Monday, August 8, 2016

Steve Roth: How Perfect Markets Concentrate Wealth and Strangle Growth and Prosperity

The winners have us all playing a loser's game

Markets work best when there is a little bit of socialism and a little of capitalism. The research and maths shows this to be the case but it doesn't take a genius to figure this out, says Steve Roth (the maths can be done on a back of an envelope). In a perfect market the rich get richer while everyone else gets poorer and this reduces their purchasing power, so if we want more rich people it is best to vote for a social democratic system, but millions of people who aspire to get rich go and vote for the wrong party. 


Capitalism concentrates wealth. Ridicule Marx and his latter-day disciples all you like (I’ll help); he definitely got that right.

But capitalism is a big word with lots of meanings, and enough ideological baggage to fill a Lear Jet. Let’s talk about something more precise: perfect markets, with ownership, in which individuals compete with others to produce stuff, and store up savings. You can see this kind of perfect world in agent-based simulations like Sugarscape. Start with a bunch of sugar farmers trying to accumulate sugar in an artificial world, hit Go, and watch what happens.

Chart 1) Here’s what happens to wealth concentration (number of poorer farmers on the left, richer on the right):

Wealth is pretty evenly distributed at the beginning (top). That doesn’t last long. You can see the same effect in another Sugarscape run, here compared to real-world wealth distributions:

The dynamics are straightforward here: poorer people spend a larger percentage of their income than richer people. So if less money is transferred to richer people (or more to poorer people), there’s more spending — so producers produce more (incentives matter), there’s more surplus from production, more income, more wealth…rinse and repeat.

Chart 2) Why, then, aren’t we spending our lives on the right side of this chart? It’s a total win-win, right? The answer is not far to find. Nassim Taleb shows with some impressive math (PDF) what’s also easy to see with some arithmetic on the back of an envelope: if a few richer people (who dominate our government, financial system, and economy) have the choice between making our collective pie bigger or just grabbing a bigger slice, grabbing the bigger slice is the hands-down winner.

To summarize: perfect markets, left to their own devices, concentrate wealth. Concentrated wealth results in less wealth, and far less collective well-being. (You’ll notice that I haven’t even mentioned fairness. It matters. But I’ll leave that to my gentle readers.)


Matt Franko said...

No inclusion of the external sector here....

Gary Hart said...

Michael Hudson says that the neo-liberals have turned the concept of a free market around to make it mean free of government intervention whereas a true free market is one free of economic rent, monopoly, usury and rentiers. Those are two completely different concepts.

Bill said...

Taking a larger slice of the available pie is not necessarily better than increasing the size of the pie and taking more of it. Whether that is so or not depends upon assumptions, not on "impressive math" nor on back of the envelope ciphering.

Kaivey said...

Bill, as the pie got larger the people at the bottom got less. Your idea is propaganda.

Kristjan said...

IMO the framing is wrong to begin with. From MMT perception there is no perfect market or imperfect market. That's very different about MMT. You can't really talk about government nonintervention since the government has intervened to begin with. Most of the left is in neoliberal paradigm (Piketty etc.) when they talk about government not intervening. From MMT perception there is no free market. The mainstream view of free market needs to be abandoned. Concentration of wealth is a result of a political choice. Saying that capitalism leads to concentration of wealth is like saying that unemployment is a natural phenomena in capitalism. It is not, It is a result of certain government policy. MMT is not against capitalism per se, MMT just shows where the fault is. The political establishment really wants workers and political activists to be against capitalists. You might say that unemployment is natural phenomena in capitalism in a sense that Kalecki is talking about It. There are capitalists who want to have unemployment and their political lobby prevails.

Bill said...

Kaivey: "Bill, as the pie got larger the people at the bottom got less."

That may well be so in the Reagan-Thatcherite era. However, there was no mathematical inevitability about it. You cannot prove by math or logic that it had to happen.

Kaivey: "Your idea is propaganda."

There is no need to be insulting. Or do you mean propaganda in favor of the proper use of mathematics?

Bill said...

@ Kaivey:

As for Taleb's paper, Taleb states his assumptions up front and is properly circumspect in his conclusions. He notes that he does not deal with dynamics, and that he does not need to do so to reach his conclusions. One thing not dealing with dynamics means is that he does not address the question of economic growth nor the question of redistribution of wealth, either towards or away from the super-rich. He says nothing about any "choice between making our collective pie bigger or just grabbing a bigger slice," as you suggest.

Bill said...


Taleb does mention economic growth and states, "For the super-rich, one point of GINI causes an increase equivalent to 6-10% increase in total income (say, GDP)." However, he at no point offers any way of relating a change in GINI to a change in GDP, in terms of effort, cost, or anything else. In fact, his table at the end changes GINI while holding the mean constant.