Why is inequality rising—and will it now fall?by Robert Skidelsky / March 27, 2014 / Leave a comment
Published in April 2014 issue of Prospect Magazine
Over 1,000 people lie down on a San Francisco beach to spell out “TAX THE 1%” ©2011 John Montgomery
The early 19th-century founders of the classical school of economics reasoned that the distribution of a society’s income depended crucially on who owned its productive resources. David Ricardo identified three classes of producer, landlords, capitalists and workers. Each of these classes owned a factor of production—land, capital and labour. With land and capital scarce relative to labour, landlords and capitalists could claim a disproportionate share of the produce that they and the workers jointly produced. Workers’ pay would be forced to subsistence. Classical socialism, as Karl Marx conceived it, was a branch of this tree. Abolish private ownership of land and capital (and the power which this gave) and one would abolish the “rents” to their owners, enabling workers to receive their proper share of production.
But towards the end of the 19th century, discussion of the class inequality of rewards faded away. The marginalist revolution— direct precursor of the mathematical economics of today—dropped the attempt at social realism, by positing a perfectly competitive market economy with numerous “agents,” each of whom would receive the value of his “marginal product”— the exact amount he added to economic value. The existence of power in the market was recognised only in the form of “monopoly”—a single firm in an industry being able to set the price of its product, a problem to be tackled by regulation or trust-busting laws. This new, marginal analysis was intended to bypass the unsettling distributional issues raised by the classical economists. The claim that the market paid every producer what he was worth undercut the socialist argument for redistribution.