Should-Read: Chris Dillow: Stumbling and Mumbling: Reinventing the wheel

August 12, 2017

Should-Read: I have never found “power” to be an illuminating and useful word in economics: “threat points”, “default outcomes”, “bargaining strategies”, etc., IMHO, are much more useful ways of thinking about issues. You get somewhere if you ask the question: Why aren’t employers today finding that they must offer higher wage increases to retain and attract the workforce they need? You don’t get much of anywhere if you say: Workers just don’t have the power to make big wage demands.

Chris Dillow: Stumbling and Mumbling: Reinventing the wheel: “In both the UK and US, wage inflation has stayed low despite apparently low unemployment–to the puzzlement of believers in the Philips curve…

…Felix Martin in the FT says there’s a reason for this. The “dirty secret of economics,” he says, is “the central importance of power.” Inflation, he says, is “society’s default method of reconciling, at least for a while, irreconcilable demands.” And because workers don’t have the power to make big demands, we haven’t got serious inflation. What’s depressing about this isn’t just that it’s right, but that it needs saying at all. Economists of my age were raised to see that inflation was a matter of power. The very idea of the Nairu arose from a paper (pdf) written by Bob Rowthorn in 1977 (He didn’t actually coin the phrase “Nairu”, but the idea is there). “Conflict over the distribution of income affects the general level of prices in advanced capitalist economies” he wrote. “Power plays a central role in the determination of wages and prices.”

His insight was taken up. In a textbook that grew from some of the few lectures I actually attended in the mid-80s, Wendy Carlin and David Soskice wrote:

In an economy in which both workers and firms have market power…each group will attempt to get hold of particular share of the economy’s product…Suppose that the competing claims are inconsistent ie that the claims of workers to real wages and firms to real profits sum to more than is available in output per head. The each side will attempt to secure its claim by using its market power – workers will secure higher money wages and firms will put their prices up. The result is rising inflation (Macroeconomics and the Wage Bargain, p6)…. The Nairu is the unemployment rate necessary to secure peace in “the battle of the mark-ups”.

Anyone who knows anything about the genealogy of the Nairu would therefore know that insofar as it is a useful idea at all, power is indeed central to it. And yet Felix has a point; this fact has been glossed over by later fancier theories. This is yet another example of something I’ve said before–that technocrats have a blindspot about power…

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