Friday, October 16, 2009

Plutonomy, and the bliss cycle

This morning, Economist Andrew Jackson posted to the Progressive Economic Forum a brief article about the idea of Plutonomy. This is defined as an increase in spending resulting from extreme concentration of wealth.
He writes:
The core of the argument is that countries which have shown an extreme concentration of income and wealth at the very top of the distribution - the US, Canada and the UK are the examples - also have, as a result, very low national savings rates.
The Citigroup report itself argues that it is high spending by the wealthiest that drives this low savings rate, as the wealthiest acquire larger debts to support their lifestyles. But Jackson cites economic studies that seem to contradict this: A Goldman Sachs (why is this the best sauce?) report that the wealthiest actually have an 11% savings rate (while the Average American doesn't have a positive savings rate).

Jackson goes on to argue that it is the Keynesian view (n.b - It isn't really something Keynes thought up but an older idea) that the savings rate increases with wealth, and that the low savings rate of countries with high wealth stratification (US, UK, Canada) "would seem to be at odds" with this. He then asks:
So the question is - what are the implications of hyper income inequality for aggregate consumption and savings?
By way of answering this question, a discussion of measurements and implications is warranted before discussion of broader theoretical questions.

There is no contradiction here between the savings theory and the low rate of savings in stratified economies. A careful assessment of the definitions involved reveals that the entire discussion is one of apples and oranges. The theory of savings is not a relative income theory. It does not argue that those who are at the top save more by virtue of their position, but rather by their income relative to the cost of living. Thus, measuring stratification alone does not provide an argument for some level of savings. Aggregate consumption can increase without reducing savings in aggregate, so long as all the new consumption comes from economic growth. The same holds true for aggregate savings, and for decreases in consumption or savings during recession. The savings rate may change while holding one of the variables fixed.

In particular, this is relevant in the USA, where real wages have been on the decline. If we posit a cost of living in the United States that has gone up moderately over the decades, and then concentrate all the gains in GDP in the hands of the few, it becomes clear how the average savings level can decline. The increased savings of the relatively small class of the wealthy could very easily be eclipsed by the decreased savings of the very large class who are now saving much less due to declining real income.

No modern theory argues that savings habits are uniquely determined by income. There are always a variety of factors. Government inducements to save (such as tax credits or penalties), lending and investment regulations, cultural attitudes, market conditions, etc. all play a part in determining the savings rate of a society. These factors are not uniform either - they can be different for the wealthy than the poor. The U.S. has particular inducements to invest, reinvest, purchase property, etc. written all over in its tax code, so it is logical to see a lower level of savings here. Also, these three nations are toward the more capitalist end of the economic spectrum when compared to other westernized nations, adding another factor of differentiation: savings is also a function of economic security, which is arguably in a long term crisis in these countries (savings is a rate, thus it is more strongly correlated with gains in economic security and vice versa due to fewer social safety nets in more laissez-faire economies).

There is also the question of what constitutes savings - it seems that a proper definition of savings will include long term appreciating assets purchased with loans as savings. A middle class person's house is that person's net worth. (S)he is clearly saving by paying money toward the home loan. But, when measuring consumer debt and savings rates, mortgage debt counts against savings.

So, from an experimental/empirical perspective the problems of measurement make the question difficult to answer given the typical methods of economic measurement. It is not so much that these measurements are inadequate, but that they are conceived from a perspective that is too limited in time, context, and incidental economic conditions. Thus, the methods of measure fail to achieve the universality that is necessary for them to be used for analysis outside of the evidence from which they were conceived. They are objects which only exist "in situ" but depend too much on unexamined assumptions to ever exist as general metrics. This is itself evidence of the limits that our naive doxic modalities place on the development of nondynamic social sciences. We suffer acutely from this in the United States because our idea of tradition in the political sphere is skeptical and static.

The question, of course, can still be answered in a theoretical sense even when the facts are elusive. Unfortunately this theoretical issue requires a critique of the concept of productivity that illustrates the economic trade-offs that technology poses. The final result of the critique will show that productivity gains cannot be expected to drive economic growth beyond a certain threshold. For sake of brevity, I will not include natural resource limitations or negative externalities like pollution or anomie. When general economic growth stops, the owners of the firms will continue to grow their own incomes through the same process of productivity increase, only now the result is no longer positive for the economy as a whole, meaning a period of stratification begins. Eventually the owners will also begin to lose money, and a period of random behavior follows. Hyper-income inequality only occurs during these last two periods, and it is relieved only by programs of wealth redistribution or failures of massive asset classes owned by the wealthy. The consumption and spending behavior of the masses during these two periods depends on the presence and efficacy of various social programs. The implication of hyper-income inequality to aggregate consumption and savings patterns is therefore not causative, but rather a symptomatic relationship.

Since income is a portion of the value of production, with the total income equal to total cost, the principal question of income distribution seems to be the distribution of the income from each unit sold. The individual cannot maintain the same level of income at the same level of productivity if his share of the unit price declines. From a single-firm perspective, the individuals employed may still have increasing incomes so long as the gains from increased productivity are distributed between workers and owners. The lot of the many does not improve when productivity gains are not matched by incremental increases in wages. Prices may fall, but price decreases cannot make up the difference beyond small shifts. A person's bills, rent and car payment will not decrease, nor can services not subject to productivity gains become more affordable. A steady increase of wages in parity with productivity gains is appealing, in part because it satisfies the basic definition of sharing that we learn in Kindergarten.

However, if one analyzes productivity gains from a macroeconomic perspective, this amelioration proves insufficient. Assume a market that perfectly clears. Now, consider that one additional good is produced in that market through a productivity gain. This event must necessarily lead to one of three changes:
  1. The good is sold at listed price and so aggregate savings decrease.
  2. Prices decrease, stimulating demand to sell that one additional good.
  3. The good goes unsold (or is expected to not sell and therefore never produced).
Whenever Case 1 occurs, savings decrease by the simple fact that this money would be all savings were it not spent on the purchase. If a different purchase was preempted in order for this purchase to occur, this contributes only to case 2 or 3 in the market for the other good. Case 3 can happen frequently in the short run, but in the long run it occurs only after the exhaustion of case 2. The price decreases, as described above, do not endlessly benefit the economy, as the increasing relative cost of services that cannot be automated eventually exhausts the balancing effect of these decreases. Furthermore, price decreases and the accumulation of unsold inventories create incentives to disinvest from the industry. Though the argument is not yet complete, for sake of clarity at this point the equilibrium production level for that industry has increased slightly and moved toward a lower price. The proportion of decrease in price will depend on the degree of competition in the industry - the single firm has an incentive to push for price decreases in order to capture a greater portion of the market, but in oligopolistic or monopolistic settings there is little or no incentive to lower prices, respectively. Prices, in any event, are not important for the discussion at hand, being significant only in their changing of consumption habits which all do the same things, relative to my conclusions, anyway.

To a certain degree, we are assuming that the gains in productivity are shared with the workers. This implies that the additional profits from production will produce a demand stimulus. However, this demand stimulus is limited to less than the revenue gain of the firm (because the remainder of increased revenue must go toward the owner). This quantity is also reduced by any decreases in price. The demand stimulus is therefore always insufficient to absorb the higher quantity of goods - therefore savings decrease and/or other parts of the market experience reduced sales.

Through various mechanisms the profits of the owner become investments into industry. The degree to which these new investments become sources of economic growth depends on the existence of new or possible industries which would compete favorably for consumer dollars with the existing industry. For our purposes, these industries pay wages but do not produce any competing goods yet - they are "start ups". In combination with the other sources of stimulus thus far, we have an equation (in dollars):

Increase in wages + reductions in savings + reductions in sales of other goods + wages from new industry = increase in sales of a given good.

Here I will posit a few constraints in the form of bliss points toward which consumers trend. Consumers have a "variety of goods" bliss point which determines the degree to which new industries will eventually succeed. Consumers have a "total goods" bliss point which determines that eventually the equation trends toward "Reductions in sales of other goods = Increase in sales of a given good", i.e. good substitution. When wages increase, increases tend to affect less than the entire workforce, and so create increases in savings that in turn cause a drag on sales increases. So long as the entirety of productivity gains express themselves through wage increases and new industries, these constraints will eventually come into full effect.

The corresponding situation when sales of a given good are not increasing is given by the same equation. We simply set the right side to zero or a negative. In this situation, gains in productivity lead only to decreases in the total labor utilized on a particular good, and possibly increases in other goods production, wages from new industry, or savings.

Eventually, however, the aggregate of all of these markets for particular goods will "zero out" (with balanced levels of increase and decrease typical of any equilibrium situation). Thus, economic growth is culturally limited by the bliss points - the accepted level and variety of consumption within the society. Therefore, the transformation toward a consumer culture is necessary as part of the package of long term economic growth. However, such a culture is not necessarily a more pleasant one to live in; and it is likely that there is a limit to any possible bliss point in terms of quantity and variety. Thus, the first stage of "growth" comes to an end.

The onset of stagnation gives rise to (and is accelerated by) the accumulation of wealth by the richest classes. Wealth becomes concentrated at the stagnation point because from this point forward, productivity gains lead to no further economic growth, and thus there is no sales growth to divide between worker and owner. The entirety of the productivity gain is thus expressed through the cost saving, i.e. the reduction in labor utilization. Thus, the productivity gain leads only to profits. These profits will see limited expression through new goods that have narrow or nonexistent profit windows. This is the second stage, the "stagnation" period.

This can only occur if the tax rates on the wealthiest classes actually permit the unlimited concentration of wealth. Where tax rates are progressive, they can slow this process, but can't really halt it. Only where there is no incentive whatsoever to acquire wealth beyond a certain point (either a 100% threshold on income tax or a wealth tax that creates an effective maximum wealth) will this process not occur.

In any event, the lack of meaningful investment opportunities for the newly accumulated profits leads the wealthy to behave erratically after some time has passed within the stagnation period. All manner of investment schemes will be invented in the vain hope of providing some means of profit. A stiff competition will arise that drives competitors to many tricks in an effort to gain advantages over each other without resorting to the horrors of the price war. This is the "erratic" stage.

In most economic situations (and I am still speaking theoretically here, even though this is virtually a statement of obvious fact), the system of competition is not perfect or "pure". Typically, the producers have a certain degree of agreement between each other on production levels. A complex system of laws always accompanies economies for the purpose of enforcing against unfair trade practices and other abuses. Systems also exist to protect workers and consumers. The economy is therefore managed synthetically or "by design". During the worst of times, blame is passed around like a hot potato and it is no wonder that systems of prediction break down - they were based on what politicians, corporations, and other power players wanted people to believe but they were never the whole truth. Of course, the people involved in these simplifications do not have a total awareness of what they have done, and so are somewhat helpless when real objectivity is needed. Ergo, amok.

At this juncture the various economic stages can be expressed as the growth stage, the stagnation stage, and the erratic stage. The cycle is allowed to repeat as a new generation rises up with a new set of consumerist indoctrinations, allowing the entire system to achieve a higher degree of consumption. It is not a business cycle, but a bliss cycle. The driving factor is the revolution in consumer purchasing patters enabled by the development of higher degrees of dependence on material objects for quality of life. In particular, the ideas that are lost in this material transformation are self-sufficiency, charisma, and spirituality. It is also worth noting that as these things develop, new levels of productivity are realized, creating "better" goods than what was available before. But are they really "better"?

The loss of self-sufficiency is the loss of knowledge and skill in daily crafts, routines, and handiwork, and the dependence on various material objects that cannot be readily produced by the individual or immediate community. The person becomes dependent on distant parts of the economy for his very existence. A person cannot survive in much of America without a car, and this dependence on automobiles ensures a much higher level of total economic output than what we would otherwise have. But the individual cannot produce his own food, clothing, grooming products, bedding, housing, or virtually any other thing in the modern economy. Therefore, these must all be purchased. This is a major source of growth.

The loss of charisma is the loss of the appreciation of other humans in our daily lives. It is the loss of free or inexpensive means of entertainment rooted in the appreciation of the beauty of other humans. Storytelling is replaced by live theater. Live theater is replaced by books, radio, eventually movies and television. Even the idea of beauty is replaced: it is no longer a particular girl or boy in the village, town, or city, but the digitally retouched famous person. Ideas discussed between individuals are instead only read about (and ultimately become politically irrelevant) because now individuals perceive each other as being stupid or ignorant in comparison with the polished and vetted non-fiction media that is marketed to every demographic. A person cannot be free without drugs or alcohol. A person cannot make love without condoms, birth control, batteries of tests, their own apartment, fantasies, etc. And there is no time for (annoying) children in the careers of busy professionals. This includes what one might think of as mass media, but it is not caused by any particular actor or institution.

When speaking of a loss of spirituality, it is easy to step on toes. So I will be brief in this regard: the way that people live today is one in which they are utterly unaware of their own effect on the world and are disinvested from their own feeling of potency. So long as the individual depends on external, market sources for self esteem, he is hopelessly committed to spending.

These transformations are brought about through the collective effect of the marketing efforts of the producers of the various products that become integrated into our material existence. The individual marketing firms use advertising, product placements, promotions, salesmen, etc. to increase sales of their particular products, but the collective effect is the transformation of social values and norms and the increased susceptibility of the general populace to any and all new products or technologies. Utilizing hooks that draw the individual into the belief that the purchase is necessary is the essential means by which the prospect is turned into the sale. In so doing, the marketing force constantly convinces the individual of his or her own insufficiency.

In connection with the thesis proper, the very presence of hyper-stratification is evidence of economic mismanagement. It only occurs through the accumulation of wealth by the richest for which no similar accumulation occurs in other classes. It takes a unique political sphere for this to even come about. Welcome to America.

1 comment:

Curt said...

Garth - good to meet you last night for Stewart Brand's talk.

One thing I'd add into your equation:

Increase in wages + reductions in savings + reductions in sales of other goods + wages from new industry = increase in sales of a given good.

is 'availability of credit/debt', which I see as the substitute over the last 20 years for actual wage growth.

I too am quite interested in new lines of economic thought... but it's awfully easy to get lost in the mass of statistics and macro/micro threads that seem to point in many directions at once.