Wednesday, May 9, 2012

Review of Galbraith, “Inequality and Instability”

Sorry to say, James K. Galbraith's book "Inequality and Instability" (New York: Oxford University Press, 2012) does not advance our understanding of the 2008 financial crisis and subsequent Great Recession. This is, firstly, because it is mostly a review and update of economic analyses by the economist Simon Kuznets and many others, aimed at explaining why inequality increases or decreases in various countries over different periods of time. Note that inequality is the "dependent variable" in this analysis. It is the passive and inevitable result of active historical forces such as industrialization.

Our approach is the opposite: we regard extreme inequality in the U.S. today as largely a political and social artifact, an "independent variable" that has itself caused the financial crisis and the continuing sluggish state of the economy. Taking this active approach, we believe that extreme inequality can be reduced by policy measures, and that this will make the economy stronger and steadier.

Perhaps Galbraith's book lacks relevance because of its timing. While its publication date is given as 2012, it clearly represents much older research, and when it finally comes to Chapter 13: Economic Inequality and the World Crisis, it is apparent that fatigue has set in. Galbraith starts the chapter with a quote in French to the effect that "this letter is long and it's time to end it."

And passivity is still emphasized in Chapter 13: "(T)he dominant forces affecting the distribution of pay (and therefore incomes) worldwide are systematic and macroeconomic…forces impinging on individual countries and perhaps modified by the institutions those countries have and the policies they apply—but nevertheless forces that originate beyond their control." We prefer to accentuate the positive: without a "perhaps," we'd say that wages are all about institutions and policies.

Of course, we do not deny that it will be no mean feat to, for example, put in place institutions and policies to increase wages in this country, but we believe it can be done. And, equally importantly, higher wages will be economically feasible, and not self-defeating, despite competition by low-wage foreign workers, and so on. Simply stated, if worker productivity and per-capita GDP have been rising for decades (which they have), wages should be able to rise too (which they haven't).

The irrelevance of Galbraith's book as a guide to current U.S. economic policy is in marked contrast to the timeliness of work done by the staff of the International Monetary Fund, in particular "Inequality, Leverage and Crises" by Michael Kumhof and Romain Ranciere, IMF Working Paper, November 2010, which will be the subject of a future post.

1 comment:

  1. "....forces impinging on individual countries and perhaps modified by the institutions those countries have and the policies they apply—but nevertheless forces that originate beyond their control."

    there are no global forces beyond state control
    yes there are consequences but look at Argentina

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