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For much of the 20th century, if one was to look at the share of national income that ended up in the pockets of “capitalists” versus in the hands of laborers, you would have seen something very surprising given the conventional wisdom. What you would have seen is that in evil, greedy, capitalist America, workers actually took home about 2/3 of the national income, with the rest going to “capitalists” (I use the quotes because your grandparents who own mutual funds are capitalists too). What is remarkable is that this share stayed very stable for over 50 years, and labor’s share in the US was larger than in many other countries.

This was true until the last decade. This is the image making the rounds:

The debate surrounding this new trend reminds me of the debate about income inequality and the stagnating economy. You see folks on the left using it as a club to demonstrate that “capitalism” is not working for the “average” American and a justification for further redistributionist policies. You see folks on the right contorting themselves to argue that the data ain’t quite measured properly. I say, who gives a damn?  And I say that for two reasons.

(1) If we end up moving towards a “futarchic” future sometime very soon, I think the concept of measured income will become hard to understand. For example suppose 3D printing advances so rapidly that every American can own a huge 3D printer for their home for an annualized cost of something like $2,000. Suppose that you can print anything, including your food, and that the “feedstock” for the printer is included in the above cost. Our economic question in that world surrounds how folks are going to secure $2,000 per year. I imagine the simplest way for people to do this is to own shares in the “3D Printing Company.”  In that case, almost all of the income will be paid to capitalists and almost none to labor. How would demonstrating capital’s declining share be emblematic of a problem? Even without the silly thought experiment above, why would “capital’s increasing share” ipso facto be representative of a problem? I thought people were concerned with issues of democracy and proper representation? So I think it would be nice to demonstrate that there are fewer capitalists today, and that financial markets make it harder for any of us to become capitalists today. Is that really the case? Heck, our 5 and 6 year old children now are among the capitalist class. In fact, neither of them work. So 100% of their “income” is coming from capital right now. And I sure bet that entrepreneurs appreciate my kids’ not spending their savings and instead making them available to current projects.

(2) More important, how come folks on the right aren’t shouting from the rooftops: “This is exactly what I would expect” given the expansion of the state over the same time period! This is what I’d be saying about income inequality, a stagnating economy, failing urban poverty and school programs. Instead of embracing this data to make your point, I see the right running away from it. But why should they? Take the case of the U.S.S.R. as an illustration. We see the same policies that doomed them in the 1980s and 1990s increasingly taking hold in the U.S.A. today. We pay massive amounts of subsidies for food production and favored energy production. There are hidden subsidies by governments at all levels for state pensioners and government workers, the size of the government workforce is staggeringly large (about 1/7 of the total workforce) and so on.

So, what does this have to do with the data on income shares? A lot! Here is an illustration from Scott Shane’s book Dismantling Utopia:

Who was paying the food subsidies? Soviet workers of course, but they generally did not know it. One Soviet economist, Alexander Zaichenko, calculated that in the United States in 1985, 65% of manufacturing income was paid out in the form of wages to workers. In the Soviet Union the figure was 36.6%. The state used unpaid wages to subsidize retail food prices, to pay for education and health care, and to keep apartment rents low. Other money went to pay novelists and poets to do their creative work; to build the finest Olympic team in the world; and to train some of the greatest virtuousos in ballet and classical music. But the forgone wages also went to make tanks and missiles, to eavesdrop on people to detect subversives, to buy privileges for bureaucrats to insulate them from the privations suffered by ordinary people, to stave off economic disaster in Cuba and military collapse in Afghanistan. Soviet workers were the source of the state’s wealth, but the state, not the workers, decided how the lion’s share of the wealth was spent.

He could just as well have been writing about 2012 America. Have a nice day, as Arnold Kling used to say.

2 Responses to “On Labor’s Falling Share”

  1. Harry says:

    I was a teenager watching Walter Reuther on Huntley-Brinkley in black and white aver, “We want a bigger piece of the pie!”

    Then I was completely unequipped to take issue with his demand, and to this day will defend any free man to discuss what is in the interest of the other free people he represented.

    Later, the metaphor of the pie would stay with me, reading essays by Robert Bartley and others. The old premise was that the size of the pie never grew, even though it had been growing beyond the imagination of Marx, who assumed permanent subjugation of labor unless there were knives to kill capitalists and carve the pie differently.

    To be sure, not everybody shares my characterization of Marx, but many share the idea of a static pie to be carved up more fairly. Congress assumes this all the time, and so do some Princeton professors do for policy debate purposes; in fairness, I assume they have ignored economic history.

    Using Wintercow’s phrase, we are doomed unless we get growth. We cannot possibly be a safe nation, or a generous nation without it. Some think we are doomed no matter what happens hence.

    I know things may be dark, but I am optimistic. We have seen this movie before, and the outcome has been good, even though the situation is always different.

  2. wintercow20 says:

    Remember Adam Smith, channeled via Milton Friedman often: “There is much ruin in a nation” … it was actually a very optimistic observation by each.

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