The winners have us all playing a loser’s game
By Steve Roth (2016)
How Perfect Markets Concentrate Wealth and Strangle Growth and Prosperity
The winners have us all playing a loser’s game
Capitalism concentrates wealth. Ridicule Marx and his latter-day disciples all you like (I’ll help); he definitely got that right.
But capitalism is a big word with lots of meanings, and enough ideological baggage to fill a Lear Jet. Let’s talk about something more precise: perfect markets, with ownership, in which individuals compete with others to produce stuff, and store up savings. You can see this kind of perfect world in agent-based simulations like Sugarscape. Start with a bunch of sugar farmers trying to accumulate sugar in an artificial world, hit Go, and watch what happens.
Here’s what happens to wealth concentration (number of poorer farmers on the left, richer on the right):
Wealth is pretty evenly distributed at the beginning (top). That doesn’t last long. You can see the same effect in another Sugarscape run, here compared to real-world wealth distributions:
That’s the Gini coefficient for wealth. Zero equals perfect equality; everyone has equal wealth. 1.0 equals perfect inequality; one person has all the wealth.
Perfect markets concentrate wealth. It’s their nature. But at some point, market-generated wealth concentration strangles those very markets (compared to markets with broader distributions of wealth). If a handful of people have all the wealth, how many iPhones will Apple sell? If only a few have the wealth to buy cars, automakers will produce a handful of million-dollar Bugattis, instead of forty handfuls of $25,000 Toyotas. Sounding familiar?
But wealth concentration doesn’t just strangle the flows of spending, production, and income. It throttles the accumulation of wealth itself. Another simple simulation of an expanding economy (details here) explains this:
The dynamics are straightforward here: poorer people spend a larger percentage of their income than richer people. So if less money is transferred to richer people (or more to poorer people), there’s more spending — so producers produce more (incentives matter), there’s more surplus from production, more income, more wealth…rinse and repeat.
This picture says nothing about how the wealth transfers happen (favored tax rates on ownership income, transfers to poorer and older folks, free public schools, Wall Street predation, the list is endless). It just shows the results: As wealth is transferred up to the rich, on the left, and wealth concentration increases, our total wealth increases more slowly. When that transfer is extreme, even in this growing economy the poorer people end up with lesswealth. (Note how the curves get steeper on the left.) As wealth concentration declines on the right, our total wealth increases faster, and poorer people’s wealth increases much faster. Note that richer people still get richer in most scenarios — it’s a growing economy, always delivering a surplus from production, and increasing wealth — just more slowly.
And that’s just talking dollars. If we start thinking about our collective “utility,” or well-being — the total of everybody’s well-being, all summed up — the effects of wealth concentration are even more profound. Because poorer people getting more does a lot more for their well-being than richer people getting more. (Likewise, even if the richer people actually lose some of their wealth, they’re not losing as much utility.)
Because: Declining marginal utility of wealth (or consumption, or whatever). This is one of those Econ 101 psychological truisms that seems to actually be true. The fourth ice-cream cone (or Bugatti, or iPhone) just doesn’t deliver as much utility as the first one. Plus, a Bugatti in one person’s hands doesn’t deliver as much utility as forty Toyotas in forty people’s hands. (Prattle on all you want about relative and revealed preferences; you won’t alter this reality.)
So if we were to re-work the chart above showing utility instead of dollars, you’d see far greater increases in utility on the right side, especially for poorer people. Widespread prosperity both causes and is greater prosperity.
Why, then, aren’t we spending our lives on the right side of this chart? It’s a total win-win, right? The answer is not far to find. Nassim Taleb shows with some impressive math (PDF) what’s also easy to see with some arithmetic on the back of an envelope: if a few richer people (who dominate our government, financial system, and economy) have the choice between making our collective pie bigger or just grabbing a bigger slice, grabbing the bigger slice is the hands-down winner.
That’s why decades of Innovative Financial Engineering has served, mostly, not to efficiently allocate resources to efficient producers, improve productivity, or increase production. Rather, these fiendishly clever entrepreneurial inventions control who gets the income from production. You can guess who wins that game. Top wealth-holders would be nuts to play it any other way (if you go with economists’ definition of rationality…).
But for the rest of us, it’s a loser’s game — at least compared to the world we could be living in. If household incomes had increased along with GDP, productivity, and other economic-growth measures for the last two or four decades, a typical household would have tens of thousands of dollars more to spend each year — and much bigger stores of wealth to draw on. If you think that sounds like a thriving, prosperous society…you’re right.
To summarize: perfect markets, left to their own devices, concentrate wealth. Concentrated wealth results in less wealth, and far less collective well-being. (You’ll notice that I haven’t even mentioned fairness. It matters. But I’ll leave that to my gentle readers.)
This all leads one to wonder: how could we move ourselves into that happy world of rapidly increasing wealth and well-being on the right side of the graph? Hmmmm….
Cross-posted at Asymptosis.
2016 June 5
Dan, nice repost.. .reminders help if frequent enough… Propaganda negates it quickly if not frequent enough.
but in answer to the question:
“This all leads one to wonder: how could we move ourselves into that happy world of rapidly increasing wealth and well-being on the right side of the graph?”
Answer: Change the foundations of gov’t. ..in the US it means reworking most of the Constitution’s terms and conditions.
After all, the entire evolutionary foundation of Anglo-Saxon gov’t is based on William the Conqueror’s diving up the wealth and resources of a nation among a few Barons who financed the incomes of the king and his supporters. Little has actually changed in the fundamentals of Anglo-Saxon based governance..
Thanks Lt….I have a bunch coming up.
“for the last two or four decades, a typical household would have tens of thousands of dollars more to spend each year — and much bigger stores of wealth to draw on.”
Wouldn’t apply to continental Europe which is long since a “union continent” — which we once were.
The way to get there (high American labor union density) from here (labor market and political forum morbidity) is so easy and straightforward I’ll cut-and-paste most of it here:
Steal a big page from Republicans anti-union book of tricks. In Wisconsin for instance government employee unions are forced to re-certify every year — majority of members required, not just of voters.
A near future (fingers crossed) Democratic Congress can pass legislation requiring first time certification or re-certification labor union elections at every workplace every so many years.
Consider this additional feature: part of election choice can be whether members wish mandatory re-certification after one year, three years or five years — plurality rules.
This extra choice could facilitate “yes” votes at high union-doubter workplaces and dispense with the most rancorous potential arguing because pro-union can always say to union-worriers: ”Try it for a year — can’t hurt.”
(Government employees left outside NLRA election structure. Wisconsin intent should be clearly recognized as unconstitutional pressure on freedom of assembly — no other purpose possible for such an over-extreme requirement. Courts say First Amendment protects government worker organizing but not their right to bargain.)
[snip]
I’m thinking that progressive states could institute mandatory certification/re-certification for labor cohorts not covered by the NLRA — like farm workers or maybe college student instructors if the NLRB ever backtracks on the latter — if for no other reason than to prime the political issue pump; to make some of the right kind of waves and hope to get everybody talking.
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Why Not Hold Union Representation Elections on a Regular Schedule?
November 1st, 2017 – Andrew Strom
https://onlabor.org/why-not-hold-union-representation-elections-on-a-regular-schedule/
If I may, from my post 12/28/09:
“However, here is the meat. Using 1976 as the center point of the range because it is the low point of the share of income for the top 1%, there are 5 times that GDP doubled for an average of 8.6 years per doubling. This during the time that income share was becoming more equal. As income became less equal over the next 32 years, there are only 3 doublings of GDP or once every 10.6 years. Also, the time between doubling is increasing to more than during the prior 43 years.
Now, for the class war aspect. In the first 43 years, the top 1% saw their income double only 3 times (1 every 14.3 yrs) compared to the bottom 99% seeing theirs double 4 times (1 every 10.75 yrs). During the next 32 years, the top 1% has experienced 4 doublings, one every 8 years compared to the 99% experiencing this only twice, one every 11 years.”
“The post 1976 economic policy we have been following has quite frankly been killing our economy. Yeah, it sure benefited the top 1%, they got their’s. But, it could not last because, you can not have one group taking more out of the economic growth faster than it can grow. That, boy’s and girls is the lesson of the first 43 year compared to the last 32 years. For the first 43 years, GDP doubling was always ahead of the income. For the next 32 years, GDP growth was always behind the income which was do to the top 1%’s share. Their’s is the only income that increased faster than the economy”
I conclude with the following question:
“So, what should economic policy in a democracy strive to do? Promote more equality in the nation’s income which everyone helps to produce thus giving everybody a more equitable rise in their standard of living or promote the top 1%’s growth and the hell with all the rest? The rest being 99% of the population, the overall economic growth, the deficit, quality of life (retirement, health care, free time, better life for future generations) and just plain happier people who don’t find a need to fight with everyone else on the planet.”
http://angrybearblog.com/2008/12/income-distribution-and-gdp-it-matters.html
Great, great question.
I vote for growth. I don’t care about inequality as long as the majority of the populace is overall better off. The average lower middle income person today is far better off than the same strata 100 or even 20 years ago.
This seems lost on the majority of posters here.