Fri Jan 9th, 2009 at 06:44:22 PM EST
Jerome has suggested that I post this as a diary of its own. So here we go.
One of the great strengths I see in the concept of the Anglo Disease is that it allows for the Left to critique Neo-liberalism on its own terms. It attacks the contradictions supporting the system, so that having been demystified, the system can be remedied from within.
Although the Anglo Disease is an imminent critique of neo-liberal capitalism, what it reveals is that the market that neo-liberals take to be omnipotent and the root of all social phenomena is not once, but twice embedded. First, the market is embedded in social structure. So that when it pressed to far, society strikes back. Second, society and market alike are embedded in a natural context. So that, for example, the market does not make petroleum. We as a species are capable of altering social structure, even if it is with great difficulty. The natural context, however, is largely fixed. The market can't make oil. But, what I want to do here is lay out the Anglo Disease in the language of economics.
As I wrote previously:
Inequality is inefficient. Why?
Because the suppression of wages for labor is a rent seeking behavior. In English, this means that in order for the part of the pie going to employers to increase in size, the size of the pie must shrink.
It's the mirror image of what we've been told is happening.
Now, typically, the story that's been told over the past 40 years is that demanding a living wage is anti-social, because increasing the slice of the pie going to workers means shrinking the pie. There's even a neat little graphic that can be used to demonstrate the concept.
In the case of the labor market, workers are producers, while employers are consumers. I've mark the producer surplus in blue, and the consumer surplus in red. So think of the blue as the wages paid to workers, and the red as the profits made by companies.
Now if the market is providing the maximum benefit to society, it should look like this.
But, the story that we've been told is that because wages are inflated by minimum wage laws and unions demanding wage hikes, what we get is something like this.
So what you see is that the red area shrinks. The purple area represents money that previously went as profits to companies, but is now paid out in increased wages. But the real trick is in the pink and light blue areas. Because workers and unions have engaged in rent seeking they have denied the economic benefit of these areas to society, and have reduced the total amount of labor consumed. So basically, increased wages have increased unemployment.
But, the truth of the Anglo disease is the mirror opposite of this. Part of the money made by the financial sector is just total bullshit. But, another part of the disease is rent seeking behavior..... by capital. By employers supressing wages. So we get this.
So again we see that employment is reduced. In this case because the reduced wages fail to draw people into the labor market, and the same social loss occurs.
The big difference is that in this case the purple area is consumer surplus. This is money taken from workers wages and shifted to employers profits.
So yes, the economy is suffering from rent seeking behavior, but the businessmen pointing to labor are projecting their own deficiencies on people who actually work for a living.
The bottom line is that a redistribution of wealth has shrunk the economy. But it's been a redistribution of wealth from workers to employers. From labor to capital.
Inequality is inefficient.
The important thing to remember, is that this is, by necessity limited to the understanding of the Anglo Disease in economic terms. Migeru made a comment that I think hits on the most important "take home" message from this.
What MfM is showing is two ways of reducing the social product. One is by artificially raising wages (thus reducing the demand for labour) and the other is by artificially lowering wages (thus reducing the supply of labour). The question is which one of the two situation occurs in practice.
This reminds me of the Laffer curve. One thing that is never explained (assuming the Laffer curve is a sound model in the first place) is how we know that we're in the part of the curve where reducing taxes increases revenues and not the other way around.
As we know, there have been empirical tests of the effect of minimum wages being introduced in various US states and the result of the research was to show that a minimum wage increased the number of McJobs.
Miguel, as the resident polymath you should know that while statistical models can prove correlation, they prove neither causation, nor do they establish with certainty the direction of the correlation. For this we must rely upon theory, and in this case, theory is of little use, so we have to establish the direct phenomenon through epiphenomenon.
Much as astro-physicists determine the presence of a planet around stars so distant that the planet itself is not visible through calculating the effect of gravity on the star's wobble, we have to look to the epiphenomenon that give proof of the phenomenon.
First, if the truth of the matter was that rent seeking by workers seeking wages was reducing the economic output of the United States, how do we explain this.
US wages have not increased when productivity has increased. I think it will be interesting to run a regression matching a measure of financialization, say the financial sectors share of GDP, as the IV driving this divergence and see what we get. But, that's for some other time.
A defense of the critique offered by the Anglo Disease concept, must mount information of this sort into coherent critique. The model provides predictions. Now we have divergent expectations.
If it is rent seeking by workers driving the reduction in GDP, then wages must be advancing faster than productivity. Alas, this is not the case. Think even in terms of the transfer of the costs of creation of human capital from employers to employees. It used to be that workers where trained on the job, but now you need to have gone to university so that you have these basic skills like typing and the like.
So it's not like companies are providing training for workers that increased their productivity. It's the product of workers investing in skills that provide benefits from employers, not employers.
I need to read Milton Friedman, but I think that you can even make an "as if" argument.
And returning to the model, remember that a graph of demand and supply represents a given set of economic transactions. In this case, we are talking about the entirety of the labor market. But it could as easily be used for any other economic transaction.