We're All Capitalists Now

Those concerned about inequality often place emphasis on the “income share of labour,” a.k.a. the ratio between the amount doled out in wages and the amount doled out in profits, treating it as a useful index of “how workers are doing.” This is logical enough insofar as workers are the ones, so the story goes, who have to rely on wages to eat.

In this sharp if somewhat technical review of Piketty’s Capital in the 21st Century, Peter Lindert (there’s a link to the pdf here) reiterates how unhelpful this measure is.

Shares of labor versus capital in current income…have never proved to be good predictors of inequality, and continue to be poorly correlated with it over time and space.

One caveat that Piketty raises in Capital is that returns on capital, high or low, only matter for his analysis insofar as they are concentrated in the hands of the few. If capital wealth was equally held by everyone, or if returns on capital were doled to everyone by the state on a per capita basis, then increasing the rate of return on capital would at worst have no impact on income inequality and, if returns to labour were unequally distributed, could actually increase overall income equality. Here’s Lindert again:

Having 60 percent of national income go to labor incomes could reflect perfect equality, with 60 percent of the population equally sharing labor incomes and the other 40 percent equally sharing property incomes. Or it could mean horrific inequality if the 60 percent going to labor were shared by everyone except one propertied ruling family.

Of course, one doesn’t need such extreme hypotheticals to make the point. In today’s industrialized economies, many if not most workers actually rely solely on income from capital for the last 10-25% of their lives (i.e. when they are retired). In such societies, one way that returns on labour could fall is if workers all decided to to be richer in their retirement than during their working years – i.e. to save more in the early days and spend more on the backend. Of course, to say “we are all capitalists now” does not deny the massive inequality in the holding of wealth, or that some are for all intents and purposes wholly excluded from any ownership of the commonweal. But it does demand that we shift attention away from abstract class categories toward questions of actual distribution and how economic structures impact on its evolution.

Lindert’s first example points to a very different problem. In most people’s minds, what Marx called exploitation–the idea that some were able to get an income from the social weal without working–was synonymous with the immiseration of the working classes. Yet one possible future (one that concerns some proponents of a basic income) is a world in which there is a reasonable level of income equality, but in which only some people have access to (or choose to get ) additional benefits derivable from work. It seems unlikely that workers in such a world could be called exploited; it is certain that the income share of labour would still tell us close to nothing about how just the society was.

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