Magazine article The American Prospect

The New Inequality Debate: More Mainstream Economists Now Find That the Income Mal-Distribution Reflects the Political Sway of Elites, Not Economic Imperatives

Magazine article The American Prospect

The New Inequality Debate: More Mainstream Economists Now Find That the Income Mal-Distribution Reflects the Political Sway of Elites, Not Economic Imperatives

Article excerpt

More and more mainstream economists have lately discovered a phenomenon that their discipline too often assumes away. They have discovered power. And this fundamentally changes the nature of the debate about inequality.

In the usual economic model, markets are mostly efficient. Power is not relevant, because competition will generally thwart attempts to place a thumb on the market scale. Thus if the society is becoming more unequal it must be (a favorite verb form) because skills are receiving greater rewards, and the less-skilled are necessarily left behind; or because technology is appropriately displacing workers; or because in a global market, lower-wage nations can out-compete Americans; or because deregulation makes markets more efficient, with greater rewards to winners; or because new financial instruments add such efficiency to the economy that they justify billion-dollar paydays for their inventors.

Increasingly, however, influential orthodox economists are having serious second thoughts. What if market outcomes and the very rules of the market game reflect political power, not market efficiency? Indeed, what if gross inequality is not efficient, and there is a broad zone of indeterminate income distributions consistent with strong economic performance? What if greater liberalization of financial markets produced tens of trillions of costs to the economy, benefits that are hard to discern, and billion-dollar paydays for traders that don't comport with their contributions to general economic welfare? Evidence like this is piling up, and hard to ignore.

ANTHONY ATKINSON'S NEW BOOK, Inequality: What Can Be Done?, is both emblem and evidence of this shift in mainstream economic thinking. Atkinson, of the London School of Economics and Oxford's Nuffield College, is the dean of economists who study inequality. After an exhaustive compilation of data and trends, Atkinson bluntly attributes rising inequality directly or indirectly to "changes in the balance of power." Thus, he adds, "Measures to reduce inequality can be successful only if countervailing power is brought to bear."

Though it has not attracted the celebrity attention, in many respects Atkinson's work is more important than Thomas Piketty's pathbreaking Capital in the Twenty-First Century, and is the perfect sequel. Where Piketty explained the tendency of wealth and income to concentrate, Atkinson digs deeper into what drove this shift and why conventional remedies will not reverse the trends. He has a far surer grasp than Piketty of the political dynamics that made possible the anomalous egalitarian era of the 30 glorious years after World War II.

In Atkinson's telling, the postwar social bargain drastically reduced inequality using several levers. Progressive taxes and welfare-state transfers were part of the story. Likewise a more highly regulated form of globalization. Worker and trade-union power resulted in a larger share of the total national product going to wage and salaries. Antitrust and some public ownership helped, too. All of these instruments, and more, have been reversed since about 1980--due mainly to a shift in political power. This shift increases the influence as well as the wealth of the rich, which leads to a self-reinforcing circle of more such policies, and more inequality.

In the labor market, the greater "flexibility" long promoted by many economists, Atkinson writes, has produced "a transfer of power from workers to employers. The growth of multi-national companies, and trade and capital-market liberalization, have strengthened the position of companies vis-a-vis customers, workers, and governments." Even technology, he adds, needs to be understood in terms of power. "Technological progress is not a neutral force but reflects social and economic decisions. Choices by firms, by individuals and by governments can influence the direction of technology and hence the distribution of income. …

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