I recently came across an interesting piece by Ian Wright of the Open University, UK. Written in November 2016, Wright considers the cause of rising economic inequality, so evident over the last 30 years or more in most major and smaller economies. Wright dismisses the mainstream causes of rising inequality: namely, unequal distribution of profits and wages or lower taxes on the rich; or automation driving down wages relatively for those not working in ‘knowledge-based’ industries. Instead, the causes of rising inequality must be found in the very nature of the capitalist mode of production. As Wright puts it, “capitalism is a system in which one economic class systematically exploits another. And its economic exploitation — not housing, tax policies or low wages — that is the root cause of the economic inequality we see all around us.”
The original mathematical analysis developed by Wright describes capitalism as an anarchic system that generates what physics calls entropy: “the activity of market exchange is acting just like the cocktail shaker: its mixing everything up, randomising things, and maximising the entropy of the system.” As a result, “we might think that differences in wealth must arise from accidents of birth or personal virtue. But the principle of entropy maximisation tells us there’s a much more important causal factor at work. We quickly get extreme income inequality even in an economy with identical individuals with identical initial endowments of money.”
Wright develops a model of capitalism that is based on this principle of entropy in a market economy, but more than that. “Maximising entropy under the single constraint of conservation of money yields an exponential distribution of wealth. That’s quite unequal. So the first cause of inequality is what Adam Smith called the higgling and haggling of the market. Since people are free to trade then entropy increases and the distribution of money becomes unequal.” But Wright argues that “we don’t find an exponential distribution in actual capitalist economies. We find something more complex. That’s because capitalist economies obey additional constraints on how money moves between individuals. Markets are not the only cause of the inequality we see in capitalism.”
The other aspect is exploitation of labour for a profit. Capitalists accumulate profits as capital. “Firms follow a power law distribution in size. And capital concentrates in the same way. A large number of small capitals exploit a small group of workers, and a small number of big capitals exploit a large group of workers. Profits are roughly proportional to the number of workers employed. So, capitalist income also follows a power law. The more workers you exploit the more profit you make. The more profit you make the more workers you can exploit.” This is the reason for rising inequality when there are no checks on capital accumulation. As Wright sums it: “the fundamental social architecture of capitalism is the main cause of economic inequality. We can’t have capitalism without inequality: it’s an inescapable and necessary consequence of the economic rules of the game.”
This mathematical analysis accords nicely with the empirical evidence. For example, Simon Mohun, Emeritus Professor of Economics, ClassStructure1918to2011wmf has published a paper that showed that Marx’s class analysis, which rests on the ownership of the means of production (between the owner of the means of production and who exploits those who own nothing but their labour power), remains broadly correct, even in modern capitalist economies like the US. He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population. Managers constitute the rest, but only 2% (Qc in graph) can actually live off rent, interest, capital gains and dividends alone. They are the real capitalist class. And that ratio has little changed in 100 years.
Moreover, this is the group that has gained most during the last 30 years of rising inequality. The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers incomes (Lpd) have risen from 2.5 times to 3.5 times workers income. So rising inequality is primarily the result of increased exploitation, a rising rate of surplus value, in Marxist terms.
I commented back in 2013 on the work by the father of inequality research, Sir Anthony Atkinson, now sadly deceased, who showed that it was not new technology and globalisation led to a rise in the demand for skilled workers over unskilled and so drove up their earnings relatively as mainstream economics likes to argue. Atkinson dismissed this neoclassical apologia. The biggest rises in inequality took place before globalisation and the dot.com revolution got underway in the 1990s.
What is decisive for capitalism is surplus value (profit, interest and rent), not differences in wage income or spending. The main feature of the last 100 years of capitalism has not been growing inequality of income – indeed, as Atkinson shows, inequality has not always risen. The main feature has been a growing concentration and centralisation of wealth, not income. And it has been in the wealth held in means of production and not just household wealth. That has generated a power law in inequality at the top.
One study shows how far that has gone in the recent period. Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them (147 control). They built a model of who owns what and what their revenues are, mapping out the whole edifice of economic power. They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network. A total of 737 companies control 80% of it all. This is the inequality that matters for the functioning of capitalism – the concentrated power of capital.
The policy implication of this analysis follows. Yes, increasing taxes on the richest 2%, particularly on capital gains and ‘earnings’ from capital, would make some difference. Atkinson showed this in a study. But the extreme levels of inequality that most capitalist economies have now reached would only be dented a little. What is required is to end exploitation (of labour) for surplus value. That’s where the power law operates. And that means ending the capitalist mode of production.
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