Productivity, Inequality and Poverty Revisited

23 Aug

We would like to respond to some criticisms of last week’s post on productivity, inequality and poverty. One reader felt that the post confused two issues because “the dynamics that keep wages down seem different to those responsible for hunger.” The causes of hunger can be addressed “without the ruling class having to make any direct sacrifice. That’s not the case with wages vs. profits.” While we agree with this reader’s comments, at least up to a point, there was a broader purpose to the previous week’s post. Perhaps we were unclear, so let us try to do better.

The broadest claim of last week’s point was to attack the argument that simply increasing productivity wall that is necessary to address either the problem of stagnating wages in rich countries (‘inequality’) or the problem of absolute poverty (basic malnutrition) in poor countries.  The persistence of malnutrition, despite the world being awash in food, suggests hunger is no mere technical problem of the ability to produce food. As we noted, there is enough wheat to give 1 1/3 loaves of bread to every person on the planet. That is just one staple. The reader feels that our claim is misleading because “undernourishment has fallen from 24% in 1970 to 15% in 2009.” That is an important achievement, though quite paltry relative to potentiality. Even in 1970 there was no technical world food shortage. Nor does it prove that this decline in hunger had anything to do with improved food production as opposed to distribution.

In fact, as the reader notes, the reasons for continuing undernourishment do not have to do with factors related to the production but the distribution of food: “the leading cause of hunger is conflict and lack of roads.” We would like to see the data behind this claim, but let us accept it for the sake of argument. In the reader’s view, ‘roads and conflict’ are distinct variables from the claim we made in the previous point that the problem had to do with ‘power.’ However, we are not persuaded. For one, the question would be why is there a lack of roads in certain areas and not others? Roads are produced by public investment, and public investment tends to follow lines of power. Poor, rural peasants, especially when identified as minority groups, are often least able to persuade governments to take their claims as seriously as other citizens, and thus resort to living on the margins of subsistence.

As the reader notes, the food question is complex – a complexity we cannot fully address in a single post. We simply wish to stress that a) our first point was about how productivity alone is not the problem, and not even the major problem, when it comes to absolute poverty nor stagnating wages – it is a matter of the ability to claim to what is produced. And b) while the reader is correct that the increasing wages requires the sacrifice of profits in a way that is not necessarily the case regarding absolute poverty, that does not mean that the explanation of malnutrition is not a question of power.

Two final points. One, by arguing that lack of productivity is not the reason behind stagnating wages or absolute poverty, we do not mean to suggest in any way that productivity is a bad thing. It is on the whole a good thing – we ought to seek not just subsistence but abundance. However in some circles of public debate, productivity becomes a kind of fetish, distracting from the lines power running through the economy. Second, an important reason for the increasing gap between compensation and productivity is declining unionization rates (see this report by the Atlanta Fed) but, as that report makes clear, unionization is only a part of an overall weakening of the average worker’s bargaining power. The limited empirical effect of unionization rates alone suggests that what is going on is something broader and deeper – the absence of a commitment to social and political equality, and the absence of movements able to make those commitments real.

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One Response to “Productivity, Inequality and Poverty Revisited”

  1. Dale K. November 8, 2012 at 8:20 pm #

    If you’re looking for something “broader and deeper” to explain the gap between productivity and wages, I suggest monetary policy. Along with the increase in productivity, there’s an increase in supply of money[1], which certainly contributes to the decrease in real wages. Moreover, both trends start to take off around 1970, coinciding with the removal of the gold standard, which allowed the fed to print more money.

    You can see the same trend with the real minimum wage rate: although it’s been increasing periodically, the real minimum wage has been trending down, starting at the same period in time (1970).

    I submit that the trends we’re seeing are not due to “the absence of a commitment to social and political equality”, but rather the ability and willingness of politicians to fund government programs on created money, which drains buying power from the citizens. And considering how most federal government programs are in fact designed to combat social inequality (welfare, medicaid, etc), it is precisely the opposite of what you say: the social equality policies using unsound money are actually CREATING the inequality that we observe.

    As it stands now in 2012, the total revenue of government does not even cover the cost of entitlements, much less the other functions of government, and average real household income declined almost twice as much since the 2009 “recovery” as during the official recession[3]. I’m sure we can look forward to more inflationary money creation, and more decreases in real wages as a result. Perhaps it’s time to look to the past (pre 1970) for an idea to restore income equality.

    [1] http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=M1
    [2] http://theonlinecitizen.com/2011/02/minimum-wage-isn%E2%80%99t-the-best-solution/
    [3] http://www.washingtonpost.com/business/economy/household-income-is-below-recession-levels-report-says/2012/08/23/aa497460-ec80-11e1-a80b-9f898562d010_story.html

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