Tag Archives: Wealth

How Adam Smith became a (surprising) hero to conservative economists

By Glory M Liu – People like to fight over Adam Smith. To some, the Scottish philosopher is the patron saint of capitalism who wrote that great bible of economics, The Wealth of Nations (1776). Its doctrine, his followers claim, is that unfettered markets lead to economic growth, making everyone better off. In Smith’s now-iconic phrase, it’s the ‘invisible hand’ of the market, not the heavy hand of government, that provides us with freedom, security and prosperity.

To others, such as the Nobel prizewinning economist Joseph Stiglitz, Smith is the embodiment of a ‘neoliberal fantasy’ that needs to be put to rest, or at least revised. They question whether economic growth should be the most important goal, point to the problems of inequality, and argue that Smith’s system would not have enabled massive accumulations of wealth in the first place. Whatever your political leanings, one thing is clear: Smith speaks on both sides of a longstanding debate about the fundamental values of modern market-oriented society.

But these arguments over Smith’s ideas and identity are not new. His complicated reputation today is the consequence of a long history of fighting to claim his intellectual authority.

Smith’s first biographer, Dugald Stewart, deliberately portrayed him in the 1790s as an introverted, awkward genius whose magnum opus was an apolitical handbook of sorts. Stewart downplayed Smith’s more politically subversive moments, such as his blistering criticism of merchants, his hostility towards established religion, and his contempt for ‘national prejudice’, or nationalism. Instead, Stewart shined a spotlight on what he believed was one of ‘the most important opinions in The Wealth of Nations’: that ‘Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.’

Stewart’s biography (first delivered as an eulogy in 1793, then published in 1794 and 1795) appeared in the wake of major events that terrified British audiences: the French Revolution of 1789, the Reign of Terror that followed and the sedition trials that followed in both England and Scotland. As the British historian Emma Rothschild has shown, Stewart’s depiction of Smith’s ideas cherrypicked in order to imbue political economy with scientific authority. She writes that he wanted to portray political economy as ‘an innocuous, technical sort of subject’, to help construct a politically ‘safe’ legacy for Smith during politically dangerous times. Stewart’s effort marked the beginning of Smith’s association with ‘conservative economics’.

Smith would soon earn a reputation as the father of the science of political economy – what we now know as economics. more>

They Don’t Just Hide Their Money. Economist Says Most of Billionaire Wealth is Unearned.

By Didier Jacobs – The 62 richest people in the world own as much wealth as half of humanity. Such extreme wealth conjures images of both fat cats and deserving entrepreneurs. So where did so much money come from?

It turns out, three-fourths of extreme wealth in the US falls on the fat cat side.

A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.

Economists define “rent” as the difference between what people are paid and what they would have to be paid to do the work anyway. The classical example is the farmer who owns particularly fertile land.

With the same effort, she can produce more than other farmers working on land of average productivity. The extra income she gets is a rent. Monopolists also get rent by overcharging customers as compared to what they could charge in competitive markets.

More generally, economists have identified a series of “market failures”, which are situations where full competition does not prevail and where someone can therefore overcharge – they would be ready to do the work for less, but lack of competition allows them to make a quick extra buck. Government can alleviate market failures through proper economic regulation; or it can make them worse.

Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.

So how much of extreme wealth derives from rents? more>

Why Wealth Is Determined More by Power Than Productivity

By Laurie Macfarlane – The process of how wealth is accumulated has been subject of much debate throughout history.

If you pick up an economics textbook today, you’ll probably encounter a narrative similar to the following: wealth is created when entrepreneurs combine the factors of production – land, labor and capital – to create something more valuable than the raw inputs. Some of this surplus may be saved, increasing the stock of wealth, while the rest is reinvested in the production process to create more wealth.

How the fruits of wealth creation should be divided between capital, land and labor has been subject of considerable debate throughout history. In 1817, the economist David Ricardo described this as “the principal problem in political economy.”

The measure of wealth used by the OECD is ‘mean net wealth per household’. This is the value of all of the assets in a country, minus all debts. Assets can be physical, such as buildings and machinery, financial, such as shares and bonds, or intangible, such as intellectual property rights.

But something can only become an asset once it has become property – something that can be alienated, priced, bought and sold.

The amount of wealth does not just depend on the number of assets that are accumulated – it also depends on the value of these assets. The value of assets can go up and down over time, otherwise known as capital gains and losses.

The price of an asset such as a share in a company or a physical property reflects the discounted value of the expected future returns. If the expected future return on an asset is high, then it will trade at a higher price today. If the expected future return on an asset falls for whatever reason, then its price will also fall. more>

Capitalism Redefined

BOOK REVIEW

Theory of Value, Author: Gerard Debreu.
The Origin of Wealth, Author: Eric Beinhocker.

By Nick Hanauer and Eric Beinhocker – For everyone but the top 1 percent of earners, the American economy is broken.

Since the 1980s, there has been a widening disconnect between the lives lived by ordinary Americans and the statistics that say our prosperity is growing. Despite the setback of the Great Recession, the U.S. economy more than doubled in size during the last three decades while middle-class incomes and buying power have stagnated. Great fortunes were made while many baby boomers lost their retirement savings. Corporate profits reached record highs while social mobility reached record lows, lagging behind other developed countries.

These facts don’t just highlight the issues of inequality and the growing power of a plutocracy. They should also force us to ask a deeper set of questions about how our economy works—and, crucially, about how we assess and measure the very idea of economic progress.

How can it be that great wealth is created on Wall Street with products like credit-default swaps that destroyed the wealth of ordinary Americans—and yet we count this activity as growth?

Likewise, fortunes are made manufacturing food products that make Americans fatter, sicker, and shorter-lived. And yet we count this as growth too—including the massive extra costs of health care.

Global warming creates more frequent hurricanes, which destroy cities and lives. Yet the economic activity to repair the damage ends up getting counted as growth as well.

Great debates rage about whether to raise or lower interest rates, or increase or decrease regulation, and our political system has been paralyzed by a bitter ideological struggle over the budget. But there is too little debate about what it is all for.

Hardly anyone ever asks: What kind of growth do we want? What does “wealth” mean? And what will it do for our lives? more>

An ambitious project to measure the wealth of nations shows how GDP is a deceptive gauge of progress

By Eshe Nelson, Dan Kopf – Is gross domestic product a sufficient measure of an economy’s health?

Many argue that GDP, which counts the sum of the goods and services produced by a nation, fails to reflect a population’s well-being, because it accounts for neither distribution of income nor extractive effects such as pollution.

Wealth includes all assets, which means human capital (the value of earnings over a person’s lifetime), natural capital (energy, minerals, agricultural land), produced capital (machinery, buildings, urban land), and net foreign assets.

Assessing an economy by GDP instead of wealth is like looking exclusively at a company’s income statements without considering the assets on its balance sheet. A company can make its income look good for a short time by liquidating assets, but over the long run this will reduce the firm’s productive capacity and other means of generating income in the future.

The same applies to a country. GDP “does not reflect depreciation and depletion of assets, whether investment and accumulation of wealth are keeping pace with population growth, or whether the mix of assets is consistent with a country’s development goals,” the report states. more>

The real Adam Smith

By Paul Sagar – If you’ve heard of one economist, it’s likely to be Adam Smith. He’s the best-known of all economists, and is typically hailed as the founding father of the dismal science itself.

As he put it in The Wealth of Nations: ‘People of the same trade seldom meet together, even for merriment and diversion but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’

The merchants had spent centuries securing their position of unfair advantage. In particular, they had invented and propagated the doctrine of ‘the balance of trade’, and had succeeded in elevating it into the received wisdom of the age.

The basic idea was that each nation’s wealth consisted in the amount of gold that it held. Playing on this idea, the merchants claimed that, in order to get rich, a nation had to export as much, and import as little, as possible, thus maintaining a ‘favorable’ balance. They then presented themselves as servants of the public by offering to run state-backed monopolies that would limit the inflow, and maximize the outflow, of goods, and therefore of gold.

But as Smith’s lengthy analysis showed, this was pure hokum: what were needed instead were open trading arrangements, so that productivity could increase generally, and collective wealth would grow for the benefit of all.

When he argued that markets worked remarkably efficiently – because, although each individual ‘intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention’ – this was an appeal to free individuals from the constraints imposed upon them by the monopolies that the merchants had established, and were using state power to uphold. The invisible hand was originally invoked not to draw attention to the problem of state intervention, but of state capture. more>

Most ‘Wealth’ Isn’t the Result of Hard Work. It Has Been Accumulated by Being Idle and Unproductive.

By Laurie Macfarlane – One of the basic claims of capitalism is that people are rewarded in line with their effort and productivity. Another is that the economy is not a zero sum game. The beauty of a capitalist economy, we are told, is that people who work hard can get rich without making others poorer.

But how does this stack up in modern Britain, the birthplace of capitalism and many of its early theorists?

In Britain, we have yet to confront the truth about the trillions of pounds of wealth amassed through the housing market in recent decades: this wealth has come straight out of the pockets of those who don’t own property.

When the value of a house goes up, the total productive capacity of the economy is unchanged because nothing new has been produced: it merely constitutes an increase in the value of the land underneath. We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others. Or as Joseph Stiglitz puts it “getting a larger share of the pie rather than increasing the size of the pie”. The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments. This wealth hasn’t been ‘created’ – it has been stolen from future generations.

Misleading accounting and irresponsible economics have provided cover for this heist. The government’s national accounts record house price growth as new wealth, ignoring the cost it imposes on others in society – particularly young people and those yet to be born. Economists still hail house price inflation as a sign of economic strength.

Most of today’s ‘wealth’ isn’t the result of entrepreneurialism and hard work – it has been accumulated by being idle and unproductive. more>

Citizens’ Wealth Fund To Tackle Inequality

By Stewart Lansley – The 20th century trend to greater wealth equality is now in reverse. Wealth is much more unequally distributed than incomes. Capital ownership is even more concentrated—so much for a share owning democracy.

Because of such concentration, the considerable returns from wealth (in dividends, rent and interest) accrue disproportionally to the already rich. The more wealth booms at the top, the more it undermines the life chances of those left out of the party. Moreover, because of rolling privatization, wealth is increasingly privately owned. Today, the public holds only a little over a tenth of total wealth, well down on the post-war decades.

Tackling these issues requires some big policy shifts. First, the level of taxation on wealth needs to rise. Wealth is hugely undertaxed compared with income: the combined revenue from existing capital taxes accounts for less than one per cent of total economic output. To spread capital ownership, we need to expand the role of alternative business models—from partnerships to co-operatives—which distribute economic gains more equally. more> https://goo.gl/RuUSFz

Insanely Concentrated Wealth Is Strangling Our Prosperity

Today’s mountains of wealth throttle the very engine of wealth creation itself.

By Steve Roth – In 1976 the richest people had $35 million each (in 2014 dollars). In 2014 they had $420 million each — a twelvefold increase. You can be sure it’s gotten even more extreme since then.

These people could spend $20 million every year and they’d still just keep getting richer, forever, even if they did absolutely nothing except choose some index funds, watch their balances grow, and shop for a new yacht for their eight-year-old.

If you’re thinking that they “deserve” all that wealth, and all that income just for owning stuff, because they’re “makers,” think again: between 50% and 70% of U.S. household wealth is “earned” the old-fashioned way (cue John Houseman voice): it’s inherited.

American households’ total wealth is about $95 trillion. That’s more than three-quarters of a million dollars for every American household. But roughly 50% of households have zero or negative wealth. more> https://goo.gl/7xjgHf

The geography of desperation in America

By Carol Graham, Sergio Pinto, and John Juneau II – America today is as divided as it has ever been, in terms of incomes and opportunities, politics, and, perhaps most importantly, hopes and dreams.

Hope matters.

As our earlier work shows, individuals who do not believe in their futures are much less likely to invest in them—as in education, health, and job training. This increases the odds of America becoming even more unequal in the future. These divisions are corrosive to our society, our polity, our civic discourse, and to our health.

There are high costs to falling behind—and losing hope—in a very wealthy society that prides itself on being a meritocracy (even though the reality is far from the reputation). The starkest marker of these costs is the increase in premature mortality among significant sectors of our society—due to preventable deaths such as suicide, opioid, and other drug overdoses, and heart, liver, and lung diseases.

These deaths are most prevalent among uneducated middle-aged whites in rural areas, but the latest (2015) data show increased prevalence across a wider range of ages, races, and places. more> https://goo.gl/a3478E