Andrew Lainton — How Inequality Harms Economic Growth Through Reduced Money Velocity – A Simple Model

Amidst Piketty fever it is useful to consider not just the issue of whether wealth become more concentrated over time but also the issue of whether this is economically harmful.

For the sake of the model below we will assume that wealth does become more concentrated over time. Actually I think this is more complicated and whether R>G depends on the state of the asset price bubble cycle – but the trend over the long run is for R>G.

With a steady rise in rentier income there may be a gap between the budgets of consumers and the price of fixed consumption assets (e.g. land on which homes are built) as those assets become ever more subject to oligopoly pricing and economic rent. This may require consumer to take out loans to up their budget constraint. But this by itself does not explain why this must harm growth. The loanable funds argument – debts = credits, advanced by Bernanke, Krugman etc. to state why this does not matter may have been crushed by the endogenous money crowd but the fact that there can be a net change in spending power from debt dynamics does not in itself explain why this must be economically harmful.

If there is a net increase in debt then by definition R will be increasing faster than G as those benefiting from capital accumulation don’t need to be so heavily geared in their investments. But in terms of economic growth this is begging the question – is concentration of wealth harmful or not.? Yes it is and I think that there is a simple reason why....

If R>G then increased concentration of assets will increase economic rents. Consumers will have to save longer to buy the same large ticket goods like houses, cars etc, go to college etc. As they will have to defer spending for longer monetary velocity slows. It is really is as simple as that. 

Decisions, Decisions, Decisions
How Inequality Harms Economic Growth Through Reduced Money Velocity – A Simple Model
Andrew Lainton