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 2nd, 2014 at 17:29 | #1

    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.

    For that matter, didn’t the biggest part of the rise in inequality happen in the 1980s specifically? That seems less like technology, and more like a result of drastically lower income tax rates and changes in financial sector regulation.

  2. April 2nd, 2014 at 17:42 | #2

    Steven Kaplan and Joshua Rauh’s “It’s the Market: The Broad-Based Rise in the Return to Top Talent” Journal of Economic Perspectives 2013 found that:
    • Rising inequality is due to technical changes that allow highly talented individuals or “superstars” to manage or perform on a much larger scale.

    • These superstars can now apply their talents to greater pools of resources and reach larger numbers of people and markets at home and abroad. They thus became more productive, and higher paid.

    • Those in the Forbes 400 richest are less likely to have inherited their wealth or grown-up wealthy.
    • Today’s rich are working rich who accessed education while young and then applied their natural talents and acquired skills to the most scalable industries such as ICT, finance, entertainment, sport and mass retailing.

    • The U.S. evidence on income and wealth shares for the top 1% is most consistent with a “superstar” explanation. This U.S. evidence is less consistent with the gains in earnings of the top 1 percent coming from greater managerial power over the determination of their own pay in the corporate world or changes in social norms about what managers could earn.

    Today’s super-rich are highly productive because they produce new and better products and services that people want and are willing to pay for.

    These rewards for entrepreneurship and hard work guide people of different talents and skills into the occupations and industries where their talents produce the most. The efficient allocation of talent and income maximising occupational choices were important to Rawls’ framework.

  3. Ikonoclast
    April 2nd, 2014 at 17:49 | #3

    I agree with the overall thesis of the article. I am interested in the last paragraph. It is a thumbnail sketch of what needs to be done. We all need to ask the questions. How could it be done? What is the whole program? How would it “lay the basis for a further transformation in which the power of private capital ceased to dominate the global economy”? What or who would dominate the global economy if private capital ceased to dominate it?

    These are fundamental questions of course. The amount of wealth and power amassed by the “1% of the 1%” will not be given up lightly or easily. A solid, comprehensive program with rock steady mass support would be required.

    All I can suggest are;

    (a) re-unionisation of the workforce;
    (b) re-nationalisation of utilities and natural monopolies;
    (c) issuing of debt money (as well as fiat money) to become a national public monopoly;
    (d) super taxes on the super rich (while they persisted);
    (e) transition to worker owned and managed businesses (worker democracy).

    The existence of owners and managers as elite, specialist classes would largely disappear.

  4. rog
    April 2nd, 2014 at 18:08 | #4

    @Jim Rose Yeah, but..

  5. rog
    April 2nd, 2014 at 18:14 | #5

    @Jim Rose

    Today’s super-rich are highly productive because they produce new and better products and services that people want and are willing to pay for

    yes I’ve heard all the “who makes a pencil” arguments but the counter argument is how much does a pencil really cost.

  6. bjb
    April 2nd, 2014 at 18:25 | #6

    @Jim Rose

    The “superstar” hypothesis is nice if you believe there really is a scarcity of skills in the managerial ranks in a similar sense to movie or sports stars. Problem is, there is no evidence that this is in fact the case.

  7. sunshine
    April 2nd, 2014 at 18:58 | #7

    From my life experience the promise of untold riches attracts an obviously lower caliber of person ,not superstars. Most conventionally successful (wealthy) people I have met are simply pig headed, ruthless, greedy and shallow folk who got lucky. Politicians wages should be kept minimal to ensure the highest quality of applicants for that important job .

  8. Fran Barlow
    April 2nd, 2014 at 21:17 | #8

    For some reason this quote from Rousseau comes to mind …

    It is useless to ask what is the source of natural inequality, because that question is answered by the simple definition of the word. Again, it is still more useless to inquire whether there is any essential connection between the two inequalities; for this would be only asking, in other words, whether those who command are necessarily better than those who obey, and if strength of body or of mind, wisdom or virtue are always found in particular individuals, in proportion to their power or wealth: a question fit perhaps to be discussed by slaves in the hearing of their masters, but highly unbecoming to reasonable and free men in search of the truth.

    A Dissertation on the Origin and Foundation of the Inequality of Mankind

    According to the Americans, that “all men are created equal” is a truth self-evident. What’s not evident is why this truth is worth stating if it has no post natal implications. Apparently, the 87 richest people in the world have as much wealth as the poorest 3.5 billion. It’s hard to imagine how one can hang onto the notion of intrinsic ethical equality when simple maths tells is that each of those 87 people is held aloft on a figurative sedan chair borne by about 40 million people none of whom live as well as anyone posting regularly here. Plainly, if people are all equally worthy, the system allegedly meeting their needs is unfit for purpose. Else if the system is as good as it gets, then some people — all between the poorest and those who will never be in that 87 lie on an ethical line between are mere ethical detritus — a kind of biogenic entropy — and mere footnotes in a narrative about the humanity of the super rich.

    I can’t accept that. I will never accept rationales for such inequality. Amongst the things that must be done by the working folk of the planet is to govern in their own name and interests, and to require of all that the benefits and burdens of productive labour be settled equitably amongst us all.

  9. Megan
    April 2nd, 2014 at 21:32 | #9

    @Fran Barlow

    And just today I read this in an article on ICH:

    Nearly a century ago, when capitalist democracy was in a crisis not unlike the present one, Supreme Court Justice Louis Brandeis warned: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” Democracy weathered that storm for two reasons: It is not inequality as such that destroys democracy but the more recent combination of inequality and transgression. Furthermore, democracy was then able to learn from crisis. The New Deal tempered economic free-for-all, primarily through the 1933 Banking Act, and gave the smallfolk new social securities.

    And then just an hour or so ago I also read a story about a multi-millionaire DuPont heir, Robert. H. Richards IV, who was convicted for the rape of his 3 year old daughter but won’t be going to jail apparently because the judge felt that would be too harsh on him.

    Inequality may not technically be “caused” by ideology. But in my view it certainly is the aim and outcome of neo-con ideology.

  10. Ernestine Gross
    April 2nd, 2014 at 22:46 | #10

    Ha, ha , ha …… finding a new label (‘top talent’, ‘superstar’) is mistaken by some for having a theory which explains the monumental problem of the growth of wealth inequality in the USA. This is arm chair theorising at its best. It is quite consistent with M. Friedman’s & Co methodology of taking what is as optimal or ‘natural’ and rationalising it via story telling. There is nothing ‘natural’ about the phenomena.

    Top talents? My word.
    - The proverbial Wall Street bankers manufactured ‘new products’ , jointly with rating agencies, which sent almost everybody else broke, except themselves. For their top talent in generating a global financial crisis they have been rewarded before and after the Lehman event. Welfare payments for the top 1% in the finance industry.
    - The ICAC transcripts give insight into the ‘technology’ used by some politicians to lift themselves out of ‘poverty’. Welfare payments for the ‘top’ 1% of politicians ranked according to gain in wealth after becoming politicians.

    Details of the ‘technologies’ used by the ‘top talents’ in various areas have been discussed on this blog-site for at least 8 years.

    My big gripe concerns the persistent confusion of the theory of a market economy with the reality of capitalism. The two terms, ‘market economy’ and ‘capitalism’ are used as if they were synonymous. They are not, except perhaps in the Austrian’s notion of ‘market economy’.

    Theoretical models of a market economy (private ownership economy with alternative assumptions about the type of market) provide one big insight: wealth distribution matters. Capitalism, as I observe it, relies on arm chair theorising – mythology seems to be an appropriate term.

  11. rog
    April 3rd, 2014 at 02:38 | #11

    @Ernestine Gross To further confuse the issue ‘freedom’ has been added to the mix, so we have ‘free market economy’ and ‘free market ‘capitalism’.

    The US is currently going through a phase where healthcare is being seen as a failure of the free market, or healthcare is an attack by govt on freedom.

    The same group see the financial crisis as a failure of the regulated market and the economy can only be rescued by a truly free market, one that is free of regulation, taxes and law.

  12. Windchaser
    April 3rd, 2014 at 03:31 | #12

    JQ, I’m not overwhelmingly convinced by this articles’ arguments. IMO, the increase in pre-tax inequality can be ascribed to a few factors:

    1) Technology, as you mentioned, helped the upper middle class has pulled away from the lower class in the US.
    2) Outsourcing, which is capital-intensive, transferred more low-paying jobs overseas.

    During the last 2 decades, the rise of emerging economies put upward pressure on materials costs: oil, iron ore, and so on. (The rising costs of hard commodities explains Australia’s good fortune during this time, I would venture). At the same time, jobs were being shipped overseas or automated. The US consumer has been caught in the middle, being squeezed from both ends.

    It also seems that during times of high capital flows, automation, or growth, a few people excel beyond the rest. You see the highest amounts of inequality during industrial booms and bubbles. And it’s related to the “superstar” effect, except now it’s not just exceptional skills, but skills + capital + luck, that drive this.

    It’s something like this: so Wal-mart outsources a bunch of jobs to China, and lowers the price of some widget by $0.15. The Chinese worker gets $0.05, the US consumer saves $0.05, and Wal-mart captures the last $0.05. Of these, Wal-mart shareholders/management comprise the smallest pool of people, so they get the most money per person.
    This is a grossly oversimplified example, but it demonstrates how small savings means big profits for a few. The bigger the corporation, the more this effect can concentrate wealth. And oh, how corporations have grown in the last few decades.

    And of course, corporate profit margins are near record highs, and they’ve been climbing during this entire time of automation and globalization. This also suggests that the root of the inequality lies in cost-cutting measures which have improved efficiency.

    Re: your article, I would caution against looking for one theory that explains all the observed facts. We don’t need the hypothesis of “technology” to explain why Greece is doing badly, or why Australia has done well — these may very well be events completely unrelated to automation. However, that doesn’t mean that automation hasn’t played an important role in shaping the course of the economy or creating inequality during the last few decades.

    IOW, the inequality is due to some factors, and Greece’s problems are due to other factors, and the same goes for Australia’s fortunes. It’s not like there’s only been one thing going on over the last few years: there’s been automation, and globalization, and the creation of the Euro, and civil unrest in some countries, and an increase in the price of oil, etc., etc.

  13. Brett
    April 3rd, 2014 at 04:37 | #13

    If you want to cut into the profits of the financial sector, then your best bet is to force them into market situations where they can’t rely on information asymmetries to make a ton of money at the expense of their counterparties. The bulk of their money came from structured finance and debt issues sold “over-the-counter” in private deals to other parties who often didn’t know any better. If they had to sell those as standardized products in an open market with restrictions on insider information (same for any credit default swaps), the profits would shrink a lot with rising competition.

    @bjb

    The “superstar” hypothesis is nice if you believe there really is a scarcity of skills in the managerial ranks in a similar sense to movie or sports stars. Problem is, there is no evidence that this is in fact the case.

    It’s more about what the people selecting and paying the compensation tend to believe, and there’s a stubborn persistence of belief in CEO Superstars and the difficulty in identifying them on CEO compensation boards. That’s why they’ll set compensation packages deliberately high as a baseline (between 50-75% of an estimate of average pay for CEOs in their business), and pay big money to anyone who seems to have potential talent or experience in the job. Nobody wants to “underpay” and end up with a “lemon” CEO.

    If you have that belief, then it does follow that there are merits to paying CEOs a lot more. If a new CEO is pulling in $25 million a year, but the company under his tenure is churning out an extra $1 billion a year in after-tax profit, then it pays for itself. The key being if you have that belief – I personally tend to think CEO’s influence on companies’ success is overrated.

  14. Redwood Rhiadra
    April 3rd, 2014 at 05:22 | #14

    And then just an hour or so ago I also read a story about a multi-millionaire DuPont heir, Robert. H. Richards IV, who was convicted for the rape of his 3 year old daughter but won’t be going to jail apparently because the judge felt that would be too harsh on him.

    Megan, it’s worse than that. The no-jail plea-bargain for the rape of his daughter was five years ago. The reason we’re only hearing about this now is his ex-wife is now charging him with raping his *other* child.

  15. BilB
    April 3rd, 2014 at 05:40 | #15

    Inequality is the product of ideology only as far as greed has a philosophical basis.

    Corporate greed operates at many levels. If you talk with small business people their field is littered with stories of managers using their oisition of trust to asset strip. At the major corporation end the CEO cult have raised this to the ultimate level of acceptance by convincing investors that they must pay huge amounts for the “best” person to protect their investment returns. We blindlu accept that a person with business sense not product sense is that right kind of person. Product sense is cheap, business sense us horrendously expensive according to the spin. Family business CEO’s would not agree.

    In our modern world I think that the ethos of buainess greed has flooded into our politics where there is an ever more heated battle for domination of the control of wealth/energies of a compliant public.

  16. Brett
    April 3rd, 2014 at 05:55 | #16

    Inequality is inevitable in any society with more than a few hundred individuals, and even then you’re starting to push it – true equality tends to not exist in groups larger than a few dozen people. It just becomes impossible to govern through direct democracy, and you have incentives to differentiate and exchange on the basis of skill and effort.

    It’s just about who you want governing your society, and how you choose and restrain them. That’s going to lead to inequalities in outcomes and conditions, even in regimes where people are ostensibly paid the same (there are other ways for the connected to reward themselves, with special privileges and dachas in the countryside).

  17. Jordan
    April 3rd, 2014 at 07:13 | #17

    Pr. Q. really nice way to avoid mentioning new block(neoliberal)buster that is raising alarms with economists; Thomas Piketty’s Capitalism in the Twenty-First Century about inequality.
    Brad deLong review
    and by James K. Galbraith

  18. Ben
    April 3rd, 2014 at 07:53 | #18

    Nice article, but I think you are a bit too quick to discount returns to capital. It’s not computers that have the big returns–its intangible capital like web platforms, organizational structures, and algorithms. Technology also (such as GPSs) facilitates further deskilling of workers and reduces their leverage in the workplace.

  19. Ikonoclast
    April 3rd, 2014 at 08:11 | #19

    @Redwood Rhiadra

    I wonder if the family dog was safe.

  20. Ikonoclast
    April 3rd, 2014 at 08:25 | #20

    Sorry for the above comment. I was not intending to belittle the horrible tragedy of the children. I was simply pondering acerbically if there was any end point to the perpetrator’s disturbances. The real point is that excess wealth leads to or enables excess abuses of all kinds and wealthy perpetrators are so often given free passes to offend again.

  21. April 3rd, 2014 at 08:34 | #21

    @bjb the Wiki is a rather good summary on how superstars earn so much more because they can scale-up their talents. it is no scarcity, it is the ability to reach a far bigger audience

    Sherwin Rosen argued that in superstar markets

    “small differences in talent at the top of the distribution will translate into large differences in revenue.”

    Rosen pointed out that

    “…sellers of higher talent charge only slightly higher prices than those of lower talent, but sell much larger quantities; their greater earnings come overwhelmingly from selling larger quantities than from charging higher prices”

    Alfred Marshall made the same observation that technology has greatly extended the power and reach of performers. his example was having a strong voice compared to access to a microphone or amplifier.

  22. bjb
    April 3rd, 2014 at 08:48 | #22

    @Jim Rose

    For the true superstars at the very top this is no doubt true. The problem is lower down the scale. Some 30 or more years ago CEO’s were earning 10′s of average salary, now they are earning 100′s or 1000′s. They _all_ think they’re superstars. A very good example are the CEO’s of all four of our major banks – each earning 10mill or thereabouts. Are any of these people entrepreneurs building and expanding these businesses ? Of course not. If they are really worth this, why didn’t they, for example create PayPal or any other disruptive technology ? (I don’t doubt that the banks do have people who could have “invented” PayPal, but you’ll not find them in the Executive Suite).

  23. John Quiggin
    April 3rd, 2014 at 08:50 | #23

    To restate Ernestine’s critique of the “superstar” “explanation”, it’s rather like saying that the reason opium makes you sleepy is because of its dormitive quality.

  24. Ikonoclast
    April 3rd, 2014 at 09:19 | #24

    @Ernestine Gross

    I agree with you. One wonders if concentrated non-worker ownership and “professional” management of our economy is really required. I am sure it is not.

    The Alvarado Street Bakery is a worker-owned bakery located in Petaluma, California. “As of 2009, more than half of the employees had been with the company for over 15 years and the average worker earned between $65,000 and $70,000 a year.” (1)

    A while ago I did some checking of bakery wages in the US. The co-operative workers of this bakery were getting about two times the standard income of a basic bakery worker in a conventional capitalist enterprise. These cooperative bakers are workers, managers and owners and are thus effectively drawing all income streams. More generally, if the owner share of national income from an economy is about 40% (currently) then we could expect workers’ pay to go up about 40% if non-working ownership was eliminated.

    There is no reason that ownership and management of an enterprise needs to be separated from the workers. Indeed, we need new laws requiring that only workers can be and all workers must be owners of the productive enterprise. If six tech-savy people get tired of being treated badly (as they see it) by a capitalist employer, they can leave. They can then start their own company where they have equal shares and equal decision making rights at meetings. They can also agree to share all income equally. They are now a workers’ cooperative whether they realise it or not.

    The crunch point comes when they hire the seventh worker. If the seventh worker is accorded full rights and a full (now seventh) share then the group remains a cooperative. If the seventh worker is hired as an employee then they have become a capitalist company. Various transition laws would be required to move from a capitalist society to a worker cooperative society.

    The free market would see cooperative enterprises competing. They could rise, fall, prosper and go broke just as enterprises do at present. A strong democratic, welfarist government would still be required. It would continue to own natural monopolies and utilities as state enterprises.

    Private property would continue to exist. All non-productive assets for personal use would continue to be privately owned. Laws to expunge rentier behaviour would also be required.

    Overall legal, conceptual and ideological changes would be required to support this structure. The current differences in wealth and huge inequalities as in the US are grotesque. Our current situation is absurd but we do not recognise the absurdity due to habituation and conceptual “normalisation” of this status quo. We need to ask these questions. What is ownership? What is possession? Following Proudhon, legitimate property (possession) is the result of labor and occupation. (Thus for example, Australia was the legitimate property of the aboriginal people who occupied it and laboured by hunting, fire-stick management and so on.)

    Thus only what you can labour on, build, maintain and reasonably occupy and manage is your ownership “due”. This is in your capacity as an individual worker or as a cooperative worker.

    (1) Source: Wikipedia.

  25. James Wimberley
    April 3rd, 2014 at 09:22 | #25

    The title of this post makes a different and stronger claim than the linked article. Do “ideology” and “technology” exhaust the possibilities?

    For ideology to be the prime cause, it would need to have been the motor of the rise of the financiers. But it could have been an epiphenomenon of the latter. In everyday language, the plutocrats bought the pundits and the politicians. Chicago, Cato and Heritage, in this view, fill the role of Willi Muenzenberg’s “useful idiots”.

    A more balanced view would see neoliberal ideology and finance capital as successful symbionts, a marriage made in hell. In that case, there is no one alternative to “technology”.

    You may very well be right in seeing their success as a reversion to the Piketty trend. The social democratic phase in which you and I grew up was unstable; a few intellectual and political cracks, and it crumbled. It’s all to do again.

  26. JamesH
    April 3rd, 2014 at 11:28 | #26

    I’m inclined to believe that executive pay varies with the amount of capital they effectively control (I do not say “control well”). It is a measure of their “skill” at extracting rents, multiplied by the size of the beast they leach onto.
    There’s no need to charge Jim Rose with circularity. There’s a simple empirical disproof: Company performance and CEO pay, for medium to large companies, are well known to be negatively correlated; the higher your CEO is paid (above a fairly modest minimum) the worse your company performance is. This was true before the GFC and is twice as true when performance during that period is taken into account. (Here is a reference paper downloaded from that well known Communist mouthpiece the Wall Street Journal, but the same correlation has been demonstrated many many times. If the CEOs were being paid on the “superstar” system, the reverse should be true. Interestingly, the paper documents what might be called a “supernova” effect – CEOs believe that because they are highly paid they really are superstars, become swollen with ego and overconfidence, and proceed to blow up the company.

  27. Ikonoclast
    April 3rd, 2014 at 11:48 | #27

    @James Wimberley

    Interesting that you mention the concept “phase” and the idea of stability/instablility. My previous post involved some idealised musing about worker cooperative ownership. These ideas are not new of course. The Marxian Professor Richard D. Wolff now writes and talks a lot about democracy at work and worker cooperative ownership. These are ideas I agree with (and parrot at times).

    However, realistically we are not near any kind of peaceful social-democratic phase change. I think it is of signal importance that the three greatest powers (all arguably regional superpowers) namely USA, Russia and China are all in effect crony oligarchies combined with secret agency states. Capitalism of the current kind (late-stage crony capitalism with a suborned secret state) is not about to be ditched or reformed or “revolutioned” away any time soon. Its hold is too powerful and too all pervasive.

    Only internal and external contradictions can bring it down. The internal contradictions revolve around ever-increasing inequality which means unsustainability of life for the poor. The external contradictions revolve around environmental unsustainability. This system can’t phase-change until the current complex connections begin dissolving. A complexity collapse must precede the next revolutions (plural because the globe will break into parts again).

  28. patrickb
    April 3rd, 2014 at 12:05 | #28

    @Ikonoclast
    So Marius Kloppers, Meredith Helicar, Gerry Harvey, Gail Evans, David Murray are great innovators eh? I think you’ve missed the point of the original post. Sure, Larry Page and a few others have developed something relatively new and made a pile out of it. But they are in a different category to the ‘superstar’ CEO/board members who pull down fantastic sums year on year for what appears to be maintaining business as usual. I find senior managers to be fairly wary of innovation and more interested in their own careers, which doesn’t necessarily dovetail well with advancing the interests of the firm.

  29. Ian Bruce
    April 3rd, 2014 at 12:21 | #29

    @Jim Rose
    Last two paragraphs …… Total bull***t , written by someone who is attempting to embed himself in the trough of corporate greed and self interest and is deluding himself that he is somehow more worthy than others #beyondbelief

  30. Will
    April 3rd, 2014 at 13:31 | #30

    Another day, another kneejerk defence of the status quo by the usual suspects. With a heavy heart I come to the conclusion that the opportunity for a boozy lunch has passed and it’s too early to hit the spirits. These ideologues believe that having large incomes at the top and redistributive mechanisms for the bottom such as a strong social safety net are mutually exclusive. It’s just like the Yanks who claim that they can choose one of either universal healthcare or defence! Good grief.

  31. Peter T
    April 3rd, 2014 at 13:42 | #31

    It’s not a “market” phenomenon at all, it’s a structural one. A corporation/government or whatever has a certain shape, maintained by all its members. There are a large number of slots at the bottom, and usually only one at the top. The larger the pyramid, the higher the top can be: the Great Moghul was much richer than the Queen of England because he sat on top of a bigger and higher pile. There is no natural way of determining distribution, as the structures as a whole are what produce, not the individuals within them.

    And power begets power – land ownership in the UK remains astonishingly concentrated due to several centuries of mostly unchecked transmission. There are countervailing forces, but they are political. We could talk about merit, but that’s defined by the top, so it’s pretty much circular, and anyway is a function of the structures too.

    This is an area where economics has very little useful to say, but there’s a lot of good sociology.

  32. sunshine
    April 3rd, 2014 at 14:03 | #32

    * Some angry old rich white men (Libertarians) say that the bigger the wealth gap the faster living standards will be raised for the poor .Also they sometimes say that only absolute poverty is relevant -not relative poverty ie; stop complaining things could be worse !

    * I dont think anyone is saying all inequality can be eliminated , or even that we should try to achieve that. What we should try to eliminate is entrenched disadvantage that reproduces itself generation after generation in particular groups .

    * One thing that worries me about Jims society of superstars and losers is that it favors psychopathic individuals. Typical psychopathic traits should not be encouraged .(apparently psychopaths are over represented in the military ,police ,surgeons and CEO’s -so there may be some uses for them).

  33. Fran Barlow
    April 3rd, 2014 at 14:53 | #33

    @sunshine

    I don’t think anyone is saying all inequality can be eliminated , or even that we should try to achieve that.

    I don’t believe all inequality can be eliminated yet or even soon, but I do believe that that “closing the gap” to use a current phrase, should be a key aim. A serious and sustained effort to achieve equality that falls short is still manifestly better than passive acceptance.

    What we should try to eliminate is entrenched disadvantage that reproduces itself generation after generation in particular groups .

    Well yes, that as part of the larger whole, obviously.

    I believe that for as long as scarcity persists, substantial inequality will attend it. In the interim, I can see why the production of particualr goods and services that are labour-intensive and require high levels of skill and responsibility may simply demand more of the labour of others. It’s easy to see how one might need to reward one person 10 or even 20 times as well as another person with a more common and lower cost set of skills or lesser responsibility. Certainly, we should try to avoid that happening but not everyone can be a brilliant engineer, mathematician, doctor, agronomist or some such thing.

    Yet it would be hard indeed to justify someone being given privileges 50 times that of another person of average skill. They don’t need that sort of reward and it’s unjust to give it to them. I’d want to see a very impressive case before I’d accept that argument.

    Curiously, the kinds of people I’m making exceptions for don’t look at all like the people who are most grievously violating equality in our current world. The richest folk tend to be people whose “work” (if that is the right term) if they met a sudden and untimely end would be missed by almost nobody, except perhaps by the next spiv stepping with alacrity into their place. Would anyone whose opinion we ought to take seriously be worse off if the richest 87 people on the planet or even the richest 1% suddenly disappeared into a parallel universe, leaving their assets behind them to be fought over by creditors and the beneficiaries of probate?

    I rather doubt it.

    I read some time last year that the Chief of NAB in Australia — a minor parasite in the grand scheme of things — was on about $2.5 million per year — which is roughly 60 times the median full time income in Australia. Let’s not even compare it with the median full time income in, say, Bangladesh or S0malia. Yet Sheldon Adelson, casino magnate and property developer and donor to the Repugs, 8th richest person on the planet, increased his net worth by $11.5bn last year — meaning that last year he out-earned the spiv from NAB by a factor of 4600! The guy from NAB barely counts as a speck of detritus in a ripple in one of Adelson’s shoes, even though NAB guy probably sees most of us, in social terms, as mere vermin.

    No rational social system would give either of these types a penny more than the rest of us get. yet they get to shape the social system to ensure that he continue to line their pockets.

    I’m often called a radical, but when you think about what the system’s defenders declare rational, they are a lot more radical than me, and not in a good way.

  34. patrickb
    April 3rd, 2014 at 15:37 | #34

    Sorry that comment was for Jim Rose.

  35. Collin Street
    April 3rd, 2014 at 15:38 | #35

    Also they sometimes say that only absolute poverty is relevant -not relative poverty ie; stop complaining things could be worse

    This is actually demonstrably false, on account of positional goods and things in limited supply: if there are five people and five houses, but one person has six times the disposable income of any of the others, the rich bastard can outbid the others and get all the things, at a fairly significant loss in total utility.

    [it's clearer if you imagine five different and unique positional goods [second house in the inner city, car-parking spot and vintage bentley, 40-foot huon pine yacht, private aircraft, etc]… with relatively-level income distributions, each person gets the one they want most, but the more income distribution is concentrated, the more Rich can spend on his second or fourth preference and outbid people on their first choice: it’s extremely likely that Rich gets less utility from his fifth-favourite thing than J Random does from his first, so there’s a clear utility loss over the community.]

  36. Lew Dog
    April 3rd, 2014 at 16:14 | #36

    Did you write the comments “policy” on Crooked Timber? Is that why you can’t defend it?

  37. Tim Macknay
    April 3rd, 2014 at 18:30 | #37

    @Lew Dog
    Are you commenting here because your comment would too obviously fall afoul of the ‘stupidity’ and ‘irrelevance’ grounds for deletion over at Crooked Timber?

  38. Ernestine Gross
    April 3rd, 2014 at 21:43 | #38

    @Ikonoclast

    Worker cooperatives. I have no specialist knowledge in this area. It seems to me this form of enterprise works better for technologies that require relatively little physical captital (eg bakeries vs steel mills).

    But I do recall having read an article on the outrage in one state in the USA, where VW has a subsidiary, when VW introduced worker representatives to the board of directors. I don’t recall the exact words of the outrage – something to the effect that it is a threat to the American way of life. VW maintained their US subsidiary is the only one among all their subsidiaries (can’t remember how many) outside Germany where this model of management is not in place and their models works everywhere and it is no threat to anybody. This model is not a worker-cooperative. It merely encourages cooperation due to an improved flow of information – not necesarily only in one direction. It is not uncommon for board members to learn something about how to improve things (‘increase in technical efficiency’) from workers. This model presupposes members of the board are knowledgeable about the technology of their business because otherwise the production workers’ suggestions would fall on deaf ears, and vice versa.

  39. Jordan
    April 4th, 2014 at 01:00 | #39

    20 hours in moderation.

    Pr. Q. really nice way to avoid mentioning new block(neoliberal)buster that is raising alarms with economists; Thomas Piketty’s Capitalism in the Twenty-First Century about inequality.
    Brad deLong review

  40. Jordan
    April 4th, 2014 at 01:01 | #40
  41. Jordan
    April 4th, 2014 at 01:22 | #41

    @Ernestine Gross
    Workers cooperatives.
    ” The formation of some workers cooperatives, such as those of the Knights of Labor in 19th century America, were designed to “cope with the evils of unbridled capitalism and the insecurities of wage labor” Wikipedia

    The biggest one is Mondragon corporation with over 100 000 partners and about 30 000 employees that are not coowners, mostly Asians that are not accustomed to such concept and refuse responsibility and benefits. Started by a catholic priest Arizmendia and 6 other villagers in an area devastated by Spanish Civil War with no jobs.

    Arizmendia got the idea from Barcelona Commune tha was established around such principle, full democracy in politics and full democracy at work. I believe it was the only right way of applying Karl Marx.
    Yugoslavia was also on the way to apply it but never completed reforms from 1956 that were designed to recreate Barcelona Commune on the country wide scale. In Yugoslavia workers were owners only formaly but had no say in most important decisions, only in everyday matters.
    This solution to capitalism had to be removed from the face of the earth and Yugoslavia ended in catastrophic war division.

    Italy has a Law since 1980s that provides 2 year unemployment benefits pay lump sum to unemployed person that finds 5 other unemployed and form a worker cooperative and available credit for start up.
    USA has Arizmendia Bakery with multiple stores and others like Republic Windows that was going for closing but taken over by employees with help of Obama and Bank of America.

    Many non-for-profit organizations are worker cooperatives. With implementation of Obamacare, many new worker cooperatives appeared as new insurers with crediting help by government untill few months ago when GOP cut funding for such companies, but they still survive and thrive.
    There is more and more of small cooperatives start ups in USA.

    Ecuador and Argentina are forming cooperatives en mass by support of government and MMT guys.
    Cooperative idea is taking roots everywhere and the speed is increasing.

  42. Jordan
    April 4th, 2014 at 01:27 | #42

    And Germany has a rule that corporations of particular size have to have at least 2 worker representatives on Board of Directors so when they tried to implement it in Georgia at the new plant, the vote of employees on unionization was NO due to state wide scare by GOP that if they vote YES that VW will leave. But acctually because of such vote VW promissed that they will not build or expand this plant and try somwhere else.

  43. Robert
    April 4th, 2014 at 06:53 | #43

    John–out of curiosity, were you planning on reviewing Piketty’s new book? Would love to read your thoughts on it.

  44. Noncist
    April 4th, 2014 at 08:14 | #44

    I don’t buy the counter argument to the “skills gap” presented in Krugman’s article. It uses education level and industry wide wages as an indicator of skills, neither of which indicate the skills that actually matter to businesses.

    The problem is that employers are looking for people who not only have the right educational background, but also communicate well, have creative ability, problem solving, critical thinking, and can work effectively both alone and in teams. Within many industries in developed economies you will find that workers who have these soft skills can command much higher pay than those who do not. Inversely, workers who have technical skill and education, but are terrible at these other necessities will find themselves in a vicious cycle of short term jobs and potentially long term unemployment.

    Look at the growing variance among wages earned within particular industries like law, technology, design, and marketing regardless of educational level – there is your “skills gap”.

  45. BilB
    April 4th, 2014 at 09:42 | #45

    What you are talking about there, Noncist, are base line inequalities. The post, I think, is about inequalities in the 10′s to 1000′s time base line average incomes.

    I cherish a world where every one is their own employer, and people work co-operatively to achieve big things (as distinct from co-operatives). Of course not every thing can be that way, and not everyone wants to work that way, so the way things are in this country aren’t too bad at all.

    The biggest problem that we face is where inequality feeds ideology with the intention to further multiply inequality. Mega greed, to what end?

    The second biggest problem we face is where religious ideology, using COLLECTIVE INEQUALITY, feeds fanaticism with the intention to achieve political and economic domination over populations.

    Rather than a skills gap I believe that we have a confidence gap exacerbated by an overly rigid community/building structure which together serve to stifle initiative. We believe that our community has developed towards a healthy “mature” structure when in fact it has become rigid and eliminated the very developmental agility that a world adapting to climate change is going to need ever increasingly.

  46. Ikonoclast
    April 4th, 2014 at 10:48 | #46

    @Noncist

    What you seem to propose is a corporate monoculture where everyone is a generalist clone with “all” the skills. This is a most perverse and unrealistic vision of human society. People are diverse and have diverse aptitudes. Some people, perhaps those with mild aspergers or a degree of social anxiety, are suited to working alone, delving deeply and even a little obsessively into complex technical problems. Perhaps I shouldn’t even judge the range of peoples’ behaviours and aptitudes and thus “medicalise” and “psychologise” their diversity of aptitudes and preferences. Perhaps corporations shouldn’t either do this either. But of course that is exactly what corporations do. They standardise and compartmentalise creating a clone culture, an ideological and business monoculture.

    I think this is what Bilb has diagnosed very accurately, that society has become “rigid and eliminated the very developmental agility” that it needs (to deal with new problems like climate change which challenge corporate capital’s paradigm of blind, endless growth). There is no need however to demonise “co-operatives”. Every company which has partners who own equal shares, contribute approximately equal labour (or amounts commensurate with their skills and ability) and draw approximately equal rewards is a co-operative. Functional families and many family businesses are actually co-operatives by this measure. Cooperation and co-operative partnerships are actually far more basic to our society than the powers that be want us to believe or perceive.

    There is no reason that a diverse, eclectic society could not have a healthy public sector (including ownership of natural monopolies), a healthy private, capitalistic (and even at times corporatised sector) AND a healthy co-operatives sector. Our problem is that we do not fully accept the value of two important sectors, namely the public sector and the co-operative sector. We have allowed the corporate capital sector to become too big, too powerful, too influential and to dominate our society and distort our politics and economy. This is where the real problem lies. Corporations and corporate capital (and especially financial capital) are currently far too powerful. Their wings need to be clipped significantly and the other sectors encouraged to grow again to give a healthy, eclectic and diverse society and economy.

    An entirely corporatised society is undemocratic. Concentrated money controls society, not all the citizens as they should. An entirely corporatised society is a rigid, unresponsive, maladaptive monoculture. That is why we can’t change BAU (business as usual) right at the point in history when we desperately need to do so.

  47. Collin Street
    April 4th, 2014 at 11:28 | #47

    Look at the growing variance among wages earned within particular industries like law, technology, design, and marketing regardless of educational level – there is your “skills gap”.

    If it’s “regardless of educational level” then either your “educational system” doesn’t impart “skills” — which is some sort of problem right there — or you’re measuring things-that-are-not-skills and calling it a “skills gap” is… foolish? mendacious? Wrong, certainly.

    Either way you’re looking in the wrong place for the problem.

  48. Ikonoclast
    April 4th, 2014 at 12:01 | #48

    @Ernestine Gross

    Please see my reply above to Noncist. It includes an argument for expansion of the public and co-operative sectors of our economy with a concomittent reduction in size and power of the corporate sector. It does not suggest that the corporate or capitalist sector needs to be expunged entirely; merely that it must be brought back into a balance so that it does not dominate our society, suffocate and suborn democracy and entirely determine the direction of our economy.

    With respect to large enterprises like steelworks requiring large capital works (which means large amounts of financial capital), we need to consider a few factors. First, my formula, as expressed above, does not preclude entirely the existence of large capitalist corporations. Sufficient space would remain for such corporations. Second, as John Quiggin has pointed out, and I think you would agree, industrial capital per se (capital for productive investment) is not the main problem with capital currently. The main problem is financial capital or rather that large component of financial capital which is now a speculative superstructure above and beyond the basic employment of capital for direct productive investment (ie. to produce real goods and services).

    (Bear with me below as I set out my ideas. They might seem obvious or wrong-headed to a money theorist like yourself. A layperson attempting to lecture an economics professor on the nature of money is probably the height of impertinence.)

    Finally, we need to ask what investment capital is. What is money capital? It’s just numbers. Money and money capital are notional and not real. This statement needs qualification. Clearly money is not real in the sense that real products and real services are real. It takes real materials and real energy to create real products. It takes real materials and real energy to create a steelworks with a capitalised value of say US$ 10 Billion. It does not in any commensurate way take the same amount of real materials and real energy to create US$ 10 billion as money. Just ask The Fed and US Treasury or the “banksters”.

    At the same time, money is real in another sense. It is a social and institutionalised reality. These days money is a controlled language; a specialised calculating and apportioning language. Money “says” what gets assigned, what gets built and so on. I don’t think it’s merely a semantic or metaphoric argument to say modern money is a language. It goes deeper than that. Money (and all the rules and law that surround it) is at least a language in the sense that a computer programming language is. It is a set of rules, a standardised syntax and grammer for “if-then” logic decisions and algorithmic computation.

    Under the current rules of this language (the grammar of the money language, the rules of calculation and equivalence, its dictionary of meanings, its laws of application and so on), a steelworks is “funded” in a certain way. This “funding” is a complex game, albeit a very serious game. The thing about games is that they have formal rules and parameters. To mistake this humanly, socially created game in its exact current form as invioable, immutable, natural or real is to fall for the Reification fallacy or the fallacy of misplaced concreteness. This occurs when when an abstraction (abstract belief or hypothetical construct) is treated as if it were a concrete, real event, or physical entity. In other words, it is the error of treating as a concrete thing something which is not concrete, but merely an idea.

    Money is a realised idea but still an idea. The general financial arrangements to create or continue the operations of a large agglomeration of physical capital are based on a set of calculation formulae based on pre-set rules of the money system. These rules can be and are changed in special or emergency circumstances. The US provision for Chapter 11 bankruptcies is a clear example. The government steps in and suspends the rules. Similarly, different methods could be found, other than marshalling corporate capital under current money systems rules for decreeing (it is all essentially “decreeing” that money is “real”) that capital is “assigned” to build a steel mill.

    Footnote:

    Some of the best evidence that the entire money system is arbitrary (and could be circumvented by decree by the state) is found in the FEMA executive orders in the USA. These are prepared in order to permit the US President rule by decree in time of emergency, war, civil strife or martial law. Essentially they would abolish by decree a significant part of the operation of the money system and markets.

    “EXECUTIVE ORDER 10990 allows the government to take over all modes of transportation and control of highways and seaports.

    EXECUTIVE ORDER 10995 allows the government to seize and control the communication media.

    EXECUTIVE ORDER 10997 allows the government to take over all electrical power, gas, petroleum, fuels and minerals.

    EXECUTIVE ORDER 10998 allows the government to take over all food resources and farms.

    EXECUTIVE ORDER 11000 allows the government to mobilize civilians into work brigades under government supervision.

    EXECUTIVE ORDER 11001 allows the government to take over all health, education and welfare functions.

    EXECUTIVE ORDER 11002 designates the Postmaster General to operate a national registration of all persons.

    EXECUTIVE ORDER 11003 allows the government to take over all airports and aircraft, including commercial aircraft.

    EXECUTIVE ORDER 11004 allows the Housing and Finance Authority to relocate communities, build new housing with public funds, designate areas to be abandoned, and establish new locations for populations.

    EXECUTIVE ORDER 11005 allows the government to take over railroads, inland waterways and public storage facilities.

    EXECUTIVE ORDER 11051 specifies the responsibility of the Office of Emergency Planning and gives authorization to put all Executive Orders into effect in times of increased international tensions and economic or financial crisis.

    EXECUTIVE ORDER 11310 grants authority to the Department of Justice to enforce the plans set out in Executive Orders, to institute industrial support, to establish judicial and legislative liaison, to control all aliens, to operate penal and correctional institutions, and to advise and assist the President.

    EXECUTIVE ORDER 11049 assigns emergency preparedness function to federal departments and agencies, consolidating 21 operative Executive Orders issued over a fifteen year period.

    EXECUTIVE ORDER 11921 allows the Federal Emergency Preparedness Agency to develop plans to establish control over the mechanisms of production and distribution, of energy sources, wages, salaries, credit and the flow of money in U.S. financial institution in any undefined national emergency. It also provides that when a state of emergency is declared by the President, Congress cannot review the action for six months. The Federal Emergency Management Agency has broad powers in every aspect of the nation.”

    I don’t quote these provisions to necessarily criticise them like a doctrinaire libertarian would. All these powers would be necessary in an extreme emergency like total war. I merely quote them here to illustrate that there are other ways for things to happen and be organised other than by our current money system. The current system is just an arbitray human invention. It’s nothing handed down on a tablet from on high.

  49. Royton De’Ath
    April 4th, 2014 at 14:14 | #49

    The long view:

    ‘We would like to be able to work out scenarios for a wide variety of societies, providing plausible explanations for why certain varieties appeared so frequently and lasted so long. We suspect, for example, that complex societies could only arise after changes in logic had reduced the pressure to suppress self-interest. Some families or descent groups were then free to place their less successful neighbors in a position of disadvantage. They justified their superiority by claiming special relationships with the very beings who had given humans their laws of behavior in the first place.

    We are struck, however, by the fact that each escalation of inequality required the overcoming of resistance. There seems to have been an ongoing struggle between those who desired to be superior and those who objected. That is undoubtedly why some of our most complex and stratified societies formed in a crucible of intense competition among clans, chiefly lineages, and ethnic groups.

    Man is born free, Rousseau declared, yet we see him everywhere in chains. We have our ancestors to thank for that. They had dozens of chances to resist inequality, but they did not always have the resolve. We can forgive them for admiring virtue, entrepreneurial skill, and bravery. We simply wish they had not accepted the idea that those qualities were hereditary.’

    Flannery, K. & Marcus, J., 2012. The Creation of Inequality. HUP: [at 1244 ebook edition]

    F & M use the term ‘social logic’ which seems to have a fragrance of ideology about it.

  50. John Quiggin
    April 4th, 2014 at 14:22 | #50

    @Robert

    I have already promised three different reviews of Pickety. It’s a big book, I’m told, so hopefully I can find plenty of material

  51. Brett
    April 4th, 2014 at 14:38 | #51

    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.

  52. Ernestine Gross
    April 4th, 2014 at 15:57 | #52

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

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

    @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.

  54. Noncist
    April 4th, 2014 at 17:03 | #54

    @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.

  55. Robert
    April 4th, 2014 at 19:31 | #55

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

  56. Ernestine Gross
    April 4th, 2014 at 20:14 | #56

    @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).

    .

  57. Ikonoclast
    April 4th, 2014 at 23:04 | #57

    @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.

  58. majidvijah
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  59. Jordan
    April 5th, 2014 at 08:01 | #59

    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.

  60. Ikonoclast
    April 5th, 2014 at 10:08 | #60

    @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.

  61. Jordan
    April 5th, 2014 at 21:12 | #61

    @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.

  62. Jordan
    April 5th, 2014 at 21:19 | #62

    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.

  63. Ikonoclast
    April 6th, 2014 at 22:32 | #63

    @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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