× Expand AP Photo/Susan Walsh Federal Reserve Chair Janet Yellen closes her notebook after holding a news conference in Washington, Wednesday, December 16, 2015, following an announcement that the Federal Reserve raised its key interest rate by quarter-point, heralding higher lending rates in an economy much sturdier than the one the Fed helped rescue in 2008.

This article originally appeared at The Washington Post.

The Federal Reserve's decision Wednesday to raise interest rates for the first time since 2006 highlights a glaring weakness of conventional economic analysis: its failure to understand the role that power plays in shaping the economy.

By all the usual metrics, wages should be bounding upward now that unemployment has been reduced to 5 percent and 13 million jobs have been added to the economy since the depths of the Great Recession. It's to counter the inflationary pressures that such wage increases would engender that the Fed finally decided to hike rates.

The only problem with this analysis is that wages are not bounding upward, and inflation has remained below-not above-the Fed's preferred rate of 2 percent. In essence, the Fed decided to act on mainstream economists' theories-wages and inflation should be increasing, dammit-rather than observable facts.

A similar preference for theory over empiricism has informed one argument that many economists have made for the "Cadillac tax," a levy on more costly health insurance policies that is scheduled to take effect in 2018, but whose implementation will be delayed if the congressional budget deal unveiled Tuesday night is enacted. Employees whose coverage is scaled back as a result of the tax, the argument goes, shouldn't fret, since employers will pass along the savings to them in the form of wage increases.

What the Fed's decision and this argument supporting the Cadillac tax both miss is that the traditional theories of how wages rise have been negated by major structural changes to the U.S. economy. Time was when tightened labor markets and increases in employers' retained revenue did lead to wage increases, but that time is clearly long gone.

What the conventional theories have failed to factor in is power: the fact that workers have lost their ability to bargain with employers, the fact that major shareholders have gained the ability to compel corporate executives-often, on penalty of losing their jobs-to funnel all available revenue to them. A cursory glance at, or in-depth survey of, U.S. business shows that companies are engaged in bargaining aplenty-not with their employees, however, who, with the rate of private-sector unionization reduced beneath 7 percent, have no means of bargaining. Rather, they're contending with "activist investors," who are reshaping the economic landscape by successfully pressuring companies to buy back their shares and merge with competitors, in the cause of enriching themselves.

Well before the current rise of income and wealth inequality, however, there were dissident American economists who recognized the crucial role that power plays in the distribution of wealth and income. Foremost among these was John Kenneth Galbraith, whose 1952 book American Capitalism painted a picture of an economy dominated by major corporations, whose power was offset by the countervailing power of other businesses, unions, and government regulations.

Precisely because Galbraith stressed the crucial role of power relations rather than the mathematical beauty of free markets, his work was dismissed by many mainstream economists.

Today, however, it's a far better guide to what's happened to our economy than the work of his critics.

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What's happened, of course, is that the countervailing powers that Galbraith identified have largely been crippled. Unions have been eviscerated. Consumers have lost much of their legal ability to seek redress from corporate misconduct, as courts have upheld compulsory arbitration clauses in consumer contracts. Decades of government neglect of its antitrust obligations have enabled the rise of monopoly power in Silicon Valley, of Walmart's ability to compel consumer-goods manufacturers to offshore their production to cheap labor markets, and of a record wave of mega-corporate mergers.

The consequences of the decades-long decimation of unions were made abundantly clear by the Pew Research Center's report, released last week, on the waning of the U.S. middle class. In 1970, when unions were large and powerful, middle-income households commanded 62 percent of the nation's household income; by 2014, that had declined to 43 percent, while upper-income households saw their share rise from 29 to 49 percent.

To be sure, genuine full employment would boost workers' ability to secure better pay, but the globalization of U.S. corporations, the deterrent effect of monopoly power on new business formation, the chronic under-consumption by underpaid U.S. workers and the underinvestment of the public sector in necessary and job-generating projects all make full employment ever more improbable.

So-wage increases? Wage inflation? Please remove noses from textbooks, dear Fed governors, and look around you. American workers won't win raises until they win back their power.