We now live in a world where 1% of the population control 50% of the wealth. (in the USA its more like 40%) Most wise people consider this to be too much.
So my question is: What is the healthy amount for the richest to control? And why?
In spite of the consensus of the discussion so far, post #53, this is a pretty easy question to answer. This is the question that Thomas Picketty Set to answer in his
Capital in the Twenty-First Century which was much discussed here by people who hadn't read the book.
His conclusion, backed by research into three centuries of data, was that wealth moves to the wealthy from everyone else when the rate of the returns to capital exceeds the rate of growth in the economy.
Growth is most closely associated with the investments in the economy that build new production facilities and not so much to the investments in paper things like stocks and bonds.
So the proper amount of wealth is related to the amount of investment required by the real economy of producing products for consumption and minimizing the so-called investments in paper.
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Like many such conclusions from research it seems to be obvious once it is stated.
The economy needs new investment to build new production facilities for growth and to replace worn out or outdated ones and to finance new ideas, innovation. What we are going to call "real investment" here and for now, for short. (economics has a slightly different use for the word "real")
These returns to capital from real investment are paid largely as profits.
According to the economics orthodoxy, neoclassical economics, profits are the "wages" paid to capital and investment. They represent the marginal productivity of capital in econ speak.
Obviously, profits are paid largely to the wealthy.
The wealthy have a much larger propensity to save and invest. Everyone else spends their income largely on consumption.
Therefore profits go into investments. In other words, this money paid as profits becomes capital, what we call financial capital, money available for investments.
In this way, profits are quite unlike the "wages" of capital. Wages paid to labor are largely consumed, they don't become more labor. For this reason profits are like the interest paid on a loan, interest paid on debt rather than wages.
And like the interest on debt profits and the capital that they turn into, they compound, they accumulate, ballooning ever larger.
This must be good - right? Savings, investment, profits are all good - right? And wages are costs, and costs are bad as is consumption and debt - right?
Economics is a bad area to try to do morality, especially the macroeconomy, what we are talking about here. There is no good and bad for these things in economics. A good economy requires a balance of these things, not the minimizing of some and the maximizing of others.
When we don't have a balance between profits and wages, which is a balance between supply and demand, when there are too much in profits being made and not enough being paid in wages, there is too much supply and not enough demand. The excess profits becomes financial capital available for real investment that is not needed because of the low demand.
But unlike labor that is not used or factories that are idled by the low demand, this excess financial capital isn't a lost resource. It instead goes into stocks, bonds, Treasury bills, corporate paper, etc. It is stored in these pieces of paper, it compounds and accumulates, it is widely considered to be invested and it is counted as wealth.
But it doesn't build production facilities, it doesn't buy production machinery, it doesn't promote innovation or productivity increases, it is not real investment. For those reasons we are going to call it here and now, for short, "paper" investment, because that is what you get from them, pieces of paper.
Now for some numbers but easy math. Business investment in the US is below 400 billion dollars a year right now. Corporate profits are more than 1600 billion dollars a year. (More like 1800 billion dollars but I promised you easy math.) And this is just the big corporations, it doesn't take into account the single proprietorships, partnerships, S corporations, etc. that are usually lumped together under the heading "small business." It hard to separate what is profits and what is income for the so-called small businesses. Many of them are professionals, doctors, lawyers, engineers, architects, dentists, etc. where the businesses profits are the professional's income.
So right now corporate profits are more than four times business investment. This means that paper investments are about three times the rate, another way of saying "flow," of real investments. And this three times number is a flow that will accumulate in a stock of paper investments year after year.
Yes, this is excessive. But does it cause any harm? Yes, it does. In brief, I know that no one reads this far anyway,
- In the last thirty five years corporate profits have more than doubled as a percentage of GDP.
- Profits and wages are both costs of production.
- We have either higher costs or lower wages because of the higher profits.
- Since the overall portion of the economy going to wages has shrunk by the same portion of the economy as profits have gone up I am going with lower wages.
- This didn't happen by accident, thirty five years ago we intentionally enacted economic, fiscal policies to suppress wages and to boost profits to have more money available for investment.
- It worked as noted above, profits went up, wages went down, but business investment didn't increase. (all measured as a percentage of GDP.)
- The means that we used to suppress wages were damaging to the economy.
- We suppressed wages using globalization, more poverty, destroying the unions, effectively lowering the minimum wage, tolerating more unemployment, putting both parents to work, more private debt, lowering taxes on the wealthy and raising them on everyone else, etc.
- This excessive financial capital fueled by the higher profits creates pressure to let for profit capitalism into businesses that it can't handle well.
- Businesses like health care, fighting wars, running prisons, public works and education for example.
- It is this excessive available financial capital that has caused all of asset bubbles and the financial instability that go with them. See Great Financial Crisis and Recession, GFC&R, of 2008 and Mortgage Backed Securities, MBSs.
- The main beneficiary of all of the money made available for paper investments has been the stock markets.
- What most people don't understand about the stock markets is that they more than 99% secondary markets, the profits and losses in the market don't come from the company whose stock is bought and sold.
- The profits and losses come from other stockholders in the market, when you make a profit on a sale of a stock the profit is provided by the person to whom you sell the stock, not from the company whose stock it is.
- They are a cross between betting on your favorite football team or in a casino where the winners are paid with the money from the losers, and a Ponzi scheme where increases in value are dependent on a constant stream of new money coming into the scheme.
- This increase in valuation is called capital gains and has an almost mythical goodness and desirability about it but it is nothing more than the inflation of the share prices.
- The inflation in stock prices puts pressure on the company's management to increase returns commensurate with the inflated value but with the real value's investment only.
- Not always a bad thing, but it often results in short term expediency at the cost of long term gains. See GFC&R of 2008 and liar's loans.
So in conclusion, we can now say how much income is needed to support the needed investment in the economy, say averaging just 10 to 25% more than the amount needed for the real business investment. Not in excess of the 300% that we have currently.
Although I have to add that over the thirty five years that we have been intentionally boosted the incomes of the wealthy more than twenty trillion dollars of what would have gone to wages under the old policies was transferred to the wealthy for investments in the real economy that never occurred. Most of this money is now overseas, either invested there or just sitting in tax haven banks.
Remember that paying decent wages to the 99% and ending poverty should be a goal of the economy not providing the 1% with huge incomes at the cost of the wages that the 99% receive.
All of these things that we talked about here, investments, stocks, bonds, profits, etc. are part of the mechanism of capitalism. They are not the reason that the economy exists. They are part of the overhead costs of capitalism. And like any overhead costs it is better when we minimize them and force them to prove their worth. To make them work hard for their money.
