Friday’s e-mail brought an invitation from the Brookings Institution for me to attend an upcoming conference entitled “From Words to Action: Delivering Inclusive Growth .”
This conference might well be superb; I here neither commend nor criticize it. Instead I write because the title of the conference prompts me to ask a question: Is it possible, in any exchange-based economy with market-oriented institutions, to have growth that is not inclusive? I think that the answer – for any meaningful interpretation of the word “inclusive” – is no. More precisely, I think that in a market-oriented economy economic growth is, practically, always highly inclusive.
“Inclusive growth” is today a term that signals one’s politics. This term is used almost exclusively by “Progressives” and others on the political left. Talking of “inclusive growth,” of course, suggests not only that non-inclusive growth is possible, but also that growth over the past few decades has indeed been non-inclusive.
In an economy of self-sufficient economic units – that is, an economy with no specialization and exchange – non-inclusive growth is possible. Indeed, in such an economy, non-inclusive growth is not only possible, it’s likely the only kind of growth about which it is sensible to speak.
If a self-sufficient farming family, for example, increases the size of its annual harvests by working harder or by using new and improved farming techniques, that family’s economic output and welfare grow. But because that family interacts with no one else, its growth includes no one else. That family’s growth is exclusive to it. (If a second family a few miles away does the same thing as the first family, the second family’s output also grows. Such growth, however, is independent of that of the first family. The second family’s economic growth is also exclusive to it.)
But in an economy with even only rudimentary specialization and trade, economic growth necessarily includes more than one economic entity. The farmer who makes his living selling milk to people in town cannot make a better living – that is, cannot have his economic fortunes grow – unless he persuades at least one other person to pay him more money (or, more precisely, to transfer to him today a bundle of resources that is larger in value than was the bundle they transferred to him yesterday). Yet he cannot persuade anyone to pay him more money unless in return he offers to at least one other person milk bargains better than he offered in the past. So the farmer’s economic growth requires that he make at least one other person better off economically. (It will not do here to object that the farmer might profit by getting a monopoly. If the farmer increases his income by monopolizing the milk market, the economy of which this farmer and the townspeople are a part shrinks rather than grows.)
Suppose that you’re this farmer (and that, having no access to the successful deployment of force on your behalf, have no prospect of monopolizing the milk market). Your goal is to increase your family’s income. You can do so by working a bit harder to increase the size of your farm’s milk output by just enough to allow you to offer one townsperson a better bargain. You’re made better off when that one townsperson accepts your offer. Yet also that townsperson is made better off. The economic growth that results from your harder work is not exclusive to you; it includes one other person. But you’re hungry for even more income growth, so you work hard enough to enable you to offer better milk bargains not just to one townsperson but to 100 townspeople. In this latter case the economic growth you enjoy is greater than it was when you offered a better milk bargain to only one townsperson – but so, too, is the resulting economic growth more inclusive: this growth now includes not just you and one townsperson; it includes you and 100 townspeople.
Obviously, if you improve your farming techniques even further – say, to allow you now to offer better milk bargains to 1,000 townspeople – you’re made even better off than you were when you offered better bargains to only 100 townspeople. Yet so, too, are 900 more people than before made better off by the efforts that you expended to increase your income.
In general, in an exchange economy each producer seeking greater income has incentives to offer better bargains to as many consumers as possible – that is, to include as many other people (as consumers) as possible in his or her efforts to increase his or her own income. In particular, in a large, middle-class dominated economy such as that of modern-day America, the path to great riches is trod by those producers who attract as many consumers as possible to purchase their products. (Today, the bottom 80 percent of “consumer units” [ranked by annual income] are responsible for 61.2 percent of consumer spending. [I calculate this figure from Table 1 here .])
Meaningful economic growth, ultimately, is growth in people’s ability to consume. Meaningful economic growth is an increase in the quantity, quality, and variety of consumer goods and services that are made available through the economy. It’s possible for an economy to grow in this way but with only a tiny handful of people – say, one percent of the population – included in the growth. If so, then such economic growth would fairly be described as non-inclusive. But how realistic is such a pattern of growth? I think not very. If people in the bottom 99 percent (or bottom 90 percent, or 80 percent, or 50 percent, or even 10 percent) have money to spend and are restrained neither by diktat nor tradition from spending it as they choose, entrepreneurs and other producers – both existing and prospective – have incentives to innovate in ways that result in these people being offered better, consumptionability-enhaning bargains.
Remember, the tale tirelessly told today by “Progressives”  is that American economic growth over the past several decades has excluded, and still excludes, middle-class and poor Americans. The masses, it is said, are treading water economically. The implicit suggestion, therefore, is that all this growth has occurred because rich Americans offer better consumptionability bargains only to themselves. Yet how realistic is this suggestion? How realistic is the claim that the rich are getting filthily richer only by serving each other and refusing to seek to profit from mutually advantageous trades with the vast bulk of ordinary people? Not very.
A story can be spun that tells of ordinary Americans producing ever-greater outputs but with this increase in outputs being captured exclusively by the rich. Part of this story is that, while ordinary Americans produce lots more, their real incomes remain flat and, hence, no one has incentives to offer ordinary Americans better consumption deals. (Astute readers will realize that Jones’s stagnant monetary income is not a sufficient condition to prevent entrepreneurs from attempting to offer Jones better consumption deals. But put this point aside.) Alas, however, a story can be spun that tells of almost anything. The question is how plausible is such a story. What must reality be like in order for that story to ring true? For this often-spun story to ring true, here are only some of the conditions that must prevail in reality (on the assumption that the economy remains reasonably market-oriented):
(1) supplies of new labor and labor-saving techniques increase so fast, or are so readily at hand, that all improvements in labor productivity are captured exclusively by employers and owners of capital (that is, real worker pay never gets bid up because employers have at hand a virtually unlimited supply of substitutes for current workers*);
(2) capital – while eager and lightening quick to replace higher-paid labor with lower-cost options – is reluctant or remarkably slow to compete for the ever-increasing rate of profit that results from owners of capital getting all of the growing returns on increased labor productivity; and
(3) today’s non-owners of capital, despite witnessing the ever-increasing rate of return to owners of capital (and being told of this reality in data-filled best-selling tomes ), almost all refuse to try to get in on the game by, say, buying more corporate stocks or by starting small businesses in order to become exploiting employers themselves.
(1′) supplies of new labor and labor-saving techniques increase so fast, or are so readily at hand, that all improvements in labor productivity are captured exclusively by rich capitalists, but only in their roles as rich consumers; the gains in labor productivity are competed away in the form of ever-falling prices of Gucci loafers, Mercedes sedans, exquisite diamond jewelry, Sub-Zero refrigerators, bottles of Opus One and Château d’Yquem, meals in Michelin 3-star restaurants, Tahitian vacations, and other goods and services enjoyed exclusively by the rich; somehow, improvements in labor productivity result in lower costs of supplying only goods and services for the rich and do not lower the costs of supplying goods and services for the masses.
The above conditions are possible; they are not remotely plausible, and are extraordinarily improbable. This fact strongly suggests that all of today’s stories of secular middle-class stagnation and non-inclusive growth are likely in error.
* If this condition held in reality, it would raise the following question: Why are any wages today above subsistence?