Here is the question of the day: What's Behind Gross Inequalities In Income Distribution?
I ask the question after reading three incorrect answers in the article Inequality and the Second Gilded Age on the Real-World Economics Review Blog.
Misguided Notions on Commodity Values
Writer David Ruccio kicks things off by stating "The only way you can answer that question is based on a theory of value — a theory of how commodity values are determined and how the resulting flows of value are distributed to different participants in the economy."
Ruccio gets off on the wrong foot because there is no such a thing as "commodity value" that can be measured.
Here are a few snips straight from chapter 2 "On the Measurement of Value" from The Theory of Money and Credit by Ludwig von Mises.
Although it is usual to speak of money as a measure of value and prices, the notion is entirely fallacious. ... Acts of valuation are not susceptible of any kind of measurement. ... But subjective valuation, which is the pivot of all economic activity, only arranges commodities in order of their significance; it does not measure this significance.Misguided Notions on Skill-Based Technology
The apparent prosperity of the developed nations of the world today has been sustained by credit expansion, not by savings. The West has been living like an heir to a great fortune, wasting away its inheritance. It is now bankrupt. The continuance of a whole way of life is now in danger of collapse, because it is becoming impossible to expand credit any further. The Chinese are in no better situation: their supposed prosperity will crumble when the policy of expanding credit in the West has to come to a halt and the markets which China has supplied fade away.Inflation Targeting Non-Solution
Fiat money is the child of the arrogance of human intellect, which has sought to invalidate the laws of human nature which have regarded the precious metals as money for thousands of years, and sought to substitute an intellectual construct for the real thing. Now we are going to pay for that arrogance.
What now? Nobody knows. Unquestionably, we are headed straight into fearful problems never seen before. At least, owning physical gold and silver may be help some of us survive.
Inflation Targeting at 2% a YearTake a good look at that first bullet point.
click on chart for sharper image.
Many bad things can happen with Bernanke's 2% inflation target.
- Wages do not keep up.
- Asset bubbles build
- Rising asset prices make it appear debt is sustainable
- Wage growth is disproportionate to debt
- Wealth concentration
- By the time bubbles are spotted it is already too late
- Recessions happen
The American mathematician Andrew Bartlett claims that “The greatest shortcoming of the human race is our inability to understand the exponential function”, to which I’d add that that shortcoming almost defines neoclassical economics. 2 percent per annum doesn’t sound like a lot, but over 36 years that means the ratio doubles, over 72 it quadruples, over 144 it becomes 8 times what it was, and so on.Three Credit Questions, Three Answers
Mish provides some nice graphs to illustrate this process.
For the record, the actual rate of growth of the private US debt to GDP ratio was roughly 2.9% p.a. from 1945 till 2008. That means that the ratio doubled every 25 years, from 45% in 1945 to 90% in 1970, 180% in 1995, and if it had kept going, it would have been 360% in 2020.
Instead it fell over in 2008, and is now going backward at a rate of knots. Here’s an extrapolation of the trend that the WEF says is “nothing unsustainable about”, from the time period they should have started their analysis—not 2000 but 1945—and focusing on the key problem—private debt:
“Nothing unsustainable about” it, eh? This naivety by neoclassical economists about growth and exponential processes in general is positively dangerous for the human race.
I’ll let Mish take over from here.