Saturday, February 18, 2017

Capitalism and Mathew effect

One of the characteristic features of modern capitalism is a Mathew Effect or a form of accumulative advantage. In simple terms, this translates everywhere to a trend where the rich and powerful become ever more so and the poor and weak become more diminished. 

This is pervasive across both the market for businesses and labor, across sectors. Large firms get larger by getting cheaper credit, recruiting better employees, capturing a far greater share of consumers who are also likely to spend more,  generating more surpluses, attracting more investors, and benefiting more from regulatory regimes. Citizens who strike gold with the ovarian lottery get richer by accessing better education, acquiring superior non-cognitive skills, getting higher-paying jobs, being more successful professionally, assortative mating within social cohorts, and so on.

In both cases, the opposite set of trends apply with even greater force to smaller businesses and less fortunate people. Furthermore, the proportion of beneficiaries among both businesses and labor across sectors has been shrinking rapidly over time, leading to egregious concentration of market power and incomes at the top of the respective ladders. Amplifying these trends is the capture of political institutions and control over the process of laying down the rules of the game in all spheres public life by the same set of small group of beneficiaries. Worse still, this control over political institutions leads willy-nilly to the erection of entry barriers that add more layers to an already inhospitable environment for vertical mobility for firms and labor. The financial market regulation in the US may be one of the best examples of "extractive institutions" in our modern economy. There is an inexorable dynamic to to these rapidly widening inequalities. 

The combination of technological advances, globalisation, and financialization over the past quarter century or so that may have hastened this trend. 

The latest data point in this comes from the market for academic instructors in higher education institutions in the US (HT: Ananth). In this fantastic Truman Capote award acceptance speech, Kevin Birmingham highlights a sobering picture of the scale of 'adjunctification' of faculty positions in US universities, 
Tenured faculty represent only 17 percent of college instructors. Part-time adjuncts are now the majority of the professoriate and its fastest-growing segment... A 2014 congressional report suggests that 89 percent of adjuncts work at more than one institution; 13 percent work at four or more... An English-department adjunct at Berkeley, for example, received $6,500 to teach a full-semester course... According to the 2014 congressional report, adjuncts’ median pay per course is $2,700... Thirty-one percent of part-time faculty members live near or below the poverty line. Twenty-five percent receive public assistance, like Medicaid or food stamps... We cannot blame this professional anemia on scarce funding. The largest adjunct-faculty increases have taken place during periods of economic growth, and high university endowments do not diminish adjunctification. Harvard has steadily increased its adjunct faculty over the past four decades, and its endowment is $35.7 billion. This is larger than the GDP of a majority of the world’s countries.
He points to a market failure which is a feature in most labor markets,
The key feature of adjunctification is a form of labor-market polarization. The desirability of elite faculty positions doesn’t just correlate with worsening adjunct conditions; it helps create the worsening conditions. The prospect of intellectual freedom, job security, and a life devoted to literature, combined with the urge to recoup a doctoral degree’s investment of time, gives young scholars a strong incentive to continue pursuing tenure-track jobs while selling their plasma on Tuesdays and Thursdays. This incentive generates a labor surplus that depresses wages. Yet academia is uniquely culpable... New faculty come from a pool of candidates that the academy itself creates, and that pool is overflowing. According to the most recent MLA jobs report, there were only 361 assistant professor tenure-track job openings in all fields of English literature in 2014-15. The number of Ph.D. recipients in English that year was 1,183. Many rejected candidates return to the job market year after year and compound the surplus... From 2008 to 2014, tenure-track English-department jobs declined 43 percent. This year there are, by my count, only 173 entry-level tenure-track job openings — fewer than half of the opportunities just two years ago. If history is any guide, there will be about nine times as many new Ph.D.s this year as there are jobs.
And this is telling,
Universities rely upon a revolving door of new Ph.D.s who work temporarily for unsustainable wages before giving up and being replaced by next year’s surplus doctorates. Adjuncts now do most university teaching and grading at a fraction of the price, so that the ladder faculty have the time and resources to write. We take the love that young people have for literature and use it to support the research of a tiny elite... If you are a tenured (or tenure-track) faculty member teaching in a humanities department with Ph.D. candidates, you are both the instrument and the direct beneficiary of exploitation. Your roles as teacher, adviser, and committee member generate, cultivate, and exploit young people’s devotion to literature.
Yes, while things may not be as dismal across departments, the broad trends are similar, not just in academia but everywhere in the labor market. Mathew Effect dominates. 

We live in the age of "winner takes all" capitalism and with a declining share of winners.  In Rawlsian terms, it is minimax capitalism. This is arguably capitalism's biggest market failure. Its implications include declining business dynamism, shrinking labor market diversity, and erosion of the credibility of institutions that underpin modern economies.

And it may well carry the "seeds" of capitalism's own decline. Marx may well have been right, albeit with a delay of nearly two centuries! We need a version of "maximin capitalism", one where the rules of the game positively favour the less advantaged so as to counterbalance the inevitable Mathew Effect.

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