Masaccio: Piketty Shreds Marginal Productivity as Neoclassical Justification for Supersized Pay

Yves here. One of the main agendas of neoclassical economics is to give Panglossian defenses of the current order a veneer of intellectual legitimacy. If our system is the result of individuals and businesses behaving in logical ways, at least in the minds of economists, surely the outcome is inevitable, and therefore virtuous, or else those operators would do things differently. The Big Lie in all of this is that neoclassical economics takes power completely out of the equation. While it does assume selfishness, in that everyone is out or himself to maximize his utility, it also assumes atomized actors who lack the power to influence markets. As we wrote in ECONNED:

To put it another way: the neoclassical paradigm is that of pure competition, where providers are mere price takers and cannot influence market dynamics. But that is a profoundly unattractive business proposition. Even if one were to wave a wand and reconfigure the modern economy along those lines, it would in short order coalesce into larger units as individuals did deals (either via alliances or merging operations) to gain the advantages of greater size, and sought to distinguish their offerings to give them pricing power. And differentiation doesn’t necessarily mean having unique products, but can come through the service related to the products. For instance, convenience stores charge more for staples like milk by virtue of location (on highways where there are no alternatives nearby) or being open at 3:00 a.m.

Yet larger enterprises, or indeed anywhere group ties matter, are weirdly disturbing to neoclassical loyalists. One of the reasons they cling so fiercely to ideas like individuals as the locus of activity, along with rationality and welfare-maximizing results (despite the considerable distortions that result) is that they believe any other stance would support a restriction of personal rights. (An aside: this view is counterfactual. Societies where social bonds have broken down and many individuals are isolated are in fact much more subject to totalitarianism and manipulation by propaganda.)

One widely repeated bit of propaganda in the US is that how much people earn reflects their worth in an economic sense. Given how important business is in American society, maintaining this belief is critical to maintaining legitimacy; otherwise, more and more people would see corporate executives not as captain of enterprise but individuals by luck or connivance, got in a position where they could exploit a system that gives them control over assets and cash flows with perilous little in the way of controls over them (there is a vast literature on principal/agent issues in large corporations).

Here, Ed Walker explains how Piketty took a wrecking ball to the ideas that compensation at the top end of the pay spectrum has anything to do with the type of performance economists care about: marginal productivity. It is telling that this part of Piketty’s argument hasn’t gotten the attention it warrants.

By Ed Walker, who writes as masaccio at Firedoglake. You can follow him at Twitter at @MasaccioFDL, and here’s his author page at Firedoglake.

One of the major criticisms of Capital in the Twenty First Century is that Thomas Piketty relies heavily on the ideas of neoclassical economics in his presentation, as here and here. Others recognize what seems to me to be the most important aspect of the book, it’s relentless assault on neoclassical economic theory, and its political cousin, neoliberalism. Here’s one example.

It’s not possible to tell what Piketty has in mind on this point. As I noted before, he is quite capable of working out ideas in the neoclassical mold, as he does with a study of the role of inheritance in wealth formation in a paper written with Gabriel Zucman. I think he is cutting out the heart of neoclassical theory, and slapping at the neoliberals who love it. To support my view, we can look at his discussion of marginal productivity as an explanation for wildly unequal income distribution. Neoliberals claim that the market rewards people according to their value in production. John Foster and Michael Yates give a good example:

Likewise Robert Lucas, Jr. of the University of Chicago, the most influential macroeconomist of his day, was merely stating the dominant view of the profession and of the establishment as a whole when he opined in 2004, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of [income] distribution. Fn omitted.

Piketty’s discussion of marginal productivity begins at page 304, for those who want to follow along in the text. He says that the main explanation for rising inequality of income is the race between education and technology. Those who have more education are better able to cope with technology, and thus are worth more in the marketplace of employment.

This theory rests on two hypotheses. First, a worker’s wage is equal to his marginal productivity, that is, his individual contribution to the output of the firm or office for which he works. Second, the worker’s productivity depends above all on his skill and on supply and demand for that skill in a given society.

This theory is crucial in the construction of the neoliberal project. First, it justifies the massive amount of money going to the C-Suite, the group Piketty sees as a crucial part of the new wealth oligarchy. Second, it has been internalized by most of our fellow citizens, who blame themselves for their economic status and are blind to the impact of social norms and governmental actions. Let’s first see what Piketty says, and then look at the impact on the neoliberal project.

“This theory is in some respects limited and naïve”, he tells us. First, the productivity of any given worker is not a fixed and immutable number, as he puts it, “inscribed on his forehead.” Second, he says that the relative power of each group is a crucial factor in determining how much each gets from revenues produced by the firm. He thinks that education and technology play a significant role:

…[I]f the United States (or France) invested more heavily in high-quality professional training and advanced educational opportunities and allowed broader segments of the population to have access to them, this would surely be the most effective way of increasing wages at the low to median end of the scale and decreasing the upper decile’s share of both wages and total income.

This analysis is based on a book by Claudia Goldin and Lawrence F. Katz The Race Between Education And Technology, and not any special analysis by Piketty. It seems odd that one would draw the conclusion that raising the supply of educated workers would increase the price paid for their labor. It seems to contradict the law of supply and demand, and smells something like Say’s Law. One way to think about it is that labor is not a commodity like coke and iron ore; there is something special about it, an idea rejected by the neoliberals. And even in the long run, how does it work for the unlucky sperm club? And how did it work out for everyone who graduated in 2008 and thereafter? Perhaps he gets it right with this: “…theoretical discussion of educational issues and of meritocracy is often out of touch with reality….” 307.

He then takes up marginal productivity theory in more detail, eviscerating the role of training and education as setting wages in the short run. It is silly to believe that even trained workers are paid according to marginal production. First, it is impossible to measure this accurately, even in the case of repetitive tasks. Second, technology is not always available that requires highly trained people. Third, education is not solely instrumental; it has value in itself.  The biggest issue, though, is that the simple theory is unable to account for differences across countries. Worker pay is the outcome of the way the society is organized. He discusses the role of the minimum wage in setting wages. It makes sense, he says to limit the power of the employer to set wages in many settings, obviously where there is a monopsony of employment, but more generally where the power of the employer is overwhelming. That would be the case where unemployment is ridiculously high, as it is today, and where the ability of workers to organize is ridiculously low, as it is today in the US.

In sum, Piketty rejects the theory of marginal productivity as a predictor of wages, and considers it irrelevant in understanding the growth of inequality.

He then asks why there is such a large variance in the growth of wage income at the very top of the income scale. The answer is not simply education, because most of the people in the top quintile have equivalent educations. The explosion of incomes in the top centile happened in the US and England, but not in continental European nations or in Japan. That blows another hole in the idea that marginal productivity explains the rise in top incomes. The data show that the top .01% in France, Japan and Sweden grew rapidly, almost doubling, while quintupling in the US. This difference cannot be explained by differential technological change, because that is fairly constant in all these countries.

The idea that marginal productivity explains anything about the very top incomes is laughable in Piketty’s telling. Consider a firm with 100,000 employees and 10 million Euros in revenues, and a cost of good and services purchased of 5 million Euros. The firm has 5 million Euros to divide among its employees. How should it set the compensation of its CFO? The theory of marginal productivity says we should figure out the value of the contribution of the CFO to the 5 million Euro figure. That’s not possible.

Let’s put this into a real life setting. Barry Ritzholz has the figures on the distribution of the bonus pool of $1.5 billion available at Pimco to be divided among 60 managing directors. Felix Salmon breaks it down:

The top of the food chain, that year, looked something like this*:

  • Bill Gross: $290 million
  • Mohamed El-Erian: $230 million
  • Daniel Ivascyn: $70 million
  • Wendy Cupps: $50 million
  • Douglas Hodge: $45 million
  • Jay Jacobs: $22 million

Obviously, the numbers here are mind-bogglingly enormous. But on top of that, they’re incredibly skewed towards the very, very top of the income distribution, in a perfectly Piketty-like manner.

The top two get 35% of the pool, the next three get 8%, and the other 55 get less than the average. Gross managed The Total Return Fund, which shrank nearly 1/3 during the last 16 months. Ivascyn managed the Income Fund, which has grown by 30% over that same year. In fact, Gross committed a stunning mistake, betting on an increase in interest rates in 2011 that seriously damaged the fund. Krugman called him on it in real time. So, it isn’t competence that resulted in the giant paycheck. Paying for lousy performance is pretty much the exact opposite of the marginal productivity theory. But there are plenty of studies showing that paying for lousy performance is common in big businesses, like the recent paper described here.

…[T]he companies run by the CEOS who were paid at the top 10% of the scale, had the worst performance. How much worse? The firms returned 10% less to their shareholders than did their industry peers. The study also clearly shows that at the high end, the more CEOs were paid, the worse their companies did; it looked at the very top, the 5% of CEOs who were the highest paid, and found that their companies did 15% worse, on average, than their peers.

Read the comments, and you’ll see how desperately people cling to the obviously false idea that pay is related to performance, which brings us back to the neoliberal project.

Philip Mirowski gives a brief description of the neoliberal project here, and a longer one in Chapters 2 and 3 of his book, Never Let A Serious Crisis Go To Waste. As I read Mirowski, the point of the neoliberal project is to recreate the mass of humans as homo economicus, the economic person. One of its principal ideas has to do with the notion of human capital, that bizarre idea of Gary Becker of the University of Chicago. Mirowski quotes Michel Foucault in his book:

The Entrepreneurial Self cannot be passive, but must move strategically in a world rife with risk. Hence, reward and punishment are accepted by the agent as the outcome of calculated risk, not the dictates of ‘justice’. Id at 96.

Neoliberals have convinced the vast majority of our fellow citizens that they and they alone are responsible for their fates. They took risks and they lost, but it was their choice. I can hear Rick Santelli ranting in the background. At the same time, neoliberals insisted that governments everywhere bail out the filthy rich and their corporations, especially their financial corporations, and governments obliged. So, we screw the productive members of society and reward the slugs, all in line with neoliberal theory.

Neoclassical economics undergirds the neoliberal project. Piketty slashes at a piece of that foundation with his attack on marginal productivity. What now is the justification for the absurd compensation of the filthy rich? Tort law failed to deal with the sins of the bankers. Why aren’t they in jail? One more block pulled from the Jenga pile of vicious ideas so beloved of the rich and their government agents.

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  1. David Lentini

    “Paying for lousy performance is pretty much the exact opposite of the marginal productivity theory. But there are plenty of studies showing that paying for lousy performance is common in big businesses, like the recent paper described here.”

    Indeed, having suffered watching the well-placed foolish getting to ride the gravy train into the ground, these results really demonstrate that highly paid managers are not interested in doing business; they’re only interested in looting the firm or at least maximizing their deluded narcissistic status indicators. So, in reality, marginal productivity theory actually destroys businesses and economies by rewarding the worst of humanity.

    “At the same time, neoliberals insisted that governments everywhere bail out the filthy rich and their corporations, especially their financial corporations, and governments obliged. So, we screw the productive members of society and reward the slugs, all in line with neoliberal theory.”

    The real issue is power. The neoliberal project is really about destroying collective public power in favor of maximizing the power of a few. And our economists have been well rewarded for their efforts. Creating the red herring of just compensation as defined by “productivity” keeps everyone running around in circles or fighting amongst themselves; we never see who really matters and what they do. Of course the bailouts are actually in line with neoliberal theory, since they reflect the power of a few to avoid the consequences of their foolishness. Getting paid for doing nothing useful, or even destroying what’s valuable and productive, is a true sign of power and therefore liberty.

    1. Ed Walker Post author

      I agree that the issue is power. The masses become homo economicus, or Eloi, and the masters become Galts, or Morlocks.

      1. Sufferin'Succotash

        H. G. Well’s dystopia doesn’t quite fit our situation. His hard-working Morlocks produced everything the idle Eloi needed. In return the Morlocks got to kill and eat some of the Eloi on occasion. It was a satire on the English working class and idle rich projected 800,000+ years into the future. For a somewhat more prescient bit of early 20th century speculative fiction, try Jack London’s The Iron Heel(1907).

  2. impermanence

    Give me an organized society and I’ll give you the few who use such to line their pockets. The desire to defraud and scam people seems to be unlimited.

    1. RepubAnon

      I’ve never seen an analysis of the economics of negotiating skills. In the perfect market model, negotiation doesn’t happen (nor does fraud) because all participants have perfect knowledge and equal market power. However, compensation in the real world depends upon both job-related skills and also internal political and negotiating skills.

      In the C-level world, it seems that negotiating skills combined with skilled manipulation of an organization’s internal politics can help a person with fewer job-related skills gain higher wages than someone with better technical skills, but less ability to negotiate on their own behalf and/or navigate the shoals of internal politics. Thus, we see people rewarded for actions which hurt the organization as a whole due to their ability to negotiate a large golden parachute, or achieve a position of power allowing them to loot the organization and be gone before the consequences hit.

  3. flora

    Thanks for this post challenging the ideological foundation of neoliberalism. Too many have accepted neolib ideology as intellectually sound, when it is not. It’s just inbred academic thinking that serves the concentrated corporate/financial interests.

  4. c1ue

    I would also point out the “pay for education” and “free market determination of pay” are incompatible unless an assumption is made that education = greater competitiveness.
    However, this is never true unless there are overt rewards for education degrees such as exists in Japan and Germany.
    If Google, Apple, Lucas Arts, and a slew of other tech companies choose to suppress their employee’s wages by collusion, obviously the “free market” has failed. To which the normal rejoinder by the neoliberal morons will be “but that isn’t a free market” whereupon the rathole of “what a free market is” discussion begins.
    As a pragmatic person – my view is that there ain’t no free lunch, and there ain’t no free markets either.

  5. susan the other

    This is a good start for breaking down our misery. It fits with Picketty’s theme that too much money itself becomes unproductive and sucks the life out of the real economy by taking rents and interest, etc. that over time are unaffordable because they create an imbalance that cannot rebalance itself. I thought the Fed did an interesting thing the other day. It actually asked the high level bankers what the overnight rate should look like now with plenty of liquidity and low interest rates. That sounds like asking Bill and Mohammed what their compensation rate for their long-time productivity should be. So these new-normal bankers are being asked to predict the productivity of the new economy going forward. (Which, everyone knows, is nada.) But somebody has to give us a definition of what the “real economy” actually is. I think the answer will be astoundingly simple. It might be simply that the real economy is people, after all the bullshit is reduced. And that will prove once and for all that everyone deserves an equal share of society and its “real” productivity. We should offer a prize to the firsts bankster who has the guts to say it.

  6. Fair Economist

    As Karrass’ bestseller says “You don’t get what you deserve, you get what you negotiate”. Real labor productivity has doubled in the past 40 years, but wages haven’t changed. Any claim that raising productivity will necessarily raise wages has been refuted by reality. Gross’ gross overpayment for losing his company buckets of money is just the obverse.

    Skilled workers doing what they’re good at generate a benefit for society, but not necessarily for themselves, as a huge number of enslaved artisans, entertainers, and even intellectuals have discovered over the centuries. The 0.1% are trying to recreate that kind of situation without it being so obvious who’s exploiting whom.

    1. NOTaREALmerican

      Re: you get what you negotiate

      Perhaps the winners – the “Management Class” – are simply those who have a brain configuration which allows them to feel entitled to take as much as they can get; rather than feeling they have enough or (worse) guilty if they take too much. (Morality OCD is definitely a debilitating illness)

      If it (just happens) to be a simple brain-configuration anomaly that would mean that (gasp) the “neo-liberals” really didn’t “convince the vast majority” of anything. The winners just “took it”.

    2. economicminor

      On with that thought, the fact that skilled workers et al are not compensated fairly could be why so many have opted out of the work force as in lowest participation rate in many decades. Some into the underground economy and others as disabled or retired, just so they don’t have to put up with the insignificant unappreciated compensation while those at the top try and win the big Monopoly game at society’s expense.

      Thank you Ives again for another beautiful piece. You are a treasure!

      But back down to our saving our nation and maybe the world, what can we as individuals do about any of this?

      1. Ulysses

        Organize into unions, and negotiate a far better share for labor! This is a lot easier said than done, of course, but just a little solidarity can help the process. We can refuse to participate in our own destruction! I remember a few years back up in Pawtucket, Rhode Island a supermarket chain spent a pretty big chunk of change putting a whole lot of new self-checkout lanes into the stores. About six of those to every one with a human cashier. The working class customers saw right away that this would throw people out of work, so they simply refused to use the new lanes! They endured very long waits at the human lanes, while the robot lanes were nearly empty. Eventually the chain backed down, and now the ratio is about 8 human lanes to every robot lane.

    3. Ulysses

      What’s sad is that the 0.1% don’t have to put much effort into screwing the rest of us over. Way too many of the 99.9% are trapped, into helping further concentrate wealth into the hands of the super-rich, without even knowing how they are being used. They sense that the system is unfair, yet they don’t quite know how it got that way.

  7. Ed S.

    The one model which can plausibly explain the insane levels of compensation at the top: the “winner take most” tournament model.

    The classic example is a tennis tournament – the winner of the 2014 US Open received $3mm; 2nd place $1.5mm (roughly); 3/4th gets $750k. If you get in (there are 128 entrants) — a measly $35k. (of course, the real money is in endorsements).

    The motivation to attract new players isn’t the $35k – it’s the $3mm. Same with business today — a “winner take most” model – get the low to mid level people working 50 hours a week for $50k because there’s the possibility of the golden ticket to the C-Suite.

    Marginal productivity has very little (if anything) to do with compensation — C-Suite execs come and go regularly with little change in the dynamics of the business (although a true incompetent can drive a company into the ground).

    Sky high CEO and C-suite pay is, in a neoliberal way, pour encourager les autres

    1. NOTaREALmerican

      And surely the “neo-liberals” also “convinced” the “vast majority” of “tournament organizers” that the top 1% of sports superstars are deserving of winning-it-all.

    2. economicminor

      Its the Big Monopoly game. It is all about winning. Just like the real board game where no one cares about the other players. Except in this game, they don’t care anything about the worker or the environment either. It is all about them. No thoughts of Society or Humanity or ever what is right or wrong, it is all about them and their status and whether they can win more properties so they can eventually win the game. They are all insane with few redeeming qualities, yet they have the power and we don’t.

  8. NOTaREALmerican

    Re: Neoliberals have convinced the vast majority of our fellow citizens that they and they alone are responsible for their fates.

    Golly, if only we could identify these “neo-liberals” who “convinced the vast majority”. If we do find them should they be promoted to “neo-dieties” for having such amazing powers of “convincing” that the “vast majority” believed them?

    So, what’s the alternative “story” that “we” need to tell the “vast majority” and what group of super-humans exist to “convince” the “vast majority” of this amazing alternative; where “da nice people” get to benefit from their labors (surely these super-humans must be neo-“somethings”).

    1. Ed Walker Post author

      As I say, “you’ll see how desperately people cling to the obviously false idea that pay is related to performance”.

      1. NOTaREALmerican

        I think the definition of “performance” isn’t what you think.
        Maybe people actually admire the “confidence” of the “worthy people” who unapologetically take everything they can get. Cue, Frank Sinatra singing: “I did it MYYYYYY WAAAAAYYYYYYY!!!!!!”

        1. economicminor

          and it doesn’t matter because what happens when someone wins at Monopoly? I guess in real life we can call them King or Emperor or what ever they want us to call them. But when all the chips are on one side of the table, there is no one left to purchase the goods and services in a predominately consumer economy. Game over! Fold up the game and go to bed.. Or in the real world, probably a revolution of some kind as even those others that were at the top and are now losers will be unhappy.

          1. NOTaREALmerican

            Well, I agree completely.

            But, real-life is a monopoly game that you jump-into in the middle of “the game”. But, most people don’t know that`. And, they don’t know there’s an end game either, as lots of people die before they pass go. So, there’s no frame of reference of real-life being anything like a monopoly game because everybody “understands” only the short-term.

            We’ve got the most natural of all systems right now. The really smart people are screwing the dumb people (and those with morality OCD) for all they’ve got.

            Over the long term, the full monopoly game, what other system could be possible? There’s no way to create the language required to convey the “concept” of “the end game” to normal pathologically optimistic humans. So, we have global-warming and winner-take-all until everybody gets mad and throws gasoline on the monopoly board and sets-it-on-fire.

            1. allis

              As a child I frequently played a modified Monopoly game. The only change in the rules was that when a player was close to being bankrupted he was gifted with cash; no one ever “lost.” So, how did the game end? It ended in a circuit. Eventually all the properties had hotels on them and all the players would go around the board collecting and paying rents. The “winner” collected the most rents and had the greatest status, but no one was kicked out of the game. The game mimicked a “stagnant” society, but one which was as prosperous as the environment allowed.

        2. flora

          ” the “confidence” of the “worthy people” who unapologetically take everything they can get”

          makes them sound like rapists.

            1. flora

              well, the point is not that there are opportunists who take advantage. The point is that there is an entire, central, ideological edifice – neoliberalism – that fails even its own rational yet remains the US govt’s and university econ departments’ guiding economic ideology. Time to start pointing out the emperor has no clothes. Which this post does. My thanks to the poster and to Yves.

  9. TerjeP

    This artical seems to conflate classical economists with certain political actors when it comes to government bailouts. If you want to make the case that classical economists are also the proponents of government bailouts then you really ought to cite some examples. Sure there are politicians that say one thing and do another. That sheild their corporate buddies from market forces when times get tough but talk of free markets when it suites their agenda. But we should not judge classical economics by the actions of ratbag politicians that at one point or another used the words supply and demand in a coherent manner.

    1. Yves Smith

      He doesn’t need to provide sources because support for the bailouts among economists was almost universal. Go look at all the praise for Bernanke when he left the Fed. And you seem to forget that Congress voted down the TARP. It was only when the markets tanked and Obama whipped for it that it was voted through. Similarly, the Senate put an unprecedented five holds on Bernanke’s renomination as Fed chairman. Obama had to whip personally to get the votes for him to be reappointed.

  10. Left in Wisconsin

    I don’t think the economists are going to be concerned about the facts not supporting their theoretical apparatus; it hasn’t seemed to be a problem til now.

    It seems to me that the neoclassical equilibrium model is fundamentally flawed (not useful for analysis of the real economy) for one simple reason: the theoretical economy is all about what people do at equilbrium or when equilibrium is gently disturbed (i.e. post-equilibrium), whereas the real economy is all about what people do when they have advantage (i.e. pre-equilibrium or during punctuations), which is when all the interesting action takes place. There are at most a handful of trivial real-world circumstances that fit the model.

    For those interested, Larry Mishel at EPI has done some good work demonstrating how pitiful our current measures of (real) productivity are – lots of bad measurement and lots of simply substituting wages for productivity in the data. And even when the measures are not terrible (i.e. mfg), capacity utilization has a huge impact, which complicates things to say the least.

    1. NOTaREALmerican

      Yabut, ya gotta admit.. the (neo)classical model sure helps the (neo) top 10%. Who cares if it’s “right”, if you’re winning.

      As always, the problem isn’t economic, it’s morality.

      1. flora

        Well, morality on the personal level, but at the national level the problem is a willingness to use law and regulation to prevent and redress abuse. So, for example, if you’re moral you won’t act badly. But if you do act badly then there are laws and regulations to rein in the bad behavior, and to deter others from acting badly.

  11. Gibby the Fifth

    Yes, but why did the explosion of pay start in the mid80’s, as opposed to the mid60’s or many other times?
    My guess is that the financialisation of economies and introduction of new products leading to more trading (but generally no improvement to investment returns) was the main cause, followed by a levelling up of top pay. After all, if a teenage scribbler is worth a lot of money, surely the CEO of Shell is worth a lot more due to the greater complexity and consequence of his tasks.
    I would love to hear the views of other readers!

  12. Oregoncharles

    Not exactly a response to this article, though this is the one that made me think about it:

    Has anyone else thought about where this site (or reality, whichever you want to reference) is pointing us? Taken as a whole, it depicts a fundamentally corrupt system descending rapidly into autocracy. Granted, that’s the way I saw it anyway. I’m not convinced that either Yves or Lambert see it that way, but I think we’re in terrible danger (my wife keeps pushing to move out of the country – something I’m reluctant to do.)

    We’re moving into a pre-revolutionary situation, unless we can pull off the electoral equivalent quite soon – something I don’t really see in the cards. I wish I did. We can see the top few consolidating their power and preparing to suppress resistance; for instance, this article makes it clear that neoclassical economics, the accepted wisdom, is a tool of control, and surprisingly effective. Hence the contempt for (most) economists that is a theme here.

    I’m not criticizing NC; at least for me, this is precisely part of its value. But I’d love to see some deep thought about what our options are. Right at the moment, we’re seeing Mexico spin out of control; any day now, we’ll see the Zapatistas marching on the capital, and growing stronger every day. Chickens roosting.

    When, and how, is it our turn?

    1. Ed Walker

      I think about this problem every time I write a post. So far, I have only one idea: we need to change the way people think about the economy, both in practice and in theory. What is the goal of the economy? How does it really work? What alternatives are there?

      I think almost all of our fellow citizens believe that the US version of capitalism is the best possible system, and that any change will hurt them. Reality will eventually force people to question that idea, hopefully leading to space for political discussions about appropriate changes. When that happens, we need to be ready to drown out the voices of the filthy rich and their minions, and that starts with plenty of people ready to take on the nonsense they spew from every media outlet and every politician, and treat them and their ideas with the contempt they so richly deserve.

      Or move to Paris. They have their problems too, but I don’t speak French well enough to participate, so I could just enjoy the life.

    2. TheraP

      I’ve thought about it a lot for maybe 10 years. It’s not just forms of government or sizes of countries or even educating the citizenry. I see it now as the worldwide Oligarchy being more powerful than any nation or government. I have no solution but I am deeply worried. So far I am free to think and write as I choose. But all around me I see how powerless we have become to do more than analyze and try to remain sane.

      When we attended the first Occupy event in a nearby large city a few years back and I saw the buses of riot-garbed police … Waiting… When I noticed the crowd of normal people, including many elderly like us…. Seeded with obvious “plants” – photographing and “mingling” in ways that to me were clear evidence of surveillance…. When we viewed the groups of mounted police once the actual March began… Obviously meant to encircle the crowd if need be. Then, I knew! The police state is here – ready and waiting.

      My husband grew up under a dictatorship. That day of the demonstration, he told me: The way to deal with mounted police… Carry marbles in your pockets!

      But that was then and this is now. The World Oligarchy and global warming have already sown seeds of distraction. And who can stop it? This worries me greatly.

  13. Paul Hirschman

    It’s a bit odd that economists never miss an opportunity to declare themselves to be scientists, like chemists and physicists, yet they declare that power doesn’t matter in any significant way, whereas real scientists focus most of their efforts on understanding the way power suffuses Nature. Economics rejects reality, the very opposite of a real science. I guess that’s the “power” of money. If you have enough money you can make any nonsense into a science.

  14. Jon Husband

    I used to be a compensation consultant from the mid-80’s to the mid-90’s with one of the major global HR consulting firms. I saw the introduction by our firm and the major competing consulting firms to major corporations of what was variously called variable pay or pay-at-risk or pay-for-performance schemes as well as increasingly-distorted executive compensation schemes.

    I quit in disgust in 1993. It was evident even then what was going to happen, as it has indeed over the past 20 years.

  15. Jesper

    In a crony capitalist society the compensation isn’t so much based on performance it is more based on value add – connected and powerful people can be very valuable. I.e. it is not what you do or what you know it is who you know.
    Would the CEOs get as much if their connections with government were weaker?
    How much is it worth to have someone who can get government bailouts if/when the business fails?
    How much is it worth to have someone who can decrease penalities if/when caught with wrongdoing?
    How much is it worth to have someone who can obtain government contracts?

    I’m not a fan of Ayn Rand, but her description of how a dysfunctional crony capitalist society functions has merit. The Randian utopia and its foundation on the other hand is distasteful and impossible.

  16. Denis Drew

    Ed Walker wrote at Firedoglake: “The country we grew up in is dying.” No need:

    The ultra (and only) practical resuscitation road would be motivating the same old elected representatives to become suddenly alive to the needs of everyday Joe(s) because Jane(s) have of late become union organized in sufficient numbers to provide equal political finance to back their 99% of the votes.

    Which organized resuscitation would also to provide equal lobbying attention: much of today’s looting of the country would not go down if there were just somebody there minding the store, to keep up with the latest scams case by case (e.g., for profit colleges, private equity, drug gouging).

    (Legally mandated) CENTRALIZED BARGAINING happens to be the only workable free market solution. Economists have to begin to recognize the (alpha and omega) difference between a two-tier labor market wherein labor’s price is set according to labor’s value compared to other labor (e.g., subsistence or less for fast food; a couple dollars hour more for better English at Starbucks) — as opposed to what can be extracted from the ultimate consumer. (This is the true theoretical come back to the marginal utility fixations — what utility for who.)

    (Centralized bargaining for those who don’t know — most Americans who never heard of such a thing; so maybe I shouldn’t put this in parenthesis — consists of all employees doing similar work [e.g., retail clerk] negotiating one, common contract with all owners doing similar business [e.g., Best Buy, Safeway supermarkets, Walgreens, Walmart]: reverses the race-to-the-bottom.)

    We get this done by spelling out the advantages of (legally mandated in the US — some places it’s just the way they do things) centralized bargaining. People don’t need a Ph.D. to understand their basic economic interests and vote them. They do need someone to point out the obvious.

    (E.g., of somebody pointing out the obvious: I wondered for decades why energy increases with the square of the speed. Some kid on a science fiction newsgroup explained that when you go three times as fast you go three times as far. Felt less dumb when I learned Issac Newton missed it too.)

    When I heard about centralized bargaining (a.k.a., sector-wide agreements) a decade ago I wondered why I didn’t think of that — it was so obvious.

    Supermarket workers and regional airline pilots (the latter the quintessential example of two-tier market valuation, $500 a week for $100,000 education) would kill for centralized bargaining. But first somebody has to point out the obvious to them.

  17. kevinearick

    Einstein was a derivative short from Lorentz in ‘The Physics of War,’ and the speed of light is a normalized function of peer observation. Change the channel and that elevator door will open. Remove and add friction to the screw for propulsion.

    The problemsolution of humanity, among others, is that it tends to assume that it is the stationary center of the universe, and individuals tend to assume that they are the center of the center. That sun is a motor-generator, that ether is the core of a coiled coil, and those rocks are electrostatic precipitation. Don’t let your eyes and/or the instrument fool you.

    Public education, peer pressure superstition competition, makes the mind inflexible, so the critters, including the Fed, have no idea whether the furnace is on or not. From the perspective of propulsion, that elevator is a solenoid, transforming perspective, if you look, from the correct distance. Whether the empire is an inductor, capacitor or resistor depends upon what you want to do.

    There are an infinite number of numbers between zero and one, but average voltage is still zero. The majority thought that Germany would fold before China, surprise. Funny, SMART technology turns out to be incredibly stupid, consuming capital faster and faster.

    There are many tests for continuity, and the critters take a short-cut, every time, thinking that they are getting ahead. Drawing down a battery and waiting for nature to replenish it is only rocket science from the perspective of empire. Cut down another redwood, to make toilet paper, and pay the planners.

    The empire always destroys its own watershed, to maintain artificial scarcity, the illusion of control, until it can’t. Where do you suppose economic mobility originates?

    Opportunity is one thing. Outcome is another. If you want a different outcome, change your input, instead of expecting a different output.

    1. kevinearick

      Russia has a better internal food supply chain than the US only in that it is in a smaller GIGO ditch.

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