Economics — a primary reason for the rise of inequality

28 Aug, 2019 at 13:08 | Posted in Economics | 13 Comments

In 2004, the Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

ineqAccounts of the rise of inequality often take a fatalistic view. The problem is described as a natural consequence of capitalism, or it is blamed on forces, like globalization or technological change, that are beyond the direct control of policymakers. But much of the fault lies in ourselves, in our collective decision to embrace policies that prioritized efficiency and encouraged the concentration of wealth, and to neglect policies that equalized opportunity and distributed rewards. The rise of economics is a primary reason for the rise of inequality.

And the fact that we caused the problem means the solution is in our power, too …

The market economy remains one of humankind’s most awesome inventions, a powerful machine for the creation of wealth. But the measure of a society is the quality of life throughout the pyramid, not just at the top, and a growing body of research shows that those born at the bottom today have less chance than in earlier generations to achieve prosperity or to contribute to society’s general welfare  …

Willful indifference to the distribution of prosperity over the last half century is an important reason the very survival of liberal democracy is now being tested by nationalist demagogues. I have no special insight into how long the rope can hold, or how much weight it can bear. But I know our shared bonds will last longer if we can find ways to reduce the strain.

Binyamin Appelbaum

13 Comments

  1. As far as I understand capitalistic economics, inequality is an automatic function of chance and compound interest. The Pareto-curve seems to bee the result. That also seems to have been the case in Mesopotamia where the jubilees were created to wipe the slate clean and restart the economy when it had become uneconomic. Today, crises and wars and destruction of the environment are the only adjustments.

  2. “Willful indifference to the distribution of prosperity over the last half century is an important reason the very survival of liberal democracy is now being tested by nationalist demagogues.”

    Absolutely. Economists are for sure part of the reason for the rise of Trump, Farage and Johnson. And they cannot keep banging on about austerity. The problems in capitalism are deeper and started before austerity.

    Economists, in thrall to (neo) classical theory and mathematical abstraction, have had their eye off the ball, and enormous opportunities have been wasted, particularly during the Great Moderation, when a lot could have been done.

  3. ” I have no special insight into how long the rope can hold, or how much weight it can bear.”
    .
    The mal-distribution of incomes and wealth in the West that has proceeded in the last 40 years is due to globalism and economic neoliberalism. It seems, despite the obvious disadvantages to the many and the gross numerical disadvantage of the few, the few have continually prevailed, essentially, via the political system to have their way.
    .
    The income and wealth disparities have lead to a surfeit of capital in few hands – this is the reason that interest rates and rates of return are at historic and immovable lows.
    .
    The system has only survived because the many can still purchase the share of the output of the economy they might have had otherwise because this surfeit of capital has been recycled via borrowing. So, the many have become increasingly indebted so they can enjoy the fruits of their labour, and disturbingly, even to survive.
    .
    The debt noose around the necks of the many will tighten until the point the many can longer service their debts. The pressure on the system can only continue to increase.

    • The Fed can buy the debts and forgive them …

      • RM. That’s not a long term answer. Or at best, it is only part of the answer. The problems are deeper than can be solved with such measures by the Fed, or macro-expansions.

        As Henry points out they relate to globalism, neoliberalism, and power.

        As pointed out in the first comments, redistributions of wealth and power, globalism and excessive capitalist laissez faire tend to only get addressed after very cataclysmic events. And then only temporarily.

        They should have happened during periods like the Great Moderation when the US had enormous world authority after the end of the Cold War and it could have implemented major social changes. But they were advised by an impotent and stupid profession.

        Sargent basically got what he wanted in thousands of economics departments around the world:

        “Superb economists at NYU (e.g., Robert Engle, Xavier Gabaix, Stanley Zin, Jess Benhabib, Douglas Gale, Boyan Jovanovic, David Pearce, Debraj Ray, Ennio Stacchetti, Charles Wilson, and others) have made notable contributions to economics partly because they are very creative but also because they studied more math than others.”

        http://www.tomsargent.com/math_courses.html

        This ‘creativity’ may have produced ‘creative’ maths (although I will leave that for proper mathematicians in maths departments to decide), but it has not brought in creative solutions for the problems in capitalism which requires real world understanding.

        The idiot savants that make up the economics profession has served present power arrangements well. But at a very big price to the majority.

        • If prices are arbitrary (which more and more traders concede when I ask them on twitter), redistribution by taxation and regulation is also arbitrary. Economics has maintained that prices are efficient enough and thus inflation is a signal that money must be tightened. If economists acknowledged that prices are administered and noisy, inflation ceases to be a meaningful signal. Thus we can redistribute share of income by creating more money rather than seizing assets. Inflation can be managed with indexation, and inflation swaps.
          .
          Say the Fed buys a basket of goods on which inflation is based. If the price of that basket goes up, the Fed now has a rising asset that balances increased cost-of-living adjustments to everyone …
          .
          The fetish with price stability is one of the main problems with economics. If prices are arbitrary, so is price stability.

    • Robert,
      .
      “The Fed can buy the debts and forgive them …”
      .
      The government has never forgiven any debt I have ever had.
      .
      Perhaps I should have opened a derivative position worth a trillion dollars that busted – might have had some luck with the government then.

      • If the Fed buys Treasuries, your taxes can go down …

        • How do you figure that?

          • Fed returns the interest to the Treasury, so interest is effectively zero percent, meaning not as much tax revenue is needed to sustain continued borrowing from the Fed.

  4. forces, like globalization or technological change, that are beyond the direct control of policymakers.

    I would contend this is not true. That the policymakers chose, or were bribed, not to control these areas does not make them beyond direct control

    • I think You are mostly right. But it’s a bit wrong to claim that they policymakers could be bribed bribed. CEO:s and politicians on the other hand are policytakers that use different means to deliver their different services to the owners: Maximum profits from the globalized market and peace on the home-front. But the policytakers have very little choice today…

  5. Lucas is one of the deaths we need to progress (a la Max Planck’s comment on getting past the locked in attitude of lost causes that neoliberalism has becomes


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