Jag Bhalla and David Sloan Wilson — Updating Hayek: Can 'The Market' Prioritize Well?

This is diablog 9 between David Sloan Wilson (DSW) and me (JB)

Think Big — errors we live by
Updating Hayek: Can 'The Market' Prioritize Well?

Jag Bhalla

ht Evonomics

Mark Thoma — Full Employment Alone Won’t Solve Problem of Stagnating Wages

I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.…

Until workers recover the bargaining power they lost with the decline of unions and the rise of globalization, it’s hard to imagine a reversal of the forces pushing us toward stagnating wages and ever higher inequality. It’s not market forces alone that are determining the split of income between those at the top of the income distribution and those below, it’s also the institutions that determine who holds the cards in negotiations over wages. Presently workers are not faring well.

To me, what we are seeing is reminiscent of the “Just Price Doctrine” popularized by St. Thomas Aquinas in the Middle Ages. According to this view, “The just wage meant that rate of remuneration which was required to enable the worker to live decently in the station of life in which he was placed; and thus, if one may so express it, such a wage, representing reasonable decency, was made a first charge on industry.”…

Solving the problem of lack of bargaining power that puts workers at the mercy of the “decency” of those they negotiate with is not easy. The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring, though unions – to the extent they still exist – do retain some value as a source of political power.

But one thing is clear. So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem.

Especially when one of the chief "contradiction of capitalism" is asymmetry of capital/profit share and labor/wage share. See Michal Kalecki, "Political Aspects of Full Employment".

"The rent is too damn high."

Distributional issues will be difficult if not impossible to address effectively without reference to economic rent and rent-seeking, and how the ability to extract rent arises from power and class. This undercuts the mainstream rationale of distribution based on marginal productivity and just deserts, which is why it is marginalized as "Marxist" and off the table for discussion in mainstream economics. So far heterodox economists other than Marxists and Marxians have been reticent to pick it up. However, it is a principle reason behind market "imperfection" being endemic and market failure being recurrent, something that mainstream economists have not be able to address successfully without taking rent into account.

The Fiscal Times
Full Employment Alone Won’t Solve Problem of Stagnating Wages
Mark Thoma | Professor of Economics, University of Oregon

Daniel Cohen, Thomas Piketty, and Gilles Saint-Paul — The Economies of Rising Inequalities

From New York Times best-selling author Thomas Piketty and noted Professors of Economics Daniel Cohen and Gilles Saint-Paul, comes an in-depth discussion of rising inequalities in the western world. It explores the extent to which rising inequalities are the mechanical consequence of changes in economic fundamentals (such as changes in technological or demographic parameters), and to what extent they are the contingent consequences of country-specific and time-specific changes in institutions.

Both the 'fundamentalist' view and the 'institutionalist' view have some relevance. For instance, the decline of traditional manufacturing employment since the 1970s has been associated in every developed country with a rise of labor-market inequality (the inequality of labor earnings within the working-age population has gone up in all countries), which lends support to the fundamentalist view. But, on the other hand, everybody agrees that institutional differences (minimum wage, collective bargaining, tax and transfer policy, etc.) between Continental European countries and Anglo-Saxon countries explain why disposable income inequality trajectories have been so different in those two groups of countries during the 1980s-90s, which lends support to the institutionalist view. 

The chapters in this volume show the strength of both views. Through empirical evidence and new theoretical insights the contributors argue that institutions always play a crucial role in shaping inequalities, and sometimes preventing them, but that inequalities across age, sex, and skills often recur. From Sweden to Spain and Portugal, from Italy to Japan and the USA, the volume explores the diversity of the interplay between market forces and institutions.

The Economies of Rising Inequalities
by Daniel Cohen (Editor), Thomas Piketty (Editor), Gilles Saint-Paul (Editor)

Oxford University Press, 2002 hardback, 2013 paper, Kindle