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Utopia and inequality

from David Ruccio

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Economic inequality is arguably the crucial issue facing contemporary capitalism—especially in the United States but also across the entire world economy.  

Over the course of the last four decades, income inequality has soared in the United States, as the share of pre-tax national income captured by the top 1 percent (the red line in the chart above) has risen from 10.4 percent in 1976 to 20.2 percent in 2014. For the world economy as a whole, the top 1-percent share (the green line), which was already 15.6 percent in 1982, has continued to rise, reaching 20.4 percent in 2016. Even in countries with less inequality—such as France, Germany, China, and the United Kingdom—the top 1-percent share has been rising in recent decades.

Clearly, many people are worried about the obscene levels of inequality in the world today.

In a famous study, which I wrote about back in 2010, Dan Ariely and Michael I. Norton showed that Americans both underestimate the current level of inequality in the United States and prefer a much more equal distribution than currently exists.*

In other words, the amount of inequality favored by Americans—their ideal or utopian horizon—hovers somewhere between the level of inequality that obtains in modern-day Sweden and perfect equality.

What about contemporary economists? What is their utopian horizon when it comes to the distribution of income?

Not surprisingly, economists are fundamentally divided. They hold radically different views about the distribution of income, which both inform and informed by their different utopian visions.

For example, neoclassical economists, the predominant group in U.S. colleges and universities, analyze the distribution of income in terms of marginal productivity theory. Within their framework of analysis, each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) within perfectly competitive markets according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

From the perspective of neoclassical economics, inequality is simply not a problem, as long as each factor is rewarded according to its productivity. Since in the real world they see few if any exceptions to perfectly competitive markets, their view is that the distribution of income within contemporary capitalism corresponds to—or at least comes close to matching—their utopian horizon.

Other mainstream economists, especially those on the more liberal wing (such as Paul Krugman, Joseph Stiglitz, and Thomas Piketty), hold the exact same utopian horizon—of just deserts based on marginal productivity theory. However, in their view, the real world falls short, generating a distribution of income in recent years that is more unequal, and therefore less fair, than is predicted within neoclassical theory. So, bothered by the obscene levels of contemporary inequality, they look for exceptions to perfectly competitive markets.

Thus, for example, Stiglitz has focused on what he calls rent-seeking behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than it would be under perfect markets because some agents are able to capture rents that exceed their marginal contributions to production.** If such rents were eliminated—for example, by regulating markets—the distribution of income would match the utopian horizon of neoclassical economics.***

What about Marxian theory? It’s quite a bit different, in the sense that it relies on the assumptions similar to those of neoclassical theory while arriving at conclusions that are diametrically opposed. The implication is that, even if and when markets are perfect (in the way neoclassical economists assume and work to achieve), the capitalist distribution of income violates the idea of “just deserts.” That’s because Marxian economics is informed by a radically different utopian horizon.

Let me explain. Marx started with the presumption that all markets operate much in the way the classical political economists then (and neoclassical economists today) presume. He then showed that even when all commodities exchange at their values and workers receive the value of their labor power (that is, no cheating), capitalists are able to appropriate a surplus-value (that is, there is exploitation). No special modifications of the presumption of perfect markets need to be made. As long as capitalists are able, after the exchange of money for the commodity labor power has taken place, to extract labor from labor power during the course of commodity production, there will be an extra value, a surplus-value, that capitalists are able to appropriate for doing nothing.

The point is, the Marxian theory of the distribution of income identifies an unequal distribution of income that is endemic to capitalism—and thus a fundamental violation of the idea of “just deserts”—even if all markets operate according to the unrealistic assumptions of mainstream economists. And that intrinsically unequal distribution of income within capitalism becomes even more unequal once we consider all the ways the mainstream assumptions about markets are violated on a daily basis within the kinds of capitalism we witness today.

That’s because the Marxian critique of political economy is informed by a radically different utopian horizon: the elimination of exploitation. Marxian economists don’t presume that, under capitalism, the distribution of income will be equal. Nor do they promise that the kinds of noncapitalist economic and social institutions they seek to create will deliver a perfectly equal distribution of income. However, in focusing on class exploitation, they both show how the unequal distribution of income in the world today is affected by and in turn affects the appropriation and distribution of surplus-value and argue that the distribution of income would likely change—in the direction of greater equality—if the conditions of existence of exploitation were dismantled.

In my view, lurking behind the scenes of the contemporary debate over economic inequality is a raging battle between radically different utopian visions of the distribution of income.

 

*The Ariely and Norton research focused on wealth, not income, inequality. I suspect much the same would hold true if Americans were asked about their views concerning the actual and desired degree of inequality in the distribution of income.

**It is important to note that, according to mainstream economics, any economic agent can engage in rent-seeking behavior. In come cases it may be labor, in other cases capital or even land.

***More recently, some mainstream economists (such as Piketty) have started to look outside the economy, at the political sphere. They’ve long held the view that, within a democracy, if voters are dissatisfied with the distribution of income, they will support political candidates and parties that enact a redistribution of income. But that hasn’t been the case in recent decades—not in the United States, the United Kingdom, or France—and the question is why. Here, the utopian horizon concerning the economy is the neoclassical one, or marginal productivity theory, but they imagine a separate democratic politics is able to correct any imbalances generated by the economy. As I see it, this is consistent with the neoclassical tradition, in that neoclassical economists have long taken the distribution of factor endowments as a given, exogenous to the economy and therefore subject to political decisions.

  1. February 24, 2018 at 1:13 am

    I wonder about another contributing factor: money creation by the banks in the form of loans.

    Premise 1: We know that inflation results when more money is created than can be absorbed by genuine economic growth.

    Premise 2: We know that over the last 100 years there has been unprecedented inflation in the housing and stock markets, far above the rate of economic growth.

    Premise 2a: We know that for whatever bizarre reasons, this inflation is not included in the Consumer Price Index, enabling its exclusion from economic policy debates about inflation.

    Premise 3: We know that private banks are allowed to create new money for any purpose they choose, regardless of productive outcome.

    Premise 4: We know that since the 1980s, in America, 95% or more of the money thus created by the banks has gone into non-productive loans to buy property or stocks.

    Premise 5: We know that only existing property owners benefit from rising house prices, that only stock holders benefit from rising stock prices.

    Premise 6: We know that 35% of the US population is excluded from participation the housing market, and that 20% of the US population owns 92% of the shares, causing the effective exclusion of 80% of the population.

    Premise 7: We know that in neoclassical economics the role of the banks scarcely features at all, and nor does the process of money-creation, making neoclassical economists effectively unable to understand or include these factors in their analysis.

    Conclusion: The way in which the banks are permitted to create new money as loans and inject it into the economy primarily benefits those who are already wealthy, and is an important contributing cause of the growth of inequality.

    • February 24, 2018 at 3:02 am

      “Premise 1: We know that inflation results when more money is created than can be absorbed by genuine economic growth.”

      I don’t know this. To my mind, inflation is a bad logical category that neoclassical economists try to squeeze “inflation of the money supply” into, but which would better be split into separate categories of Consumer Price Inflation (what non-economists mean when they talk about inflation) and Asset Inflation. When both rich pockets and poor pockets have “too much” money, this yields GDP growth, whereas when just one does, money in poor pockets yields CPI type inflation and money in rich pockets yields asset price inflation. One of the biggest way economists make themselves look foolish is by taking money in rich pockets and using it to predict the price of milk will go up.

      “Premise 2: We know that over the last 100 years there has been unprecedented inflation in the housing and stock markets, far above the rate of economic growth.”

      In other words, money in rich pockets has grown faster than money used to provide the other side of transactions involving the sales of consumer goods. Ok.

      “Premise 3: We know that private banks are allowed to create new money for any purpose they choose, regardless of productive outcome.”

      If you mean they are allowed to make bad loans and go out of business, um, I guess so? Maybe what you meant to say is that loans are restricted based on productive earnings being greater than zero (and money not being lost) but there is no forcing function requiring earnings to be proportionate to funds loaned out. In fact, there is a forcing function pushing returns to zero in the form of ever-increasing advantages for people with money including tax and capital scale economies.

      “Premise 7: We know that in neoclassical economics the role of the banks scarcely features at all, and nor does the process of money-creation, making neoclassical economists effectively unable to understand or include these factors in their analysis.”

      More to the point, neoclassical economists are only allowed to ask questions for which the right answers result. Any idea that allows for an increasing tax burden on the rich is quickly excised from this body of knowledge. For example, look at any Economics 101 textbook and you will see that propensity to consume is a constant percentage of income that does not vary with wealth of the individual for example. This is ludicrous, but yet it is necessary to get the answers that University Donors like to see.

      • February 24, 2018 at 3:04 am

        Dang! I saw the extra “for example” right as my finger was clicking “Post Comment”. Tragic!

  2. February 24, 2018 at 1:15 am

    This comment is just to enable me to tick the ‘notify me’ box below

  3. February 25, 2018 at 12:28 am

    Where does intent enter this discussion? Stating that the goal of a perfect economy is to give people their ‘just desserts’ is like studying medicine and concluding that the goal is to let each person live or die according to their natural health and immunity. Interesting academic science, perhaps, or a great apology for the status quo, but as a technology it sucks!

    The point of economics, as with medicine or engineering, is to first understand the natural world and then intervene to achieve some human goals. These goals come from outside the science in question. They may come from humanism, common-sense empathy, greed, or tribalism. The goals of what to do with the world are aggregate preferences informed by philosophy.

    Mainstream economics at first appears to dismiss humanist goals or define them as equal to outcomes. It appears blind. But if pressed, economists will admit that they’ve taken over both the “philosophy” and the “aggregating preferences” part. Mainstream economics imposes philosophical values and decides how human societies make collective decisions. It’s not blind, it’s authoritarian.

    • Rob Reno
      February 26, 2018 at 2:23 am

      I look forward to your book Pavlos. You aught to read some of the WEA books, they are saying much the same as you.

  4. Antonis
    February 25, 2018 at 10:09 pm

    First of all, Marx does not focus on inequality. He speaks about alienation and in Capital about exploitation. Inequality is connected with the sphere of distribution; however, Marx’s focal point is the sphre of production. Innequality, is the dominant discussion for the Post keynesians. They want a more equal distribution, and do not believe in the revolutionary turnover of the capitalist mode of production (see Robinson 1973 and her famous pendulum- for a modern framework e.g. Stockhammer). Secondly, Marx and the neoclassicals do not have the same starting point and analysis as for the notion of the competition (see Shaikh 2016). This does not mean that the nowadays situation is positive. We have to intervene and we can change the aforementioned picture – this is a lesson from the over centennial action of the labour movement.

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