Power is a residual
By Scott Sumner
When economists use regression analysis to estimate the relationships between variables, part of the dependent variable is unexplained. Thus even after you put land, labor, and capital into the model, you may not be able to fully explain economic growth. Interestingly, this unexplained residual factor is often given a very suggestive name—such as “technological progress.” Another example might be a regression that tries to explain the pay gap between men and women. After accounting for various factors like hours worked, education, type of work, etc., there generally remains an unexplained residual. It is often called “discrimination,” although it just as well might be called “productivity differences between men and women that are not explained by the model.” Perhaps the most politically neutral terminology would be “wage differences between men and women not explained by the model.”
In a new column, Paul Krugman argues that education can’t explain very much of the recent increase in inequality. I think that’s right. He suggests the real issue is “power.” It seems to me that power is one of those residuals. When you don’t know why incomes differ more than in the past, you attribute the difference to power.
I’m not quite sure what power means in this context. Perhaps the most plausible definition would be “market power,” or what is more commonly called monopoly power. Maybe with the rise of the information economy, and the growing importance of intellectual capital, market power is increasing.
On the other hand I think you need to be very careful here. When non-economists in the social sciences use the term “power” it is often means something like, “the cause of aspects of the global economy that I do not like, but which I cannot explain due to a lack of training in economics.”