Tue May 27, 2003

Risks, Rewards and the Wage Bargain

David Adesnik has a long post ruminating on some complaints by Kevin Drum on the amazingly rapid rise in income and wealth inequality in the United States over the past twenty five years or so. Kevin does some basic math to calculate how the increase in GDP over that time would have been distributed if rates of inequality hadn’t changed. David responds:

While I don’t understand much about economics, I tend to accept that growth in market economies reflects the willingness of those with capital to invest it in projects that carry with them a certain degree of risk. If the projects fail, so be it. If they succeed, those who put up the capital reap a far greater share of the profits than those employees who enjoyed the security of wage-based income.

Writ large, this process ensures that when the economy grows, the rich will always get richer far faster than everyone else.

This is the standard rationalization for rising wealth inequality. But it isn’t true, for several reasons.

On its own terms, I don’t think the story implies that the rich must get richer at a faster rate, which was Kevin’s original point. It just says there should be a lot of turnover in the class of rich people. If getting rich is just a matter of risk taking, you may win or lose on any given spin of the wheel and the rich have more to lose.

Neither do the empirical data bear out the idea that rapidly increasing inequality is an inevitable feature of capitalism. Look at the comparative cases—- other advanced capitalist democracies don’t have nearly as much wealth inequality as the U.S., and the U.S. itself for most of its history didn’t have such severe inequities either. So it’s hard to argue that the changes we’ve seen over the past 25 years are simply a matter of the Iron Laws of the Market.

Perhaps the most important point is that, when you get right down to it, the amount of risk borne by CEOs or very wealthy investors doesn’t seem nearly proportionate to the profits they make. Conveniently, John Quiggin and Ken Parish have informative posts on just how difficult it is to fail once you’re in the CEO position. John cites David Gordon’s Fat and Mean, a great attack from the mid-1990s on the idea that corporations were downsizing and becoming leaner and more efficient. What was really happening, Gordon convincingly showed, was that the social wage bargain was changing. Middle-managers and workers were being forced to bear a much larger part of the risk inherent in the capitalist enterprise, and owners and executives were becoming increasingly well-insulated from the downside. David talks about “the security of wage-based income,” a laudable institution but sadly a part of history for most workers in today’s economy. Check out Vicki Smith’s illuminating book, Crossing the Great Divide: Worker Risk and Opportunity in the New Economy for a close look at the world of work in different sectors of the U.S. economy.

If you want to know more about wealth and income inequality in the U.S., the books to read are Edward Wolff’s Top Heavy and Lisa Keister’s Wealth in America. (If you are Megan McArdle, you should buy the Wolff book, because it’s written by an economist and therefore is scientific, whereas Lisa is a sociologist.)

Towards the end of his post, David says “I have no idea what proportion of income inequality reflects natural trends in the American economy as opposed to Republican policy objectives.” It’s exactly this idea of “natural trends” in the economy that’s at issue. The standard description of this natural trend—wealth accrues to the risk takers, who also bear the downside of that risk—isn’t really true. As Marx said a long time ago, capital is not a thing, it’s a social relationship. (Don’t panic because I just mentioned Marx.) You don’t have to be a Marxist to see that the social relations of production have changed in the U.S. over the past generation, and that they bear little relation to the stylized story of virtuous accumulation through risk-bearing.