How does inequality of wealth skew the free market?

No silicon not all of them. Nor was/has all of TARP been repaid to the American taxpayers.

http://www.foxnews.com/urgent_queue/index.html#527cb3ba,2009-02-05

Quite a nice hefty sum of it has simply went poof and vanished.

But I am glad you bring up TARP.

As it demonstrates on the other side of the aisle, the very same kind of government interventionism in business, which is just as bad as the socialist interventionism currently engaged in, and pushed by the current President's, administration and it's cronies in the Congress.

 

So, collapse of the banks and the resulting 1930's style depression would be preferable to what we have now? You think OWS is bad? Imagine a real leftist mass movement. There is some grain of truth when socialists say that social programs are the price capitalists pay to keep the masses from revolution.

 

Its much simpler than most here are making out.

Inequality doesnt skew the market, it undermines it.

Too few people with too much of the rewards means less and less for the rest of us to have to spend.

We can take on debt to make up for this problem but that is now coming to bite us in the arse.

At the end of the day the wealthy in the last decades, have chosen to put their wealth into financial products and equity rather than into pay checks through long term industrial investments.

While thats an understandable rational reaction (finance world products have given greater returns) its only a short term solution to their abiding problem - they have more money than they can ever ever spend. Therefore increasing inequality effectively takes more and more money out of the productive economy and pushes up asset prices. Leading to bubbles we cant easily recover from because consumers have less and less to spend to keep the economy going.

One of these days you americans are going to have to admit that really its not the wealthy that are the job creators its the consumers.

 

That's not true at all. The lack of CONSISTENT regulation has been the problem. We need to set a Constituational amendment of standard regulation against certain specific monopolies and then STOP making exception after exception simply to pad individual congressmens bids for office (through corporate campaign contributions). Had something like Sherman been left in place and NEVER been exempted for corporate businesses, then right now we'd still have in a place a strong small business environment, better competition, and in my opinion, a great backbone of local manufacturing that would put China to shame right now. Going back and forth based on who's in power, and selling out to the corporations with the most money has been teh problem, NOT the regulations in the first place.

For anyone that can't think logically about a mega-corps environment and a small business driven environement, please consider this thought, and try to use common sense. I'll simplify it for this sake, but consider thinking in terms of trillions of dollars and millions of citizens. But if you have a person with 10 million dollars, and you give him an additional 1 million (through tax breaks, by stripping away his competition, by reducing costs for manufacturing, research or distribution), that person is likely to sock that money away into tax protected, deferred, or exempt investments, and NOT into new employees and new businesses. Its very likely that their income is due to the fact that have reduced employees, sweetheart tax deals and a vertical monopoly that earns them more than a collection of small businesses. The problem with that one persone getting the money is that they are not likely to pour much, if ANY of that money back into the economy they took it from. That means lower revenues, less employess, and less money active in the system.

Now, instead of 1 million to 1 person, you split it by giving 1000 dollars to 1000 people, who each only have about 30000 dollars in income a year. Adding 1000 to each of them is likely to get completely spent. That means that entire million goes to use out in teh economy. It may be debt reduction, house fixes, car payments, or even new TV's and appliances. The difference is, that money stays in a revunue traded stream and moves around through different businesses, sparking economic growth.

Multiply that analogy and realize that by seeing money consolidated up the corporate ladders into the hands of few, while reducing salaries and income for the masses of low income employees (rather than more money going into the hands of large groups of small business owners), the system gets unbalanced to the point where it will eventually degrade into nothing.

Soon, in a mega environement, steep unemployment and low wages that dont' keep up with inflation completely brings to a halt economic prosperity. Even the Wal-Marts of the world get too expensive for the masses, and they stop being profitable. So they fire more people, manufacture less, and put more people out of work. In a small business environment, when 2-3 stores get hurt and go out of business, the blow is menial and hardly noticed. When a Wal-mart eventually goes bankrupt, it means global depression (which is what we are getting closer and closer to). Now, that may simply mean a 5 year development where we reset back to a means, but its likely governments, in the pockets of the wealthy that still hoard their wealth, will not fully reset, but will try to continue carrying economic success on the backs of mega corps. Guess how they do that? Stimulus package anyone?

We need a full reset. Regulations should be enacted yesterday that require the de-monopolization of businesses. Companies need to be told that they must sell off all but 1-2 tiers of their vertical monopolies, and ONLY to new start ups funded by small business co-ops. Strip away long standing patents on companies like Monsanto and Pfizer, opening doors for equal competition. Takeaway all tax breaks on mega-corps, and if they pick up and ship their companies overseas, close the door behind them with tariff penalties on any products they try to send back to teh states. Then hand their emptied business building over to multiple new starts (private industry start ups with government loans) in the same industries, with free access to their patents and manufacturing practices.

There was this fear that ending the Bell monopoly would be disastrous for teh phone companies. It was the absolute best govenrment regulatory decision in the last 50 years. Without that action, we'd have no competition in phone markets, and would likely NOT have had the technological revolution of the last 10 years in cell phones. People would still have land lines and bag phones. More competition meant more jobs and a better economy.

I dont' know why we keep forgetting that lesson. Except that politicians convince half of the masses that THIS time it will be different. It never ever is.

 

A regulation that says "Your car must get X amount of miles per gallon" raises the cost of a car to levels unaffordable by the poor.

A regulation that says "The fridge you manufacture must only use X amount of KwH of electricity a year" causes the price of the fridge to rise to unaffordable levels.

A program like cash for clunkers destroys the low end car market and the poor suffer without the ability to buy a sub-$1000 car.

All of this is done in the name of the environment, but really these programs change nothing with the environment, but instead give a false perception to interested parties that they are changing the environment.

This is like Aztec priests sacrificing countless people in the idea that it will change the weather.

Under this logic, a company should also have its taxes raised if it turns to automation and hires a robots to do the work humans used to do in order to discourage them from automation. Is that a good idea? Sounds like Ludditism to me.

No, it won't "eventually degrade into nothing" Wal-mart will lower it's prices to compensate. Companies aren't going to price their products to unaffordable levels so that the average median income is staring at a pair of fruit of the looms they cannot afford. Companies do not have some suicidal streak.

So they lower prices to compensate.

They do this for efficiency reasons. If 1 employee is capable of doing the job with reasonable overtime its simply more efficient to let the 1 employee have the hours of 3. If that employee is overworked, then virtually any manager in the world will see his productivity decline and he will hire an extra person.

This would destroy innovation. No one is going to allow themselves to be told by some overarching tyrannical Government that their patent is no longer protected.

Obamacare did something similar when it passed with a provision stripping doctors of their right to create their own companies to market their own inventions. A doctor that invents a new, highly effective artificial heart can no longer market and develop that heart on his own, he must give up his patent to a 3rd party to market and develop for pennies on the dollar. The result? No more artificial hearts, progress grinds to a halt.

Wow, an astute observation but Government often has the unintended consequence of crushing competition.

You keep forgetting that we, as a free society, have private property rights and it is simply against the principles of that society for Government to do much of what you wish it could do. In a society that puts individual freedom above collective benefit as a cultural value sometimes Government is restrained in it's ability to enact social change.

Now maybe you wish we had a culture that was less inclined towards individual private property and freedom. But this is a philosophical debate that has gone back to the founding fathers and won't be resolved anytime soon.

 

Did you not pay attention to 2008? How'd did it work out for the taxpayer to have mega-banks go bankrupt all at once? Think that can't happen in the oil industry, airline industry, automobile industry (duh), retail, housing, or any other market right?

And you blame regulation now, but why is it that you can't seem to fathom the differences in regulatory legislation if you had a small business environment? If you had 50-60 legitimate car makers still in the US (or better, an even larger variety of part manufacturers) then you wouldn't need ot regulate that type of quality, free market competition and consumer choice would win out. If you had 40 manufacturers making carbeurators, then whoever could sell theirs for the lowest price with the best fuel efficiency will get the contracts from car makers. Those manufacturers have to invest heavily in research and development, yet they still have to stay reasonably priced because of a much larger group of competitors. In a mega environment, its a lot easier for 3 mega car companies with all of their R&D done in house to plod along without achieving bare minimum quality and product efficiency. In that environment (the current environment), the government HAS to intervene on behalf of the taxpayer, or else the irresponsible "winner" (of the corporate race) gets to destroy our world and economy with its irresponsible behaviors.

Look, I'm a liberal that actually wants less regulation, but I want to achieve less regulation by working out a practical economy FIRST. The right seems to think that deregulation will fix the problem, while the left is correct in that you have to fix the problem SO THAT you can later deregulate. Its a not so subtle difference, but one that makes better sense when you think about it. Your solution is always going to be short term and create more problems (patching a leak in a boat that is already doomed to sink) while mine fixes the problem first, before enacting a solution that won't work in reverse.

 

Huh? It seems to me that there are several government forces that lead to artificial consolidation of wealth.

I apologize, but I cannot lend any credit to your argument once you have blamed current circumstances on the free market when, obviously, the effects of free market principles are being mitigated.

How does one control the free market while the market remains free? I think the ability to manipulate the market without authority receives far too much consideration as a risk.

What government regulation and oversight do you have in mind?

Are you saying that the economy is static? Inequality often leads to a larger pie, and thus mutual growth of every individuals slice. To me, the biggest fallacy commonly taken up today is the belief that redistribution of wealth will lead to a greater mean standard of living.

These financial products, what do you suppose they were sold to finance?

I am not sure that I should reply to this statement seriously. That would only give it some semblance of credibility. So, I will be humorous.

That must be a freakishly huge mattress in which the wealthy are stuffing all of that loot.

Are the wealthy and the consumers mutually exclusive?

 

FREAKONATURE ASKS: Are the wealthy and the consumers mutually exclusive?

The term,"Wealthy" includes a class of people that does not include those who are "Not Wealthy". The term "Consumer" indicates a function within an economic system juxtaposed to the term "Producer". Nevertheless, your point is valid: The wealthy, as well as the "not wealthy", are in fact consumers.

Everyone buys milk, bread and all manner of other products and they all pay the same price. However, the wealthy are often taxed at a lower rate than the not wealthy. Consequently, the money spent by the wealthy has a higher exchange value. The question is: Does this inequality constitute a distortion of a free market economy?

 

Why would you mention taxes in a discussion of free market principles? Either way, I don't see how inequality naturally distorts the free market through consumption. It seems to me that consumption is a vehicle that mitigates inequality of wealth distribution.

 

The whole point of capitalism is to allow the masses to determine the use of resources and not that of a central planner. This is the essence of freedom. Take Hitler, he decided what type of car Germans would drive(Volkswagon), free interprise invented variety and more jobs.

The amount of wealth created is based in the motivation of each individual and not that of the central planner. It is common knowledge that each individual has different levels of motivation(some want more some are satisfied with less). Any attempts to spread the production always lead to less overall production.

America has proved many things. Capitalsim and free interprise created overall prosperity. Having a fair playing field allowed many to prosper, while having too much regulation has stunted the growth of prosperity.

The problem with liberals is that they only see the surface of an issue. They see a rich man and a poorer man. They wish to take from the rich man and give to the poorer man. This is immoral and theft no matter who forces the transfer(the individual or the government).

What is moral is for the rich man to give freely to the poorer man. Each individual needs to be assessed based on their motivation and abilities. I do not wish to give to they who are lazy, I do give to they who are not able to achieve themselves. The government cannot do this, only local knowledge can do this.

Government welfare, impeads the movement of labor to where it is needed. This is why we have massive cities with high numbers on welfare and unemployment. Individuals are unnaturally motivated to stay in poverty.

 

I see your points, and they're good ones. But I keep running into the problem that capitalism requires government, and if all the government does is protect capitalism, then the people are effectively being charged for the cost of their own imprisonment.

 

They propped up failing business models which are sucking the life out of our economy.

Not unless you amend the Constitution.

 

Purely speculative and overly simplistic.

I'd have no problem with a leftist revolution. I much prefer to fight people face to face than through some statist intermediary.

Bring it. Gutless wimps...

 

Inequality is an inevitable component of a naturally free market. However, taxation is not an intrinsic element of a naturally free market. Taxation becomes relevant when two or more classes of money are created. For example, some consumers spend after tax "earned" income but other consumers spend after tax "investment" income.

There's an man-made advantage to "investment" income because: After taxes, there's more of it but all consumers pay the same price for goods and services. Consider the impact on purchasing power for an individual who only spends "earned" income. In this case, taxation appears to compromise a "free market".

 

DAYBREAKER SAID: I keep running into the problem that capitalism requires government, and if all the government does is protect capitalism, then the people are effectively being charged for the cost of their own imprisonment.

The proper role of government is to make the rules and serve as a "referee" on the playing field. The proper exercise of this role will protect and preserve capitalism. However, a distinction is required between "capitalism" and "capitalist".

In recent history, we have seen government abandon its proper role in favor of "capitalists" who made a lot money; but for the rest of us the outcome was a near catastrophe. However, this was not a failure of "capitalism". This was a failure of government to properly function as a rule maker and referee.

 

Hey, you're learning. There are two reasons for social programmes, one, what you just said, and two, when workers fight for them and win, either through strikes or elections or whatever. For instance a party might offer a policy in order to not get thrashed at an election.

This post has it spot on as well.

 

Hmm.. interesting one, I think you are both right actually. Governments basically look after the rich, so they often channel money from the poor to the rich. But they are also expected by both capitalists and workers to make sure that the working class is fit enough to work and go to war, not dying in the streets so the rich trip over them while shopping, and not of course revolting in the Karl Marx sense.

 

Quit telling lies.

 

Well Hitler was loved by the German and American capitalists, so that's your theory gone down in flames.

And the masses don't determine anything. They grovel for a few crumbs of the master's table. Either that or they take him on in a scrap. As far as the master is concerned, if he needs a worker he employs him as and when required for the minimum he can get away with. Then he sacks him and if he starves and loses his house, who gives a (*)(*)(*)(*)?

 

What lies?

 

I 100% agree that taxation is a variable outside of a free market that affects it's efficiency, and I will go farther into saying that currently it would seem that taxes are inevitable. It is the method in which those taxes are collected that is the largest factor in determining the effect that taxes can have. I still do not understand how this is a reason that unequal distribution of wealth skews the free market. Also, you state that taxation becomes relevant when there are two or more classes of money, but it seems that you are saying that taxes create different classes of money.

If we restate taxes as a fee paid to relieve the risk of force, fraud or coercion and remove the fixing of these prices by a party outside of the market, then taxes are part of the free market and would not have the negative affects you describe.

 

The free market is just a term that refers to people having the freedom to trade as they please. Being that some people choose to keep working, saving, and investing in future production, while others choose to spend and enjoy in the present, inequalities in wealth exist. This is the natural state of things.

People should be treated equal by the law; people are not, and should not be expected to be economically equal.

 

Seems like you are merely describing the negative effects of a centralized power. At first, I thought we were thinking differently, but upon further inspection, I think we somewhat agree in this post and others. While I understand that the government maintain able bodies to serve their masters, I think we may differ on our approaches to eliminating the puppeteer/government monopoly on power.

 

Inequality leads to a larger pie? Nonsense, its a larger pie that is increasingly taken by the wealthy that then leads to a lesser and lesser pie. In the longer term Equality leads to a larger pie. Because both wealthy and less wealthy all benefit from the consumer boom.

More equity, more bonuses and more financial products.

Indeed I urge you to continue ylour comic musings, they are worthy of your long hours of effort.

However, why on earth would the wealthy require a mattress for their money? They have digitised savings accounts that can hold infinite amounts.

Absolutely. Not that the wealthy dont buy anything. But the differences are clear.

 

The free market is social darwinism. If wealth inequality is high in a free market, then either there aren't very many hard working people, or there aren't very many skilled and intelligent people, or both.