Crisis and Inequality. Mattias Vermeiren
about 40 per cent of manufacturing jobs in the US economy.11 While globalization also opened up opportunities for firms and led to the creation of new jobs in competitive (usually capital-intensive) industries and business service sectors of the advanced economies, these jobs predominantly went to high-skilled workers. In this way, economic globalization reinforced the effects of SBTC on income inequality.
From a neoclassical perspective, rising income inequality due to SBTC and economic globalization is both unavoidable and desirable. It is unavoidable because of structural shifts in demand for low-skilled and high-skilled workers in competitive labour markets, where wages correspond to workers’ marginal product of labour. But it is also to a significant degree desirable because people respond to incentives triggered by the market price mechanism: if people know that they will be rewarded with higher income, they will be more eager to develop skills (via education) for which there is high demand in the labour market. In the long term the greater supply of scarce skills will boost the growth potential of the economy by providing the human capital that is needed for technological innovation. There is a broad consensus among neoclassical economists that the long-term growth of GDP is dependent on labour productivity growth, which refers to the quantity of goods and services that a worker can produce per hour: ‘it reflects our ability to produce more output by better combining inputs, owing to new ideas, technological innovations and business models’.12 The availability of new machines and technologies has radically improved the efficiency of the production process over the past two centuries, raising the labour productivity of the average worker as well as the average standards of living (measured by GDP per capita) in advanced capitalist countries. Economic globalization is also believed to have boosted productivity by facilitating technology transfers and competition.
The relationship between labour productivity and living standards has profound implications for public policy. According to most neoclassical economists, governments face a trade-off between equality and efficiency. First famously elaborated by US economist Arthur Okun in his 1975 book Equality and Efficiency, the existence of this trade-off has become so commonly accepted that it was labelled by Greg Mankiw as one of the ten Principles of Economics in his widely used introductory textbook:
When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller. This is the one lesson concerning the distribution of income about which almost everyone agrees.13
Policymakers should therefore focus on enlarging the economic pie by adopting policies that make markets and firms operate more efficiently and boosting average productivity – for example, by ensuring that workers are well educated and have access to the best available technologies, as well as by freeing up markets and intensifying competition in ways that push firms to adopt these technologies (e.g. by liberalizing trade).14
Towards a political economy perspective on rising inequality
Power and institutions as determinants of inequality
It would be wrong to believe that technological innovation and globalization are unrelated to inequality. Yet, from a political economy perspective, the neoclassical interpretation remains deficient for various reasons. As discussed above, income inequality has also increased within the top 10 per cent, between the 9 per cent and the top 1 per cent, which is difficult to explain on the basis of the theory of marginal productivity. Indeed, as Piketty notes in his book, ‘when we look at the changes in the skill levels of different groups in the income distribution, it is hard to see any discontinuity between the 9 percent and the 1 percent, regardless of what criteria we use: years of education, selectivity of educational institution, or professional experience’.15 The SBTC is even less well-equipped to explain differences in income gains within the top percentile (see table 1.1 above), whose members display even greater uniformity in skills than the top 10 per cent.16
Moreover, the neoclassical interpretation fails to explain why the trajectory of inequality has been so markedly different in the Anglo-Saxon countries and the continental European countries. After all, these advanced capitalist economies have been more or less equally exposed to exogenous market forces like technological innovation and globalization, making it difficult to understand why wage differentials between high-skilled and low-skilled workers rose faster in the former group of countries than in the latter. In fact, the more egalitarian countries of Northern Europe have been more open to international trade and more export-oriented than the less equal Anglo-Saxon economies. So although technological change and globalization may act as powerful forces for income inequality, continued cross-national diversity suggests that other factors influence both the magnitude and the rate of change in inequality and top income shares: from a political economy perspective, the effects of technological change and globalization on the distribution of income and wealth in the advanced economies have been shaped and mediated by a variety of public policies and economic institutions that should be central to debates on inequality.
Finally, the neoclassical view that labour productivity growth translates into a growth of wages and living standards for the average worker is clearly at odds with the fall in the labour income share since the 1980s. The constancy of the labour share of GDP was long seen as one of the ‘stylized facts’ in neoclassical economics: being equal to the marginal product of labour, wages are expected to grow in step with productivity growth, and the labour share of GDP should remain more or less stable over time.17 The fact that the labour share remained stable during the post-war era of egalitarian capitalism until the 1970s and has fallen ever since is a clear vindication of a central claim in the political economy literature, which states that the distribution of national income between the two factors of production is a function of shifting relations of bargaining power between capital and labour.
The typical starting point in the political economy literature is therefore that the distribution of income and wealth in an economy is intrinsically political, in the sense that it is always determined by the distribution of political and economic power between different groups and classes in that economy. All capitalist economies have an intrinsic propensity to fuel economic inequality due to the asymmetric relations of power between the owners of capital and the owners of labour, as Karl Marx argued forcefully in the first volume of Capital. Marxist political economists believe that owners of capital always have structural power in market economies through their control over the means of production: a fundamental feature of the capitalist mode of production is the commodification of labour; the majority of people have to sell their labour to capitalist employers to make a living, leading to a dependent relationship that allows employers to exploit the working classes by extracting ‘surplus value’ from their labour. For Marx and his followers, the exploitation of labour power through extraction of surplus value is the ultimate source of capitalist profits: workers’ wages will always be lower than the value added they produce for their firms. As such, Marxists reject the neoclassical view that wages tend to reflect the marginal product of labour: due to asymmetric bargaining relations between capitalist employees and wage earners in competitive labour markets, wages of the majority of workers will be typically below the value they produce for their firms.
The capitalist class also often has a structural power over the formation of the public policies of the government, which is reliant on the decisions of private businesses to invest in the economy and create a sufficient amount of economic growth and jobs: ‘a major, perhaps the major, function of government is to encourage businessmen to invest and produce, thus increasing GDP and improving everyone’s standard of living’.18 As Charles Lindblom argued in his 1977 book Politics Against Markets, the structural power of capital has two components.19 First, the owners of capital are able to cause economic disruption by organizing investment strikes – for example, postponing decisions to expand production or moving production abroad – whenever they disapprove of the government’s economic policies. The mere threat of such an investment strike can often be sufficient