"One model to rule them all" Mark Thoma
"Dumb and Dumber in Macroeconomics" Robert Solow
"Bubble, bubble, toil and trouble" Alex Leijonhufvud
Wednesday, January 29, 2014
Models
What's the point of a model?
To explain
To predict
To give policy implications
To look good in magazines
I've only studied a few models, one of which was the IS-LM model. The IS-LM model gives an equilibrium level of output and interest rate. If you alter a variable, say government spending, it will demonstrate the changes to equilibrium levels. It also has guidelines for policy; in order to increase output, increase G or lower i.
I can see how this is a model, a theory. I can see how it is useful in the real world to guide actions.
What is shrouded in mystery for me is how real business cycle models or DSGE models are useful. Perhaps this is due to my lack of experience with them, but people with much more experience than I don't seem to be too enchanted with them either.
DSGE Models
DSGE models, from what I understand, are more realistic RBC models New Keynesians use with frictions such as sticky prices. During my research, I stumbled upon the Lucas Critique which makes a lot of sense in the context of the microfoundations of macroeconomics debate- more about that further down.
A DSGE model could be one where consumers maximize their utility, firms maximize profit, there's a production function with inputs of capital and labor, and some institutions making policy. I think all of this is done with a representative agent who knows their preference for money, leisure, etc. throughout their whole life. The Smets-Wouters is a well known DSGE model that the European Central Bank uses.
DSGE Shortcomings
Again, what's the point of these models? To explain, predict, and give advice. However, even the "best" DSGE model doesn't predict well or lend itself to practical policy advice. When the model does have something to say, the complexity of the model makes the interpretation quite tough. As far as explaining goes, Lars P Syll shames DSGE models for explaining unemployment as a joyous, utility raising event.
The idea of a representative agent being all knowing about the future is something I don't know if I could teach without sounding like a crazy person. Some things are unpredictable, fundamentally uncertain as Keynes argued.
DSGE models are microfounded, specifically with maximizing utility as the basis of the whole model. Although the idea of utility has been around since Bentham, the idea of mathematically maximizing utility through optimization problems started in the marginal revolution with people like Jevons.
It is quite amazing to me, having taken a course on history of economic thought, how deeply entrenched the ideas of the marginal revolution are in modern day thought. How did the marginal revolution and microeconomics get the golden star of "this is what economics is- end of story?" There were so many economists before the marginalists with a different set of questions and methodologies but yet utility maximization and budget constraints are all we remember.
Ugly Models
I'm not too familiar with models or modeling, but if I had a model, I would make it ugly. I would include the ugly things that to me, clearly impact output and well-being.
Blogs everywhere (and some blogs constantly) have been talking about income inequality. It is bad, Saez and Piketty, shocking graph, 1%, etc. Why don't we try to put that in models? Maybe I'm missing some big point about models and what they are supposed to do. But if I want to explain, predict, and give policy advice, it would seem that inequality would be a big piece of the puzzle.
2. Unemployment and hysteresis
I don't know if the notion of hysteresis was born in a neoclassical camp or not, but to me, it makes sense. Unemployed people if unemployed for a long period lose networks, up to date skills, etc. The longer a recession or a slump is, the longer it takes to get people back to work, the less likely it will be they can return, the higher average unemployment. Models should include involuntary unemployment and not explain unemployment as preferring leisure at the moment.
3. Unstable financial system
Deregulation, too big to fail, misaligned incentives. The strength and composition should be a part of models that analyze economic growth and forecast where were are going. For example, maybe a "shock" could be deregulation and we'd expect output to increase but the financial system to become increasingly fragile and susceptible to a bust.
4. Dis-equilibrium/Stagnation
What if the interest rate is at zero and congress is deadlocked? What tendency is there for the economy to return to a stable state? I think in the real world the economy is mostly out of equilibrium and sometimes actions that should push it back to equilibrium are unavailable or have interaction effects that can improve one variable but worsen another.
5. Power dynamics
At the risk of poisoning a decent post with something "uneconomic", I do think power dynamics play an important role in explaining and predicting phenomena in the economy. One of the most distinct tools of power is unemployment. For example, I believe if workers weren't afraid of losing their job and not finding a new one, they'd want better wages or they'd work less. Businesses can always threaten to leave a city, a state, or a nation and take their jobs elsewhere if they don't receive conditions they like. These conditions can be positive for output and well-being- perhaps the businesses demand better infrastructure in their community or better educational investment so they can transport materials easily and hire intelligent workers. These conditions can also be negative on output and well-being- lower taxes on business for example would deplete the tax base of the community. People don't live in bubbles. We make choices as individuals but also as communities. Our choices are constrained by the society we live in. Models should be more than summing up individual, atomistic decisions.
To explain
To predict
To give policy implications
I've only studied a few models, one of which was the IS-LM model. The IS-LM model gives an equilibrium level of output and interest rate. If you alter a variable, say government spending, it will demonstrate the changes to equilibrium levels. It also has guidelines for policy; in order to increase output, increase G or lower i.
I can see how this is a model, a theory. I can see how it is useful in the real world to guide actions.
What is shrouded in mystery for me is how real business cycle models or DSGE models are useful. Perhaps this is due to my lack of experience with them, but people with much more experience than I don't seem to be too enchanted with them either.
DSGE Models
DSGE models, from what I understand, are more realistic RBC models New Keynesians use with frictions such as sticky prices. During my research, I stumbled upon the Lucas Critique which makes a lot of sense in the context of the microfoundations of macroeconomics debate- more about that further down.
A DSGE model could be one where consumers maximize their utility, firms maximize profit, there's a production function with inputs of capital and labor, and some institutions making policy. I think all of this is done with a representative agent who knows their preference for money, leisure, etc. throughout their whole life. The Smets-Wouters is a well known DSGE model that the European Central Bank uses.
DSGE Shortcomings
Again, what's the point of these models? To explain, predict, and give advice. However, even the "best" DSGE model doesn't predict well or lend itself to practical policy advice. When the model does have something to say, the complexity of the model makes the interpretation quite tough. As far as explaining goes, Lars P Syll shames DSGE models for explaining unemployment as a joyous, utility raising event.
The idea of a representative agent being all knowing about the future is something I don't know if I could teach without sounding like a crazy person. Some things are unpredictable, fundamentally uncertain as Keynes argued.
DSGE models are microfounded, specifically with maximizing utility as the basis of the whole model. Although the idea of utility has been around since Bentham, the idea of mathematically maximizing utility through optimization problems started in the marginal revolution with people like Jevons.
It is quite amazing to me, having taken a course on history of economic thought, how deeply entrenched the ideas of the marginal revolution are in modern day thought. How did the marginal revolution and microeconomics get the golden star of "this is what economics is- end of story?" There were so many economists before the marginalists with a different set of questions and methodologies but yet utility maximization and budget constraints are all we remember.
Ugly Models
I'm not too familiar with models or modeling, but if I had a model, I would make it ugly. I would include the ugly things that to me, clearly impact output and well-being.
- Wealth and Income Inequality
Blogs everywhere (and some blogs constantly) have been talking about income inequality. It is bad, Saez and Piketty, shocking graph, 1%, etc. Why don't we try to put that in models? Maybe I'm missing some big point about models and what they are supposed to do. But if I want to explain, predict, and give policy advice, it would seem that inequality would be a big piece of the puzzle.
2. Unemployment and hysteresis
I don't know if the notion of hysteresis was born in a neoclassical camp or not, but to me, it makes sense. Unemployed people if unemployed for a long period lose networks, up to date skills, etc. The longer a recession or a slump is, the longer it takes to get people back to work, the less likely it will be they can return, the higher average unemployment. Models should include involuntary unemployment and not explain unemployment as preferring leisure at the moment.
3. Unstable financial system
Deregulation, too big to fail, misaligned incentives. The strength and composition should be a part of models that analyze economic growth and forecast where were are going. For example, maybe a "shock" could be deregulation and we'd expect output to increase but the financial system to become increasingly fragile and susceptible to a bust.
4. Dis-equilibrium/Stagnation
What if the interest rate is at zero and congress is deadlocked? What tendency is there for the economy to return to a stable state? I think in the real world the economy is mostly out of equilibrium and sometimes actions that should push it back to equilibrium are unavailable or have interaction effects that can improve one variable but worsen another.
5. Power dynamics
At the risk of poisoning a decent post with something "uneconomic", I do think power dynamics play an important role in explaining and predicting phenomena in the economy. One of the most distinct tools of power is unemployment. For example, I believe if workers weren't afraid of losing their job and not finding a new one, they'd want better wages or they'd work less. Businesses can always threaten to leave a city, a state, or a nation and take their jobs elsewhere if they don't receive conditions they like. These conditions can be positive for output and well-being- perhaps the businesses demand better infrastructure in their community or better educational investment so they can transport materials easily and hire intelligent workers. These conditions can also be negative on output and well-being- lower taxes on business for example would deplete the tax base of the community. People don't live in bubbles. We make choices as individuals but also as communities. Our choices are constrained by the society we live in. Models should be more than summing up individual, atomistic decisions.
Wednesday, January 8, 2014
The way we teach economics
Economics: A debate
I enjoying sharing the small amount of economic jokes I know with my students. Here's one I used last semester, "They say if you lined up all the economists in the world head to toe they still wouldn't reach a conclusion". Of course, I'm the only one who thinks it is funny, but that won't stop me.
My mentor introduced economics to me as a debate, as a conversation. I thought I understood what that meant, economists have debates and talk to each other and then economics comes out of it. However, the more I delve into economics, the more I see why it is indeed a debate.
Here are two examples of recent debates in economics (in the blogosphere at least):
If the interest rate is positively or inversely related to inflation
Macroeconomic Methodology
A student beginning to study economics might be surprised to see economists debating topics that have so much sway over the economy. A positive statement is supposed to be "what is". It is not supposed to be good or bad or even right, just testable. There are so many positive economic claims. Claims from models and claims from empirical work.
One of the charges of economics as a field is to debate which of these claims are important and most supported. The debate is highly relevant, even when talking about things like the sign on the interest rate, because in the end, the economy is made up of people, and people will bear the burden of the mistakes of the field.
Economics: A Web
Even the definition of economics is contested; the study of how people make choices, the social provisioning of goods, the study of allocation of scarce resources, etc.
Heterodox economists will often refer to "the mainstream" when discussing certain methodologies, assumptions, and concepts. But what do we really mean by "mainstream"? After hours of blog navigating (Geez, I took my professors for granted), I came across another debate about this issue between Lars P. Syll, Simon Wren-Lewis, and others.
The conclusion is that mainstream economists believe that the market system can work and can be efficient. Believing in the natural rate hypothesis is just one way for this idea to manifest.
New Classicals and New Keynesians are both in the mainstream, although New Keynesians have more and more realistic assumptions in their DSGE models. As far as I can tell, methodology is also comparable.
(I believe there's a link between the microfoundations debate and the divide between mainstream and heterodoxy. Microfoundations developed in the marginal revolution in a sense were the roots of neoclassical economics. NC and NK economists defending microfounded macro models would seem to be defending neoclassical roots in macro models.)
But yet, to be mainstream, as Simon Wren-Lewis challenges, one does not have to fall in line with conservative ideals that are usually associated with neoliberalism.
I enjoying sharing the small amount of economic jokes I know with my students. Here's one I used last semester, "They say if you lined up all the economists in the world head to toe they still wouldn't reach a conclusion". Of course, I'm the only one who thinks it is funny, but that won't stop me.
My mentor introduced economics to me as a debate, as a conversation. I thought I understood what that meant, economists have debates and talk to each other and then economics comes out of it. However, the more I delve into economics, the more I see why it is indeed a debate.
Here are two examples of recent debates in economics (in the blogosphere at least):
If the interest rate is positively or inversely related to inflation
Macroeconomic Methodology
A student beginning to study economics might be surprised to see economists debating topics that have so much sway over the economy. A positive statement is supposed to be "what is". It is not supposed to be good or bad or even right, just testable. There are so many positive economic claims. Claims from models and claims from empirical work.
One of the charges of economics as a field is to debate which of these claims are important and most supported. The debate is highly relevant, even when talking about things like the sign on the interest rate, because in the end, the economy is made up of people, and people will bear the burden of the mistakes of the field.
Economics: A Web
Even the definition of economics is contested; the study of how people make choices, the social provisioning of goods, the study of allocation of scarce resources, etc.
Heterodox economists will often refer to "the mainstream" when discussing certain methodologies, assumptions, and concepts. But what do we really mean by "mainstream"? After hours of blog navigating (Geez, I took my professors for granted), I came across another debate about this issue between Lars P. Syll, Simon Wren-Lewis, and others.
The conclusion is that mainstream economists believe that the market system can work and can be efficient. Believing in the natural rate hypothesis is just one way for this idea to manifest.
New Classicals and New Keynesians are both in the mainstream, although New Keynesians have more and more realistic assumptions in their DSGE models. As far as I can tell, methodology is also comparable.
(I believe there's a link between the microfoundations debate and the divide between mainstream and heterodoxy. Microfoundations developed in the marginal revolution in a sense were the roots of neoclassical economics. NC and NK economists defending microfounded macro models would seem to be defending neoclassical roots in macro models.)
But yet, to be mainstream, as Simon Wren-Lewis challenges, one does not have to fall in line with conservative ideals that are usually associated with neoliberalism.
Monday, January 6, 2014
Lesson Planning
I'll take "reasons against stimulus" for $500 Alex.
Daily Double:
How come running deficits and "printing money" in recent years has not led to hyperinflation?
Why haven't private businesses been "crowded out"?
What is "The difference between being at full employment and below it"?
Daily Double:
How come running deficits and "printing money" in recent years has not led to hyperinflation?
Why haven't private businesses been "crowded out"?
What is "The difference between being at full employment and below it"?
Saturday, January 4, 2014
Days of Future Past
One of the first things students learn in economics is the concept of scarcity. Finite resources, unlimited human wants. William Dugger and James Peach offer a different foundation - the concept of abundance.
"Abundance does not mean that everyone is satiated. It means that everyone has enough within the limits of knowledge of society...Abundance means that everyone has adequate healthcare, nutrition, education, transportation, recreation, housing, self-expression, and personal security" (Dugger and Peach, Economic Abundance).
They propose the goal of universal employment via raising the minimum wage, cutting taxes progressively, raising government spending, and loosening monetary policy.
While I deeply agree with the authors, I see two crucial obstacles in not only their vision, but the vision of others before and after.
1. What does "adequate" mean?
They say abundance is determined contextually, by the potential of our society and technology but that's not helpful for policy making.
2. How can power dynamics change when the people in power don't want them to (or when we don't care enough to change them)?
Political
Money's ability to influence the political process, and thus economic possibilities has been well documented and for a long time. Several authors with visions of the future have included political change alongside economic ones. Dugger and Peach are no exception. However, it is a puzzle to me how power dynamics can change will still existing. I fear the only "shock" that will change the dynamics will be something ugly.
Economic
"It is the fear of unemployment which makes the workers put up with the authority of their employers" (Joan Robinson, The Problem of Full Employment)
Robinson, Marx, Kalecki, Dugger, Peach, and countless others have identified unemployment as the tool to keep workers in line. The fear of losing your job, your income, your life(?), wills you to accept exploitation and oppression. You don't quit your job that pays you 1/100th of what your boss gets paid and 1/100th of your value because well, what if you don't find another one?
Relieving the fear of unemployment through job guarantees or government issued income payments would seem to provide space for workers to resist unfair practices and could usher a more equitable society. But again, what would alter the dynamics that exist now? Why hasn't this change already occurred?
The thought of telling businesses to remunerate more fairly or to not fire people during recessions is outrageous, I assume to not just business people. Interfering in business management is interfering in the market system and we all know the market works fine without any help. Sarcasm aside, it might be detrimental to start poking around in business, but hasn't it been detrimental to the unemployed and the poorly paid thus far? Hasn't income inequality been detrimental for ALL? How did business win the coin toss to see if the economy works best when we appease business versus workers?
I think there may be other reasons for a lack of change in income inequality and infiltration of money into politics, one of them is complacency, "In Marx's view, educated men were usually members of the upper class, and thus they owed their position, prosperity, and superior knowledge and education to the privilege inherent in the capitalist system. Therefore, they would generally do everything within their power to preserve that system" (E.K. Hunt, Property and Prophets). Most people probably aren't members of the upper class and want to save capitalism, but I do think there's an inverse relationship between income and the desire to demand change. Empathy can produce strong incentives to demand change, but once one is not immersed in deprivation daily, a sense of urgency is lost. Those that are still in deprivation might not have the time or energy to be demanding things.
Will we reach the great ideas that have been put forth from Robinson to Dugger to the visionaries to come with the existing dynamics and apathetic and/or unheard citizens?
*The title of this post was stolen from the new X-Men movie, but I thought it was just too fitting to not.
"Abundance does not mean that everyone is satiated. It means that everyone has enough within the limits of knowledge of society...Abundance means that everyone has adequate healthcare, nutrition, education, transportation, recreation, housing, self-expression, and personal security" (Dugger and Peach, Economic Abundance).
They propose the goal of universal employment via raising the minimum wage, cutting taxes progressively, raising government spending, and loosening monetary policy.
While I deeply agree with the authors, I see two crucial obstacles in not only their vision, but the vision of others before and after.
1. What does "adequate" mean?
They say abundance is determined contextually, by the potential of our society and technology but that's not helpful for policy making.
2. How can power dynamics change when the people in power don't want them to (or when we don't care enough to change them)?
Political
Money's ability to influence the political process, and thus economic possibilities has been well documented and for a long time. Several authors with visions of the future have included political change alongside economic ones. Dugger and Peach are no exception. However, it is a puzzle to me how power dynamics can change will still existing. I fear the only "shock" that will change the dynamics will be something ugly.
Economic
"It is the fear of unemployment which makes the workers put up with the authority of their employers" (Joan Robinson, The Problem of Full Employment)
Robinson, Marx, Kalecki, Dugger, Peach, and countless others have identified unemployment as the tool to keep workers in line. The fear of losing your job, your income, your life(?), wills you to accept exploitation and oppression. You don't quit your job that pays you 1/100th of what your boss gets paid and 1/100th of your value because well, what if you don't find another one?
Relieving the fear of unemployment through job guarantees or government issued income payments would seem to provide space for workers to resist unfair practices and could usher a more equitable society. But again, what would alter the dynamics that exist now? Why hasn't this change already occurred?
The thought of telling businesses to remunerate more fairly or to not fire people during recessions is outrageous, I assume to not just business people. Interfering in business management is interfering in the market system and we all know the market works fine without any help. Sarcasm aside, it might be detrimental to start poking around in business, but hasn't it been detrimental to the unemployed and the poorly paid thus far? Hasn't income inequality been detrimental for ALL? How did business win the coin toss to see if the economy works best when we appease business versus workers?
I think there may be other reasons for a lack of change in income inequality and infiltration of money into politics, one of them is complacency, "In Marx's view, educated men were usually members of the upper class, and thus they owed their position, prosperity, and superior knowledge and education to the privilege inherent in the capitalist system. Therefore, they would generally do everything within their power to preserve that system" (E.K. Hunt, Property and Prophets). Most people probably aren't members of the upper class and want to save capitalism, but I do think there's an inverse relationship between income and the desire to demand change. Empathy can produce strong incentives to demand change, but once one is not immersed in deprivation daily, a sense of urgency is lost. Those that are still in deprivation might not have the time or energy to be demanding things.
Will we reach the great ideas that have been put forth from Robinson to Dugger to the visionaries to come with the existing dynamics and apathetic and/or unheard citizens?
*The title of this post was stolen from the new X-Men movie, but I thought it was just too fitting to not.
Thursday, January 2, 2014
Veblen, valuing, and how much is too much?
How much is too much?
After making $25,000/year the past few years, making $300,000/year seems excessive. How could someone making $300,000 claim they are barely getting by?
Ah but my expenses are not the same as those of a $300,000 salary. Perhaps those expenses look something like this: $5,000 housing, $5,000 transportation, $5,000 food, $5,000 entertainment, $5,000 investment/saving. You see, making $300,000 you can still live "check to check", complain you are being taxed too high, barely getting by.
Even a raise to $500,000/year won't help- you can buy the things all your friends have- a bigger house in a better area, better car, more trips, etc.
To a person wandering the streets, without a home, I have too much. I'm greedy, selfish for having a beer, watching movies on my TV, typing on my laptop.
To me, $1,000,000/year is a lot. But, if it was a reward for a CEO that created millions of jobs in a fair and sustainable way, would it be so excessive? Or for a scientist that created a some sort of cure? Or a hedge fund manager who had a good year? When is it justified?
Our judgment of how much is too much is clouded by our comparison to others and ideas of what we are entitled to (American Dream).
So how much is too much? I don't pretend this is an easy question or that I have an answer. I suspect some people would say there's no such thing as too much. You work hard and reap what you sow, by following the rules or being clever enough to skirt them. You sacrifice to get where you are and are entitled to your rewards. Even less individualistic people make arguments for some degree of income inequality because it provides incentives for people to "not all just be janitors".
On the other hand, some people argue the degree of income inequality has grown too large and is starting to have negative effects on the economy- for everyone. Venture capitalists like Nick Hanuer recognize in order for capitalists to be wealthy, they need consumers to buy their products. If people are too poor to buy, how can capitalists stay in business?
Then there is the argument, people must be okay with income inequality because people keep working for these huge corporations. Well, as Joan Robinson and others have argued, workers don't have any say as long as there is cyclical unemployment. If you have a $50,000/year job at a bank and are angry the CEO gets 100x more than you do a year what are your options? Quit and hopefully 1)find another job 2) another job that has a less than 1:100 ratio.
So how much is too much? I'm not sure, but I think stagnant money or capital creating capital for capital's sake is a waste and has better uses for the present that could boost the economy and the standard of living for people.
Valuing
For me, the income question is not one of identifying selfish, greedy bastards but a question of how we value people and people's work.
The allocation of income and wealth is grossly distorted and I believe that is an economic problem. The way markets reward work in the aggregate is a source of market failure- an externality that needs correcting.
As Solow argued in "Hedging America" markets can be quite astounding at times. It is nice to go to Jewel and buy wine from Spain whenever I want to at a reasonable price. Even Marx recognized the power of markets and Lange proposed using markets in socialism to re-create the price mechanism. That said, correcting market failures should be the focus- at least for now.
We can't depend on people to realize they have too much money and to start redistributing it to those who have less. The allocation issue has to be addressed systemically- rewards for work and redistributive policies.
So if markets produce income inequality and we like markets (sometimes) then how do we proceed?
1. Try to address how markets reward and allocate work.
It is amazing how discredited the idea of laissez faire is- we know markets don't work well all the time and they need various interventions to function. But yet merely suggesting interventions should be taken in the way markets allocate income is fiercely resisted by even moderates.
Attract more talent and skills to more productive occupations (teachers, scientists creating cures) and make less productive occupations like Wall St. less attractive.
Abba Lerner offered a national wage plan that would increase the share of national income going to labor via the cycle:
2. Think about and explore tools and instruments to address existing income inequality.
Redistributive policies like taxes haven't done so well recently at addressing income inequality. Loopholes and money have prevented them from functioning properly.
Where is a good place to start?
Big "think" people like Robert Reich and Gar Alperovitz have some ideas. They identify not just one source of inequality but many, and utilize a set of tools to address each issue.
-Put Wall St. on a leash
-Fix the tax system
-Utilize community based organizations and cooperatives
-Improve the lives of workers
-get money out of politics
They both recognize people live in an economic environment, not a bubble. Which I think is a necessary condition if we are thinking critically about these issues.
After making $25,000/year the past few years, making $300,000/year seems excessive. How could someone making $300,000 claim they are barely getting by?
Ah but my expenses are not the same as those of a $300,000 salary. Perhaps those expenses look something like this: $5,000 housing, $5,000 transportation, $5,000 food, $5,000 entertainment, $5,000 investment/saving. You see, making $300,000 you can still live "check to check", complain you are being taxed too high, barely getting by.
Even a raise to $500,000/year won't help- you can buy the things all your friends have- a bigger house in a better area, better car, more trips, etc.
To a person wandering the streets, without a home, I have too much. I'm greedy, selfish for having a beer, watching movies on my TV, typing on my laptop.
To me, $1,000,000/year is a lot. But, if it was a reward for a CEO that created millions of jobs in a fair and sustainable way, would it be so excessive? Or for a scientist that created a some sort of cure? Or a hedge fund manager who had a good year? When is it justified?
Our judgment of how much is too much is clouded by our comparison to others and ideas of what we are entitled to (American Dream).
So how much is too much? I don't pretend this is an easy question or that I have an answer. I suspect some people would say there's no such thing as too much. You work hard and reap what you sow, by following the rules or being clever enough to skirt them. You sacrifice to get where you are and are entitled to your rewards. Even less individualistic people make arguments for some degree of income inequality because it provides incentives for people to "not all just be janitors".
On the other hand, some people argue the degree of income inequality has grown too large and is starting to have negative effects on the economy- for everyone. Venture capitalists like Nick Hanuer recognize in order for capitalists to be wealthy, they need consumers to buy their products. If people are too poor to buy, how can capitalists stay in business?
Then there is the argument, people must be okay with income inequality because people keep working for these huge corporations. Well, as Joan Robinson and others have argued, workers don't have any say as long as there is cyclical unemployment. If you have a $50,000/year job at a bank and are angry the CEO gets 100x more than you do a year what are your options? Quit and hopefully 1)find another job 2) another job that has a less than 1:100 ratio.
So how much is too much? I'm not sure, but I think stagnant money or capital creating capital for capital's sake is a waste and has better uses for the present that could boost the economy and the standard of living for people.
Valuing
For me, the income question is not one of identifying selfish, greedy bastards but a question of how we value people and people's work.
The allocation of income and wealth is grossly distorted and I believe that is an economic problem. The way markets reward work in the aggregate is a source of market failure- an externality that needs correcting.
As Solow argued in "Hedging America" markets can be quite astounding at times. It is nice to go to Jewel and buy wine from Spain whenever I want to at a reasonable price. Even Marx recognized the power of markets and Lange proposed using markets in socialism to re-create the price mechanism. That said, correcting market failures should be the focus- at least for now.
We can't depend on people to realize they have too much money and to start redistributing it to those who have less. The allocation issue has to be addressed systemically- rewards for work and redistributive policies.
So if markets produce income inequality and we like markets (sometimes) then how do we proceed?
1. Try to address how markets reward and allocate work.
It is amazing how discredited the idea of laissez faire is- we know markets don't work well all the time and they need various interventions to function. But yet merely suggesting interventions should be taken in the way markets allocate income is fiercely resisted by even moderates.
Attract more talent and skills to more productive occupations (teachers, scientists creating cures) and make less productive occupations like Wall St. less attractive.
Abba Lerner offered a national wage plan that would increase the share of national income going to labor via the cycle:
↑employment→ ↑business confidence→ operating at high
level of capacity ↓markup → ↑competition → reduced degree of monopoly
2. Think about and explore tools and instruments to address existing income inequality.
Redistributive policies like taxes haven't done so well recently at addressing income inequality. Loopholes and money have prevented them from functioning properly.
Where is a good place to start?
Big "think" people like Robert Reich and Gar Alperovitz have some ideas. They identify not just one source of inequality but many, and utilize a set of tools to address each issue.
-Put Wall St. on a leash
-Fix the tax system
-Utilize community based organizations and cooperatives
-Improve the lives of workers
-get money out of politics
They both recognize people live in an economic environment, not a bubble. Which I think is a necessary condition if we are thinking critically about these issues.
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