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Piketty Digest #10: Inequality of Labour Income

by Adam David Morton on September 25, 2014
Piketty Forum

With all the furore surrounding Thomas Piketty’s Capital in the 21st Century my aim here is to carry a weekly focus on the book reblogged from For the Desk Drawer. The purpose is modest. There is already in existence some rather excellent coverage and detailed engagement with the book both in the general media and on specific blog sites. I am thinking here of the analyses by Michael Roberts on his blog site; the competing viewpoint or ‘afterthoughts’ of David Harvey; Benjamin Kunkel’s assessment in ‘Paupers and Richlings’ for London Review of Books  matched by Knox Peden’s great essay on ‘The Abstractions of History’; or Paul Krugman’s rather different tone in ‘Why We’re in a New Guilded Age’ for The New York Review of Books. My own endeavour is much less ambitious than any of these engagements. It seeks to offer a weekly equivalent to the ‘Pocket Piketty’ provided by Duncan Green. Each week my intention is to carry a blog post that summarises my notes on each chapter in just a few hundred words that can be read quickly. The purpose of these summaries is to produce an interpretative synopsis of each chapter drawn from my more detailed notes.

These interpretative digests will also enable me to formulate my engagement with a reading group on Piketty’s Capital in the 21st Century, organised by Chris Hesketh at Oxford Brookes University. They will also provide a quick précis for teaching purposes at the University of Sydney and through this novel pedagogical exercise conclude with a question each week to be developed in my Department of Political Economy classes on ‘The Political Economy of Global Capitalism’ (linked to the Twitter hashtag #ECOP2613). Such short interpretative digests may thus provide a different and original form of engagement with the book. Without attempting to rival or replace the importance of detailed engagement, these ‘Piketty digests’ will facilitate a quick and accessible read for people ‘on the go’. The posts will be formulated and produced after reading each chapter, in dialogue with the Oxford Brookes University reading group and colleagues at the University of Sydney, rather than polished after completing the reading of the whole book and then subsequently edited; although I may tidy up a little week-to-week. Perhaps these ‘Piketty digests’ will also provoke some wider resonances and points of contact. Here is the tenth ‘Piketty Digest’ on ‘Inequality of Labour Income’.

Chapter 9: Inequality of Labour Income

Over the half-way mark in these digests sees the focus turn to some of the detail on the dynamics of labour income inequality and the emergence of what Piketty calls a patrimonial middle class across both developed and emerging economies — Here Piketty raises questions about marginal productivity theory, the notion that a worker’s wage is determined by his or her marginal productivity and primarily skill — The theory involves the assumption that 1) a worker’s wage is equal to his/her marginal productivity or individual contribution to the output of a firm; and 2) that the worker’s productivity depends on his/her skill and on supply and demand for that skill in a given society — Although Piketty is at pains (or painfully?) distances himself from the ‘limited and naïve’  theory of marginal productivity, the theory is deemed to offer ‘interesting and important clues’ to explaining the historical evolution of labour income — Through a less than radical departure from marginal productivity theory, Piketty argues that ‘the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills’ — Education and technology are regarded as the decisive force for achieving progress in wages, for Piketty, but ‘the rules of the labour market play a crucial role in wage setting during periods of time determined by the relative progress of education and technology’ — Absent here is any notion of exploitation and a focus on the production of surplus appropriated and distributed by those other than its producers — Absent too would be the alternative conclusion that the physical processes of appropriating and distributing the surplus should be reserved for the subject of surplus-producing workers, which is the topic of a fascinating book by Richard Wolff entitled Democracy at Work: A Cure for Capitalism — Instead, Piketty traces the explosion of very high salaries across a series of countries, with different results, which has led to increased income inequality and the rise of supermanagers in both the financial and ‘non’-financial sectors — In the 1970s and 1980s, the upper centile’s share of national income was quite similar across the United States, Britain, Canada and Australia, ranging from 6 to 8 percent, with Canada the highest at 9 percent and Australia lowest at 5 percent of national income — By 2010, the upper centile’s share is nearly 20 percent in the United States, compared with 14-15 percent in Britain and Canada and barely 9-10 percent in Australia — As Piketty indicates, ‘we can say that the upper centile’s F9.5-1024x723share in the United States increased roughly twice as much as in Britain and Canada and about three times as much as in Australia and New Zealand’ — This condition is compared to Continental Europe and Japan where the upper centile’s share of national income was barely 7 percent in the 1980s to about 9 percent; for Sweden from as little as 4 percent to about 7 percent; while for Germany it rose from 9 percent to nearly 11 percent of national income from the 1980s to the 2010s — ‘The central fact is that in all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990-2010, while the average person’s purchasing power stagnated’ — Historically, Piketty also traces how on the eve of World War I, the top decile’s share of national income in all European countries was 45-50 percent, compared with little more than 40 percent in the United States — The strong divergence that began in the 1970s then led to the top decile’s share of US national income reaching 45-50 percent, or roughly the same level as Europe in 1900-1910 — The United States has now shifted from being slightly less ‘inegalitarian’ than Europe in 1900-1910, to slightly more ‘inegalitarian’ in 1950-1960, to much more ‘inegalitarian’ in 2000-2010 — Emerging economies are also drawn into the analysis (South Africa, India, Indonesia, Argentina, China, Colombia) but Piketty admits that there are significant limitations to the available data for measuring the dynamics of income distribution in poor and emerging countries and for comparing them with the rich countries due to the meagre tax data for the entire twentieth century — Nevertheless, with a more strident tone, Piketty then asserts that on the basis of his analysis of labour income inequality the illusion of the theory of marginal productivity can be revealed as ‘it becomes something close to a pure ideological construct on the basis of which a justification for higher status can be elaborated’ — No kidding, Sherlock! — The edging around these issues is then apparent in his statement that ‘the theory of marginal productivity and of the race between technology and education offers a plausible explanation of the long-run evolution of the wage distribution’ but, he then states, there is a margin of error in the explanation of the skills-technology logic — Just as disappointing as these bland conclusions is Piketty’s account of the prevailing social norms whereby the rapid increases in wage inequalities in the United States and Britain have been tolerated and, albeit emerging later, with similar patterns evident in Continental Europe and Japan — ‘The problem is now to explain where these social norms come from and how they evolve, which is obviously a question for sociology, psychology, cultural and political history, and the study of beliefs and perceptions at least as much as for economics’ — The failure to explain the prevalence of such social norms, however, is evident in Piketty’s discussion of the rise of the ‘conservative revolution’ (or neoliberalism) since the 1970s and 1980s, which he links to a concern in these countries with the “developmental catch-up” coming from other states — A turn to ‘meritocratic extremism’, or the apparent need for modern societies to reward people with high salaries, has thus been condoned in these states, he believes, matched by decreases in the top marginal income tax rates with that windfall used to finance political parties, pressure groups and think tanks — This is a flaccid analysis that 1) fails to account for where social norms supportive of the ideology of neoliberalism come from, or why in a specific historical context social norms are underpinned by material entitlements and power relations linked to the discipline of capital, as argued in my joint article with Andreas Bieler in International Studies Quarterly; and 2) fails to provide a comprehensive critique of how capitalism works to deliver socially unacceptable results that requires a vision of an alternative economic system free of capitalism’s structural flaws.

Question: How can social norms be conceived as material social processes in a way that surpasses the deficits of discourse, whilst avoiding the problems of economism, and why does a certain set of ideas, rooted in material relations, come to dominate at a particular point in time?

Adam David Morton
Adam David Morton is Professor of Political Economy in the Department of Political Economy at the University of Sydney. He is author of Unravelling Gramsci: Hegemony and Passive Revolution in the Global Political Economy (2007); Revolution and State in Modern Mexico: The Political Economy of Uneven Development (2011), recipient of the 2012 Book Prize of the British International Studies Association (BISA) International Political Economy Group (IPEG); and co-author of Global Capitalism, Global War, Global Crisis (2018) with Andreas Bieler. He co-edits Progress in Political Economy (PPE) with Gareth Bryant that was the recipient of the 2017 International Studies Association (ISA) Online Media Caucus Award for the Best Blog (Group) and the 2018 International Studies Association (ISA) Online Media Caucus Award for Special Achievement in International Studies Online Media.

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