Wednesday, October 27, 2021

OXFAM — 26 billionaires had as much as the world’s bottom 50%

Real-World Economics Review Blog


Matt Franko said...

The problem is income not wealth morons…

The problem is with a flow not a stock…. the first derivative of the balance not the balance…

Tom Hickey said...

Uh, stocks are the outcome of net flows. Those stocks did not appear out of nowhere. In addition, the are unearned income, the result of marginal pricing of equity. Most of these gains are result from increased capitalization of assets in markets. Under capital gains, gains are taxed at a different rate that earned income because of law and regulation. This is scam that taxes work and not economic rent as unearned gains (flow) that magnify wealth (stock).

Matt Franko said...

“Uh, stocks are the outcome of net flows”

Reification error … try again…

Tom Hickey said...

Net flow is change in a stock over a period. It can be considered in terms of an net amount of change in a period or a rate of change over time. These are entries on accounting statements under various categories, and reports derived from them, not "things," although they are sourced, in this case differently. The bathtub analogy is only an analogy. No problem.

Where is a rectification error is in thinking that because taxes and debt "fund" spending on a sources and uses basis that taxes and debt therefore "pay for" spending, when institutional analysis shows clearly that they do not and cannot.

There is a difference between earned income from work and gain through not earned by work, that is, economic rent, in this case through financialization. It's called "earning as you sleep" colloquially in RE as land value increases the value of property independently of improvements. And this is supposedly the best way to "earn." This is gain from economic rent.

One can argue that this phenomenon of capitalism is the result of knowledge-application, risk-assumption, value-creation, etc., or the basis of free enterprise, or all of these and more, but it is still essentially "free money" from the "magic" of financialization in the case of the billionaires. That is to say, the capitalization rate increases against the real asset, or "fundamentals" without substantial change in the fundamental asset. This is the result of an expectations premium or discount rather than corresponding change in value of real assets.

It generally comes from economies of scale, capital intensity, intellectual property, etc. that lead to concentration of capital and limit competition.

Under capitalism, it is assumed that people are rewarded proportionately relative to contribution, but this level of difference is difficult to justify as fair. This was evident during the GFC when some were declared systemically important, hence, too big to fail while "the little people" were hung out to dry. We are now dealing with consequences of that socially and politically in addition to economically.

And this is just on the economic level, disregarding the social and political consequences. There is a reason that Marx is coming back in vogue. Many folks are no doubt thinking WTF? and some are saying it out loud.

Matt Franko said...

I don’t care how much Musk’s shares are worth…. It has nothing to do with me.., Nobody cares…

This new Democrat proposal is same as dumb commie Bernie’s statement that we could have clean water if we taxed Bil Gates…

That or they came up with this in the last week because of the announcement from Trump that he is going public with that SPAC and they don’t want him to get all the wealth that portends..,

Ahmed Fares said...

Some pushback against the Marxists.

Sharing the Benefits of Innovation

Less well-known than Nordhaus’s work on climate change, but every bit as interesting and important, is his research on the benefits of innovation. In his 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement,” Nordhaus reported this startling finding about the non-farm sector of the modern U.S. economy: “Only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”

Specifically, producers, on average, capture a mere 2.2 percent of the total benefits of their successful introduction into markets of technological advances. A whopping 97.8 percent of those benefits are enjoyed by people each of whom as a consumer did nothing other than exercise his right to spend his money on those options that he judges best for himself.

While each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality.

If the social benefits of the typical successful innovation were a pie divided into 45 equally sized slices, those who creatively figure out how to innovate, and who bear the risks of doing so in competitive markets, are content to allow those who play no role in the entrepreneurial-innovative process to grab 44 of the 45 slices. The persons responsible for making the pie in the first place ultimately receive as payment for their efforts only one slice.

That’s quite a bargain for humanity! It means that if, say, Jeff Bezos’s innovation is typical of those studied by Nordhaus (and there’s no reason to believe that on this front it isn’t), then Bezos alone is responsible for making his fellow human beings nearly $6.5 trillion dollars better off as a group. That’s about $840 of additional economic well-being for each and every man, woman, and child alive today on the face of the globe.

Because of Bezos’s efforts, you are $840 wealthier. So is your spouse. So is each of your children. So is your neighbor. So is your ne’er-do-well cousin Marty. (Actually, if you live in America, the amount of additional wealth that Bezos has bestowed on you is almost certainly greater than $840. The reason is that people who are most integrated into the global economy get a larger per-capita share of the benefits of market innovations than do people who are less integrated. The $840 figure is derived from dividing $6.5 trillion by 7.7 billion – today’s global population. But because the peoples of North Korea, Cuba, Turkmenistan, and other economically unfree countries enjoy very little, if any, advantages from market innovations, a more precise calculation of each Americans’ per-capita benefit would require that $6.5 trillion be divided by a number smaller than 7.7 billion. But we need not here do this calculation.)

A Parade of Benefactors

And yet Jeff Bezos is just one entrepreneur among a multitude. A handful of these entrepreneurs, like Bezos, are famous, but the vast majority are unknown. Do you know the name of the inventor of the shipping container that dramatically reduced the cost of shipping cargo? I’ll tell you: Malcom McLean – who, when he died in 2001, was worth $330 million. McLean, therefore, likely increased humanity’s collective well-being to the tune of about $15 billion, or by just about $2 for every person alive today.

source: Capitalists Get Rich but Consumers Capture the Benefits

Tom Hickey said...

For the second time, William Nordhaus? Really?

Ahmed Fares said...

Yes, because he makes a good argument which I agree with.

Tom Hickey said...

Nordhaus argues that after technology has increased productivity and made workers no longer necessary but expendible, the then disposable workers should thank the owners of production ("entrepreneurs) for the rise in their standard of living even though they are unemployed or underemployed because the ownership class created a system that allows them to claim the gains of productive increase for themselves and their heirs. I don't see that as being a convincing argument.

Marx admits that capitalism has benefited worker more than preceding economic systems but that it is not the only alternative or the final system. Nordhaus is an apologist for TINA.

Ahmed Fares said...

The argument being made here is that consumers capture 98% of the value that entrepreneurs produce without any effort on their part, which is the same as a rise in the real wage. That is the definition of unearned income.

As an aside, my interest in economics began many years ago when I read a book titled: Naked Economics: Undressing the Dismal Science by Charles Wheelan. As I recall, he asks why it is that a busboy in Mexico can cross the border into the US, and suddenly he can earn a multiple of his previous wage for doing the same job. Or more recently, discussions about why a barber in the US makes more than a barber in Shanghai. I learned later that average wages in an economy are determined by the average productivity in that economy. This is why I've never believed in the labor theory of value because most of the value I receive have nothing to do with my own labor.

As for unemployment and underemployment, that is a result of government policy. We've being industrializing for over two hundred years, and we still have jobs. Though we do need more government help when the change happens too quickly, which a JG would solve.

As for other modes of production, it's not the socialism has been tried and wasn't done right but that it contains basic flaws that socialists don't want to deal with, like the problems of incentives. You can get people to work under socialism, but you can't get them to work that hard. The workers still put in their 40 hours a week, but they go home with less.

My first experience with socialism was the group project in school. I found a quote by someone who has had the same experience:

For the social loafer, the group experience couldn’t be more relaxing. They receive a high grade for someone else’s work, and they didn’t have to shed a drop of sweat during the process. For the hard worker(s), you’ve had to complete double (or more) of your share of the work, to the point where it pains you to put their name on the cover page to receive the same mark.

As the saying goes “You can lead a horse to water, but you can’t make him drink.” As a group member, you can divide the work perfectly so that everyone has to complete the same amount, but if one member under-performs or doesn’t perform at all, your group mark will suffer.

The group project is socialism in a nutshell.

Tom Hickey said...

The argument being made here is that consumers capture 98% of the value that entrepreneurs produce without any effort on their part, which is the same as a rise in the real wage. That is the definition of unearned income.

Complete nonsense. Consumers pay for the value they receive. That is what exchange is about. Producers "capture the value" in the money they receive. The surplus value is profit over expenses, including management and everything else that goes into production of goods. Profit goes to equity holders that are passive in the process of production but get to consume a disproportionate share of production based on ownership alone.

Tom Hickey said...

My first experience with socialism was the group project in school.

More nonsense. This is not "socialism." You are talking about a team, not an economic system. This is an issue with all teams whose members are not equally qualified and motivated and the reward is distributed equally among the team.

Ahmed Fares said...

Consumers pay for the value they receive.

No they don't. They get more for what they pay with each hour of labor over time. That's what Baumol's cost disease is all about.

Baumol's cost disease (or the Baumol effect) is the rise of salaries in jobs that have experienced no or low increase of labor productivity, in response to rising salaries in other jobs that have experienced higher labor productivity growth.

Teachers should get at least a 2% yearly increase in wages to cover inflation. Instead, they get a 3% increase in wages to account for that 1% increase in productivity. If the entrepreneurs are capturing all the gains from productivity, how did the teachers get that extra 1%?

A gain in the real wage is the opposite of exploitation. How can the arrival of an entrepreneur enrich you and exploit you at the same time? These are polar opposites.

Peter Pan said...

This is like claiming a farmer should get a cut of all economic activity, since they are the ones who fed you.

Tom Hickey said...

@ Ahmed

How come workers have relative stagnant wages relative to the top of the town. Sure looks like the labor share is deficient relative to the owners passive income and capital gains resulting in both an income and wealth gap,

Teachers are not a good example because services are relative low in productivity growth since they are based on work time rather than technological innovation. The only reason teachers get what little they get is on account of teachers' unions, which is the complaint of the right-wing that argues that teachers are overpaid.

Owners are reaping the reward of tech disproportionately based on the distribution of income and wealth, which is at a high historically and getting worse year over year. This is reflected in Gini coefficients.

Search on "marginal productivity and just deserts." There is raft of argument that this is erroneous.

Lars Syll, New study shows marginal productivity theory has only a ‘negligible’ link to reality

Ahmed Fares said...

re: the superstar effect

Juan Diego Florez cemented his reputation as a top operatic tenor during a 2008 performance of Gaetano Donizetti's La Fille du Regiment. Among professional singers, Donizetti's masterpiece is known as "the Mount Everest of opera"; a reputation due, almost entirely, to a devilishly tricky aria, "Ah! Mes amis, quel jour de fete," that arrives early in the first act. The aria demands the tenor to hit nine high C's in a row — a supremely difficult feat.

In his 2008 performance of Donizetti, at the Metropolitan Opera House, Florez hit all nine notes. The acclaim was so overwhelming that he was summoned back to the stage for an encore, overturning the Met's long-standing ban on the practice.

As a top opera singer, we can assume that Florez does well for himself financially (likely on the order of 5-digit paydays per performance), but not lavishly well. Put another way: he's well-off but not wealthy.

Then there are the superstars.

In 1972, a young tenor by the name of Luciano Pavarotti also made a name for himself performing Donizetti at the Met. Like Florez, he too hit the high C's. But there was something extra in Pavarotti's voice. The audience at the Met in 1972 did more than demand an encore from Pavarotti, they weren't content until he had returned to the stage seventeen times! In writing about Florez's 2008 performance, the New York Times noted: "If truth be told, it's not as hard as it sounds for a tenor with a light lyric voice like Mr. Florez to toss off those high C's…[I]n the early 1970's, when Luciano Pavarotti…let those high Cs ring out, that was truly astonishing."

In other words, both Florez and Pavarotti are exceptional tenors, but Pavarotti was slightly better — the best among an elite class. The impact of this small difference, however, was huge. Whereas we estimated that Florez was well off but not wealthy, when Pavarotti died in 2007, sources estimated his estate to be worth $275 to 475 million.

In a 1981 paper published in the American Economics Review, the economist Sherwin Rosen worked through the mathematics that explains why superstars, like Pavarotti, reap so many more rewards than peers who are only slightly less talented. He called the phenomenon, “The Superstar Effect.”

Though the details of Rosen's formulas are complex, the intuition is simple: Imagine a million opera fans who each have $10 to spend on an opera album. They're trying to decide whether to buy an album by Florez or Pavarotti. Rosen's theory predicts that the bulk of the consumers will purchase the Pavarotti album, thinking, roughly: "although both singers are great, Pavarotti is the best, and if I can only get one album I might as well get the best one available." The result is that the vast majority of the $10 million goes to Pavarotti, even though his talent advantage over Florez is small.

Once identified, The Superstar Effect turned up in a variety of unexpected settings, from the sales of books to CEO salaries.

source: From CEOs to Opera Singers – How to Harness the "Superstar Effect"

Ahmed Fares said...

More on CEO pay and the superstar effect,

How Superstars’ Pay Stifles Everyone Else

But broader forces are also at play. Nearly 30 years ago, Sherwin Rosen, an economist from the University of Chicago, proposed an elegant theory to explain the general pattern. In an article entitled “The Economics of Superstars,” he argued that technological changes would allow the best performers in a given field to serve a bigger market and thus reap a greater share of its revenue. But this would also reduce the spoils available to the less gifted in the business.

Top C.E.O.’s are not pop stars. But the pay for the most sought-after executives has risen for similar reasons. As corporations have increased in size, management decisions at the top have become that much more important, measured in terms of profits or losses. Top American companies have much higher sales and profits than they did 20 years ago. Banks and funds have more assets.

With so much more at stake, it has become that much more important for companies to put at the helm the “best” executive or banker or fund manager they can find. This has set off furious competition for top managerial talent, pushing the prices of top-rated managers way above the pay of those in the tier just below them. Two economists at New York University, Xavier Gabaix and Augustin Landier, published a study in 2006 estimating that the sixfold rise in the pay of chief executives in the United States over the last quarter century or so was attributable entirely to the sixfold rise in the market size of large American companies.

source: How Superstars’ Pay Stifles Everyone Else

Ahmed Fares said...

Check out the chart in the link below to see how digital technology has enabled the superstar effect in the newspaper industry.

Average is Over: Newspaper Edition

Joshua Benton at the LA Times illustrates average is over for newspapers. On the left the print circulation of major newspapers in 2002. The NYTimes is the leader but other newspapers follow closely behind in a slowly decaying curve likely related to city size. On the right, 2019 digital subscriptions. The NYTimes dominates. Only the Washington Post is even in the same league (The Wall Street Journal, however, should also have made Benton’s list at 1.5 million digital subscribers.) Without classified ads and other local information, for which there are now multiple online substitutes, there isn’t a big demand for local newspapers. News is now national and only a handful of newspapers can survive at national scale. Moreover, the few who can survive at national scale are now so much better than their competitors precisely because they can afford to be better.

Ahmed Fares said...

From the National Bureau of Economic Research:

[bold mine - there's a pdf file in the link]

Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth

Digital versions of labor and capital can be reproduced much more cheaply than their traditional forms. This increases the supply and reduces the marginal cost of both labor and capital. What then, if anything, is becoming scarcer? We posit a third factor, ‘genius’, that cannot be duplicated by digital technologies. Our approach resolves several macroeconomic puzzles. Over the last several decades, both real median wages and the real interest rate have been stagnant or falling in the United States and the World. Furthermore, shares of income paid to labor and capital (properly measured) have also decreased. And despite dramatic advances in digital technologies, the growth rate of measured output has not increased. No competitive neoclassical two-factor model can reconcile these trends. We show that when increasingly digitized capital and labor are sufficiently complementary to inelastically supplied genius, innovation augmenting either of the first two factors can decrease wages and interest rates in the short and long run. Growth is increasingly constrained by the scarce input, not labor or capital. We discuss microfoundations for genius, with a focus on the increasing importance of superstar labor. We also consider consequences for government policy and scale sustainability.

Ahmed Fares said...

Talent and the Winner-Take-All Society

Rising inequality reflects the growing importance of winner-take-all markets.

Winner Take All

In our forthcoming book, The Winner-Take-All Society, Philip Cook and I suggest that runaway professional salaries are the result not of a breakdown of competition but of the spread of markets in which the value of production depends primarily on the efforts of only a handful of top players who are paid accordingly. For example, even though thousands of people are involved in making a major motion picture, the difference between commercial success and failure usually hinges on the performances of only a few--the director, the screenwriter, the leading actors and actresses, and perhaps a few others. Similarly, even though thousands of players compete each year in professional tennis, most of the television and endorsement revenues in the industry are attributable to the draw- ing power of just the top ten players.

Winner-take-all has long been a feature of markets in entertainment and sports. But in recent years, many other fields have adopted the winner-take-all payoff structure. There are two reasons for its proliferation: developments in communications, manufacturing technology, and transportation costs that have enabled the most talented performers to serve ever broader markets, which has increased the value of their services; and changes in implicit and explicit rules that have led to much more open competition for top performers, which has made it more likely that they will be paid their economic "value" as determined by the marketplace.

On the first point, consider the recent evolution of the automobile tire industry. Once a firm that produced the best tire in northern Ohio was assured of being a player in at least its regional tire market; today, sophisticated consumers choose from among only a handful of the best tire producers worldwide. Corporate performance has always depended strongly on the efforts of a handful of people at the top, but because of the broader scope of their markets, the leaders of the surviving companies have much greater leverage than their earlier counterparts did.

Ahmed Fares said...

Vive L’Entrepreneur

If Entrepreneurs are leaders willing to take risks and exercise initiative, taking advantage of market opportunities by planning, organizing, and employing resources, often by innovating new or improving existing products, then Napoleon Bonaparte had these qualities in bucket loads.

According to the Duke of Wellington his appearance on the battlefield was worth forty thousand men.

Well, there was the whole Russia thing...

Tom Hickey said...

Digital technology is definitely a game-changer that needs to be address. A lot of inequality in compensation result from gaining access to the right group, and in many cases it is far from equal opportunity. But the superstar effect is something else entirely where reward is based not so much on contribution as mass market distribution. This is latest iteration of a trend previously but magnified by digital distribution and rights to intangible property. The result is rent extraction far beyond contribution to productivity in an economy.

This phenomenon is a creation of institutional arrangements rather than extraordinary talent in that previously there were extraordinarily talented people and industries that profited from using their talent, but at nowhere near the same level of compensation who to the scale that digital media enables.

The logic of capitalism is based on capital formation being necessary for growth. So, capital accumulation is prioritized over other factors through institutional privilege like intangible property rights, lower tax burden for capital gains over work, etc.

But with digital media, there is no signficant increase of productive capital goods The beneficiaries are winners in a game that has been created to increase profits for owners of digital media. Not that Facebook, Google, etc, are not investing in banks of servers and associated equipment, paying big energy bills, etc., but these are not capital goods in the ordinary sense of producing commodities for exchange. Similarly, financial institutions and the outsized pay scale there.

This phenomenon is not only growing in the US but also replacing the industrial base, in that under capitalism in open economies, it makes more economic sense to export industry offshore and import the embedded labor involved. This gives the lie to the necessity of encouraging domestic capital formation for growth. Instead, there is increase in wealth at the top and an erosion of the capital base.

These are some things that need to be considered as we enter a digital age.

Tom Hickey said...

Interesting to compare Jeff Bezos and Elon Musk in this regard.

Amazon began as a platform that that did not produce anything but served as a retail marketplace given tax advantages to incubate it that were not rescinded until it became so large that states noticed declining revenues from sales taxes. Since then, Amazon has been vertically integrating, producing its own products based on privileged information and developing its own delivery system. It can be argued that Amazon serves as a venue that encourages others' production, but it produces almost nothing of substance itself.

This makes one wonder whether companies like Amazon that don't add to the productive industrial base should be accorded the same privileges accorded capital formation through investment in domestic industry. Same for Walmart. They are just involved in moving stuff around, which used to be done by mom and pop stores. Efficiency increased lowering costs, but both Sam Walton and Jess Bezos's strategy was similar — low prices and low wages.

On the other hand, Elon Musk's ventures are actual entrepreneurship involved in production, at least for the most part so far. Starlink, a project of SpaceX, is an internet service provider, so it is not involved in goods production but rather a venue for digital media. It is a spinoff of SpaceX's capabilities.

Tom Hickey said...

According to the Duke of Wellington his appearance on the battlefield was worth forty thousand men.

Figuratively. Those "40K men" didn't do any of the fighting. Similar with officers in the military. They don't do the fighting unless they have operational tasks. Same with managers. They may enhance the production process, but they don't produce anything.

Yet, hierarchical organization beats horizontal every time. It is the ancient military model that history shows has worked. Combat used to be hand to hand, one on one. The Roman phalanx, the forerunner of the modern tank warfare, gave the legions their edge over the tribal warriors they faced in subjugating Europe.

Peter Pan said...

Too bad the superstar effect doesn't apply to computer operating systems.

Tom Hickey said...

Too bad the superstar effect doesn't apply to computer operating systems.

That's really a different matter concerning straight up monopoly that could be addressed using anti-trust legislation, as far as I can see not being a lawyer.

See Jeffrey A. Eisenach and Thomas M. Lenard, The Microsoft Monopoly: The Facts, the Law and the Remedy

Tom Hickey said...

Oops. Forgot link.

See Jeffrey A. Eisenach and Thomas M. Lenard, The Microsoft Monopoly: The Facts, the Law and the Remedy

Peter Pan said...

DOS/Windows became dominant because they were first on the market. A similar situation developed with AutoCAD, which became the industry standard. In the early days of the internet, I chatted with someone who claimed to be the founder of AutoCAD. He said the best strategy is to get the software out, and to quickly fix the problems reported by users.

There are better alternatives to Windows and AutoCAD, yet they struggle under obscurity. Businesses still run systems based upon 30 year legacy code.

Consumers share part of the blame for the domination of one market player over another. Is MySpace an inferior product to FaceBook? Is Rumble that much worse than YouTube?

Consumer herd behavior kills competition, and by extension, innovation. In the case of social media, censorship is the price that is being paid.

Peter Pan said...

See Jeffrey A. Eisenach and Thomas M. Lenard

21 years later, and their hold on the desktop PC market remains strong. Too few power users, too few gamers using Linux, too many businesses competing for customers who run Microsoft products and platform.

The promotion of Windows 11 actually suggests you buy a new PC to run it. The arrogance of this company knows no bounds.

Ahmed Fares said...

DOS/Windows became dominant because they were first on the market.

Yes, it's that first mover advantage which leads to a network effect.

I thought of installing Linux, but my tax package won't run on it. I just checked and got this on a search:

Is there a Linux compatible TurboTax version?

No, but you can install vmware on linux, then install windows under vmware, then run turbotax on the vmware windows client. Linux is free, and vmware is free as long as you are using it as a private individual, and not on the job.

Not really "free" if I have to learn all this stuff. Also, I would still need Windows.

Peter Pan said...

The makers of TurboTax have little incentive to release a Linux version. Not enough customers.

In place of an emulator, you can install Linux as a dual boot, which gives you the option to boot to Linux or Windows.(As long as ACPI is enabled in your BIOS)

Peter Pan said...

Btw, I use UFile, which is browser-based. Should be no problems running in a browser on Linux.