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That’s not correct (on economics)

Seems the folk that write about economics are largely idiots.

OK … maybe that is a bit strong, but with so many examples like this, it is hard to come to any other conclusion.

The shift in income shares since the 1970s — from the middle and bottom to the top, as well as from the top to the very, very top — is a big reason incomes for the middle class and poor have grown so slowly.
[snipped a bit about another writer]
That’s not correct. Look at the chart here, showing average annual economic growth over three-year periods since 1950, and you’ll see that growth since the 1970s has been slower than growth before the 1970s. The peaks on the right side of the chart are lower than the peaks on the left.

A simple observation – economic growth is about consumption. You only produce goods when you have interested consumers. To increase consumption you must have more folk getting paid more money – and not stashing away increased income in investments. This point is by no means new, as I have seen writings from the 1950′s that made the very same observation – and it could easily be far older.

If your income increased quite a lot, some folk will spend it all, but most put a much larger portion into savings. To the extent that investment is good for the economy, this is a good thing. In a capital-starved economy, unequal income distribution might be a very good thing. When the income distribution shifted disproportionately to a smaller group, what we got is less consumption and more investment. Less consumption depresses economic growth. Note that this is a destabilizing feedback pattern.

The above referenced article fails to make the connection – and this failure is very common in the Wall Street universe.

I came out of an engineering / science background. The best folk in those disciplines are well-capable of distinguishing causes from effects, and ruthless in their practice of analysis. By comparison, most writings in economics – in terms of analysis – seem hopelessly flabby. (Growing up, the few folk I knew who went into economics were far from brightest, so perhaps the poor state of economics as a discipline is predictable.)

What would the world look like if capital was far in excess of economic needs?

Back in the 1950′s my father considered going into farming, but found that farm prices had jumped far out of reach. Back in the 1970′s house prices were rising far faster than costs (at least around here). In the 1980′s and 90′s computer and software companies rode enormous bubbles in price on stock markets, though very few ever paid a dividend, and most are gone today. There are and were lots of other bubbles. Any time something looks like a good investment, lots of money flows in and prices rise dramatically. Looks like there is a lot of money looking for a place to invest.

Our present world looks very much like what you would expect with too much capital.

In fact, if we use the history of the stock market as an measure, then it would seem that excess capital (or at least misdirected capital) was a problem as far back as the 1920′s. The original notion of the stock market makes sense – you buy stock in a company, the company expands, and the stock pays dividends. The price of the stock reflects the investors expected return on investment. What we have now is a market that places little or no value on dividends, and prices reflect what investors expect when the stock is sold in the future. The current stock market is little more than yet another form of gambling. What made the stock market transition from something useful to gambling? The answer lies in too much capital chasing too few places to invest – and from our history it seems this was true as far back as the 1920′s.

For symbolic reasons, I think we should move all the stock exchanges to Nevada. Could help the economy in Nevada. Might make New York a much more livable city – more like it once was. But the main reason is to make plain the association between gambling and the stock market.

Stop for a moment. Try to imagine what the world would be like if the economy had followed a steady boom from early 1900′s, without crashing and stumbling through the 1930′s. Without the economic crash, Germany might not have gone to war, and World War II might never have happened. If through those decades we had steady growth, and less waste on warfare – what would the world look like now? Keep that in mind the next time someone suggests that our current economic system works at all well.

We have an economic system that generates too much capital, and the result is unstable.

Unstable feedback loops are something for which a good engineer knows how to look – and designs carefully to avoid. When I looked at our economy, it seemed to be filled with unstable feedback loops – but for a long time I assumed that appearance was due to my incomplete understanding. After living through a major economic malfunction, with the nominal economic experts largely clueless … I’m thinking my first impression was right.

Ironically, one solution to this problem is quite old, but reviled by true believers in the Wall Street zeitgeist. To help limit excess capital and promote growth, you need more folk saving less and consuming more. How do you get folk to save less? Remove the need to save “for the future”. If as a society you guarantee that folk do not worry about their future expenses, then you will see more consumption (and more growth), and take a good chunk out of the excess capital.

So if you are wealthy, and you want a good return on your investments, it is logical for you to promote socialism. (A logical conclusion I fully expect will terminally confuse all true believers in the Wall Street zeitgeist.)

The central driving cause behind all this instability is singular wonderful fact – dramatically rising productivity. By this I mean productivity at producing real things – growing food, and the manufacture of real goods – not the government measure that counts less useful activity. Over the past century or so, the rate at which work produces goods expanded enormously. The problems come from a theory of economic organization that does not offer a stable model though which to channel rising productivity – but the underlying cause is wonderful.

Classic science fiction takes a singular premise, asks “what if” the premise were extrapolated into the future, and tries to sketch out what might be the result. Quite a while back, an author took the premise of rising productivity, and extrapolated into a future when only one person out of a hundred had to work to supply all material needs. The story was a failure. The author could not tell a convincing story, which might be a direct reflection of our present confusion about how to structure a working economy.

The more I study economics and politics, the more it seems the last century was little more than a turbulent interlude. Farsighted individuals asked the right questions long ago, but as a society we have yet to fully comprehend the questions, and are yet further from workable answers.