Rising asset prices generate a more unequal distribution of wealth by increasing the value of wealth that must be acquired to secure a position in the next wealth class. At the same time, the growing credit possibilities of rising asset values reinforce the floor preventing demotion into a lower social class. In light of asset price fluctuations, diversity and stability of the wealth portfolio, and the credit practices associated with such portfolios, thus have a defining role in both upward and downward movements across classes.Naked Capitalism
This asset dependence is specific to particular classes because they have different kinds of assets. Different kinds of assets have different credit implications and practices associated with them and these different credit implications and practices may ease cash flows in particular classes to prevent downward social mobility. But increasing asset inequality makes upward social mobility more difficult. In this way asset inflation and growing wealth inequalities restrict social mobility and give rise to industrial feudalism....
How Inequality Leads to Industrial Feudalism | naked capitalism
Hanna Szymborska, Senior Lecturer in Economics, Birmingham City Business School; and Jan Toporowski, Professor of Economics and Finance, SOAS, Visiting Professor of Economics, University of Bergamo, and Professor of Economics and Finance, International University College.
Originally published at Institute for New Economic Thinking
https://www.nakedcapitalism.com/2022/01/how-inequality-leads-to-industrial-feudalism.html
See also
MR Online
Originally published: Peoples Democracy by Sanjay Roy (January 23, 2022
https://mronline.org/2022/01/25/world-inequality-report-class-divide-explains-more-than-regional-divisions/
Marketplace
Kristin Schwab
https://www.marketplace.org/2022/01/24/how-much-labor-force-has-been-lost-covid-19/
3 comments:
Increasing asset prices just means we need to produce more assets.
Just like increasing car prices means we need to create more cars.
As ever, if the private sector is hoarding and not creating sufficient supply, then the public sector must step in and defeat the attempt to corner the market.
That is its job. A responsibility it seems to have shirked in recent times.
Increasing asset prices just means we need to produce more assets.
From the article:
Among Krzywicki’s most enthusiastic admirers was the economist Oskar Lange (1904-1965). Lange criticized Roosevelt’s New Deal and Keynesian intervention by arguing that such policies supported the monopoly positions of certain capitalist groups. In this situation the profit of the entrepreneur ceases to be the reward for a willingness to undertake risk and the efficient minimization of costs. It becomes simply a privilege arising out of economic concentration and government guarantee. Financial and industrial feudalism, he thought, was now a system of precisely defined group privileges, divided among social strata as rigid as any in medieval times. In such a society, incentives to progress disappear. More than this, such a society would revive the cultural and political superstructure of feudalism with every kind of discrimination, intolerance, fanaticism, and narrowness of outlook, with the state bureaucracy integrated with the oligarchy of haute finance and big business. Keynesianism, in his view, had to be tied to a progressive anti-trust agenda and full employment.
Peter F. Drucker also foresaw that the economies of scale would lead to concentration and monopoly power. He viewed that as an aspect of capitalism that is built into the pursuit of efficiency. What begins as competitive ends anti-competitive.
Marxian economists Paul Sweezy and Paul A. Baran called this monopoly capital.
John Cochrane weighs in to the discussion:
A lot of the rise in "wealth," and "wealth inequality," even properly defined and measured as the market value of net assets, consists of higher market prices for the same underlying physical assets. In turn, higher asset prices stem almost entirely from lower real interest rates and lower risk premiums, not from higher expectations of economic growth.
This raises a deep "why do we care" question. Suppose Bob owns a company, giving him $100,000 a year income. Bob also spends $100,000 a year. The discount rate is 10%, so his company is worth $1,000,000. The interest rate goes down to 1%, and the stock market booms. Bob's company is now worth $10,000,000. Hooray for Bob!
But wait a minute. Bob still gets $100,000 a year income, and he still spends $100,000 a year. Absolutely nothing has changed for Bob! The value of his company is "paper wealth."
We compare Bob to Sally, who earns $100,000 per year wages and has no assets. The distribution of income and of consumption is entirely flat. But the distribution of wealth was already concentrated: Bob had $1,000,000 of wealth, because we ignored Sally's human wealth, the present value of her salary. Now wealth inequality is 10 times worse, because we also ignore the higher capitalized value of Sally's human wealth.
But why should we care? Bob and Sally are both marching along unchanged.
Well, you say, I just assumed Bob didn't change consumption. He should sell some stock and go out on a round-the-world private jet tour. Or, what gazillionaires really do, he should start a foundation and give it away. But Bob won't do that for a simple reason. Originally, he wanted to spend $100,000 per year. Originally, if he sold his company for $1,000,000 and invested it at 10%, he could spend $100,000 per year. Now if he sells his company for $10,000,000, he can only invest that at 1% per year so the most he can spend is still $100,000!
So no, rising asset prices don't make people richer, they just pull forward future returns. I would add to that the capitalized value of pension payments, which at a lower interest rate, are worth more also.
source: Wealth and Taxes, part II - The Grumpy Economist
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