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The Economics of the Anglo Disease

by ManfromMiddletown Fri Jan 9th, 2009 at 06:44:22 PM EST

Jerome has suggested that I post this as a diary of its own.  So here we go.

One of the great strengths I see in the concept of the Anglo Disease is that it allows for the Left to critique Neo-liberalism on its own terms.  It attacks the contradictions supporting the system, so that having been demystified, the system can be remedied from within.

Although the Anglo Disease is an imminent critique of neo-liberal capitalism, what it reveals is that the market that neo-liberals take to be omnipotent and the root of all social phenomena is not once, but twice embedded.  First, the market is embedded in social structure.  So that when it pressed to far, society strikes back.  Second, society and market alike are embedded in a natural context.  So that, for example, the market does not make petroleum. We as a species are capable of altering social structure, even if it is with great difficulty.  The natural context, however, is largely fixed.  The market can't make oil. But, what I want to do here is lay out the Anglo Disease in the language of economics.


As I wrote previously:


Inequality is inefficient.  Why?

Because the suppression of wages for labor is a rent seeking behavior.  In English, this means that in order for the part of the pie going to employers to increase in size, the size of the pie must shrink.

It's the mirror image of what we've been told is happening.

Now, typically, the story that's been told over the past 40 years is that demanding a living wage is anti-social, because increasing the slice of the pie going to workers means shrinking the pie.  There's even a neat little graphic that can be used to demonstrate the concept.

In the case of the labor market, workers are producers, while employers are consumers. I've mark the producer surplus in blue, and the consumer surplus in red.  So think of the blue as the wages paid to workers, and the red as the profits made by companies.

Now if the market is providing the maximum benefit to society, it should look like this.

But, the story that we've been told is that because wages are inflated by minimum wage laws and unions demanding wage hikes, what we get is something like this.

So what you see is that the red area shrinks.  The purple area represents money that previously went as profits to companies, but is now paid out in increased wages.  But the real trick is in the pink and light blue areas.  Because workers and unions have engaged in rent seeking they have denied the economic benefit of these areas to society, and have reduced the total amount of labor consumed.  So basically, increased wages have increased unemployment.

But, the truth of the Anglo disease is the mirror opposite of this.  Part of the money made by the financial sector is just total bullshit. But, another part of the disease is rent seeking behavior..... by capital.  By employers supressing wages. So we get this.

So again we see that employment is reduced.  In this case because the reduced wages fail to draw people into the labor market, and the same social loss occurs.

The big difference is that in this case the purple area is consumer surplus.  This is money taken from workers wages and shifted to employers profits.

So yes, the economy is suffering from rent seeking behavior, but the businessmen pointing to labor are projecting their own deficiencies on people who actually work for a living.

The bottom line is that a redistribution of wealth has shrunk the economy.  But it's been a redistribution of wealth from workers to employers. From labor to capital.

Inequality is inefficient.

The important thing to remember, is that this is, by necessity limited to the understanding of the Anglo Disease in economic terms.  Migeru made a comment that I think hits on the most important "take home" message from this.

What MfM is showing is two ways of reducing the social product. One is by artificially raising wages (thus reducing the demand for labour) and the other is by artificially lowering wages (thus reducing the supply of labour). The question is which one of the two situation occurs in practice.

This reminds me of the Laffer curve. One thing that is never explained (assuming the Laffer curve is a sound model in the first place) is how we know that we're in the part of the curve where reducing taxes increases revenues and not the other way around.

As we know, there have been empirical tests of the effect of minimum wages being introduced in various US states and the result of the research was to show that a minimum wage increased the number of McJobs.

Miguel, as the resident polymath you should know that while statistical models can prove correlation, they prove neither causation, nor do they establish with certainty the direction of the correlation. For this we must rely upon theory, and in this case, theory is of little use, so we have to establish the direct phenomenon through epiphenomenon.

Much as astro-physicists determine the presence of a planet around stars so distant that the planet itself is not visible through calculating the effect of gravity on the star's wobble, we have to look to the epiphenomenon that give proof of the phenomenon.

First, if the truth of the matter was that rent seeking by workers seeking wages was reducing the economic output of the United States, how do we explain this.

US wages have not increased when productivity has increased. I think it will be interesting to run a regression matching a measure of financialization, say the financial sectors share of GDP, as the IV driving this divergence and see what we get. But, that's for some other time.

A defense of the critique offered by the Anglo Disease concept, must mount information of this sort into coherent critique.  The model provides predictions.  Now we have divergent expectations.

If it is rent seeking by workers driving the reduction in GDP, then wages must be advancing faster than productivity.  Alas, this is not the case.  Think even in terms of the transfer of the costs of creation of human capital from employers to employees. It used to be that workers where trained on the job, but now you need to have gone to university so that you have these basic skills like typing and the like.  

So it's not like companies are providing training for workers that increased their productivity.  It's the product of workers investing in skills that provide benefits from employers, not employers.

I need to read Milton Friedman, but I think that you can even make an "as if" argument.

And returning to the model, remember that a graph of demand and supply represents a given set of economic transactions.  In this case, we are talking about the entirety of the labor market.  But it could as easily be used for any other economic transaction.

Display:
This is a very thought provoking analysis.  It seems to be based in a traditional economic mode of thought that considers a single, (national), market for labor and capital.  This is what Keynes was describing in The General Theory of Employment, Money and Interest. But in our current situation much of the complication and much of the underemployment, now unemployment, involves trans-national issues and processes.  Companies that once manufactured products in the USA have either been bought and pulled apart, with the manufacturing and associated jobs sent to China or other low wage countries, or the management of these companies has done this themselves.  There was great pressure from the "financial sector" which profited greatly by this move.  This constituted regulatory and benefit "arbitrage" on a massive scale.

All of the aspects of labor in the USA to which so many conservative economists and businessmen objected, such as health care, environmental protections, retirement, etc. was not required in China and there is so vast a supply of labor available there that labor is practically free.  Ross Perot was concerned about US jobs going to Mexico, but China took US jobs and then Mexican jobs.  We fought a Civil War in the USA over race based slavery in significant part because so many working class men in the North did not want to have to compete against slave labor.  But our brilliant, if amoral, business and financial class has discovered that wage slavery in China is far more "efficient" at putting money in their pockets than any economic arrangement previously devised.

Your argument is illuminating in an "as if" sort of way.  The net result is the same: the owners and financial types get to keep a massively larger portion of the money than was the case when goods were manufactured in the USA.  In order to properly account for the existing situation we would require a multi-national General Theory, as the workers in China do not consume any significant portion of what they produce and US labor is completely left out.

This is exactly what the critics of "Globalization" predicted.  Ross Perot was right about the general process.  He was only in error as to where the jobs would go.  They went to China, not to Mexico.  It got so bad that the Mexicans were seeing their own chili peppers pushed off the shelves by cheaper Chinese products.  But none of the "serious people" wanted to see this aspect.  Their profits and the profits of those for whom they worked depended on not seeing and, especially, not acknowledging this situation.  For twenty years the downside of this fraudulent process was concealed from the public by a series of financial bubbles.  Why should they complain when they were getting richer due to rising property values, etc.

In effect, they managed to confound their critics by conflating an economic analysis that was based on a single market for goods, services, labor and capital with a trans-national or global production system for which that mode of analysis was grotesquely inadequate and concealed it all with Greenspan's unlikely bubble dance.  The only thing more grotesque is the consequences this successful conflation of disparate realities has had on workers in the USA.

I love your graphs and agree with much of what you are saying.  I just don't think we can afford not to look at the whole picture.  We cannot let the inadequacies of our modes of analysis blind us to the underlying reality. Perhaps now there will be some scope for economists who want to actually analyze and describe what is occurring other than in academia.  My sense is that prior to the blowup, bringing up such issues, especially in a business or financial context, was  not a way to advance a career.

     

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2009 at 03:09:40 AM EST
What I'm attempting to do here is a very economics way of going about things.  

Basically, it's talking to them in their own terms to explain why much of what they are saying is wronging.  It's telling that economists have this tendency to assume that it's rent seeking by labor that's behind what's going on.

To be fair, it can go either way, but that's why it's vital to go beyond saying, "hey, there's rent seeking behavior shrinking the economy, it must be those damn lazy workers" to accepting the possiblity that it's the exact opposite.

You're right that the global market comes into play, but the phenomenon is happening, but outsourcing to low wage countries is a clear example of where employers are definitely causing a reduction in the wealth of the national society.  Because there is no reciprocation from the low wage country in terms of increased trade volume, creating jobs in the developed country.

The object is standard rentseeking behavior, the method is achieved through using trade agreements.  Trade can be beneficial, but in order to be so there has to be reciprocation.  And that's not what this is all about.

It's about increasing the big boys slice of the pie at a heavy cost to society.

By keeping the critique in economic terms, we force the neo-liberals to defend things that they take to be givens.  Such as the presumption that rent seeking is a pathology of labor alone.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Jan 10th, 2009 at 03:27:37 AM EST
[ Parent ]
MFM
What I'm attempting to do here is a very economics way of going about things.  

Basically, it's talking to them in their own terms to explain why much of what they are saying is wrong...

I agree that, in a debate, it is always best to defeat an opponent in an argument by using the terms of his argument against him.  I do not mean to criticize you for doing what you set out to do--and succeeding.  But this is not an academic debate and I see two problems with this approach:

1) Unless you have the standing of, say, Paul Krugman the supporters of the neo-liberal/neo-classical capitalist economic world view will simply ignore you. "Efficiency" to them concerns the effectiveness with which the policies put money into their own and their employer's pockets, not with how well it enables the economy to function for all.  After all, few of their employers even have come close to losing all that they had made in the last 30 years, and they are well positioned to ride out and even profit from an economic collapse.  

The goal of these economists now is public relations damage control-- making certain that their wonderful system of wealth extraction survives the winter so that it can feed again next season.  Few will be swayed by even the most cogent rational analysis.  They know which side of their bread is buttered.  

Instead, neo-liberal economics, as it has been presented in the USA since Ronald Reagan, must be thoroughly discredited and made repugnant in the minds of a preponderance of the US population as being the chief implement by which our current misery has been brought upon us.

2) Debating these issues on their terms renders them at best highly arcane if not largely incomprehensible to the vast majority of the population.  Most of that population would be outraged at the moral implications and consequences that are routinely accepted as obvious and necessary within the profession as it now exists.  I started to explain your "rent seeking" behavior by labor to my wife and she immediately exploded: "But what about "rent seeking" by the CEOs and owners?!!"  

What is needed is to accurately translate their terms into language that most can understand and then to show it for what it is.  Showing if for what it is in today's context means clearly including the trans-national arrangements and the way the system has been manipulated to the benefit of the wealthy at the cost of everyone else.   An angered and aroused public will do the rest....  I hope. :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2009 at 05:05:02 PM EST
[ Parent ]
What is needed is to accurately translate their terms into language that most can understand and then to show it for what it is.  Showing if for what it is in today's context means clearly including the trans-national arrangements and the way the system has been manipulated to the benefit of the wealthy at the cost of everyone else.   An angered and aroused public will do the rest....  I hope. :-)

I agree and that's the challenge.  

But, part of the reasoning has nothing to do with the masses.  It has to do with presenting an argument that is largely contained to academia, but gives scholars simple tools to fight the invasion of econo-think into the study of social phenomenon. Once we put them on the run there, we can carry on the fight to the public.

We have to demystify what's going on.  And I tend to think of pies or pizzas.  It's an easy metaphor for the whole thing.

So let's say that we have the way that the pie is divided up to start with, but one of the parties wants to increase the size of their slice of the pie.  But in doing this, they reduce the size of the pie. Why?

Your wife was right to think immediately, well what about the CEOs, because that's what's happening.  And I think that in part it shows just how counter-intuitive the argument that it's workers shrinking the pie.  Making them look ridiculous forces them to defend their arguments in real terms, and stop hiding behind the veil of academic authority.  

Now, why has the pie shrunk?

That's actually really simple, and it's tied up in the Anglo Disease.

Put money in the hands of people who are living at or near the margin of existence, I'm talking about people who are barely paying their bills, and they will spend the money.  Put money in the hands of people who own several homes, and they are going to "invest" it.

In the first case,additional money sets off a whole slew of economic activity. So let's say that the guy working at the factory sees his wages increase at the same time as his productivity does.  So his wage goes from $12/hour to $13/hour.  He has more money in his pocket, and he feels that he can afford to take his family out to eat, and he leaves a nice tip.  So now the waitress who's making $7/hr has more money in her pocket, so she decides that she can afford to buy milk for her kids instead of making them drink kool-aid.  So now that money has circulated again, and that's the key of it.

Put money into the hands of people who very little of it, and they will spend it on things that make their live much better.  It will circulate multiple times, and each circulation creates value that adds to the value of things being produced by a society.

Now put that money in the hands of someone who's already got a great deal of it, and they will put it away into an investment.  And the money does not circulate, the waiter gets no extra tips, the store no increase in milk sales. Instead it takes money from the real economy.  It takes more wages from the guy working in the factory, so he hardly ever goes out to eat, and the waitress's kids are going to be drinking kool-aid.

I'm hoping that that places in less academic terms.

I see two goals here.

  1. Attack the proponents of neo-liberalism in academia, where people grasp the technical terms.

  2. Once you've denied them the veil of authority that academia carries, the neo-libs are revealed as charlatans and selfish bastards.  You've got them on the run, carry the fight to the court of public opinion. Shame them, and force them to explain how their self serving ideology is anything else than greed.

First, you have to drive them out from their strongholds, that's why the academic argument comes first.

Then when you've denied them refuge in academic authority, you cut the bastards to bits for the whole world to see.  And once you've revealed them for what they are, it's not going to be a few discontents calling their bullshit for what it is, it will the masses prepared for the creation of another world.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Jan 10th, 2009 at 06:11:37 PM EST
[ Parent ]
I think there is something deeper as well, and it lies in the fundamental emptiness of financial capital. There is a vacuum or Black Hole at the heart of the system because we attribute "Value" to something that is in fact its antithesis - a claim over Value or IOU asserted ex nihilo by credit intermediaries.

But my approach these days is no longer to attack the existing system - there's no need, it's doing a wonderful job of discrediting itself.

Instead, my strategy is to point out and facilitate as best I can the emerging new alternatives to conventional wisdom and allow people to make their own comparisons.  

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 10th, 2009 at 06:37:06 PM EST
[ Parent ]
I certainly think that there's something of the distinction that Marx makes between money and capital.

Money, despite what Pink Floyd had to say on the subject, is not the root of all evil today.  Capital is. It's that distinction that Marx makes between industrial and and financial capitalism.

Money simply facilitates transactions, capital requires a return.

I understand what you are saying about the system discrediting itself, but I think that there among the people at the top in the United States, neo-liberalism has become nothing short of a religion.

You have to break their gods, in order from them to get it, because their beliefs are based in faith not reason.

Even people who spout the rhetoric of change, aka the incoming president, are agents of the status quo. Obama is talking about cutting public pensions and healthcare, that hardly strikes me as the sort of change that we need.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Jan 10th, 2009 at 06:46:45 PM EST
[ Parent ]
ManfromMiddletown:
Money simply facilitates transactions, capital requires a return.

I would say firstly that unsecured credit facilitates transactions, and has a cost consisting of shared system costs and defaults.

Secured credit and conventional Equity in a Corporation are the conflicting financial claims (financial capital) over productive assets (industrial capital) which require a return.

However, this return is paid for from the sale of production/ use value of the relevant productive assets.

Ther is nothing wrong with a cost of credit or a return on capital per se.

The key problem lies in the fact that interest-bearing credit currently is money.  The increasing inequalities in access to this credit combine with exclusive ownership of productive assets - and particularly the Commons of land, non-renewable resources and knowledge - to create a continuing and finally unsustainable transfer of wealth.  

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 10th, 2009 at 07:19:05 PM EST
[ Parent ]
Add to that that a vast pool of capital, much of it backed with claims on real assets, was betrayed into hopelessly unproductive uses and the present system starts to come into focus.  What is needed is an intelligent and highly selective repudiation of such debt.  Let the losses, where appropriate, be recouped from the personal assets and estates of the perpetrators.  The biggest obstacle to this is lack of will.  When a better understanding of what has happened begins to spread I suspect that the will will appear.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2009 at 11:07:19 PM EST
[ Parent ]
ARGeezer:
What is needed is an intelligent and highly selective repudiation of such debt.

I think it is possible to transform the vast pools of unrepayable property-backed debt to a form of finance which does not have to be repaid ie Equity - just "not Equity as we know it, Jim".

We may achieve this Unitisation within a framework based upon Partnership law (%age shares or "nth's"), rather than Trust law (Units in Unit Trusts) or Company law (conventional shares).

The result is not so much repudiation as transformation.

The holder of distressed (ie unrepayable) debt exchanges his bonds for Units. He has no right to get his capital back from the user of the capital (the Occupier) but he can get some or all of his Capital back from other investors by selling to them his Units in the resulting "Rental Pool".

The amount he gets back depends on the rate of return on Capital investors require.

Since we index-link the Occupier's rental a rate of 2 to 3% is good in the current climate. The crucial point is that because the resulting rental is genuinely "affordable" (in large part because the obligation torepay Capital has been removed) it is therefore more likely it will be paid and the lower risk justifies the lower rate of return.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 11th, 2009 at 07:14:02 AM EST
[ Parent ]
This may well be the best way out of the mortgage backed security fiasco.  But such a solution will only come after the market has capitulated to the decline and there still seems to be no solution in sight.  That will probably take at least a year.  Right now many probably still think or hope that they will get most of their money back.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jan 12th, 2009 at 04:43:10 PM EST
[ Parent ]
D'accord!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2009 at 11:01:39 PM EST
[ Parent ]
But your labor demand curve has the wrong shape for low-wage labor in high-income Anglo Disease nations.

We are not in a full employment economy, and beyond the level of effective demand, there is no benefit to employers in hiring more workers, no matter how low a wage they are willing to accept. So the D:L curve should go downward sloping to the quantity of labor for which there is effective demand, and then drop vertically to the L axis.

Drop the wage, and its not inside the diagram that the reduction in the size of the pie occurs, but outside the diagram in the income feedbacks ... the result of the wage suppression is a reduction in effective demand and a leftward shift in D:L.

If unwilling to cure the Anglo disease, the temporary response is therefore to find unsustainable short term arrangements to prop up effective demand, replacing the effective demand lost due to wage suppression.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 10th, 2009 at 06:59:16 PM EST
[ Parent ]
But your labor demand curve has the wrong shape for low-wage labor in high-income Anglo Disease nations.

I'm having a hard time visualizing this, can draw a picture for me?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Jan 10th, 2009 at 08:14:05 PM EST
[ Parent ]
Unlike demand for goods and services, demand for labor is derived demand ... the marginal revenue product for labor producing goods or services for which there is no effective demand is $0, so at the limit of effective demand for the product, the elasticity of demand for labor in that specific labor market becomes 0.

The result when labor supply intersects within the zone of nil or negligible wage-elasticity of demand for labor is a bargaining range scenario, where there is no technical determinant of position within the wage and relative bargaining power is expected to determine position within the range.

Not all labor markets will be within the bargaining range for the same overall labor market conditions and same minimum wage ... and of course, this does not apply to a full employment economy (and hence does not apply within the standard economic modeling, which assumes from the outset a long-run tendency to full employment), but the empirical results tend to suggest that observed gross elasticity is nil or negligible, so if the partial elasticity is negative, it is offset by a positive income effect.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 10th, 2009 at 11:56:44 PM EST
[ Parent ]
A great diagram and a very useful meme.

Good work.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 10th, 2009 at 06:47:40 AM EST
It seems clear that globalisation has coincided with and probably caused increased inequality within the US, but has it decreased inequality within the global system - i.e. by enabling China/India and their workers to move up the food chain?  

Secondly, if inequality is inefficient, has the increased inequality in the US reduced the ability of the US to compete within the global system?  Would higher wages within the US enable it to compete more effectively within the global system, or is the problem excessive capital rents in the US?

Is globalisation reversible, or must any solutions we devise to the problems coming with globalisation also have to be resolved in a global context?  I.e without an effective system of global financial governance is it possible to address the impact of globalisation in a national context?

It seems to me that the larger problem is that we have has economic globalisation without political globalisation (or indeed environmental global resource management) and it is the dis-juncture between global economics and the lack of global government which is the real problem.  

And it is precisely the emergence of any global governance that the neo-cons and neo-libs have fought most bitterly - in the name of nationalism and patriotism - when in fact their real objective was to move their assets abroad without regulatory interference and into a much less regulated space.

If this is correct, then the real challenge is not to try to roll back economic globalisation, but to roll forward a much greater degree of global economic, political, and environmental governance and to expose political nationalisms as a cover for economic betrayal.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jan 10th, 2009 at 07:20:59 AM EST
I think globalization tends to be underemphasized in the US when we get into discussions of aggregate demand.  The US is largely dependent on domestic consumption on the demand side (~70% of GDP, give or take a bit), and so falling domestic wages -- whether from outsourcing, union-busting, a non-indexed minimum wage, and any other cause easily attributable to rent-seeking -- can have an extremely harsh impact on the state of workers, and thus aggregate demand, here.

The goods are still there.  The income needed to support consumption is not.  The only way to bridge the gap, then, is borrowing.  And here were are.

That's a pretty big simplification, of course, and I probably didn't express it clearly enough, but I think there's a good bit of merit to it.

The policy implications, then, are fairly clear.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jan 10th, 2009 at 10:12:18 AM EST
[ Parent ]
It seems clear that globalisation has coincided with and probably caused increased inequality within the US, but has it decreased inequality within the global system - i.e. by enabling China/India and their workers to move up the food chain?  

It isn't workers that benefit from this the most.

Remember that while the relative distance between China and India and the developing world is closing, inside of India and China, inequality between rich and poor is rapidly increasing.  I know more about China than India.  To give an example in 1980, China's gini coefficient was in the 20s, it was similar to the Scandinavian countries.  Now it's in the upper 40s, and it approaching Latin American levels.   India, I don't have stats for.

So what we are witnessing is the growth of inequality within nations, at the same time that inequality between them is shrinking.  (And don't forget that Africa is falling ever further behind.)

So there is no birth of a global middle class.  Instead there is the segregation of the world into rich and poor.  The difference is that this class system is no longer quite so color coded......

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Jan 10th, 2009 at 04:38:13 PM EST
[ Parent ]
Looking at the ranking of countries by Gini index there appears to be a  correlation between high inequality and low economic performance which confirms your basic thesis.  However rapid increases in average GDP/Capita also seems to correlate with increasing Gini within a nation.  Whether this is a temporary phenomenon which occurs during a growth spurt and which stabilises as an economy stabilises (and the increased income is gradually re-distributed) is an interesting question, and one which I do not have the data to answer.

However the clearest correlation appears to be between a high degree of correlation between democratic political development and lower inequality as it takes strong governance answerable to the greatest number for income redistribution to be enforced through the state.

As capital is a lot more mobile than people it is natural for capital to gravitate to areas of lowest re-distribution - e.g. tax shelters and trading hubs such as Singapore - thus giving the appearance of a correlation between aggregate wealth and low regulation/re-distribution.

Only a system of global re-distribution/governance can prevent capital flows from systematically reinforcing inequality.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jan 11th, 2009 at 10:14:37 AM EST
[ Parent ]
... since reversion to a system of regulatory permission required for large cross-border capital transfers would also prevent capital flows from systematically reinforcing inequality.

That is, after all, what was in effect during the 1950's and 1960's, when persistent systematic declines in national income inequality was far more common than today.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jan 11th, 2009 at 11:50:23 AM EST
[ Parent ]
However a reversion to national regulation also assumes that the economy can be renationalised.  However if the global economy is dominated by global corporations with opaque internal transfer pricing etc. it is doubtful whether that genie can be put back into the bottle.  A standard global corporation profits tax payable wherever the profit is generated would remove the incentive to to cook the books or divert resources for purely tax avoidance reasons..

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jan 11th, 2009 at 12:49:07 PM EST
[ Parent ]
Don't forget that its the second age of globalisation, not the first ... we reverted to national controls on capital flows after the first age of globalisation drew to a close with the rise of the trading blocs in the early 1900's.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Jan 11th, 2009 at 02:44:44 PM EST
[ Parent ]
Most of the transnats wouldn't survive two seconds of determined trust-busting. Most of them are monopolies and oligopolies on the style of the railroad robber barons.

And besides, any company with a turnover equivalent to the GDP of a moderately sized African republic needs to be either nationalised, broken into itty bitty pieces or taken out behind the woodshed and shot. To prevent it from buying politicians like they were toy cars, for no other reason.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 11th, 2009 at 05:34:29 PM EST
[ Parent ]
That should be "if for no other reason."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 11th, 2009 at 05:35:57 PM EST
[ Parent ]
... if roughly 200m Chinese and a similar number of Indians are the primary beneficiaries of the globalisation in the medium term, then the question is whether they gained more than the losers in the Anglo Disease countries did.

Probably depends on whether you do the sums in purchasing power parity or current exchange rate terms.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 10th, 2009 at 07:02:04 PM EST
[ Parent ]
Let me add a note that a difference between global inequality when measure in purchasing power parity term ... that is, including standard of living gains of the emerging Chinese and Indian middle classes ... and in terms of current exchange rates ... that is, the international financial value of income gains of the emerging middle classes ...

... would, under the Economics of the Anglo disease, not necessarily be an accident. Its the financial value that transnational corporations are pursuing, while political elites in China, for example, are quite clearly pursuing sufficient standard of living gains among the urban middle classes to avoid political turmoil as China negotiates the demographic shock waves of Mao's population explosion.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jan 11th, 2009 at 11:46:54 AM EST
[ Parent ]
That sounds like a gap that would have to break down eventually? I mean, if the Chinese are equally or less productive than their American counterparts, then allocating more to the transnats and increasing the Chinese labour's standard of living at the same rate or faster as the US labour's drops would have to break down...

So who'll be left holding the bag? The Chinese, on account of pollution and other externalities they don't count at the moment? The transnats, on account of pursuing monetary wealth that ceases to be meaningful when the states that underwrite it start inflating their currencies? Third countries who accepted suddenly worthless dollars for feeding their resources into the Chinese industrial plant? The Americans, by finding most of their tangible assets in the hands of transnats? Some combination?

Or have I missed something fundamental?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 11th, 2009 at 05:52:08 PM EST
[ Parent ]
... cost would seem to be more along the same dynamic ...

... but note that while the transnational corporations require the impossible, in the sense of ever rising share of global income, when there is a maximum attainable share of global income, and further that the maximum sustainable share is likely less than the maximum attainable share, so they are quite likely to overshoot then crash.

By contrast, the Chinese do not have to keep up the pace indefinitely. They are navigating a demographic transition, and sometime in the current generation the number of new entries into the labor force will start dropping.

Obviously the American economy, and the military industrial complex in particular, are set up to be the biggest losers, precisely because of the focus on marshaling political support while taking the economic sustainability of their growth regime for granted.

If we go full cycle into a system of international political economy dominated by a relatively small number (three or four) of regional clusters, I imagine the successful transnationals will evolve into regional trading bloc champions.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jan 11th, 2009 at 10:16:06 PM EST
[ Parent ]
... in terms of the "stuff getting produced and moved around and used" economy. But I'm reading something along these lines:

  • The pie is getting smaller, because industry is being moved to places where it takes more resources to manufacture stuff than the places it comes from.

  • The developing countries take a part of the hit for the pie getting smaller, by ignoring pollution and other ecological costs that pile up due to the lower efficiency.

  • The Americans are taking the biggest hit, because their industrial plant is going the way of the dodo.

  • The transnats are laying increasing claim to the smaller pie, so right now they're winning.

  • This process cannot continue indefinitely, because when the Americans have lost (or lost claim to) too much of their industrial plant, the only way the transnats could increase their share is by laying claim to Chinese wealth, and the Chinese will oppose this more effectively than the Americans.

So when the music stops,

  • The Americans have lost big time.

  • The Chinese have gained, but due to the costs they're ignoring, they haven't gained nearly as much as they think right now.

  • The transnats who realise that the music will stop can position themselves to gain.

  • The transnats who fail to realise that the music will stop are going to be caught with their pants down, because their business model won't apply any longer

  • The transnats who plan ahead will attempt to capture tangible assets, rather than leave their fortunes in paper money, because when the music stops, the value of paper money will be a matter of political negotiation.

Does that sound about right?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 06:59:33 AM EST
[ Parent ]
JakeS:
The transnats who plan ahead will attempt to capture tangible assets, rather than leave their fortunes in paper money, because when the music stops, the value of paper money will be a matter of political negotiation.

If the music really stops, then even the ownership of tangible assets will be a matter of political negotiations. As Chris likes to point out, property is a relationship, not an object. It ceases to be yours the moment force is no longer applied on your behalf to maintain exclusive rights. For this reason, if I where the Chinese lending money to the US, I would not be all too comfortable owning physical assets in the US either.
by someone (s0me1smail(a)gmail(d)com) on Mon Jan 12th, 2009 at 11:00:03 AM EST
[ Parent ]
True. But if the music really stops in a way that makes the US seriously reassess property ownership by the transnats, the world is going to be a quite different place. That would take something not too far short of a revolution. Which means that all political relationships - alliances, geostrategy, distribution of wealth, political power, everything - would be up for grabs to some extent or another.

Trying to grasp what the world will look like on the other side of such a fundamental discontinuity is, I think, more in the realm of tea-leaf reading than political analysis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 03:00:40 PM EST
[ Parent ]
... and modern Russia ... authoritarian strong man governments with local barons behind the scenes putting limits on the reach of the strong man's authority seems to persist through some of the biggest political disruptions imaginable.

Its reasonable to presume that the less dystopian scenarios will involve a rise of regional blocs, since that's what's tended to happen before. It is, after all, not the first time in the world-system that a wave of globalization under the cover of a capitalist hegemony has come to an end, and it seems to be more or less variations on a theme.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 04:07:44 PM EST
[ Parent ]
... but not all the strongmen and barons do. And it seems hard to predict which strongmen and barons will come out ahead. Lots of randomness in revolutions, and it's a lot easier to cut a guy's head off than it is to reattach it...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 04:12:45 PM EST
[ Parent ]
... there is almost 100% turnover in the incumbents in the roles and even when the role themselves have dramatically different names and supporting folkviews.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 04:49:36 PM EST
[ Parent ]
What the Chinese are gaining is not having a political melt-down and chaos. And, of course, a massive industrial machine with a massive resource hunger and a massive destruction of the viability of their own sustainable biocapacity.

They are in a race, and whether they end up as winners in some sense depends on how effectively they manage the demographic transition. However, they are doing just about everything they can do, with all of the choices facing them involving hard trade-offs and genuine uncertainty how much bad to accept for how much good on either side of the choice ...

... and, sure, it could all come unraveled.

However, they might keep on juggling plates without too many crashing down and without falling off the high wire that they are driving their unicycle across. Its not a static question of where they have arrived, its a dynamic question of whether they can keep the plates on the air and the unicycle wheel on the wire.

There is, however, a possible viable future, with their current demographic track meaning a falling population level by the next generation, and their real economy at least gaining the ability to make things that countries with the resources they need may be interested in having.

For transnationals looking to maintain and buid on their present position of strength, it does depend on how effectively they acquire effective military force, doesn't it? Because when it comes down to it, when there is a dispute over property titles across large number of borders, the ability to move a squad of soldiers into the property and boot out the interlopers, from the perspective of that side of the negotiating table, is the strong hand when it comes to property rights.

This is, of course, another reason for those of us with a commitment to liberal democracy to invest in resilient local economies in sub-Saharan Africa. The big transitional World Wars tend to get started in a region of soft states on the periphery of the main actors ... Italy in the Napoleonic World War, the Balkans in WWI, eastern Europe and Southeast Asia in WWII (the long cycle people have more examples, those are the ones that come to mind). The EU already has multiple stakeholdings in Sub-Saharan Africa, the US is heavily dependent on Africa oil, and the Chinese, of course, are busily building up their influence, swapping manufactured goods on easy credit terms for access to raw materials.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 01:18:46 PM EST
[ Parent ]
For transnationals looking to maintain and build on their present position of strength, it does depend on how effectively they acquire effective military force, doesn't it?

East India Company, meet Weyland-Yutani... You do have a talent for thinking up decidedly unpleasant scenarios...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 12th, 2009 at 03:09:04 PM EST
[ Parent ]
... but the East India Company ended up handing military power over to the Raj ... I'm not 100% sure how stable that kind of corporate feudalism really is, and in particular how it gains political legitimacy amongst the governed.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jan 12th, 2009 at 04:03:11 PM EST
[ Parent ]
You do have a talent for thinking up decidedly unpleasant scenarios...
- Jake
Make that "an informed talent"

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 13th, 2009 at 03:45:52 PM EST
[ Parent ]
This is a really good diary, MfM.  Well done.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jan 10th, 2009 at 12:47:58 PM EST
Revisiting on dKos Colman's earlier calculations on the topic...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Jan 11th, 2009 at 06:25:00 PM EST
I'm glad you did this.

I was thinking about it, but it seemed like a lot of work.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sun Jan 11th, 2009 at 07:43:54 PM EST
[ Parent ]
This diary should be added to the Socratic Economics series, IMO.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jan 12th, 2009 at 04:53:50 PM EST
What is the Socratically posed question?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Jan 12th, 2009 at 05:24:03 PM EST
[ Parent ]
I don't think that it really fits in the Socratic economics series.

But I definitely think that it deals with the Anglo Disease.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Jan 12th, 2009 at 06:25:38 PM EST
[ Parent ]
What is interest?

Diversity is the key to economic and political evolution.
by Cat on Mon Jan 12th, 2009 at 07:25:43 PM EST
[ Parent ]
What is the Socratically posed question?
How does rent seeking behavior apply to capital and labor in contemporary societies?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jan 12th, 2009 at 09:52:07 PM EST
[ Parent ]
But that was not Socratically posed but answered more or less fully!

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Jan 13th, 2009 at 02:30:28 AM EST
[ Parent ]
There are a number of illuminating inner dialogues in this thread that complement material already in the series and that will be effectively lost to those not possessed of your recall ability if it is not especially marked.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 13th, 2009 at 03:51:22 PM EST
[ Parent ]


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