There is (almost) no quarrel about the fact that inequality has increased during the past three or four decades. One of the consequences of this is the growth of unsustainable indebtedness of households in order to maintain aggregate demand, a problem intimately related to the global financial crisis and the so-called Great Recession. James Galbraith’s book Inequality and Instability highlights this aspect of the crisis and the process of inequality.
So it is critically important to understand the causes of this rising inequality. One of the most popular lines of analysis finds in technical change the source of growing inequality. This explanation says that skill-biased technological change has replaced workers at the lower levels of pay with machinery. This has the double effect of reducing the value of their contribution to production and of increasing the reward for highly skilled workers that have the capacity to repair and manipulate more sophisticated machinery. Thus technological change is seen as the force behind changes in wage structure and therefore inequality during the last three decades.
This line of analysis fits well with conservative ideology: because technical change is largely unpredictable, the phenomenon of rising inequality would appear to be an accident or an act of nature, not the consequence of perverse policies. This is an explanation that is more, let’s say, politically neutral, in contrast with such things as de-unionization. This account of inequality is found in many studies, including Acemoglu and Steelman and Weinberg. A study by the OECD also concludes that rapid technological progress brought higher rewards for higher skilled than for lower skilled workers. According to this study technological change affected the way earnings from work were distributed. And although the study found that globalisation went hand in hand with the adoption of the new technologies that penalized low skilled workers, the main conclusion was that neither trade integration nor financial openness had a significant impact on wage inequality.
There are many problems with all of these studies (for the OECD study Rosnick and Baker provide a serious critical review). But perhaps the most important shortcoming is that by concentrating on technology, they fail to carry out a detailed analysis of the impact of macroeconomic policies on income distribution. Monetary, credit and fiscal policies have a critical role to play in income distribution. During the past three decades, macroeconomic policies have been dominated by the overarching objective of price stability. This has often been translated into a restrictive posture in monetary and credit policies, as well as regressive stance in fiscal policy. Even more directly affecting wages are incomes’ policies that are implemented through various channels in both developed and developing countries. And yet, the OECD study does not devote any space to a meaningful discussion of macroeconomic policy priorities and the instruments to implement them. This is not surprising: for the OECD (or for that matter the IMF or the World Bank), the neoliberal policy package should never be up for evaluation even if we are discussing issues that pertain to macroeconomic policy. Of course, this leaves outside of the analytical picture things like unemployment, a critical parameter for the study of inequality.
So if the followers of the technological explanation of inequality fail to examine macroeconomic policy, how do they fare when studying the process of technical change? The more extreme version of this technological explanation of inequality is found the studies of authors like Acemoglu who concludes that we are facing a process of “directed technological change”. According to his research technical change will always be directed towards more profitable areas. Two factors determine the profitability of new technologies: when relative prices change the relative profitability of different types of technologies also changes. Technologies used predominantly in the production of goods that are now more expensive will be demanded more, and the invention and improvement of these technologies will become more profitable. This is a remake of the neoclassical story according to which trends in the capital-labor ratio depend on the relative rates of growth of factor supplies and factor demands.
This type of analysis exhibits several critical weaknesses. It lacks an adequate empirical base in terms of specific case studies for particular innovations. It also fails to carry out an analysis of specific branches of manufacturing with an industrial organization perspective that takes into account intra industry channels of competition, as well as the role of finance. In the end, as the study The Rate and Direction of Inventive Activity Revisited shows, we are still far away from a robust theory of technical change. This is why studies like Brian Arthur’s analyses where lock-in processes and increasing returns to adoption lead to path dependency, showing that technological trajectories are truly unpredictable.
But if technology is behind the inequality story, it is perhaps towards Marx’s analysis that we should turn for some light. Capitalism has an inherent tendency towards productivity augmenting technical change, whether this affects skilled or unskilled workers. As Moseley pointed out, it is the ‘hunger for surplus value’ that drives technical innovation in a capitalist economy. And that is something that not only drives inequality, but also has profound macroeconomic consequences that are highly relevant for the study of inequality trends.