r>g meets c>l

June 2nd, 2014 at 8:53 am

Or: Part 2, why is capital so much stronger than labor?

Piketty’s r>g is now pretty widely known for this sort of thing.  In case you missed it, it posits that if the rate of return on wealth grows faster than the economy, wealth holdings will continue to grow more unequal.

Many have raised questions about the validity of this formula, arguing that it assumes more saving by the wealthy than is realistic or, as I suggested in yesterday’s post (see also Bivens’ comments here), other policies can whack at r.  Furman raised a related critique: even faster g won’t necessarily reduce inequality if GDP growth is also skewed toward the wealthy.  Piketty himself, though more in conversations since its release than in his book, suggests r>g is no iron-fast rule but more of a tendency that he predicts based on the elaborate and persuasive logic and evidence in his book.

But to me, c>l, or capital>labor, is more worrisome than r>g, though of course the two are related (“labor” here means not just unions, but those who depend on paychecks).  To be clear, I’m being “cute” here because unlike r and g, c and l are not obvious, measurable quantities, though critics like Jamie Galbraith have argued ‘r’ ain’t so measurable either.  It’s not hard to think of measures: the change in the profit share of national income (close to “alpha” in Cap21) relative to that of the labor share; the unionized share of the workforce; political science measures of capital’s influence versus labor’s of the type Gillens has developed.

All of these show c increasingly gaining on l (the labor share of income is still much larger than the profit share–there are a still a lot more who depend on paychecks than stock portfolios…but it’s given up about four percentage points–$550 billion in national income or about $4,000/worker–in recent years).

And like r>g, there’s a self-perpetuation to c>l, especially in today’s pumped-up money-in-politics climate.  When I talk about “the toxic interaction of wealth concentration of political influence” I’m referring precisely to the ability of capital to promote the policy set that reinforces r and blocks l.  This dynamic would predict difficulty moving policies like a higher federal minimum wage, Keynesian stimulus, direct job creation, expanding the safety net, closing the carried interest loophole, a tax on the negative externalities generated by finance…and ease moving regressive tax cuts, attacks on social insurance, austerity measures, and cuts in the non-defense discretionary budget.

Sound familiar?

Sticking with simple math, think of the problem of c>l in terms of a simple equation where capital’s clout over labor on policy matters is a function of B*x, where B is an elasticity that translates x, wealth concentration, into political clout.  This framing helps with diagnosis and prescription in that the problem progressives face is that both B and x have increased.

Even if B were stable, capital’s relative clout would be higher based on the growth of x.  But B too has increased, as the high court has facilitated more power from money in politics and the influence of lobbyists has burrowed its way deeply into both parties (one respondent to the question I posed yesterday–why is capital so much stronger than labor?–answered: “because Democrats no longer have labor’s back”).

So part of the answer must be to reduce both B, the elasticity that maps capital’s growing resources onto political power, and x, the resources themselves.  And, as I stressed yesterday, both of those factors are movable by policy, but the conundrum and challenge is that the force of c>l blocks the needed interventions.

Thanks to commenters for many great and helpful thoughts and references regarding this question.  More to come…


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10 comments in reply to "r>g meets c>l"

  1. Robert buttons says:

    Any comment on Piketty’s CNBC comments disparaging fed policy: “Those who are gaining from all this printing of money are not the people that you’d like to gain”

  2. Sandwichman says:

    I’d like to propose substituting for the word “inequality,” the word “lopsided.” Inequality is their word and it carries with it a customary whiff of distinction, justified by merit. The connotation is undeserved but has been instituted through sheer repetition and amplification. Wealth and income are not merely unequal, they are literally lopsided: one side has been lopped off.

    One side of economic analysis has been lopped off, too. It is the side that deals with the inherent imbalance, the lopsidedness. A lopsided economics makes a lopsided economy even more so.

    But let me be more specific. As John R. Commons, pointed out, efficiency and scarcity are complements as well as substitutes. Lionel Robbins’s famous definition of economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” implicitly (albeit ambiguously) posits the scarcity of the means as given and thus evades the crucial complication of artificial scarcity.

    There has been in economics a long-lasting and lopsided preoccupation with one kind of artificial scarcity: the restriction of output by workers. Every once in a while a renegade economist such as Veblen looks directly into this lopsidedness and debunks it but the prejudice trundles on as if nothing had happened. As Warren Samuels noted 20 years ago, the contemporary “efficiency wage” literature is rife with pejorative anti-worker bias. Google scholar shows 10 results for Samuels’s critique (four of them in articles by David Spencer) compared to 4589 results for Shapiro and Stiglitz’s article on “shirking” and efficiency wages.

    And just what IS a wage anyway? It is a ratio. It is a rate of remuneration PER period of time or unit of output. By far the most common form of wages today are time wages.What would one think of an analysis of capital that analyzed the return without reference to the principal? Yet contemporary economics treats the supply of hours of labor as unproblematically generated by workers’ preferences for leisure or income. There is NO theoretical foundation for this treatment. There is NO empirical foundation for it. The “leisure device” has been shown to be utterly unfounded and yet it forms the basis of the systematic exclusion from contemporary economic theorizing of the question of the efficiency of the given hours of work.

    Again, the “New Keynesian” efficiency wage hypothesis literature provides a stark illustration of this lopsided exclusion. Bob LaJeunesse’s 1999 Challenge article on the efficiency week garnered ONE citation and even that by an author who declined to pursue the analysis.

    Concern with the efficiency of the hours of labor, as well as the rate of pay for those hours is not just some quaint institutionalist (or Marxist) hobby horse. Marshall’s neoclassical analysis of an “efficiency wage” and that of his star pupils, Pigou and Chapman, was influenced both directly and indirectly by Thomas Brassey’s Work and Wages, which focused explicitly on the productivity effects of variations in the hours of labor. The neo-Walrasian, mathematical modelers have opted for a pre-marginalist doctrine, in effect resurrecting on the “revealed preference” supply side the defunct wages-fund doctrine that was long ago discredited and disavowed as an explanation of the demand for labor.

    In conclusion, lopsided outcomes in income and wealth are hardly a surprise in an economic system in which the power to restrict output and thus to maintain a profitable advantage through artificial scarcity is itself lopsided. A lopsided economics that treats the entrepreneur as the epitome of efficiency and workers as shirkers is unlikely to disclose the sources of income and wealth lopsidedness. The lopsided treatment of the wage as somehow immune to operations on the divisor side of the ratio is equally unlikely to consider the full range of appropriate remedies for the lopsidedness of income and wealth.

  3. Smith says:

    I think you’re making this unnecessarily complex. Income inequality stems from human nature because if I’m in charge I’m going to pay myself as much as I possibly can. Some may argue that in the mid 20th century egalitarian cultural norms magically took effect that restrained this tendency. I would instead point to the 90% marginal tax rates that took away 90% of the incentive for the pervasive personal greed. A side effect of high taxes is that faced with a choice of paying the government or your own workers, an incentive is provided to reward employees and expand business. I question why simple self interest needs any more elaboration to explain inequality. Piketty’s pointing out that only depression and war seemed to provide an impetus for greater equality since the alternative was revolution and fascism respectively need not exclude a return to a better society absent the motivating force of mass privation and conflagration.

    I fail to see how artificial scarcity is really the driving force, secondary effect, or proximate cause of inequality.

    I think inequality should also stay put since poetically I’m not in love with
    “We hold these truths to be self-evident, that all men are created without lopsidedness.”
    or in Piketty’s case
    “Liberty, Non-Lopsidedness, Fraternity”
    (with all due respect)

    • Robert Buttons says:

      Your analysis fails because the greatest contraction in inequality in the history of mankind occurred, not in the 20th century, but in the 19th century, specifically in England and the US. (See Clark, G “What is the True Rate of Social Mobility? Surnames and Social Mobility, England, 1800-2012). This was a product of laissez faire capitalism, before unions, before interventionalist government. Our massive INCREASE in inequality began in 1971, which, in the time course of free markets, essentially immediately followed our “progressive” “reforms”.

  4. Peter K. says:

    One of my favorite things about the whole inequality debate is the recent rash of conservatives who argue that inequality 1920s was worse than today because they didn’t have the welfare safety net back then.(!)


    Aren’t you guys trying to turn back the clock to the 1920s and beyond???

    • Robert buttons says:

      Look at my comment above. Inequality MASSIVELY declined in the 1800s, stabilized in the 1920s (central bank era) and MASSIVELY increased in 1971 (welfare state era). We need to go back.

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