consumption (in the restaurants where they dine as well as in their homes). In turn, the higher average wage-rate of nonsupervisory workers is regulated in part by the minimum wage and in part by the Reserve Army of unemployed and underemployed workers. The threat to currently employed workers is that they might find themselves unemployed, underemployed, or working at a minimum-wage job.

In addition, the profits captured from both groups of workers are distributed to a wide variety of other activities, not just capital accumulation as presumed by Lewis. These include high CEO salaries, stock buybacks, idle cash, and financial-sector profits (with a declining share going to taxes). And, if the remaining portion that does flow into capital accumulation takes the form of labor-saving investments, we can have an economic recovery based on private investment and production with high unemployment, stagnant wages, and rising corporate profits.

For Temin, the goal of economic policy is to reduce the barriers (conditioned and created by an increasingly segregated educational system) so that low-wage workers can adopt to the forces of technological change and globalization, which can eventually “reunify the American economy.”

My view is radically different: the “normal” operation of the contemporary version of the dual economy is precisely what is keeping workers’ wages low and profits high across the U.S. economy. The problem does not stem from the high educational barrier between the two sectors, as Temin would have it, but from the control exercised by the small group that appropriates and distributes the surplus within both sectors.

And the only way to solve that problem is by eliminating the barriers that prevent workers as a class—both black and white, in finance, technology, and electronics as well as retail and food services, regardless of educational level—from participating in the appropriation and distribution of the surplus they create.

 

  1. antireifier
    March 21, 2017 at 1:12 pm

    This seems to confirm the success of the plan developed after the first meeting of the Trilateralists in 1973. They were worried that expectations by people were too high caused by and excess of education and democracy. They took actions to reduce expectations by lowering access to education (not the same as schooling) and discrediting democratic institutions and the public service (including public education). The good news is that the change happened relatively quickly once the plan was implemented. Which means that a new plan could also bring about relatively quick results. A recent keynote address by Chris Hedges nicely documents the process of installing our present Neoliberal Age of Austerity.

  2. Grayce
    March 21, 2017 at 8:24 pm

    There are many views of the mechanisms of the shift of wealth to the 1%, and tax cuts are visible means for improving not only “The Economy” but also the extra little bit that can be taken for the traditional CEO comp, cash buybacks etc. What is not often included is the incredible gift of bankruptcy protection–not bankruptcy in which a firm is liquidated, but bankruptcy in which debt is neutralized–where the firm emerges “stronger than ever” albeit on the backs of debtors and perhaps employees and former employees with deferred compensation.
    It might be important to assume that each time a tax incentive (positive) is enacted, that an equal and opposite disincentive to use bankruptcy (negative) as a car wash must accompany it. Without new legislation, Chapter 11 has migrated from a last resort to a simple tool for shedding old obligations. But, if a corporation is a legal fiction “person” then changing officers does not free the corporation of its signed contracts and legacy handshakes.
    Cartoonists have yet to draw the image of a corporate welfare king, but he will be driving a really big car through a carwash called Chapter 11, and all his bumper stickers (small supplier bills, vested benefits) will get left behind, but CEO bonuses will remain inside.
    On the other side of the balance sheet, tax cuts are so easily assumed to be plowed back into the business creating jobs, jobs, jobs, but in reality it might not be enough for those for whom there is never enough.
    At that point, instead of jobs or research, the marginal surplus may just find its way into a private pocket. How else did CEO pay go from 40x the average worker to 400x?

  3. rjw
    March 22, 2017 at 2:49 am

    Thanks David, another thought provoking post. As an aside, I only really discovered Lewis recently. He produced some great stuff. His “evolution of the international economic order” is a fabulous read.

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