Distribution versus Growth
When I wrote the op/ed on Robert E. Lucas in the Wall Street Journal last week, I was unaware of an article he wrote in 2004 for the Federal Reserve Bank of Minneapolis. It’s Robert E. Lucas, Jr., “The Industrial Revolution: Past and Future,” May 1, 2004.
It’s quite good. (HT2 Art Carden.)
And here is the last paragraph.
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
The article as a whole, which surveys economic growth over long periods, reminds me of my favorite study by University of California, Berkeley economist Brad DeLong. It’s titled “Cornucopia: The Pace of Economic Growth in the Twentieth Century,” NBER Working Paper 7602, March 2000. DeLong quotes a famous passage from Karl Marx and Friedrich Engels, The Communist Manifesto, in which Marx and Engels waxed rhapsodic about the incredible accomplishments of capitalism in the 19th century. The bourgeosie, wrote Marx and Engels, was:
the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades…. [It has], during its rule of scarce one hundred years…created more massive and more colossal productive forces than have all preceding generations together. The subjection of nature’s forces to man, machinery, the application of chemistry to industry and agriculture, steam-navigation, the railways, electric telegraphs, the clearing of entire continents for cultivation, the canalization of rivers, the conjuring of entire populations out of the ground–what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor?
Then DeLong writes:
Yet compared to the pace of economic growth in the twentieth century, all other centuries–even the nineteenth century that so impressed Karl Marx–were standing still.
DeLong backs it up, by the way.
The other person who does something similar to what Lucas does, but with an imaginative and illuminating video that shows the connection between income growth and increases in life expectancy, is Hans Rosling. Here’s his “200 Countries, 200 Years, 4 Minutes, The Joy of Stats.” I highly recommend it: educational and entertaining.
Now back to the paragraph from Lucas that I quoted near the start.
The last line is particularly important. If we focused on getting the conditions that lead to economic growth right, then distribution would become less important: a rising tide lifts almost all boats—and has been lifting almost all boats.
There is something missing, though. Economists who see big gaps in prices tend to think of arbitrage. I would have expected Lucas, a first-rate economist if there ever was one, to note that the huge discrepancy between wages and productivity between India and the United States, for example, would lead to a movement of resources—labor—from India to the United States. One way to get a huge increase in world productivity over a time period as a short as a decade is to allow hundreds of millions of, and maybe even a billion, people to move from poorer countries to rich countries. In other words, allow much more immigration. In all the work I’ve read by Lucas, and I read a lot when I wrote his biography in The Concise Encyclopedia of Economics, I don’t recall seeing him say much about immigration.
Do any of you know whether he wrote or spoke in favor of allowing more immigration?
Postscript: If you read Lucas’s article carefully, you’ll notice that someone made a mistake in labeling the vertical axis in Figure 1. It’s labeled “Population Growth Rate.” It should be labeled “Population.”
May 25 2023 at 3:13pm
May 25 2023 at 5:51pm
I agree that little of the historical increase in wellbeing, including of the least fortunate, has come from redistribution from income-increasing investment and innovation to consumption. But on the other hand, I don’t think that redistribution of consumption from the better-off to the less better off has been a drag on income-increasing investment and innovation. Tradeoffs do exist, but they do not appear to be very important.
May 26 2023 at 4:38am
My view is local (Florida) and personal, with some reading of other places. It does not reflect on the wider world of distribution.
One of the drags that redistribution creates is the incentives to not improve ones status. In the lower end, many people lose some or all of their “benefits” if they improve their earnings. I know of people that turned down better jobs for that reason. I know of people that only work for unreported cash for that reason. Many people make sure that they don’t work enough hours to go over the line that changes their category.
Many of the people that are incentivized to not go for the second rung on the ladder with never see the third rung or the 20th. I often wonder how much talent and capability is wasted by individuals that could be capable if they started climbing.
May 26 2023 at 5:20am
The other drag is the current difficulty of getting entry level workers and by extension, skilled workers. On local construction sites, there are very few younger citizens, and even fewer with the capability of becoming skilled. I work with all foreigners in my company and notice that the majority of similar companies are the same.
May 26 2023 at 12:29pm
We all need to remember that “all wealth is creadted COLLECTIVELY.” (Amazon, for example, is not the work of Jeff Bezos alone. However, in a vivid illustration of the bitter irony of the U.S.-style capitalism, he praised his employees upon returning to earth from his vanity trip to “space” …the same employees who cannot freely unionize and some of which have to pee in bottles to finish their route on time!)
Redistributive efforts are essentially a recognition of this basic fact. If you oppose “direct redistribution of resources,” but believe in “equitable growth,” then support creation of strong labor unions as a countervailling force to virtually unrestrained corporate power. Ask yourself why there is so much calmor about “excessive wage growth” while corporate profits have gone through the roof?
May 26 2023 at 1:45pm
If you’re pointing out the simple fact that there’s a division of labor and that no one can do something that massive alone, you’re correct. Leonard Read wrote about this in his classic essay “I, Pencil.” I recommend it if you haven’t already read it.
If you’re saying that Bezos does deserve his tiny share of the wealth his company created, I think you’re incorrect. Why do I say “tiny>” Because William Nordhaus pointed out that innovators in the U.S. economy get, on average, 2.2 percent of the value they create. Even if Jeff Bezos gets, say, 10 percent, that means that most of the wealth his company creates doesn’t go to him but to consumers. Workers at Amazon get slightly higher pay than they would get elsewhere, or else they wouldn’t work there.
I won’t defend the peeing in bottles thing if it’s true.
But it is not true that they cannot freely unionize. They can; it’s just that the majority doesn’t seem to favor unionization. Actually, with U.S. labor laws, workers often can’t avoid having a union represent them, no matter what their wishes.
I don’t agree. While there are many motives for redistribution, I think the main two factors are: (1) a misunderstanding of the fact that both sides gain from exchange, and (2) envy.
May 27 2023 at 4:21pm
Thank you for your reply (and apologies for the typos).
“All wealth is created collectively” has a profound implication regarding the “functional distribution” of income both within a business organization and the economy: no innovator-entrepreneur could get to where he/ she is without and army of employees implementing, refining and improving upon the original idea, finding new applications, and in the process creating new value. The “economic rent” that goes to the original innovator- entrepreneur even after adjusting for risk, tax (avoidance) and… is still much too high relative to rewards received by others when expressed on a per capita basis. Too “normative?” Maybe! But we have “norms” everywhere else in our lives which are intended to prevent excesses. Why should the “for whom” question be a glaring exception? (See also below for other arguments).
Moreover, in the real world, where millions of the working poor live, (unlike the fictional world of “freshwater economists”) decisions are made in the context of asymmetries, especially in economic power relationships. Often, one is “free to choose” between (a) arduous work at low wages and (b) endangering family survival. It is a world characterized by consistent “unequal exchanges” which would be rejected if people had real choices and were better organized.
The precipitous decline in the unionized fraction of the labor force in this country since the 1980s, more than reflecting workers’ “free choice” to suddenly turn their backs to labor unions that fought and got so many improvements that we all enjoy, is the result of deliberate attempts, especially by corporations, to follow up on Regan’s union busting policy and use barriers, coercion, implicit and explicit threats, laws, …to weaken labor unions. (The case of Amazon is well documented for all who care enough to educate themselves about the outside world to study). This process, not surprisingly, was accompanied by the decoupling of real wage and productivity growth since the 1980s and contributed to the lopsided distributions of income and wealth that we witness today.
The constant theorizing and sermonizing by apologists of the status quo that high income inequality is a precondition for economic growth are refuted both by the experience of this country during its “golden growth” period and Adam Smith (I mean the real one and not the “Chicago Smith”).
To suggest that objections raised against nefarious aspects of the US style capitalism reflect “envoy” is to ignore their serious implications: the existence of a permanent large class of workers who, as a result of inadequate wages, cannot afford to buy what they produce unless they become net debtors and have close to zero financial cushion makes the economy much more vulnerable to (exogenous) shocks as recent episodes vividly demonstrated. When things begin to unravel, the “champions of free enterprise,” “market fundamentalists” and “Silicon Valley libertarians” run to the government to socialize their losses! Mass unemployment and economic hardships disproportionately affect those who have no voice and destroy their lives (….and somebody authors a paper suggesting that mass unemployment during contraction is the result of households “efficient response” to the shock and gets a Nobel prize for it!). When the crisis subsides, the government is left with a much higher stock of public debt (and debt/GDP). It is then pressured by the ideological twins and allies of the same group of people who caused the problem in Congress to cut social spending (of course, taxes are sacred cows) to reduce the deficits and avoid “endangering the wellbeing of future generations!” And the cycle of “free to choose” hypocrisy continues!
May 27 2023 at 5:46pm
You have a couple of good points. You have several misconceptions, primarily about the causes of problems with the working poor. As a small employer, I disagree severely with your opinion the the poor can’t get ahead because they are held back by the (implied evil) companies. Labor unions are very seldom the answer, more often just another layer of bureaucracy keeping deserving, but not connected, workers out of the particular employment. .
I have two employees originally from Mexico that dropped out of elementary school. In their mid 40s, they both have their houses and rental property paid for. We get pretty rude to people claiming it can’t be done. As well as rude to people claiming there are no obstacles, most of which are government related**.
**You really don’t want to get me started on the ways the government sabotages people.
May 29 2023 at 7:31pm
“[Capitalism creates] a permanent large class of workers who, as a result of inadequate wages, cannot afford to buy what they produce unless they become net debtors…]”
Is there any economic system in which workers can afford to buy what they produce? Certainly not socialism. Its guiding principle – from each according to his ability, to each according to his need – dictates that workers whose ability exceeds their need will receive less than the value of their production.
Even craftsmen in the preindustrial era couldn’t afford to buy all that they made. Could a cobbler purchase every shoe he crafted and still eat and keep a roof over his head, much less buy the tools and materials needed for his shoes?
Perhaps Robinson Crusoe could afford to purchase what he produced in the sense that he “bought” goods and services with his own time and energy. In a sense he bought food with time and energy that could have been spent providing for less urgent needs – shelter against weather and predators, perhaps. But a miscalculation of what he could afford might well prove fatal.
May 30 2023 at 1:13pm
I’m referring to a well known problem in modern macroeconomics known as “aggregate demand deficiency” and a related issue known as “effective demand failures.” No need to bring Robinson Crusoe and socialism into the discusssion!
May 29 2023 at 2:34am
Henderson suggests: “[T]he huge discrepancy between wages and productivity between India and the United States, for example, would lead to a movement of resources — labor — from India to the United States. One way to get a huge increase in world productivity over a time period as a short as a decade is to allow hundreds of millions of, and maybe even a billion, people to move from poorer countries to rich countries.”
But in fact this is not happening. What we see instead is a movement of resources- capital – from the U.S. to low-cost labor countries like India. This increases the wealth of the owners of the capital. There is no obvious reason for them to share more of this wealth with their fellow-citizens than they already share. So society’s net wealth increases while society’s well-being does not improve.
May 29 2023 at 4:11pm
I think you are missing a couple of things.
The low wage workers improve their lot over alternatives and do not remain low wage workers in the long run. See Japan, Korea, and Singapore for starters
the people in the wealthy countries get more goods for the same amount of effort.