Economists’ long-held beliefs make income inequality worse [View all]

[Sherman A1]

http://www.bostonglobe.com/opinion/2014/10/11/income-inequality-made-worse-economists-long-held-beliefs/P9hHPQ9L4kU0HNOAKxgdlK/story.html

Though many economists today are sounding the alarm over rising income inequality, one culprit somehow has been overlooked: their own wage theory.

Wage theory — one of the sacred truths of modern economics — suggests that competitive labor markets are self-regulating. Each worker is paid his or her productive worth. Unions, minimum wages, or any other interference — all just cause unemployment. Nearly all contemporary public policy is dictated by some version of this theory, but it simply no longer holds up.

Adam Smith, often called the father of classical economics, told a very different story. Smith believed that each society sets a living wage to cover “whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.” His successor David Ricardo similarly saw the “habits and customs of the people” as determining how to divide income between profits and wages. Marx’s class struggle was just a more confrontational version of the idea.

Around the turn of the 20th century, economists grew dissatisfied with this squishy sociologist’s answer, and some found it morally problematic. “The indictment that hangs over society is that of ‘exploiting labor,’” conceded John Bates Clark, a founder of the American Economic Association. He set out to disprove it.