Greedy Goblin

Thursday, June 9, 2016

Why the top 1% gets more and more wealth? (and more free market evidence)

It's well known that the top 1% gets more and more rich, currently owning half the wealth of the World. Why this happened, is it a problem and can it be fixed if it is?

The answer for the first is trivial: people of all wealth groups are buying products and services that mostly contribute to the income of the top 1%. If you go to the local restaurant or buy a no-name shoe, you likely support middle class people. If you buy a smartphone, a ticket for a blockbuster movie or invest your money into financial instruments, your payment will find its way to some IT billionaire, a Hollywood bigshot or a Wall Street shark. No one forces you to do the latter, but you do it, probably because you value their product higher than what the local community could offer.

It's not a problem for the World GDP. The money goes to the best producers to encourage and enable them to produce even more and better. If Apple couldn't make a fortune with the first Iphone, there wouldn't be current Iphone. Is it a problem to you? Probably yes, because - unless you work in the industries controlled by the 1% - you won't even get a slice from the sales! The car mechanic who doesn't buy a new car from his salary but an Iphone kills his own job. I've seen this in Hungary (and all in Eastern Europe) in the early 90-es: as soon as better quality Western products were available, no one bought Eastern ones, so the companies went bankrupt and the people got unemployed (green line: GDP as % of 2006):

Can we fix this? Can we make steps for wealth equity? Only by treating the source: people buying higher quality (or at least higher "brand") products that they can produce, therefore killing their own jobs. The perfect (but completely unfeasible) solution would be barter system: workers and shareholders don't get money, but products of their company and they have to trade for other products. So not everyone can run to the Iphone store on payday, the only way to get an Iphone is to find an Apple shareholder or worker and barter your product for an Iphone, guaranteeing that either someone (the Iphone owner) takes your product, keeping you in your job or an Iphone is not purchased, preventing further wealth concentration.

The implementable version is my Utopia: a system of several different "tier" regions with free movement of people and goods between them, but different government spendings, regulation and different taxes which aren't for income, sales, wealth or profit but poll taxes: "Tier 1 territory, you must pay $100K/year to live here but there are high quality schools, lots of cops and high quality demand for products" down to "Tier 5 territory, no tax at all, but only minimal education, few cops and only clearly dangerous products and conditions are banned". All territories would have their own currency, so someone working in T2 land can only buy T1 products if he finds someone who trades his T2 currency for T1 currency. If people in a lower tier land want to buy T1 goods en-masse, they devalue their currency and get stopped by the insane prices of T1 products due to the high T1/T2 currency rates, while their products become very cheap and start to sell in other lands.

PS: Black Desert Online provided another evidence how far non-free market can sink:
Beer is the most sold item in BDO, because it's so important. It fuels the workers who gather practically everything. Without beer, all the production falls back to the stone age: players gathering raw materials with their hands. And it's missing from the marketplace. Why? Because its price is locked in a low range, so it's not profitable to produce it for sale. I make more money from smelting Iron Ore into shards than I could by making beer. So I make it just for myself. If you can't make it, or forgot to make it, you are out of luck, because even its materials are often missing from the marketplace. Of course if there was proper free market where the price is set higher by the high demand, I'd make beer for sale.


Anonymous said...

Your utopia requires lots of goblins in order to work. It sounds appealing to me, but why would the average guy buy anything below his tier?

A better fix is to decrease overall taxes (while still keeping progressive tax), so the little guy has more money to spend, buying local and high quality instead of saving up for only high quality; the middle class will have an easier time starting their own businesses, and big businesses will produce inside their own country instead of using foreign labor to circumvent local taxes.

Resivan said...

Applying video game economic principles directly to the real world is seldom a good idea. Almost all video games have economies that ultimately are based on killing NPCs, collecting whatever they drop, and selling most of it to another NPC. Whatever player to player economy exists piggybacks on that. In the real world, there are no NPCs and the social sanctions for killing and/or robbing your fellow players usually make this impractical.

In the real world your Tier 5 regions are known as failed states. Those without marketable skills will be forced into them, and militants of whatever cause will flock to them in search of recruits. The resulting terrorists will have no respect for regional lines.

The Tier 1 areas will, of course, need to import labor. It's not feasible to pay the staff, retail employees, tradespeople and others needed by a functioning society well enough to actually live there. This is a problem that occurs in the real world fair often. If the imported labor includes the security forces, there's a chance that the Tier 1 residents will be the first ones up against the wall come the revolution.

Gevlon said...

@Anon: you already buy awful lot of stuff below your tier. For example your clothes are made by Asian sweatshop slaves and most of your food also come from simple workers.

It doesn't matter how much money the little guy has if he spends most of it on products by the 1%. The 1% gets more rich, he gets more poor.

@Resivan: "killing NPCs" is "working" and most of the NPC drops (in term of value, not count) is NOT vendored. I did a group Imp captain rampage, got 10M value, only 1M from vendors, the rest are valued by players.

Failed states aren't T5 regions. They are failed because they contain mixed people and those who are better than T5 are rebelling against their situation, having no other option (as better countries won't take them). If someone is recruitable by terrorist, he has marketable skills. I'm sure some savvy mercenary corporation gets to them first and recruit them to be security staff fighting the terrorists.

T1 areas don't need to import labor, they need to import the fruits of labor: products generated in lower tier territories. It's necessary for the system to function as only their purchases let lower tier people have T1 currency to buy their "Iphones".

Anonymous said...

"T1 areas don't need to import labor, they need to import the fruits of labor: products generated in lower tier territories. It's necessary for the system to function as only their purchases let lower tier people have T1 currency to buy their "Iphones"."

T1 areas need to import people to do the jobs T1 residents wouldnt do.

Real world: Northern Europe & America since the 60s

Gevlon said...

Or, they can export the job they don't want to do. It's currently easier to import workers than export jobs, because their taxation is low (or they are illegals). If it was impossible, because everyone who lives in a T1 country must pay the T1 tax and tax evaders would be hunted and arrested, they would export the jobs instead.

Middle ground: moving workers who live in lower tier regions but do "work bursts" in higher tier ones, working 12 hours a day for a month and then return home and live a good life from their earnings (many Hungarians do that burst-working in Germany or UK)

luobote kong said...

I really recommend you read "Capital in the 21st Century" by Thomas Picketty. You might draw different conclusions but it would inform your analysis particularly around the wealth gap and its causes.

Gevlon said...

@lubote kong: unless you claim that the 1% rob the wealth of the rest by force, there is one and only cause: the export-import balance of the "1% nation" and the "99% nation" is screwed. The 1% is producing more stuff to buy for the 99% than reverse.

luobote kong said...

@Gevlon. So you haven't read it. I don't claim anything. But what is known is the top 1% no longer need to invest into job creating activities. I rent out property. I dont employ anyone. Its easy money. In the past I could have built a factory and employed people to makw stuff. But sweating non productive assets is a much better return. I get richer while poorer people pay me increasing rent because there is a national property shortage.Thats not a claim. Just a fact of life in the UK. No force required.

Gevlon said...

@lubote kong: If you rent out property, you are creating jobs, since that property didn't just spawned, someone had to build it. By buying it and keeping it, you contribute to the shortage of property that finances building more homes. Who would build if they couldn't sell?

Anonymous said...

Isn't your utopia just a strawman version of a free-trade block and wouldn't that exacerbate wealth inequality?
While there may be an issue with the concentration of wealth, it is not visibly from your example. The Hungary case is a classical example to what happens when trade barriers are removed.
We see closed block that must produce everything to satisfy its own needs. The trade borders are removed and suddenly all the inefficient areas of the economy suffer because better/cheaper products are available from outside. That allows the primary resource of a nation (people) to be reallocated towards areas in which that nation holds a competitive advantage. You are showing a stagnant economy held back by its inefficiencies suffering a short-term suffers a free-trade shock before doubling in size over the next 10 years because it is doing more of the stuff it does well, and less of the things it does badly.

Gevlon said...

@dobablo: it would decrease inequity, since it would force the lower production people to buy from each other, keeping themselves in jobs. They can only buy from other tier people (as a group) if they also sell them something.

What you miss about Hungary is that the employment didn't return to the old level despite the GDP growth. The reason is - inequity. Hungary isn't a "pure tier 2" country, it's a mixture of people of different production tiers and their average is "2" and as a result, the living costs are "tier 2".

The T1 people either left the country and work in the EU or very rich.
The T2 people are fine.
The T3 people are struggling: despite they have jobs, they are poor.
The T4 and T5 people are unemployable. They simply can't produce enough to earn the country's minimal wage. If the minimal wage would be removed, they couldn't earn enough for food, so they are hopelessly welfare leeches.

A Concerned Minmatar said...

I apologize that this is not entirely on topic, but the remark at the end prompted me to write it.

Are you going to make a project out of this? So far you seem to be playing only for your own enjoyment. It does not make very interesting reading.

Personally, I think a good "project" would be voting with your wallet that price controls are not OK in an mmo, by leaving BDO.

luobote kong said...

@Gevlon Your logic if you believe in the pure sanctity of the market place is sound. But the reality along with your DVD example is far more complex. When you understand why it is more profitable NOT to create something or build a new house, a scenario that on the surface appears illogical, it will be the day you understand why the 1% are widening the gap from the 99%. Actually even Karl Marx spotted it but his solution was somewhat less pragmatic than yours.

Halycon said...

Apple is kind of a bad example. Their market cap, and therefor the bulk of their worth, is completely divorced from their revenue. They don't actually have that high of margins for a company valued at what they are. A high gross, but because they're a design company and farm out production elsewhere almost all their profits are eaten leaving a small net. Comparatively. Notice I'm not saying anything about the greatness of their products, not getting into that flame war. I'm talking a pure dollar and cents comparison to their rivals for profitability. Microsoft and Google net more or about the same off a lower gross, and spend considerably less to make the net.

In your parlance, people who invest in Apple are M&S. And the M&S's investing in their stock is what makes them as rich as they are. Not their products.

Kines Pavelovna said...

I'd argue it's just neoliberalism, which has been pushing an applied economics experiment, combined with reaganomics, that's been driving inequality.

So the applied econ experiment is - squelch trade barriers and everyone specializes based upon their local advantages, allowing everyone to reap some gains. From the success of this policy it necessarily follows that there is a persistent skew in the distributions of growth rates within each nation, as it's specialized sector's growth rate outpaces, the growth rate of the non-specialized sectors.

reaganomics - The only interesting difference between a hamster and a human being, is that a human being is responsible for how his cage is designed. The fundamental idiocy of reaganomics is the idea that one can shift this responsibility, that of building the rule set we refer to as society, to another and still obtain a desirable outcome for oneself.

In some of the west, the USA in particular, our speciality is the banking sector. So just as the growth of the banking sector begins to explode, relative to each and every other sector of our economy, the population which owns the banking sector has been given responsibility for designing the rules which determine how much in tax they should pay. Now this is important, the entire point of the applied econ experiment was to shift some of the extra profit generated by the special sector to the rest of the economy, overtime this shift would ameliorate, even eliminate, the negative effects to the rest of the economy of adopting this policy, and we'd all benefit. No such shift has occurred, so only some have benefited, the very very wealthy, and the very very poor.

Master Builder said...

"A system of several different "tier" regions with free movement of people and goods between them, but different government spendings, regulation and different taxes which aren't for income, sales, wealth or profit but poll taxes"

Aren't these called nations? And aren't a lot of these problems caused by free trade/globalization?

Bola Bo said...

One very important factor you miss is the substitution of technology for labour. This hollows out the previous middle class and moves people up or down, based on whether ther contribute to the creation of new tech or not. Robotic automation is even moving to hamburger flipping. Elimination of clerical workers such as bank tellers and checkout people (being replaced be ATMs and automated checkout) has been going on for decades.

In many areas, the birth rate is also in decline. This may eventually compensate for the automation effect, but probably not.

Anonymous said...

Your idea of economic zones sound like the "time zones" in the dystopian science fiction movie "In Time."

"A place where time has become currency. Thanks to scientific advances people can stop aging at 25, but it comes with a catch: after reaching 25 a person is genetically-engineered to live only one more year. The time is used as currency, you can earn more at work but you sell it for goods and other services. Once your time runs out, you die."

In the movie, people live in different "time zones" and must pay a toll to travel between them (analogy to Gevlon's exchange rate between economic zone currencies, or higher tax in higher zone).

I don't see why the different zones would become any fairer or allow any more freedom of movement in practice than they do in the movie. Over time, the poor are locked into a cycle of debt and the rich live lavishly. Even if you convince us to accept that different economic zones don't make anything more unfair, it's a long stretch that they increase productivity in some way.

By the way, a commenter noticed this similarity last time Gevlon mentioned this idea (in the post he linked). Oddly, they liked the idea, despite noticing that it is dystopian and totalitarian:

"There was a movie loosely based on this premise, "In Time." Basically, time was the only currency, and if you were rich, you could buy your way into a better district, where if you were skilled, would be able to buy more time and thus be able to "afford" to live there.

I rather like your proposed concept. It's dystopic, and highly totalitarian, but it actually works. The only barrier to immigration is being able to buy your way into the new district. Of course, this will produce a horrific "brain drain" in the poor district as the people that CAN move up do, but how is that different than our world?"

It seems hard to get the masses (of both M&S and goblins) to like an idea that embodies both those traits. It creates drastically disparate and unfair living conditions.

Maybe this is something that Gevlon would implement if he is emperor of the universe for a day - but how could the general public possibly be convinced that this is a good idea? It seems more likely this sort of situation arises forced by the 1% on the 99% in order to entrench their power. But Gevlon sees it as some kind of Utopia??

And even if we have these zones, still people in zone 5 will want stuff made in higher zones. If they are so unproductive that they can only afford zone 5, do you think they can make functioning toilets, cell phones, edible food? They need this stuff from higher zones, so the funneling of money upward continues.

Some links about "In Time:"

Biggles said...

Sounds a little bit like Elysium, be it that Elysium was only 2 zones.

The model starts falling apart when the T1 reach a level of technological advancement where production and services become available for (nearly) free. Stuff like replicators from Star Trek would qualify: convert enlessly available energy into matter, creating anything you'd need. When that happens, slowly but surely T1 technology would start trickling down to the lower levels, increasing progress and well-being on all tiers. Or.... we all end up like the people in where technology has advanced so far that stupidity is rampant...

Anonymous said...

we all end up like the people in where technology has advanced so far that stupidity is rampant...

we already are living in it. Smartphones! the only thing smart about it is that the user can and will be held dumb. The internet made us dumber, why research anything if you have (highly biased and mostly corrupted) data on your fingertips. The masses will be more stupid the more technological advanced the society gets. Our current system highly depends on the dumb and isn't ready for startrek, where everybody try their hardest to advance themselves in what every occupation they desire.
A good movie that forecasts some of this bullshit to perfection is Metropolis (yes that old one)