- Email: [email protected]
Response to David Colander
International Review of Economics Education 12 (2013) 86–87
Contents lists available at SciVerse ScienceDirect
International Review of Economics Education journal homepage: www.elsevier.com/locate/iree
Response to David Colander John Quiggin * School of Economics, University of Queensland, Brisbane 4072, Australia
A R T I C L E I N F O
Article history: Available online 8 April 2013
David Colander raises important questions about income distribution, globalization and the financial sector. It seems to me that the questions raised by the Occupy movement (as distinct from earlier radical critiques of the existing order) are mainly about income distribution, and particularly about the role of ‘‘the 1 per cent’’ a categorization taken from (the left wing of) the mainstream economics profession. So, I will focus on Colander’s discussion of income distribution, and the stories economists tell about it. Stories are important, but facts are more so. The facts about income distribution in the US are so striking as to demand pride of place in any introductory course. For most of recorded history, the distribution of income was both highly unequal, and relatively stable. Until 1945, it could be taken for granted that only a tiny proportion of the population could expect more from life than hard work to secure the basic necessities. And until the 1980s, the long-run constancy of the labor share of income was one of the great stylized facts any good theory had to accommodate. On the whole, marginal productivity theory told a convincing story about these seemingly eternal facts. Suppose that population growth holds real wages close to a socially defined minimum decent level, that capital ownership remains in the hands of a small minority, and that technology is CobbDouglas. The model fits those stylized facts pretty well. Since 1945, the facts have been less co-operative. Belief in the inevitability of high inequality was upended by the Great Compression in income distribution that followed the New Deal and World War II. The income share of the top 1 per cent fell from nearly 25 per cent on the eve of the Great Depression to less than 10 per cent during the Great Compression. In place of the Iron Law of Wages, and ‘the poor have ye always with you’, the economics profession came up with the Kuznets curve, and human capital theory, which explained a society in which nearly everyone was middle class.
* Tel.: +61 7 334 69646. E-mail address: [email protected]. 1477-3880/$ – see front matter ß 2013 Published by Elsevier Ltd. http://dx.doi.org/10.1016/j.iree.2013.04.005
J. Quiggin / International Review of Economics Education 12 (2013) 86–87
87
Just as this theory was perfected, the status quo ante reasserted itself with a vengeance. Between 1970 and the present, real median hourly wages barely moved, but the incomes of the top 1 per cent grew by leaps and bounds. All of the equalization achieved during the Great Compression, and then some, was undone. By 2007, the top 1 per cent were receiving more than 25 per cent of all income in the US. A brief drop in inequality occurred during the Global Financial Crisis, but the trend towards greater inequality re-emerged as soon as growth resumed. Contrary to Colander, I don’t think much of this can be explained by explicit changes in property rights. The Occupy Wall Street movement is entirely right to conclude that what matters here is power. Marginal productivity theory may help to explain wage differentials within the 99 per cent, but it tells us nothing about why the Mitt Romneys of this world are stupendously rich, even as the companies they ran have been driven into bankruptcy. So, I’d go further than Colander in saying that the 15 per cent rule is no longer applicable. Most of our introductory textbooks represent a discredited market liberal consensus that cannot be salvaged, even with radical surgery. We would be better off going back to the 1948 edition of Samuelson’s classic, and updating the story from there.
Contents lists available at SciVerse ScienceDirect
International Review of Economics Education journal homepage: www.elsevier.com/locate/iree
Response to David Colander John Quiggin * School of Economics, University of Queensland, Brisbane 4072, Australia
A R T I C L E I N F O
Article history: Available online 8 April 2013
David Colander raises important questions about income distribution, globalization and the financial sector. It seems to me that the questions raised by the Occupy movement (as distinct from earlier radical critiques of the existing order) are mainly about income distribution, and particularly about the role of ‘‘the 1 per cent’’ a categorization taken from (the left wing of) the mainstream economics profession. So, I will focus on Colander’s discussion of income distribution, and the stories economists tell about it. Stories are important, but facts are more so. The facts about income distribution in the US are so striking as to demand pride of place in any introductory course. For most of recorded history, the distribution of income was both highly unequal, and relatively stable. Until 1945, it could be taken for granted that only a tiny proportion of the population could expect more from life than hard work to secure the basic necessities. And until the 1980s, the long-run constancy of the labor share of income was one of the great stylized facts any good theory had to accommodate. On the whole, marginal productivity theory told a convincing story about these seemingly eternal facts. Suppose that population growth holds real wages close to a socially defined minimum decent level, that capital ownership remains in the hands of a small minority, and that technology is CobbDouglas. The model fits those stylized facts pretty well. Since 1945, the facts have been less co-operative. Belief in the inevitability of high inequality was upended by the Great Compression in income distribution that followed the New Deal and World War II. The income share of the top 1 per cent fell from nearly 25 per cent on the eve of the Great Depression to less than 10 per cent during the Great Compression. In place of the Iron Law of Wages, and ‘the poor have ye always with you’, the economics profession came up with the Kuznets curve, and human capital theory, which explained a society in which nearly everyone was middle class.
* Tel.: +61 7 334 69646. E-mail address: [email protected]. 1477-3880/$ – see front matter ß 2013 Published by Elsevier Ltd. http://dx.doi.org/10.1016/j.iree.2013.04.005
J. Quiggin / International Review of Economics Education 12 (2013) 86–87
87
Just as this theory was perfected, the status quo ante reasserted itself with a vengeance. Between 1970 and the present, real median hourly wages barely moved, but the incomes of the top 1 per cent grew by leaps and bounds. All of the equalization achieved during the Great Compression, and then some, was undone. By 2007, the top 1 per cent were receiving more than 25 per cent of all income in the US. A brief drop in inequality occurred during the Global Financial Crisis, but the trend towards greater inequality re-emerged as soon as growth resumed. Contrary to Colander, I don’t think much of this can be explained by explicit changes in property rights. The Occupy Wall Street movement is entirely right to conclude that what matters here is power. Marginal productivity theory may help to explain wage differentials within the 99 per cent, but it tells us nothing about why the Mitt Romneys of this world are stupendously rich, even as the companies they ran have been driven into bankruptcy. So, I’d go further than Colander in saying that the 15 per cent rule is no longer applicable. Most of our introductory textbooks represent a discredited market liberal consensus that cannot be salvaged, even with radical surgery. We would be better off going back to the 1948 edition of Samuelson’s classic, and updating the story from there.