18 October 2011

The Inequality of Economic Theories Part 1

Inequality and Inefficiency

The monetary base of economies has changed.  Global capital, which can refinance, is running circles around governments who cannot refinance themselves. (re: East India Company v's the 'absolute monarch', Louis XVI).

As the 2011 Nobel economics prize winner Tom Sargent comments, greedy bankers figure out odds, what’s their interests and increased the risks and probability of a crisis. That’s rational expectations.

Protesters are against greedy bankers, who they know can out figure the odds, their interests, run rings around the governments and increased the risks of the crisis.  Protesters' "we know what you are doing" is also rational expectations. The '1%, by the 1%, for the 1%' (Joseph E. Stiglitz in Vanity Fair) is the argument.  Global Protests are against a system that makes people study and work hard to produce low or zero returns. They protest against the inefficiency and a cycle, or downward spiral, of inequality.

Protesters have new social networking tools and technology that makes it both easier and more effective to organise change. (see 'Occupy' is a response to economic permafrost'). 'Horizontalism becomes endemic-techn makes it easy: it kills vertical hierarchies spontaneously'.

In the meantime governments are suffering coordination failure, or worse from illusions: RT@NickMalkoutzis 'thanks for the behind the scenes footage from the Eurogroup meeting'

Lets suppose a model where global capital has rational expectations, Governments suffer from coordination failure, political meltdown and protesters have rational expectations.  It makes an explosive model.

The current economic and political systems is tied by a Gordian Knot. In Greece both protesters and analysts agree that the system is inefficient, but who cuts the knot?

Inequality, and the squeeze on the middles classes, has struck hard at the 'advance' economics. Economic growth has moved eastwards. The room at the top has filled up, only few enter and leave it, and the door is firmly shut.  The inequality that it leaves outside kill opportunities, leaving an economy becomes increasingly inefficient (relative to its potential).

There are two double think theories on inequality that need to canceled themselves out:

1)   Lowering 'low' incomes increases productivity and competitiveness. Cheaper wages, leads to more exports (provided everyone doesn't do the same policy - who buys?), greater growth and the economy is prosperous (for your country, children, your children's children, religion or whatever). 'Be poor or we won't give a job' argument.  Great in a perfectly competitive model (homogeneous agents: everyone is equal, wealth does not restrict market entry, equal access, etc) but not in an oligarchic or monopolistic reality.

2)   The opposite argument if you are rich: increasing 'high' incomes increases productivity, as it rewards those for being the most productive in the economy. An 'I deserve to be rich; you deserve to be poor' argument from the 19th Century 'marginal-productivity economic theory. To make sure that the 'powerful' remain powerful, they then monopolise educational, resources and all pathways to power. Thus, financial managers of the crisis are rewarded for their contributions to society.  Austerity measures, falling output, poverty, destruction of human capital, whole sale destruction of communities are somehow necessary to keep up these wonderful contributions to society. Contrast this very few rewards received by 100,000s of contributions, ideas, pioneers, social enterprises and creative users on the internet.  Unsurprisingly cyber space wants also to also occupy physical space. To what extent was Microsoft's Encarta v's Wikipedia an uneven competition between private entrepreneur property and social entrepreneur property?

Inequality is inefficient:
1)  it restricts opportunity and deprives access to untapped resources. Practices result in dumping (human) resources to maintain or protect inequalities.
2) it reproduces itself, through monopoly power and preferential tax treatment for special interests and loop holes. Financial capital is highly mobile, but restricts the mobility of human capital via opportunities, uneven development, labeling, standardization, product discrimination into race, rationality, gender, age,fashion, etc.
3) it breaks up social and community action do deal with, for example, environment, health, education problems and to coordinate responses to financials crisis. It generates mistrust; a 'tragedy of the commons' 
4) misallocates resources, (buying power is uneven and supply is restricted), benefits are privatised and costs are socialise such as pollution or bank bailout. The most talented young people go into professions that are not actually productive - be it armies of lawyers, bureaucratic or finance - for the economy

As I write, a twitter: @INETeconomics "Market outcomes need to be modified to create a more even #distribution of incomes" Nobel laureate Michael Spence http://t.co/U2zUNdFK. Such is the speed of change.

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