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Robert Solow, the author of this article, is one of the most well-respected economists of his generation. He derived the "Solow Growth Model" which underpins a

Robert Solow, the author of this article, is one of the most well-respected economists of his generation. He derived the "Solow Growth Model" which underpins a good deal of modern macroeconomics. [1] Here, he states that it is customary to think of the value of a firm in terms of (1) returns to labor and (2) returns to capital. He argues that there is a third factor, (3) position in the market, that provides a rent to the owners and shareholders of the company. Just as a title/deed provides the owner with a geographical rent opportunity, regulation creates an opportunity for a company to extract an abstract sort of monopolistic rent within a market. Estimates of this component of rent lie between 10-30% of GDP, and it changes as a function of regulation. He argues that the division of this rent "has been shifting against the labor side for several decades" starting under the Reagan administration, due to (1) the decline of unions and collective bargaining (right to work laws, "hardening of business attitudes") and (2) the "casualization" of labor, i.e. the increase in part-time/contract-based labor that many companies are able to force onto a workforce that would, in many instances, favor full time employment. These casual workers "have little or no effective claim to the rent component of any firm's added value." In summary, the aggregate workforce is losing bargaining power whereas the aggregate business owners (investors) are gaining bargaining power within the economy, allowing the investors and owners to carve out a larger share of rent profits. While Solow does point out that international competition and "the biased nature of new technology" both play a role in this phenomenon, he strives to emphasize the importance of internal social change in the division of economic rent. Personally, I think that he is dancing around a much more controversial thesis: inequality is a direct result of poor government regulation and oversight (starting with Reagan) which is due to a deterioration of the separation of powers between the public and the private sectors as corporate owners and investors have been able to buy influence in Congress and further support/entrench regulation that favors their own interests. Unions/collections of workers no longer have the power to combat corporate interests at the political/legal level and are being dismantled/shafted which leads to many individual laborers being shafted as well, which is the cause of the nonexistent wage growth. [1] http://www.unc.edu/~jbhill/Solow-Growth-Model.pdf http://www.unc.edu/~jbhill/Solow-Growth-Model.pdf

mc32 11y ago
That could perhaps explain this phenomenon in the U.S. but this phenomenon is not solely expressed in The US. It is exemplary in the U.S. but it is also seen in more socialist countries as well. China, Brazil, as well as European economies.
- roymurdock 11y ago
  I think it would be hard for you to argue that workers have more rights/power in China or Brazil. China is socialist only in name. They are an economic powerhouse because the ruling class has fully embraced capitalism in order to exploit its large labor force. Brazil has a long history of corruption and poor regulation/enforcement. Slavery is still a very large issue in the agricultural industry there, which makes up a large portion of the economy. I'd love to see any data that you have that supports your thesis about the prevalence of this phenomenon in Europe despite a fairer split of economic rent due to fair labor laws.
- iamthepieman 11y ago
  But the point still holds in the countries you mentioned. It may take more political capital than monetary capital for businesses to strip power from workers but the effect is the same. In the U.S. corruption is built into the governance system via things like citizens united, and revolving door agencies. In a country like China it occurs at a lower level via selective enforcement of regulations, bribery and price fixing. not saying that these things can't all happen in both countries - they are just some surface level examples that illustrate how the same outcome is achieved in two very different systems.
- marcosdumay 11y ago
  Why do you think so? The entire world is going trough an increase in government size and interference, and a reduction on unions power. This is not a US-only phenomenon.
Bartweiss 11y ago
I think this is an excellent summary, but I question the assertion that Solow's "monopoly rent" is equivalent to gain from regulation. That's certainly a portion of rent, especially in intensely regulation-aided markets like cable service. However, I would argue that other anti-competitive forces like cost of market entry and brand loyalty (I'm looking at Apple) also generate 'rent', where that's defined as "profits beyond market efficiency". The regulatory landscape is certainly a major player in entry costs and market inefficiencies, but it's far from the only one. The labor to capital transfer, then, isn't solvable simply by correcting regulation-induced monopolies - it would require an attack on other forms of rent seeking as well.

mc32 11y ago

That could perhaps explain this phenomenon in the U.S. but this phenomenon is not solely expressed in The US. It is exemplary in the U.S. but it is also seen in more socialist countries as well. China, Brazil, as well as European economies.

roymurdock 11y ago
I think it would be hard for you to argue that workers have more rights/power in China or Brazil. China is socialist only in name. They are an economic powerhouse because the ruling class has fully embraced capitalism in order to exploit its large labor force. Brazil has a long history of corruption and poor regulation/enforcement. Slavery is still a very large issue in the agricultural industry there, which makes up a large portion of the economy. I'd love to see any data that you have that supports your thesis about the prevalence of this phenomenon in Europe despite a fairer split of economic rent due to fair labor laws.
iamthepieman 11y ago
But the point still holds in the countries you mentioned. It may take more political capital than monetary capital for businesses to strip power from workers but the effect is the same. In the U.S. corruption is built into the governance system via things like citizens united, and revolving door agencies. In a country like China it occurs at a lower level via selective enforcement of regulations, bribery and price fixing. not saying that these things can't all happen in both countries - they are just some surface level examples that illustrate how the same outcome is achieved in two very different systems.
marcosdumay 11y ago
Why do you think so? The entire world is going trough an increase in government size and interference, and a reduction on unions power. This is not a US-only phenomenon.

Bartweiss 11y ago

I think this is an excellent summary, but I question the assertion that Solow's "monopoly rent" is equivalent to gain from regulation. That's certainly a portion of rent, especially in intensely regulation-aided markets like cable service. However, I would argue that other anti-competitive forces like cost of market entry and brand loyalty (I'm looking at Apple) also generate 'rent', where that's defined as "profits beyond market efficiency". The regulatory landscape is certainly a major player in entry costs and market inefficiencies, but it's far from the only one. The labor to capital transfer, then, isn't solvable simply by correcting regulation-induced monopolies - it would require an attack on other forms of rent seeking as well.