Heather Boushey. Unbound: How Inequality Constricts Our Economy and What We Can Do about It. Cambridge: Harvard University Press, 2019.
Heather Boushey is a co-founder of the Washington Center for Equitable Growth, and she is currently a member of the Council of Economic Advisers to President Biden. Her book represents a recent shift of economic thinking on the subject of economic inequality.
Traditional thinking and its limitations
Traditionally, mainstream economists have taken a rather benign view of inequality, seeing it as a harmless, normal, or even essential aspect of a free-market economy. American economist William Bates Clark laid a foundation for this thinking in the late 1800s with his “marginal productivity theory of distribution.” Leon Walras had already argued that each factor of production—land, capital or labor—generated income that equaled the value of its contribution to production. Alfred Marshall had agreed, saying that his theory supported the old saying that “most men earn just about what they are worth.” Clark developed a mathematical model to show that under the assumption of perfect competition, firms will add labor until the contribution of each worker to production just equals the wage paid. Then he generalized:
It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.
[W]hat a social class gets is, under natural law, what it contributes to the general output of industry.
In other words, when some people get more than others, that’s as it should be, since what they get is just a reflection of what they give. Twentieth-century economists incorporated this thinking into a general model of economic equilibrium in which the market efficiently allocates all resources and maximizes social utility. “A perfectly competitive market would arrive at a point where no further improvement could be made to any person’s outcome without leaving some other person worse off.” Many economists argued that deliberate increases in equality could only be achieved at the cost of reduced efficiency and lower aggregate income. In the natural market economy, economic contributors do not receive equal returns, but they do get their fair share of the aggregate income. Economic growth increases the benefits for all, as “a rising tide lifts all the boats.”
Economists have recognized exceptions to perfect competition like the power of large corporations over wages and prices. But they may not take these “imperfections” seriously enough to rethink the assumptions of their theories.
Boushey is one of an increasing number of economists who do question the underlying assumptions of mainstream economics as well as its benign view of inequality. “We need to recognize how economic power translates into political and social power, and reject old theories that treat the economy as a system governed by natural laws separate from society’s.” I think most sociologists would agree, since the very term “natural law” is problematic for us. Scientists may misuse the term by assuming that the institutions of a particular social system, such as industrial capitalism, are written in stone and impervious to major social change.
Such criticisms of mainstream economics are not new, although they were often overlooked after the ascendancy of “neoliberalism” and Reaganomics in the late twentieth century. Boushey cites the earlier critique of free-market economics by Karl Polanyi, who viewed economic processes and social power relations as inseparable. One could also mention Thorstein Veblen and other “institutional” economists of the Progressive Era.
Inequality in the spotlight
Economic theory has never developed in isolation from historical events, but has always been affected by trends in the economy itself. One only has to think of how the Great Depression advanced Keynesian thinking, or how the runaway inflation of the 1970s advanced Milton Friedman’s monetarism. After about 1980, the economy entered a period of generally slower growth and greater inequality, compared to the period of postwar prosperity. What growth there was generated gains mainly for the wealthy, while the middle class and the poor fell farther behind. Bousher cites research by Emmanuel Saez and Gabriel Zucman finding that the share of the wealth owned by the top 1% has increased to 42%, compared to only 23% in 1978. I should mention that specific numbers like these are somewhat contested, since they depend on how wealth is defined and measured. The general trend toward greater inequality in both income and wealth, however, does show up in many studies.
This experience poses a challenge to traditional thinking, which expects everyone to receive economic rewards commensurate with their contribution to production. Where is the larger contribution that would justify the spectacular rewards for the most powerful owners and managers, if they are having so little success in growing the economy for the good of all? “By the early 2000s, rising income inequality—especially at the very top—had become so striking that attempts to cast it as consistent with natural laws of the economy that would eventually benefit society more generally rang hollow.”
Mainstream economists have tried to interpret the growing inequality without straying too far from traditional thinking. They have said that new technologies and skill requirements have widened the income gap between skilled and less-skilled workers, and that globalization has aggravated the situation by putting less-skilled workers in competition with those of other countries. But since these are global developments, they do not explain why the emerging inequality is especially severe in the United States.
The new inequality cries out for a deeper theoretical explanation, one that incorporates power, politics and social conflict. We must confront the possibility that some features of our economic order are designed to benefit the few at the expense of the many. We must stop assuming that the economy already works like a well-oiled machine, but consider the argument that it could work better if benefits and opportunities were more widely distributed.
How inequality constricts
The general theme of Boushey’s book is announced in the subtitle: “How Inequality Constricts Our Economy and What We Can Do about It.” The author uses three particular verbs to describe the effects, claiming that “inequality obstructs, subverts and distorts economic growth.” The differences among these concepts may be a little subtle, but they do provide an outline for organizing the book. The obstruction part includes chapters on “Learning and Human Capital” and “Skills, Talent, and Innovation.” The subversion part includes chapters on “Public Spending” and “Market Structure.” The distortion part includes chapters on “The Economic Cycle” and “Investment.” I will devote one post to each of these three parts.
Beneath the Surface 