Then versus Now: Or, why all the inequality?

Via, via, via. Click to embiggen, commentary below.

A few things are driving this.

1. The entrance of South East Asia, then China, then India into the global division of labour and the global market for consumer goods and services. This pushed up returns for the wealthy who could hirer cheaper and sell more widely and pushed down returns to labour as workers had to compete with their ever poorer neighbours (although many goods were cheaper and inflation lower).
2. A decline in innovation, a la Tyler Cowen. We became much better at doing things from the 1920s-1970s. Most of the modern world was created then and we haven’t created anything like a big a breakthrough as kidney dialysis, chemotherapy, the airplane, TV, refrigerators, air-conditioning, etc., in the last 30 years. The internet is nice, but not a huge boon to GDP.
3. Some combination of declining returns in the real economy and rent-seeking in the financial sector has caused a shift from real production to finance. With attendant crises and diminished growth. As it became harder to profit from real production capital fled to finance. As finance became more dominant it became more difficult to profit from real production, a vicious cycle.
4. The above graph looks at US incomes and so overstates the divergence. Policy may be set in the main at the national level but production occurs globally. Many people worse off than those living in the US have become significantly better off. The deceleration from the 1980s in the west is mirrored by an acceleration in the rest of the world. Little comfort to some, great comfort to others.
5. Policy in the west erred in two ways:
1. It sought to trade equality for more growth. Taxes were reduced on the wealthy to incentivise them to innovate more. Unfortunately the incentive effects of tax cuts on the wealthy are weak, especially compared to how much more difficult it became to innovate (see 2) or produce profitable non-financial firms (see 3).
2. Secondly, the decline of trade unionism didn’t just make workers more “flexible”. It also caused a decline in worker “voice” in the workplace. Compensating for this, and I would argue provoked by this, there was an increase in occupational licensing (from baby-sitter to lawyers) and centralised directives to protect workers. Where workers could have once demanded whatever protection was deemed necessary with union backing, they now had a significantly weaker on site negotiating position. Workplaces became more intimidating for workers, and more regulated for employers.

UPDATE: Read Noahpinion (do it, it is excellent) for an expansion and deepening of the argument I make in point 1.

Filed under: Economics, History, Politics, Bosses, Capital, China, Cosmopolitianism, Equality, Finance, Hong Kong, India, Indonesia, Inequality, Labour, Malaysia, Occupational Licensing, Philipines, Regulation, Singapore, South Korea, Supply Side Economics, Taiwan, Thailand, The Great Stagnation, Trade Unions, Vietnam, Voodoo Economics, Workers

Where did money come from?

Doing the rounds on teh interwebs is this fantastic post by David Graeber, and anthrolopogist, on where money comes from.

The basic “story”, and it is only a story, is that first there was barter, then people realised you couldn’t always swap your stuff for what you wanted (no double coincidence of wants), so people invented money, then people invented lending money at interest, then, eventually, capitalism.

This is an economist’s fairytale but the truth, or at least what we know so far is infinitely more interesting…

The actual evidence is that in Mesopotamia—the first case we know anything about—these more widespread pricing systems in fact emerged as a side-effect of non-state bureaucracies. Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory. But look at the historical record and there they are. Sumerian Temples (and even many of the early Palace complexes that imitated them) were not states, did not extract taxes or maintain a monopoly of force, but did contain thousands of people engaged in agriculture, industry, fishing, and herding, people who had to be fed and provisioned, their inputs and outputs measured. All evidence that exists points to money emerging as a series of fixed equivalent between silver—the stuff used to measure fixed equivalents in long distance trade, and conveniently stockpiled in the temples themselves where it was used to make images of gods, etc.—and grain, the stuff used to pay the most important rations from temple stockpiles to its workers.

[...]

The numismatist Phillip Grierson long ago pointed to the existence of such elaborate systems of equivalents in the Barbarian Law Codes of early Medieval Europe. [7]For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms. One can’t help but wonder how classical economic theory would account for such a situation. Did the ancient Welsh and Irish invent money through barter at some point in the distant past, and then, having invented it, kept the money, but stopped buying and selling things to one another entirely?

The killer blow for economists comes here though…

Murphy argues that the fact that there are no documented cases of barter economies doesn’t matter, because all that is really required is for there to have been some period of history, however brief, where barter was widespread for money to have emerged. This is about the weakest argument one can possibly make. Remember, economists originally predicted all (100%) non-monetary economies would operate through barter. The actual figure of observable cases is 0%. Economists claim to be scientists. Normally, when a scientist’s premises produce such spectacularly non-predictive results, the scientist begins working on a new set of premises. Saying “but can you prove it didn’t happen sometime long long ago where there are no records?” is a classic example of special pleading. In fact, I can’t prove it didn’t. I also can’t prove that money wasn’t introduced by little green men from Mars in a similar unknown period of history.

Read it all, very interesting.

Filed under: Economics, History, Anthrology, Austrians, Barbarians, Barter, Bureaucracy, Credit, David Graeber, Debt, Economics, Ireland, Mesopotamia, Money, Punishment, State, Sumerian, Truck, Wales