Home > Economics - General > Inequality is caused by ideology, not technology

Inequality is caused by ideology, not technology

April 2nd, 2014

I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

while technology explains the decline of the middle and working classes relative to the professional and managerial class, even this latter group has barely maintained its share of national income since the 1980s. The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years, far outpacing the professional and managerial class as a whole.

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialities.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

On the same day as this came out, Paul Krugman was demolishing another version of the argument, the zombie idea that current high unemployment in the US is due to a “skills gap” which apparently emerged on the day Lehman Brothers collapsed.

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  1. Brett
    April 4th, 2014 at 14:38 | #1

    How does hiring work with a majority cooperative system? It seems like you’d end up with a lot of “labor contracting” where my “one-man business” or “partnership” retains the services of a bunch of members of other co-ops who theoretically work for their co-ops, but in practice work for me all of the time – sort of like how companies like Amazon and others will outsource janitorial work to contracting firms whose workers spend all of their time working under the supervision of Amazon’s managers even if they legally don’t work for them.

    That said, I do like the idea of Labor Co-operatives that aren’t particularly tied to a single firm (sort of like if you had a Temp Agency that was owned and ran by its employees). The big flaw I’ve always seen with modern unions is that they build strength off of tying employees tighter to their firms, which makes them more vulnerable to disruption if the company tanks. Labor Co-Ops could theoretically make workers less dependent on employment at any particular firm, which is nothing but goodness in my mind – more exit power is always a good thing for workers.

  2. Ernestine Gross
    April 4th, 2014 at 15:57 | #2

    @Jordan Thank you for telling me a little about the history of cooperatives in the USA.

  3. Noncist
    April 4th, 2014 at 16:53 | #3

    @Ikonoclast
    I wasn’t offering my comment as a vision of how things should be, but rather describing how they are now.

    Within an industry, people with a breadth of skills, especially interpersonal skills that are hard to teach get more opportunities and higher wages than those who do not. As organizations cut costs and try to be as adaptable as they can be given their rigid corporate structure, these soft skills matter even more than they did previously. Thus, a gap grows in the earnings of workers even with the same technical skill or education level.

    In describing the state of the world now, Krugman lumps these variables together and the distinction I am making is lost, but it matters.

    Of course, there are many problems with this structure. The nature of the labor market itself is a fundamental problem, because even middle class workers can easily become wage slaves for lack of a better term. If the public sector met everyone’s basic needs merely for being people who have basic needs, then labor could value itself more accurately and forming co-operatives or doing work that you love instead of what you need to do would be much less risky.

  4. Noncist
    April 4th, 2014 at 17:03 | #4

    @Collin Street
    Maybe it’s semantics then, say talent instead of skill.

    Most hiring and wage decisions are made on the basis of interpersonal skills. The skills you can teach are a necessary bar to get over for holding many jobs, but the workers who have the most interpersonal talent tend to earn more – sometimes even if they do not actually have the technical skills required for their job!

    I am saying that if you drill into the earnings figures for most industries you will see that the gap between the highest and lowest paid workers is growing over time. This is increasing inequality in a method similar to the so-called skills gap, but I grant that maybe this would be more of a talent gap or even a personal-marketing gap.

  5. Robert
    April 4th, 2014 at 19:31 | #5

    @John Quiggin
    Great news, John! I look forward to them.

  6. Ernestine Gross
    April 4th, 2014 at 20:14 | #6

    @Ikonoclast
    More or less in reverse order:

    1. The set of Executive Orders you have listed amount to an alternative or shadow institutional environment. I have no independent knowledge in this area. I take the information as given. It surely provides a good example of the meaning of institutional environment(s) as distinct from natural environment. Without having the benefit of knowing how the elements of the shadow institutional environments would be interpreted, on the face of it, it entails an extreme concentration of power. It seems to me, in real time there is at any time a theoretical possibility of a catastrophic point (in the technical sense) of system change . One idle question, which comes to my mind is: Can a catastrophic point (technical meaning) in the natural environment induce a catastrophic point (again technical meaning) in the institutional environment? To answer my own idle question, it seems to me it cannot be excluded as a possibility.

    2. One size fits all. I agree with you regarding the corporate model of enterprise. One size does not fit all. Furthermore, this form of enterprise is, IMHO, inconsistent with the philosophical foundation of the theoretical models of economies which take as primitives individuals’ preferences and resources. If one wants to model a non-dictatorial resource allocation system (economy) then taking preferences as given is the way to go (even though, contrary to some people’s perception, theoreticians are not blind to observations that people can be influenced in what they want).

    3. Money. I am not fond of the idea of money as a language, although the expression ‘money talks’ is quite meaningful to me. Can we leave it at that for today?

    4. Overall. I suspect you might agree with the suggestion that analysing systems (including the postential change of systems) requires a different brush from that used for refining the operations of a system. I’ll probably attract the wrath of many when I say as long as the analysis is confined to macro-economic variables, system analysis is not possible. By contrast if one starts of with preferences of individuals and natural resources, then the institutional environment becomes a variable and therefore amenable to examine the alternative institutional environments. In support of this idea, I like to point to the progress made by the axiomatic approach to economic theory. Although largely confined to private ownership economies, the research program made progress, from complete commodity markets to sequence of commodity and financial markets (relevant for the GFC) to incomplete markets (relevant for global warming) and, on a less ambitious level, partially segmented markets (relevant for uneven development, globalisation, multinational firms).

    .

  7. Ikonoclast
    April 4th, 2014 at 23:04 | #7

    @Ernestine Gross

    A quick-ish reply in the same order you used.

    1. Yes, you got my point. I listed the executive orders as an example of a different (non-economic) way that resources could be allocated. Your terminology of an “alternative or shadow institutional environment” puts it well. I get frustrated on other blogs where respondants clearly cannot imagine anything other than the existent economic system for allocating resources. They cannot imagine other economic systems nor can they imagine non-economic systems (e.g. conscription and commandeering) nor can they imagine real world situations where such alternative systems might come into force. I guess they don’t read any history.

    Because they cannot imagine other systems, they assume total societal collapse will occur as soon as the current economic system collapses or more precisely as soon as its “mere” financial or debt component collapses. I can’t imagine how they think societies withstood over 5 years of total war in WW2. I do foresee an extended collapse running over the long term but for more fundamental Limits to Growth reasons. In that period, which could be the next 50 years or longer we will likely run a whole gamut of various alternative insitutional environments.

    In answer to your question “Can a catastrophic point (technical meaning) in the natural environment induce a catastrophic point (again technical meaning) in the institutional environment?” I will be less cautious than you. I will predict that catastrophic points in the natural environment will almost certainly induce catastrophic points in the institutional environment.

    2. It seems we are agreed that the instutional environment should provide “room” for public, private and worker co-operative enterprises. The feeling I get today is the insitutional environment is deliberately heavily biased against public and worker co-operative enterprises. Oligarchic and corporate capital mostly get the laws and rules insitutional environment) they want.

    3. Money. I would be happy if you would agree with me that people tend to reify money too much. They tend to regard it as real when it is notional. This leads to the false reasoning that says for example that we (the nation) don’t have the resources to provide free tertiary education. By “resources” they mean money. But of course the real resources could be made available if we managed our notional money systems differently and thence real resources differently. We could tax more. We could spend less on defence. We could deficit fund and so on. Indeed, we could consume less grog and sports as a nation and educate more. Bricks and mortar and building fittings that go into breweries, pubs and elite sports stadiums and car raceways could go into tertiary instutions. Ultimately it’s a matter of where the real resources go. Money is just a notional allocation system much distorted by other assumptions, habits and sectional interests, political and social.

    4. Your point 4 gives me food for thought and I can see where you are going with it. At least I think I can. My infatuation with MMT did not last all that long. Although I found MMT useful for throwing off mindsets which reify money, I found MMT less useful (meaning not useful at all) for considering situations of real constraints outside the economy i.e. resource and environment constraints. I mean this from a layperson’s amateur theorising pont of view not from any technical or academic position. I couldn’t rigorously support, or even properly express, my rather fuzzy concepts in this arena.

    Currently, economics gives me this kind of feeling. One could map all the objects in a room. Then one could ask the question. What will all these objects look like and where will they be after a bomb goes off in the room? There are a lot of poweful forces that could seriously dis-arrange our economy. These forces, IMHO, are coming to a head although as I said the full drama may take 50 years to play out. I am not sure things will remain in the boxes they are in at present. It’s just a feeling.

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    April 5th, 2014 at 03:57 | #8

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  9. Jordan
    April 5th, 2014 at 08:01 | #9

    Ikonoclast & Ernestine.

    All that can be explained by, Solution will not be applied untill is seen as solution to present problem.It can show itself much earlier then environment is ready to see it as solution, and it will not be used. And if shows up later then needed, it won’t be applied also since machine is on the other track allready and will not pivot to a proper one.
    Money is notional allocation system for allocation of real resources. Who or what controls it? Right says it is market while lefties says it is government.

    MMT is only a description of such allocation and it says it is government that does it with taxes and spending. Government does it by incentives in peacetime and on longer time scales instead of by coercion in times of war when such allocation speed is of outmost importance. In time of war it can not wait for incentives to work to allocate resources, it does it by FEMA orders. This way allocation of resources is instantenous.
    But government controlls it fully in time of peace and in time of war. It is time scale that makes the important difference.

    4. “By contrast if one starts of with preferences of individuals and natural resources, then the institutional environment becomes a variable and therefore amenable to examine the alternative institutional environments.”
    Are you saying that marketing does not work? “Buy GI bonds to feed and clothe our soldiers” did not work? Government does marketing too, and with much more influence then comercial marketing. It has power to give incentives in synergy with its own marketing. So institutional environment is not a variable. In theory that market is one allocating real resources it is variable.
    It is a feedback loop in times when foundation for crisis is being set up. Like when Reagan gave a feedback loop push to populace by naming “welfare queens” and Star Wars within Cold War environment.
    Is Cold War a product of individual preferences or government marketing? Is “welfare queen” product of individual preferences or institutions that supported racism?
    What was first, chicken or egg? It depends on when you declare/decide chicken to be called chicken while evolving into a chicken. Answer is easy when you know who decides on when to call it a chicken.

    MMT is a very good at providing ability to see such notional allocation of real resources by government decisions that also depend on feedback loop from individual decisions shaped by previous institutional environment. Reflexivity as Soros calls it.
    Every action has a reaction and that reaction gives next reaction.

    Feedback loop in dynamic systems and decisions on what is stock and what is flow in dynamic systems. Analysys fails only from not differentiating stock from flow properly.

  10. Ikonoclast
    April 5th, 2014 at 10:08 | #10

    @Jordan

    I see MMT as a de-mystified description of the post Bretton Woods system. As such I think it is accurate, valid and useful. The MMT of Mitchell, Wray et. al. also carries prescriptive values I happen to agree with. Mitchell could be characterised as quite left of centre. He makes explicit calls for directly assisting the unemployed and the working poor, for reducing inequality and for reducing subsidies to the wealthy. He also calls for a focus on real economy outcomes (e.g. full emplyment) as opposed to a focus on budget outcomes thus evincing a preference for the real over the nominal.

    At the same time MMT focuses (seemingly) solely on the nominal flows of macroeconomics to achieve these real outcomes. This will no doubt prove useful (IMO) when and while it is the drag of poor macroeconomic policy that is keeping the economy functioning below par. Good macroeconomic policy might be simplistically likened to lubricating oil in an engine. Whilst lubrication is good the engine can function with minimum friction or drag and maximum possible output relevant to its capacity, rating and fuel use. Remove the lubrication and the engine could nip or seize up (a recession or depression).

    On the other hand, MMT seems to say little directly about real inputs (matter and energy) to the economy. To be fair, MMT is very concerned with real outputs and real activities (like the amount of employment generated). MMT takes real material and energetic inputs as a given; not discounting that they exist and have an effect but more or less explicitly stating that an examination of these factors is not within the purview of MMT.

    MMT’s rejection of micro-economics is attractive to me but that is my current bias. It is very possibly a result of my general ignorance of micro-economics other than a little familiarity with the rejection of it (possibly by straw man arguments) by Mitchell and Keen (not an MMT-er as such). On the other hand, Ernestine Gross who writes on this site is a proponent of certain forms of micro-economics (if I assess this correctly). She has written above, “I’ll probably attract the wrath of many when I say as long as the analysis is confined to macro-economic variables, system analysis is not possible.”

    I assume “system analysis” means system analysis of the entire economy. I can wholeheartedly agree with this statement, not as a proponent of micro-economics about which I remain woefully ignorant, but as a proponent of at least a place at the analytical table for thermoeconomics, also referred to as biophysical economics. It is empirically fundamental that economic activity cannot occur without energy flows and exergy (energy available for useful work) use. Otherwise the economy would be a perpetual motion machine breaking both the first and second laws of thermodynamics. Economic activity is the creation of greater order out of lesser order and this takes exergy . Just as in my simplistic engine analogy, the oil system represents macro-economic flows, exergy for the economy eqautes to the fuel the engine runs on.

    Outside of Ernestine’s support of micro-economics (where my judgement is now in abeyance due to admitted personal ignorance) I support her general position. The other positions Ernestine takes generally make sense to me and I note this assuming Ernestine will follow this debate too. She says “analysing systems (including the postential change of systems) requires a different brush from that used for refining the operations of a system.” This is maybe an obvious distinction for a Professor to make. To me as I pondered it seemed a nice distinction in the proper sense of the word “nice”: a fine and precise distinction. I take it to mean that macro-economics might be useful for running some aspects of the economy but it is not useful or at least not nearly sufficient for a full systems analysis of the entire economy. I can agree with this simply by considering the valid role (as I see it) for thermoecomics as another necessary but not sufficient on-its-own discipline for understanding economics.

    I particularly agree with Ernestine’s critique of the corporatised dimension of our economy and her general statement that capitalism (as it exists now at least) is not to be conflated with the idea of free markets. But these are positions that any armchair lefty like me or MMT proponent like Bill Mitchell would agree with. I completely agree with Ernestine’s idea that the institutional setting of the economy is crucial to making the economy what it is at any point in time. Indeed, I think this is quintessentially a political economy viewpoint (and thus I heartily approve).

    Indeed I think that that view, re the institutional settings, is also potentially a scientific point of view or at least a proto-scientific point of view in the Popperian sense. Scientific laws (expressed as mathematical equations) are true or rather approch very closely to being true and accurate. But this near approach to truth is conditional on limiting parameters. Newtonian physics, for example, is accurate enough only whilst the relative speeds involved are small fractions of the speed of light. Thus a set of purely economic “laws” if such were possible would only approach the true within a given institutional setting which provides the limiting parameters. Thermoeconomic laws would not be economic laws but physical laws and so would be a different case. What part of micro-economics would “escape” limiting institutional parameters and what part would be “captured” or “bounded” by limiting institutional parameters I cannot begin to say.

  11. Jordan
    April 5th, 2014 at 21:12 | #11

    @Ikonoclast
    That is exactly why i wrote about marketing and how it shapes the system. So the system is affected by government decisions. Why government makes such decisions is not the part of economic analysys, but societal. The system is not a natural fenomenon but a product of governments and history that shaped it to the point that made a difference.

    To me a good macroeconomic policy is more likened to a steering wheel and sensor warning lights.
    Engine oil is healthy and hopefull working populace. It is allways there but is it clean and viscous as it should be?
    Money is octane within gasoline.

    Monetary policy is only a brake – fiscal policy is gas pedal.
    Problem that needs solving is speed changer.
    Tax policy is clean windshield.
    Demand is road to the destination.
    Supply is road already passed.
    Demand and supply is the same road.

    Gasoline is human desires that are shaped by hope and marketing and care for children.

    Micro is straightforward and it is shaped by macroeconomics; is there enough liquidity and capacity in the system? The rest is shaped by human desires.

    Micro applys only to non-corporations and individual states/ users of the currency. Macro applys to issuers of currency.
    So micro also applys to international trade just as to non-corporations.
    Corporations also can issue money- stocks in IPO are new almost free money, especially when there is no dividends with stocks. They can buy other corporations with their own issued money- stocks.

    But overall, microeconomics fully depend on government policies. I am moving from country to country and finding that out.

    In short, “money talks” means money moves resources, not other way around. Money moves organising ability, labor, material and desires. Place money into such and such sector and that sector will transfer resources from one sector to the one with money.
    Who places money? Government. It forms Fanie Mae and other GSCs and more resources will be moved into housing from other failing sectors.
    Government is in full control of macroeconomic outcome with its organizing ability, tax and spend policy.

    This is also Pikkety’s book point.

  12. Jordan
    April 5th, 2014 at 21:19 | #12

    About real inputs into economy. There is no limit. Only limit is human labor and cooperative capacity.
    There is organisational structure that was formed over centuries.
    Only the question of what problem needs to be solved is at fault today. The environmental and inequality problem is not at the table so it is not being solved. But history shows that it was solvable and MMT provides ability to see how easy it is to solve problems and that money is never an issue for solving problems. Only deciding on problems to be solved is.

  13. Ikonoclast
    April 6th, 2014 at 22:32 | #13

    @Jordan

    I indicated that I accepted and supported MMT to a point. Beyond that point, I argue (among other things) that the economy can be “exogenously supply limited”. By that I mean the economy can be limited by real material and energetic limits outside the economy itself, i.e. environmental factors. At that point we will have to agree to disagree.

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