It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest.
I think this factor can be subsumed under 'jobs'. The wages of labour should be determined by the law of demand and supply on the labour market. If growth automatically leads to job creation, an economy with a higher level of growth should have a tighter labour market. The demand is higher and the supply is lower. Thus higher wages. I don't see an alternative explanation for why GDP growth should lead to higher wages (in (neo)classical economics).
Another reason mentioned is tax base. I don't think GDP is that accurate a measure of the tax base, net domestic product would be better (see regrettables). Tax base is somewhat similar to power, but also different. Rather than the position with regard to other countries, the tax base is relevant for the extent to which politicians can spend on their pet projects. The problem is the same as with power, caring primarily about something else than the good of the people.
Yet another reason mentioned is that GDP growth is necessary to keep the stock market/capitalist project from collapsing. A bit paranoid, but that doesn't make it completely unlikely. I can't evaluate this one.
Pace rdf and Jerome, is it part of the (neo)classical canon generally thought that a modern capitalist society needs a continual rise in median income (wages, capital gains, rents, etc.) in order to survive? Rien ne réussit comme le succès.
I'm not well-versed enough in economics to address all aspects here, but let's take the stock market.
Can the stock market grow in a steady state economy?
Yes, but this will be at the cost of other sectors of the economy. Growth can continue indefinitely if it follows a logarithmic function, but at a certain point it becomes too small to notice.
Can the stock market survive if it is -on average- static?
I don't see why not. Some companies will continue to do better than others in some periods. No one will win or lose from investing in the market on average. But enough people take part in lotteries where on average, you lose. The stock market is a better option than that.
How good a measure is GDP for the stock market?
I think that, like the tax base, net national product is a better measure for the stock market on the intermediate term than gross domestic product. The way NNP is calculated goes as follows: GDP (plus) net income from abroad* (minus) consumption of capital.
*negative when more money goes abroad
But that income accumulating at the top needs to be reinvested into the economy or else oversaving will eventually dry up the money supply and kill demand, no? So it seems that even if average income remains steady, if too few people are getting the bulk of that income while the majority are seeing less of it, the economy would be in a more precarious state than if the income were more evenly distributed (yikes, I really need to read up on the basics here.)
Have there been any examples in the last 100 years or so of societies managing alright with "steady state" incomes? (I am wondering if Japan since their bubble burst would be one, but have not been able to find information about income there during that period.)
At a certain point you will get a lot of social tension, but that is an external influence (in the capitalist system).
Could you describe what you mean by social tension and how it arises? Also, what do you mean by "an external influence (in the capitalist system)"? Do you mean that social tension is essentially a psychological or sociological phenomenon? Rien ne réussit comme le succès.
I take it for granted the desire for some degree of inequality is rooted very deep in the human physiology (I mean, the desire to be on the higher end of the ladder, of course), just as well as offsetting tendancies for altruism and equity (not the same as equality), which make most primates "social species" and not just lone predators.
May be your question should be rephrased as "does GDP growth implies income inequality growth ?"
Stricly considering the span of all incomes, I think yes (the rock bottom will always earn absolutely nothing, whatever the wealth of a nation, whatever the social system, there are always dropouts - meanwhile, if the total wealth grows, the top earners will probably earn more even if their share in the total erodes).
With more subtle statistical definitions of inequality, like variance, percentiles etc... I think history says no: Jérôme has shown us many graphs with the rich getting much richer in recent years, but also that in many other periods of recent history inequalities were stable or decreasing, although western economies were still experiencing growth during these periods (including most of the cold war, viet nam war, etc..)
May be we should look into other predictors of change in inequality, I think we could find something better with combinations of:
I think I mean what I said: GDP growth correlated with income inequality.
Where are the data for this parametric fitting? Those whom the Gods wish to destroy They first make mad. -- Euripides
Well, I know where to get inflation, growth series for France (e.g. www.insee.fr). But inequality is much harder to summarize with a single indicator. INSEE does regular studies in France, but the frequency is far lower than yearly (like, every 5 years) and the indicators do not all remain the same making comparison very hard over 10, 15 years. Generational accounting is only coming into the spot lights now, and we certainly won't find any retrospective series on this at this point (and probably not anytime soon in France).
For other countries, which we would need to make correlations significant , the same series that are easy for France would be easy too. But I am even more clueless as to how to get the others. I remember one graph from Jérôme with the income of the top US percentile, we could lay it in a table of approximate numbers. But that is still only one country.
At this point I'm thinking, correlation with such simple series as inflation and growth have certainly been run already... I'm gonna go googling ! Pierre
As I read it, the countries that did relatively well did not change their income inequality much but those who did change it fared worse. But to which direction we cannot tell. Orthodoxy is not a religion.
http://www.aeconf.net/Articles/May2002/aef030105.pdf
Very high in google, not sure it really warrants of its worth. Although observing that the debtor-creditor scenario can make inflation beneficial to the middle class (which has access to credit), global empirical data suggest that inflation is bad for inequalities (because the really poor don't have access to credit to take advantage of the inflation ? and because the rich move faster to adapt to it ?), even filtering out data points where it's actually hyper-inflation wrecking an entire country.
There is also this: http://www.eldis.org/static/DOC4760.htm from the IMF, so probably heavily loaded also (it says max growth = good for the poor, whatever the rest), but it gets wrung at: http://delong.typepad.com/sdj/2005/06/is_inequality_a.html (again, don't know exactly what it's worth).
So there are many references to well formatted data series in these papers, but eventually the conclusion after critical reading seems to be that ... there is no general, worldwide, significant link between anything.
OK, I go back to sleep ! Pierre
Yes, median income in the U.S. has dropped 2 or 3 out of the last five years I believe, but over the long term, median real income does steadily increase, I believe. The point is that there are many people who are not at all bothered by the notion of increasing inequality, as long as everyone generally is always doing a little better than last year. And so the political implications of a corrleation between GDP growth and income ineqality are not necessarily significant among such people. (Also, I was just talking to some mainland Chinese people at a party this past weekend, and when I asked them about the thousands of riots per year and unemployed hordes clogging the cities, their attitude in a nutshell was that, Yes, some people are getting rich far faster than others, but overall, everyone is better off than they were 5, 10 years ago, even the poorest.)
What I am curious about is:
Regarding the second point, I guess the first question is: Is such an economy even feasible? I think Colman and Jerome may answer in the affirmative, at least with respect to the consumption of natural resources. If so, can GDP grow without increasing socioeconomic inequalities (which sort of goes back to your question)? Rien ne réussit comme le succès.
1) Suppose you consume all natural resources at replenishment rates; 2) realise that that means there is no untamed environment left, but it also implies waste is produced at the natural absorption rate; 3) Suppose income inequality stays constant.
Where is GDP growth going to come from?
Ecology teaches us some lessons about inequality, diversity and complexity, too. The "problem" of political economy is human solidarity and empathy. Those whom the Gods wish to destroy They first make mad. -- Euripides
The income needs to be reinvested, surely, but I don't know why this would need to benefit median income. Investment can be primarily in capital, and to the benefit of the rich. The wealth does not need to trickle down. In terms of survival of the capitalist system. Demand can be taken over by the richest.
Of course, this is not necessarily optimal. Investing mainly in capital should bring declining marginal profits, whereas the marginal cost of labour should decline as a result, etc. So at a certain point some of the growth at the top should trickle down. But it does not need to.
By social tension (we're shifting discourses quite radically here) I mean that the people are more prone to protest, theft, riots or revolutions. If there is great economic inequality and the living conditions of the rich are improving at the cost of the bulk of the population, this will, I think, be more likely.
Because we were talking about developments that would undo the capitalist system, I called this external. Because the capitalist system is about the economy. Of course, one could take a different view on that. The value of social coherence is not included in the economic system, as far as I know. So, yes, I would say that it is sociological, or psychological.
No, that is the pre-Keynesian loanable funds theory. It is true that the "accumulation" destroys the income, and an equivalent amount of new purchasing power must be created if the economy is not going to slow down ... which could be created through deficit spending, through the acquisition of new real assets, or through the equivalent standing behind the net capital and official account outflows that permit a current account surplus.
But the creation of purchasing power for new investment in real assets is not "reinvestment of savings".
The modern purposes of the loanable funds theory (normally dressed up in modern equations to let it slip by) are to allow microeconomics to pretend to be macroeconomics by assuming away the problem of determination of national income, or else to justify measures designed to benefit the wealthy in the guise of "encouraging saving", given that (in the words of JK Galbraith), those with money to save tend to have more money than those that do not have money to save. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
