'Inequality: Power vs. Human Capital'

Chris Dillow:

Inequality: power vs human capital, by Chris Dillow: David Ruccio points to
labor’s falling share of income in the US and

says:

We need to talk much more about profits and who owns capital. And, in addition,
who appropriates and distributes the surplus and to whom that surplus is
subsequently distributed.

This is like saying a man should put his trousers on before leaving the
house. It’s good advice, but it shouldn’t need saying.

A nice new paper
by Amparo Castello-Climent and Rafael Domenech at the University of Valencia
supports his point. They point out that there’s no correlation between inequality of human
capital and inequality of incomes. This is true across time..
And it’s true across countries… This is a challenge for the neoclassical view that income inequality is due
to inequality of marginal productivities. …

Instead, the more obvious possible reason for the lack of link between human
capital and income equality is simply that inequality reflects not differences
in productivity but differences in power which themselves arise from
institutional differences. Inequality is higher in south America than in Japan
or South Korea simply because south America has

extractive institutions which enable a small minority to exploit the masses,
whereas Japan and South Korea do not.

Institutional differences in power also help explain another fact: why does
the return to university education differ so
much (pdf)
across European nations of similar income? It is higher in the UK than in
Germany or Nordic countries, for example. It’s hard to explain this by technical
change or globalization, as these factors should have affected countries
reasonably similarly. A more plausible possibility, surely, is that
institutional factors – the power of capital over labor – allow (some) graduates
greater access to the economic surplus in the UK than it allows them in the
Nordic countries.

Although I’m speaking here in macroeconomic terms, the point holds at a micro
level too. Why did Rebekah Brooks get a £10.9m

payoff from Murdoch? It’s not because she has obvious greater marginal
productivity or technical human capital than the rest of us. It’s because (for
reasons we needn’t consider) she had privileged access to the surplus.

Inequality, then, is better explained by power than by human capital or
marginal productivity.

This is not a novel thought, or the first time I’ve made this point, but more
and more it seems that we shouldn’t think of these as competing explanations for
inequality, but rather as complementary explanations that are mutually
reinforcing.