Saturday, February 28, 2015

Branko Milanovic — What remains of Pareto?

My class on personal income distribution theories (within-nations) begins with Pareto. Pareto will indeed be for ever part of such classes because he was the first economist to have been seriously interested in empirical analysis of inter-personal inequality. Before him, economics was about functional income distribution which, of course, makes sense if you assume that all workers are at subsistence, all capitalists rich, and all landlords even richer. Then, you do not need to bother with inter-personal inequality. It is just a transformation of factoral income distribution. (This is, I think, most obvious in Ricardo who cannot even conceive of a possibility of wages ever going above subsistence—except temporarily to precipitate the Malthusian movement. The advantage for modeling—since Ricardo’s “Principles” are in reality an exercise in verbal modelling—is that you have one fixed quantity and you can then let others vary).

It is just a minor simplification to say that Pareto thought that there was an iron law of income distribution, namely that inequality did not change whatever social system was in power. It gave consistency to his theory of the circulation of the elites, because whatever elite be in power (land-owning, capitalist or bureaucratic), income distribution would be the same although the people who would be rich or poor would be different. It was a serious critique of the idea that Marxist socialism would reduce income inequalities.
What remains of Pareto’s claim? Several things are clear now--more than a century after Pareto defined his power low and showed that the number of recipients of a given income decreases in proportion as that income threshold is raised. Pareto law does not apply to any entire distribution.
Global Inequality
What remains of Pareto?
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace


Magpie said...

Sometimes I wonder if bloggers (even well-meaning and smart ones, as Milanovic) actually think things through before writing stuff.

This is Milanovic now:

"Before him [i.e. Pareto], economics was about functional income distribution which, of course, makes sense if you assume that all workers are at subsistence, all capitalists rich, and all landlords even richer."

This was Milanovic on February 19:

"It is not the amount of income that makes you a worker, but the need for continuous application of your labor. This is the fundamental difference between labor and all forms of capital. This is the cleavage, so obvious to anyone, that has been at the source of the classical distinction between labor and capital."

What gives?

Branko Milanovic said...

Nothing gives: the two things are not inconsistent at all. The first view was held by classical economists in 1820-1850s because all workers were poor and assumed to remain so. But when there are workers with high wages functional distribution does not resolve itself into personal distribution directly and simply. You have to worry about both. But rich workers still remain workers, no matter how high their wages.

Magpie said...

Sorry, Prof. Milanovic, but in my opinion, the view of subsistence wages is largely a myth.

This is Adam Smith in the Wealth of Nations (1776):

"By necessaries I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in publick without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, no body can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England."

This is Ricardo in 1817 (3rd edition of Principles of Political Economy and Taxation):

"It is not to be understood that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English laborer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where 'man's life is cheap', and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history."

Marx himself did not hold a subsistence view.

It's true that Malthus, in the first edition of Essay on Principles of Population, adopted a subsistence view. But given the criticism he received, he soon enough changed that.

Roger Erickson said...

20% ?

Branko Milanovic said...

Magpie, I like your quotes and I did not fully understand your first post. Smith's quote is well known, and he does allow for differences in wages and incomes btw the countries. He does not speak much or at all about the rising real wage in UK (over time).
Ricardo, in his whole modelling always takes wage to be fixed. So the quote really does not influence his thinking. But it is something you may wish to pursue further.