October 27, 2011

Horse 1240 - The 1% Must Win

The Occupy movement which has manifested itself around the world (and in some cases in violence), I fear has overlooked one rather important detail as to why wealth with always concentrate into the hands of the few; that is the whole process of Wealth Condensation.

Wealth Condensation is the phenomenon which causes wealth to naturally accumulate into the hands of the few because ultimately, the economy performs a positive feedback loop and will always reward those people who are already wealthy.

If we look at the basic factors of production, namely Land, Labour, Capital and Enterprise, we also note the rewards for controlling those factors - Rent, Wages, Dividends and Profit. It's worthwhile to consider the conditions of the people who control those factors.

Poorer people tend to control only their Labour and as such, the only reward from production that they receive are wages. As people become richer, they tend to proportionally spend less of the rewards on keeping themselves alive. As people become richer, they have a portion of their rewards left over and naturally they want to put those rewards to work in the form of investment.
The thing is though, that investment really is nothing more than purchasing more Land, Labour, Capital and Enterprise; so we'd expect that as people become richer then they're deriving rewards from more than just Wages. Richer people also start to begin collecting rewards in the form of Rent, Dividends and Profits; naturally they want to put those rewards to work in the form of investment which purchases still greater Land, Labour, Capital and Enterprise.

You also need to remember that ever since about 1978 when real wages peaked, there have been two rather largish shifts in Western Economies.
Firstly there has been active steps taken to punish Labour through the  destruction of workers ability to campaign for higher wages. One only needs to look at the policies of Thatcher and Reagan to see that. In Australia we had the Price and Incomes Accords under Hawke and Keating and finally under Howard there was the Workplace Relations Act 1996 and the Workplace Relations Amendment Act 2005, which was deceptively called "WorkChoices".

Secondly, because firms naturally want to decrease input costs for their products to increase profit, there have been active measures to shift production to countries where wages are less. Consequently and as markets have been freed up due to deregulation, there has been an improvement in the Financial Sector at the expense of most other sectors in the economy. Apart from mining which is experiencing a boom because really it does little than to help production in countries where wages are less (specifically China), the area of the biggest increase of wealth in Western economies is the Financial Sector. Guess what? The Financial Sector mainly  derives its income in the form of the rewards of Dividends and Profit.
The Financial Sector like everyone else wants to put those rewards to work in the form of investment which... you guessed it, purchases greater Land, Labour, Capital and Enterprise. Ho Hum.

So then to the 1%, because Rent, Dividends and Profits naturally flow to them, they'll continue to re-invest that wealth into more Land, Labour, Capital and Enterprise and generate still further Rent, Dividends and Profits. That's more or less why they got there in the first place and why the 1% must win.

Whoever has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him.


emily's nephew said...

You say nothing about the desirability of the situation.
Clearly the trickle down economic theory has been demonstrated as spurious, as has the idea that the market will take care of the weak.
'From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.'

What about redistribution from the 1% either voluntarily (eg Gates) or compulsorily through a progressive tax system, etc?

Rollo said...

A Progressive Taxation System? Covered it:

Why the GST is horrible? Covered that too: