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Monday, December 14, 2009


the hazards of wealth concentration

nathan's economic edge links to max keiser's interview with steve keen, which begins at 12:40.

i want to focus on one point brought up immediately after the start, where keen comments on the effect on velocity of the concentration of wealth.

If you have an economy with a certain stock of money turning over at a particular speed that's the level of output it can support. and if you then have a transfer of wealth from those who have to spend it very rapidly, like workers who turn their money over basically 26 times a year, and it goes into the hands of the bill gates' of the world ... then they spend far more slowly than that, turning over their accounts once every ten years, you actually slow down the rate at which money is turning over and [lower] the level of output it can actually support.

this is perhaps relevant to the postulation of the origin of the crisis forwarded by historian james livingston.

Look first at the new trends of the 1920s. This was the first decade in which the new consumer durables--autos, radios, refrigerators, etc.--became the driving force of economic growth as such. This was the first decade in which a measurable decline of net investment coincided with spectacular increases in nonfarm labor productivity and industrial output (roughly 60% for both). This was the first decade in which a relative decline of trade unions gave capital the leverage it needed to enlarge its share of revenue and national income at the expense of labor.

These three trends were the key ingredients in a recipe for disaster. At the very moment that higher private-sector wages and thus increased consumer expenditures became the only available means to enforce the new pattern of economic growth, income shares shifted decisively away from wages, toward profits. At the very moment that net investment became unnecessary to enforce increased productivity and output, income shares shifted decisively away from wages, toward profits. ...

So the "underlying cause" of the Great Depression was a distribution of income that, on the one hand, choked off growth in consumer durables--the industries that were the new sources of economic growth as such--and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s. By the same token, recovery from this economic disaster registered, and caused, a momentous structural change by making demand for consumer durables the leading edge of growth.

keen is offering that wealth concentration slowed the natural velocity of money by diminishing the savings available to consumers and concentrating it into pools of low-turnover investment capital. this trend of declining multiplicity was observable, as noted in the statistics kept by the federal reserve bank of saint louis. the diminishment of economic turnover (and real wages) was masked by the rising indebtedness and the associated growth of the FIRE economy -- until that debt boom collapsed, once debt service cost began to test the limits of output to support it. this is of a kind with livingston's view that the reduction in wages diminished real economic activity while supporting a capital markets bubble vulnerable to perturbation.

UPDATE: mark thoma offers bruce bartlett:

I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged.

read my blog, mr bartlett, and you would understand! increasing inequality of income distribution slows the velocity of money, increasing the need of counteractive debt/endogenous money creation and giving impetus to credit booms and their inevitable terminating crises.

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interesting to watch the pained realization in this country as we begin to conclude that the celebrated increase in living standards over the decades was mostly a charade. the items so celebrated as increasing the quality of life for the masses were little more than borrowed items loaned at usurious rates.

I suppose that observation is self evident to many folks but it seems to me that we are at a crossroads. we can endure either continued subjugation to the hamster wheel of debt, forgo those items that have become so dear to us, or appeal to the government to "correct" the problem. I suspect we'll get the latter whether we like it or not.

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I totally agree with the article. Seems like economies are like bicycles...inherently unstable, but still make forward progress. On one side is capitalism and its quest for efficiency and the resultant concentration of wealth. On the other side is the power of workers and labor. Extreme capitalism is subject to the same failure mechanism as is only a matter of whether the bicycle crashed to the left or the right.

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I totally agree with this article!

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We don't always agree, but I keep coming back to your blog, and now I know why. This post is an education for me, and the best commentary I've read here.

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in honor of your penchant for typing in all lower case i will post my comment in all lower case as well! funny thing is i do this for email all the time and it drives my friends nuts...

anyway, great article on the evils of wealth concentration. my personal favorite whipping boy is that all this "increased value of living" that everyone keeps talking about it just a bunch of cell phone toting, dvr'ing bunch of people looking for ways to occupy their time. so much for great advancement!

as an aside i have recently started a blog and am wondering if there is anyway that I could get added to your blogroll? any help would be greatly appreciated.

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This is a great article!
So very true. If wealth was distributed to workers it would grow the economy. Where would the medical industry be if it's money were not drained away by the insurance companies?

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