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LarsP. Syll — Mainstream theories of income distribution

Summary:
Increasing asymmetry of income and wealth, which now goes by the name "inequality" as the buzzword, arises either from the function of perfect markets or from asymmetry of power. A perfect market is one in which there is no asymmetry, that is, the agents are homogenous.A perfect market could generate asymmetry through difference in ability that lead to differences in distribution owing based on merit and just deserts (as conventional economics assumes). However, perfect markets don't exist other than as modeling constructs. Class structure, for example, generates asymmetries. Always has and always will, to the degree that is is permitted and not compensated for.Addressing rising inequality by addressing the causes involves addressing the asymmetries from which inequality arises.

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Increasing asymmetry of income and wealth, which now goes by the name "inequality" as the buzzword, arises either from the function of perfect markets or from asymmetry of power. A perfect market is one in which there is no asymmetry, that is, the agents are homogenous.

A perfect market could generate asymmetry through difference in ability that lead to differences in distribution owing based on merit and just deserts (as conventional economics assumes). However, perfect markets don't exist other than as modeling constructs. Class structure, for example, generates asymmetries. Always has and always will, to the degree that is is permitted and not compensated for.

Addressing rising inequality by addressing the causes involves addressing the asymmetries from which inequality arises. Libertarians assume that all asymmetry of power and influence is introduced by "state" (government) influence on markets. That is only partially true, however. Influence does often occur through government but this is through asymmetrical power that exists among agents, enabling capture. In addition, economies of scale produce greater efficiency but at the expense of concentration, which risks monopoly and monopsony power and monopoly and monopsony rents as a consequence. This generates "monopoly capitalism."

The upshot is that market "imperfections" lead to asymmetric power, and asymmetric power enable the extraction of economic rent as unearned gains, which in turn results in asymmetric distribution that is not based on merit and gained through competition in perfect markets.

Further elaboration of this cycle is needed to clarify for electorates what the reasons for rising inequality rather rather than appealing to models based on unrealistic assumptions that exist only in economists' brains.

This necessitates an investigation of power and its operation in a society as a social system (complex adaptive system). This was initiated by the classical economists in their investigation of economic rent, continued by Karl Marx, taken up by Veblen and the institutionalists, and subsequently shunted over to sociology ( cf. C. Wright Mills) and political science since the advent of marginalism explained economic rent away based on idealistic models of a market economy based on near perfect markets.

Conventional economists know about market imperfection, rent, rent-seeking and rent extraction but they have avoided dealing with it as a socio-economic factor. Now rising social dysfunctionality is forcing a return to investigating distribution and the causes of increasing inequality of income and wealth.

This can no longer be avoided but no one has yet grasped the "third rail" of economics — other than the Marxists and Marxians, that is, which a reason no one else dares touch it, since contemporary capitalism is based on it and argues unequal distribution is necessary because "incentive." Well then, even if this would be the actual reason, which is highly doubtful, it is a bug rather than a feature.

LarsP. Syll’s Blog
Mainstream theories of income distribution
Lars P. Syll | Professor, Malmo University

See also

Michael Roberts Blog
Invisible Leviathan – Marx’s law of value in the twilight of capitalism
Michael Roberts

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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