Power: take two

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from Peter Radford

I have been reading Walter Scheidel’s wonderful book “The Great Leveler”, which gives us a very long period perspective on inequality.  Were I to be limited to only two books on inequality, this would be one.  It covers the ebb and flow of inequality over an extremely long time, with extensive discussions on civilizations as diverse as ancient China and ancient Rome.  Anyone who wants to make a serious contribution to the understanding of inequality has to be familiar with Scheidel and his mountain of data.

At the risk of being too brutal to Scheidel’s argument, here is my very brief version of it:

• Inequality is the norm, not the exception, throughout history
• Its ebb and flow is dictated more by the impact of warfare and mayhem on society than by social reform or redistributive governance
• Our current high level of inequality is simply a return to the norm because the devastation of capital during the first half of the twentieth century has now worn off, and the urgency for social reform caused by the two world wars has dissipated

And that’s about it!

What I like about the simplicity of this general idea is that it undermines the logic — at least in my mind — of economic forces being the key determinant of resource allocation.  Politics trumps economics at every turn.  Each time a society suffered a wave of mayhem it appears to have created opportunity for a reshuffling of the social order during which time resources were temporarily more evenly distributed.

Sometimes this more equal distribution was a result of deliberate action by an elite trying to stave off social unrest whilst it [re]established itself securely.  Sometimes it was a result of the wholesale destruction of capital and the consequent “clearing the decks” before a new elite rose to power to co-opt resources for itself.  Sometimes the mayhem was purely warfare related, other times it was a result of a natural disaster like the Black Death.

In any case the episodic rise and fall of real wages  was firmly in the hands of political forces as societies shaped and then re-shaped their power structures and as new elites found themselves able to obtain rents and other sources of disproportionate wealth acquisition not available to the average citizen.

The logic of history, to the extent that such a thing exists, is best described as a pulse fluctuating around a norm of inequality, with purely economic forces playing a secondary role in terms of distribution, and with political power playing the dominant role.

So much for “marginalism”!

Oddly this reality helps justify Robert Lucas’ ridiculous assertion that attempts to explain inequality are a dangerous sideshow for economists.  As it turns out he is correct.  Economics is too limited in its scope to be able to offer an explanation.  It has made itself so small a part of the overall explanation of social wealth allocation that its contribution can also only be minor.  By carving itself away from politics in order to study only markets, and idealized markets at that, economics has nothing to say about inequality.  Those economists who have stepped into the arena have inevitably had to expand their reach beyond the standard or mainstream toolkit of economics and incorporate social and political elements into their explanations.

This doesn’t invalidate things such as the interplay between supply and demand, what it does invalidate is the attempt to create a “scientific” economics based on the notions of marginal productivity and the inevitability of the relationships that such marginal analysis purport to describe.

The only inevitability in society is that elites will always distort resource allocation in a parochial or self-serving manner, reducing the so-called natural forces of economics to irrelevancy.  Unless, of course, those elites are eliminated by warfare or similar mayhem. In which case economics temporarily emerges as significant whilst a new elite rises to power.

The premier role this analysis gives to politics and social studies generally is a price economics pays for being the study of market allocation alone.  Apparently Lucas is content with economics being a bit player in the study of economies as long as it preserves its market biased ideological purity.

One last thing: if we consider a list of major economic phenomena of interest and importance in real economic life as we experience it, economics actually has weak or no explanations for many.  It is poor on growth.  It is almost blind on industrial organization.  It doesn’t even care, per Lucas, about inequality,  and so on.  But it is wonderfully logical and gives awesome insight into the fantasy world of perfect markets.  Wherever economist think they have a strong explanation it is almost always only in reference to a phenomenon they have arbitrarily constructed and not in reference to something beyond the laboratory.

Power matters:  Economics no so much.