Dienstag, 11. Dezember 2012

How a steady concentration process kills the economy and why equilibrium is a pipe dream of armchair economists

In my last two posts I have shown a model of a money driven economy, where money is considered a catalyst that needs to flow between the participants of the economy to enable economic activity.



Without that catalyst participants are not able to communicate their demand effectively.
Unfortunatly money tends to be distributed very unequal, so money flows are not homogenus but in a lot of cases very thin, so that they barely cover the flow of goods required to stay afloat. The reason for that unequal distribution of money in the economy is a process of ever increasing concentration of money onto the accounts of a few. The mathematical background of the mechanics driving this process of ever increasing concentration is described here by a group of scientists at the Univerisity of Minnesota. They are talking in that paper about entrepreneurs. But when you think about it, you will discover that every participant of the economy is an entrepeneur who seeks return on his investment. The capital that every partcipant has, is the ability to work 2000 hours or more per year. And that capital is reinvested plus the aquired productivity enhancing "assets" over and over with the aim to get a return larger then 1 on it. So if the minimum you need to stay afloat is 10000$/year and you earn 20000$ that year your return is 100%. If you are able to reinvest / spend that surplus in a way that aims to increase your productivity in the next period you are part of the game. The only thing that need to happen to ignite the process of concentration, are variation in the success  over the population of participants and over time and that it is done over and over again.   The rate with which the concentration of wealth increases is directly dependent on the amount of variation (sigma) of the return. And that varies a lot. So if a waiter earns 20000 his return is 100%, if the CEO of Daimler is earning 10000000, his return is 100000%. Now you may argue that the waiter will spend most of his income for consumption and not for productivity enhancing assets and you are right on with that. That is the mistake most people do and what Mr. Zetsche and alike don't do. Their propensity to consum 100% of the surplus exceeding the bare minimum necessary to stay alive is much lower compared to the propensity of low wage earners to do so. Mr. Zetsche will aquire most probable shares of the company or other assets enhancing his productivity measured in income per year.  And both will continue to do so year over year. And that drives the concentration of wealth up in steady fashion. And money is part of that. So to sum things up. To create a process of an ever increasing concentration of wealth, including money, we need just three things.

1) People able to generate a surplus
2) The idea to reinvest that surplus to enhance productivity even further with the goal to build a better future for themself and their children
3) Variation in the success over population and time in doing so.
Thats it!

And almost every neoliberal recipe is of the sort that is enhancing the variation / the spread which  leads direct to the acceleration of the rate with which the concentration  increases. Taxes on consumption are one example and there are a lot more, when you think about it.
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Now some will argue that investments = purchases of assets to increase productivity will create a money flow back into the economy. They do to some extend, when it comes to machinery or equipment for example, but the purchase of a high yield bank account is certainly not an investment that returns money into the economy. The odd thing here is, that investments that go back into the economy are aimed at things that devalue labour, which makes things worse for those who have no other means left then reinvesting their labour capacity over and over again. So the economy comes under deflationary pressure from two sides. Extraction of money by accumulating it in the hands of a few and devaluation of labour ,driven by a productivity competition among those who are on the upper floors of the pyramide. All this has nothing to do with an equilibrium of some sort. It is the direct opposit! An economy operated in this way, is a system that systematically produces a big deal of inequality. And by doing so, the entire thing goes belly up every 60 to 70 years, because the deflationary pressures, the piles of debt and the resulting loss of cohesion in the societies explode to an destructive level.
That's what neoclassical armchair economists miss, when they are promoting their stupid pipe dream equilibrium theories.

Sapere Aude!

Georg Trappe

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