As regards the first paragraph, I can let point 1 slide, because at the moment I've got no real objection to it. Point 2, however, is a blatant untruth, and Point 3 misses the mark. And nothing in his second paragraph is relevant to the wealth disparity.
The era of modern capitalism began circa 1500. And wages have risen steadily throughout the developed world ever since. Unions and regulations like minimum wage laws are very recent appendages, and the fact of the matter is that the greater part of the history of industrialization, and those wage increases, predates them.
The rise in wages tracks closely with improvements in worker productivity, and those improvements are due to improvements in the means of production. Capital investment, in other words, is the main reason why living standards have improved throughout the industrialized world. Additionally, at least throughout the 20th century, the increase in the demand for labor tracks closely with improvements in worker productivity (in accordance with the arguments of Lionel Robbins and Mises, among others). Contrary to the union view of the impact of technology on labor, the demand curve for labor shifts to the right when labor becomes more productive.
Labor unions exist in several different forms, operating in different ways, but what they tend to have in common is a way of inflating wages by artificially boosting the demand for labor. ("Demand enhancement" through lobbying, for instance, or reducing the supply of labor, as in the craft union model.) One way this was accomplished was by union support for "child labor reform," which effectively removed two million competing laborers from the market. You'll also find all manner of "make work" or "featherbedding" practices, such as the way labor is divided by unions in Hollywood movie production.
What it all amounts to is that the "wage gains" promoted by unions are illusory in that they don't reflect a true market equilibrium. Nor do such gains benefit the entire population the same way that improvements in productivity do.
Reich is also incorrect about the taxation of the postwar period. Like soooo many progressives, socialists and Keynesians, he confuses the top marginal tax rate with the top effective rate. The top income earners didn't pay more than 50% (and by some analyses, no more than 30%) during the period through Eisenhower.
There are four predominant market models found in a capitalist economy, ranging from "unfettered capitalism" (pure competition) to pure monopoly. Without going into too deep detail here, I will just point out that the primary functional distinction between these models is the profundity of barriers to entry (and exit). In pure competition, there are no real barriers to entry or exit.
It's necessary at this point to distinguish the two kinds of profit: "normal profit," or the cost of maintaining the entrepreneurial spirit at the firm, and "economic profit," which is what's left over from revenues after all costs are subtracted. The salient point is that normal profit is a cost. In a software development shop such as those I've worked at, it's what goes into employee bonuses, holiday parties, video games for the break rooms, etc. It's what is used, above and beyond wages and benefits, to keep the producers happy. Economic profit, or just "profit" in regular parlance, is what goes back to the shareholders.
In a pure competition market, there are are only short-run economic profits. Competition enforces efficiency by making the consumer sovereign as regards price. Any firm that charges more than its competitors will lose business. Any firm that charges less than its competitors will either lose normal profit or draw the competitors down to the same price. The equilibrium in such a market is defined by a double equivalence: P = MC and P = min ATC. Price equals marginal cost, and price equals minimum average total costs. Because no one firm can influence the price to any great degree, firms in a competitive market are "price takers."
When both of these equivalences are in effect, a condition called "economic efficiency" exists, consisting of "productive efficiency" (the firm is using all its resources properly to produce its output) and "allocative efficiency" (society is getting what it wants, and how much, at the price it demands). This means that society is benefiting fully from the use of those resources. You can neither improve society's benefit by reducing, nor by increasing, the price.
The upshot is that in a competitive market, there are no long run economic profits. This means that there is no upward distribution of wealth.
None of these conditions hold true in an imperfect competition, and they're the furthest from the mark in a pure monopoly. As you move from monopolistic competition through oligopoly to pure monopoly, economic profit margins become ever-wider, meaning that in each successive model, there is more and more upward redistribution of wealth.
Again, what distinguishes these models from each other is barriers to entry. And most barriers are imposed by government, in the form of regulation. Regulation, then, is the primary reason for the wealth concentration. It stands to reason, actually, when you consider that much regulation is actually crafted by public-sector unions and representatives in response to lobbying on the part of the very industries and firms that benefit most from it. Regulation is used to tilt the market in favor of the larger players, those which can best exploit economies of scale.
And this can be confirmed easily by simply tracking the wage disparity as it has widened over the course of the 20th century. It has increased in lockstep with the regulatory burden.
If you follow the trend in wage increases over the latter part of the 20th century, you'll see that for decades, the rate of increase was similar for all three socioeconomic classes. There were gaps between the wage bands, to be sure, but the slopes of the curves were essentially identical. Then, in the mid-to-late 70s, we encountered Keynesian meddling in the wake of the oil shocks, and Stagflation hit. As a result, the wage curves for the lower and middle classes flattened, while the curve for the upper class kept on trending upward. During the Reaganomics era, that topmost curve also flattened, and the two lower curves began climbing again, but the disparity had nonetheless been profoundly widened, and it's still wide today.
It's also worth pointing out that over the course of the 20th century, federal revenues do not track closely with top marginal tax rates. It's not necessary to inflict punitive tax rates on the citizenry in order to raise revenues; throughout the 1920s, for instance, Andrew Mellon, as Secretary of the Treasurer, kept bringing rates down, and revenues kept increasing. (See: Laffer Curve.)
On the subject of poverty itself, let's take a look at the War on Poverty and its impact. The Great Society programs began taking effect in 1964, and we just had the 50th anniversary last year. The federal government began tracking poverty in detail in 1959. In the five-year span between 1959 and 1964, the size of the population comprising those under the poverty line declined by some 4.6%. We can round that up and say nearly 5% in five years. That's what the market accomplished, on its own, unaided by government.
In the fifty years since the WoP began, the size of that population has diminished by only another 5%. This tells me that the anti-poverty programs have slowed the rate of decline by a factor of 10.
2 comments:
Berry, regulations-pertaining to products or employees- as a barrier to entry have basically always existed. Guilds, basic unions,associations have always tried to controlled entry to their fields in order to keep wages and/or profits high.
That's true. What's different nowadays is that these restrictions carry the force of law. In prior days, a trade guild might impose an embargo on a city whose merchants had abused some of its traders.
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