2018-06-07 19:42:11 UTC
poorer, but why have things got so bad so fast? Is the problem a
result of monopolies? Have monopolies resulted in more market power
which has resulted in more profits which has resulted in more
political power which has resulted in still more market power, with
the whole process forming a feedback loop that can't be stopped?
"Challenging the Oligarchy
Paul Krugman, December 17, 2015 Issue
Back in 1991, in what now seems like a far more innocent time, Robert
Reich published an influential book titled The Work of Nations, which
among other things helped land him a cabinet post in the Clinton
administration. It was a good book for its timebut time has moved on.
And the gap between that relatively sunny take and Reichs latest,
Saving Capitalism, is itself an indicator of the unpleasant ways
America has changed.
The Work of Nations was in some ways a groundbreaking work, because it
focused squarely on the issue of rising inequalityan issue some
economists, myself included, were already taking seriously, but that
was not yet central to political discourse. Reichs book saw
inequality largely as a technical problem, with a technocratic,
win-win solution. That was then. These days, Reich offers a much
darker vision, and what is in effect a call for class waror if you
like, for an uprising of workers against the quiet class war that
Americas oligarchy has been waging for decades.
To understand the difference between The Work of Nations and Saving
Capitalism, you need to know about two things. One, which is familiar
to most of us, is the increasingly ugly turn taken by American
politics, which Ill be discussing later. The other is more of an
insider debate, but one with huge implications for policy and politics
alike: the rise and fall of the theory of skill-biased technological
change, which was once so widely accepted among economists that it was
frequently referred to simply as SBTC.
The starting point for SBTC was the observation that, around 1980,
wages of college graduates began rising much more rapidly than wages
of Americans with only a high school degree or less. Why?
One possibility was the growth of international trade, with rising
imports of labor-intensive manufactured goods from low-wage countries.
Such imports could, in principle, cause not just rising inequality but
an actual decline in the wages of less-educated workers; the standard
theory of international trade that supports such a principle is
actually a lot less benign in its implications than many noneconomists
imagine. But the numbers didnt seem to work. Around 1990, trade with
developing countries was still too small to explain the big movements
in relative wages of college and high school graduates that had
already happened. Furthermore, trade should have produced a shift in
employment toward more skill-intensive industries; it couldnt explain
what we actually saw, which was a rise in the level of skills within
industries, extending across pretty much the entire economy.
Many economists therefore turned to a different explanation: it was
all about technology, and in particular the information technology
revolution. Modern technology, or so it was claimed, reduced the need
for routine manual labor while increasing the demand for conceptual
work. And while the average education level was rising, it wasnt
rising fast enough to keep up with this technological shift. Hence the
rise of the earnings of the college-educated and the relative, and
perhaps absolute, decline in earnings for those without the right
This view was never grounded in direct evidence that technology was
the driving force behind wage changes; the technology factor was only
inferred from its assumed effects. But it was expressed in a number of
technical papers brandishing equations and data, and was codified in
particular in a widely cited 1992 paper by Lawrence F. Katz of Harvard
and Kevin M. Murphy of the University of Chicago.1 Reichs The Work of
Nations was, in part, a popularization of SBTC, using vivid language
to connect abstract economic formalism to commonplace observation. In
Reichs vision, technology was eliminating routine work, and even
replacing some jobs that historically required face-to-face
interaction. But it was opening new opportunities for symbolic
analystspeople with the talent and, crucially, the training to work
with ideas. Reichs solution to growing inequality was to equip more
people with that necessary training, both through an expansion of
conventional education and through retraining later in life.
It was an attractive, optimistic vision; you can see why it received
such a favorable reception. But while one still encounters people
invoking skill-biased technological change as an explanation of rising
inequality and lagging wagesits especially popular among moderate
Republicans in denial about whats happened to their party and among
third way types lamenting the rise of Democratic populismthe truth
is that SBTC has fared very badly over the past quarter-century, to
the point where it no longer deserves to be taken seriously as an
account of what ails us.
The story fell apart in stages.2 First, over the course of the 1990s
the skill gap stopped growing at the bottom of the scale: real wages
of workers near the middle stopped outpacing those near the bottom,
and even began to fall a bit behind. Some economists responded by
revising the theory, claiming that technology was hollowing out the
middle rather than displacing the bottom. But this had the feel of an
epicycle added to a troubled theoryand after about 2000 the real
wages of college graduates stopped rising as well. Meanwhile, incomes
at the very topthe one percent, and even more so a very tiny group
within the one percentcontinued to soar. And this divergence
evidently had little to do with education, since hedge fund managers
and high school teachers have similar levels of formal training.
Something else began happening after 2000: labor in general began
losing ground relative to capital. After decades of stability, the
share of national income going to employee compensation began dropping
fairly fast. One could try to explain this, too, with technologymaybe
robots were displacing all workers, not just the less educated. But
this story ran into multiple problems. For one thing, if we were
experiencing a robot-driven technological revolution, why did
productivity growth seem to be slowing, not accelerating? For another,
if it was getting easier to replace workers with machines, we should
have seen a rise in business investment as corporations raced to take
advantage of the new opportunities; we didnt, and in fact
corporations have increasingly been parking their profits in banks or
using them to buy back stocks.
In short, a technological account of rising inequality is looking ever
less plausible, and the notion that increasing workers skills can
reverse the trend is looking less plausible still. But in that case,
what is going on?
Economists struggling to make sense of economic polarization are,
increasingly, talking not about technology but about power. This may
sound like straying off the reservationarent economists supposed to
focus only on the invisible hand of the market?but there is actually
a long tradition of economic concern about market power, aka the
effect of monopoly. True, such concerns were deemphasized for several
generations, but theyre making a comebackand one way to read Robert
Reichs new book is in part as a popularization of the new view, just
as The Work of Nations was in part a popularization of SBTC. Theres
more to Reichs thesis, as Ill explain shortly. But lets start with
the material that economists will find easiest to agree with.
Market power has a precise definition: its what happens whenever
individual economic actors are able to affect the prices they receive
or pay, as opposed to facing prices determined anonymously by the
invisible hand. Monopolists get to set the price of their product;
monopsonistssole purchasers in a marketget to set the price of
things they buy. Oligopoly, where there are a few sellers, is more
complicated than monopoly, but also involves substantial market power.
And heres the thing: its obvious to the naked eye that our economy
consists much more of monopolies and oligopolists than it does of the
atomistic, price-taking competitors economists often envision.
But how much does that matter? Milton Friedman, in a deeply
influential 1953 essay, argued that monopoly mattered only to the
extent that actual market behavior differed from the predictions of
simple supply-and-demand analysisand that in fact there was little
evidence that monopoly had important effects.3 Friedmans view largely
prevailed within the economics profession, and de facto in the wider
political discussion. While monopoly never vanished from the
textbooks, and antitrust laws remained part of the policy arsenal,
both have faded in influence since the 1950s.
Its increasingly clear, however, that this was both an intellectual
and a policy error. Theres growing evidence that market power does
indeed have large implications for economic behaviorand that the
failure to pursue antitrust regulation vigorously has been a major
reason for the disturbing trends in the economy.
Reich illustrates the role of monopoly with well-chosen examples,
starting with the case of broadband. As he notes, most Americans
seeking Internet access are more or less at the mercy of their local
cable company; the result is that broadband is both slower and far
more expensive in the US than in other countries. Another striking
example involves agriculture, usually considered the very model of a
perfectly competitive sector. As he notes, a single company, Monsanto,
now dominates much of the sector as the sole supplier of genetically
modified soybeans and corn. A recent article in The American Prospect
points out that other examples of such dominance are easy to find,
ranging from sunglasses to syringes to cat food.4
Theres also statistical evidence for a rising role of monopoly power.
Recent work by Jason Furman, chairman of the Council of Economic
Advisers, and Peter Orszag, former head of the Office of Management
and Budget, shows a rising number of firms earning super-normal
returnsthat is, they have persistently high profit rates that dont
seem to be diminished by competition.5
Other evidence points indirectly to a strong role of market power. At
this point, for example, there is an extensive empirical literature on
the effects of changes in the minimum wage. Conventional
supply-and-demand analysis says that raising the minimum wage should
reduce employment, but as Reich notes, we now have a number of what
amount to controlled experiments, in which employment in counties
whose states have hiked the minimum wage can be compared with
employment in neighboring counties across the state line. And there is
no hint in the data of the supposed negative employment effect.
Why not? One leading hypothesis is that firms employing low-wage
workerssuch as fast-food chainshave significant monopsony power in
the labor market; that is, they are the principal purchasers of
low-wage labor in a particular job market. And a monopsonist facing a
price floor doesnt necessarily buy less, just as a monopolist facing
a price ceiling doesnt necessarily sell less and may sell more.
Suppose that we hypothesize that rising market power, rather than the
ineluctable logic of modern technology, is driving the rise in
inequality. How does this help make sense of what we see?
Part of the answer is that it resolves some of the puzzles posed by
other accounts. Notably, it explains why high profits arent spurring
high investment. Consider those monopolies controlling local Internet
service: their high profits dont act as an incentive to invest in
faster connectionson the contrary, they have less incentive to
improve service than they would if they faced more competition and
earned lower profits. Extend this logic to the economy as a whole, and
the combination of a rising profit share and weak investment starts to
Furthermore, focusing on market power helps explain why the big turn
toward income inequality seems to coincide with political shifts, in
particular the sharp right turn in American politics. For the extent
to which corporations are able to exercise market power is, in large
part, determined by political decisions. And this ties the issue of
market power to that of political power.
Robert Reich has never shied away from big ambitions. The title of The
Work of Nations deliberately alluded to Adam Smith; Reich clearly
hoped that readers would see his work not simply as a useful guide but
as a foundational text. Saving Capitalism is, if anything, even more
ambitious despite its compact length. Reich attempts to cast his new
discussion of inequality as a fundamental rethinking of market
economics. He is not, he insists, calling for policies that will limit
and soften the functioning of markets; rather, he says that the very
definition of free markets is a political decision, and that we could
run things very differently. Government doesnt intrude on the
free market. It creates the market.
To be honest, I have mixed feelings about this sales pitch. In some
ways it seems to concede too much, accepting the orthodoxy that free
markets are good even while calling for major changes in policy. And I
also worry that the attempt to squeeze everything into a grand
intellectual scheme may distract from the prosaic but important policy
actions that Reich (and I) support.
Whatever one thinks of the packaging, however, Reich makes a very good
case that widening inequality largely reflects political decisions
that could have gone in very different directions. The rise in market
power reflects a turn away from antitrust laws that looks less and
less justified by outcomes, and in some cases the rise in market power
is the result of the raw exercise of political clout to prevent
policies that would limit monopoliesfor example, the sustained and
successful campaign to prevent public provision of Internet access.
Similarly, when we look at the extraordinary incomes accruing to a few
people in the financial sector, we need to realize that there are real
questions about whether those incomes are earned. As Reich argues,
theres good reason to believe that high profits at some financial
firms largely reflect insider trading that weve made a political
decision not to regulate effectively. And we also need to realize that
the growth of finance reflected political decisions that deregulated
banking and failed to regulate newer financial activities.
Meanwhile, forms of market power that benefit large numbers of workers
as opposed to small numbers of plutocrats have declined, again thanks
in large part to political decisions. We tend to think of the drastic
decline in unions as an inevitable consequence of technological change
and globalization, but one need look no further than Canada to see
that this isnt true. Once upon a time, around a third of workers in
both the US and Canada were union members; today, US unionization is
down to 11 percent, while its still 27 percent north of the border.
The difference was politics: US policy turned hostile toward unions in
the 1980s, while Canadian policy didnt follow suit. And the decline
in unions seems to have major impacts beyond the direct effect on
members wages: researchers at the International Monetary Fund have
found a close association between falling unionization and a rising
share of income going to the top one percent, suggesting that a strong
union movement helps limit the forces causing high concentration of
income at the top.6
Following his schema, Reich argues that unions arent so much a source
of market power as an example of countervailing power (a term he
borrows from John Kenneth Galbraith) that limits the depredations of
monopolists and others. If unions are not subject to restrictions,
they may do so by collective bargaining not only for wages but for
working conditions. In any case, the causes and consequences of union
decline, like the causes and consequences of rising monopoly power,
are a very good illustration of the role of politics in increasing
But why has politics gone in this direction? Like a number of other
commentators, Reich argues that theres a feedback loop between
political and market power. Rising wealth at the top buys growing
political influence, via campaign contributions, lobbying, and the
rewards of the revolving door. Political influence in turn is used to
rewrite the rules of the gameantitrust laws, deregulation, changes in
contract law, union-bustingin a way that reinforces income
concentration. The result is a sort of spiral, a vicious circle of
oligarchy. That, Reich suggests, is the story of America over the past
generation. And Im afraid that hes right. So what can turn it
Anyone hoping for a reversal of the spiral of inequality has to answer
two questions. First, what policies do you think would do the trick?
Second, how would you get the political power to make those policies
happen? I dont think its unfair to Robert Reich to say that Saving
Capitalism offers only a sketch of an answer to either question.
In his proposals for new policies, Reich calls for a sort of broad
portfolio, or maybe a market basket, of changes aimed mainly at
predistributionchanging the allocation of market incomerather than
redistribution. (In Reichs view, this is seen as altering the
predistribution that takes place under current rules.) These changes
would include fairly standard liberal ideas like raising the minimum
wage, reversing the anti-union bias of labor law and its enforcement,
and changing contract law to empower workers to take action against
employers and debtors to assert their interests against creditors.
Reich would also, in a less orthodox move, seek legislative and other
changes that might move corporations back toward what they were a
half-century ago: organizations that saw themselves as answering not
just to stockholders but to a broader set of stakeholders, including
workers and customers.
Would such measures be enough? Individually, none of them sounds up to
the task. But the experience of the New Deal, which was remarkably
successful at creating a middle-class nationand for that matter the
success of the de facto antiNew Deal that has prevailed since the
1970s at creating an oligarchysuggest that there might be synergistic
effects from a program containing all these elements. Its certainly
But how is this supposed to happen politically? Reich professes
optimism, citing the growing tendency of politicians in both parties
to adopt populist rhetoric. For example, Ted Cruz has criticized the
rich and powerful, those who walk the corridors of power. But Reich
concedes that the sincerity behind these statements might be
questioned. Indeed. Cruz has proposed large tax cuts that would force
large cuts in social spendingand those tax cuts would deliver around
60 percent of their gains to the top one percent of the income
distribution. He is definitely not putting his moneyor, rather, your
moneywhere his mouth is.
Still, Reich argues that the insincerity doesnt matter, because the
very fact that people like Cruz feel the need to say such things
indicates a sea change in public opinion. And this change in public
opinion, he suggests, will eventually lead to the kind of political
change that he, justifiably, seeks. We can only hope hes right. In
the meantime, Saving Capitalism is a very good guide to the state
1 Changes in Relative Wages, 19631987: Supply and Demand Factors,
The Quarterly Journal of Economics, Vol. 107, No. 1 (February 1992).
2 A good overview of the decline of SBTC is Lawrence Mishel, Heidi
Shierholz, and John Schmitt, Dont Blame the Robots: Assessing the
Job Polarization Explanation of Growing Wage Inequality, EPICEPR
working paper, November 2013.
3 The Methodology of Positive Economics, in Essays in Positive
Economics (University of Chicago Press, 1953).
4 David Dayen, Bring Back Antitrust, Fall 2015.
Jason Furman and Peter Orszag, A Firm-Level Perspective on the Role
of Rents in the Rise of Inequality, October 2015, available at
6 Florence Jaumotte and Carolina Osorio Buitron, Union Power and
Inequality, www.voxeu.org, October 22, 2015."