The misleading discussion of wealth and income inequality.

in economy •  4 years ago 

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Inequality in wealth is observed as a higher concentration of ownership of capital. The share of income to capital as compared to labor has not changed much. But the ownership of capital appears to be more concentrated for a variety of reasons.

Nordhous estimates the distribution of surplus from exchanges to capital to be 2.2%. That means that for the average exchange, the price paid by a consumer is much lower than what that consumer would have been willing to pay. The price received by the seller is very close to the lowest price that seller would have been willing to sell for. The rest of the surplus flows to consumers.

[Aside: one of the stronger arguments for socialization of an industry is that by eliminating monopolistic competition in the industry all production would be sold at marginal cost, remitting all surplus to consumers. This works well in a static market. But not in a dynamic market. By imposing such a policy a dynamic market can be immediately converted into a static one.]

So, discussions of wealth and income inequality that only look at money measures mislead. The real wealth is in the higher quantity and quality of durable goods households are able to buy, the higher levels of education provided to children (human capital), and the higher quality of healthcare, among others.

Focus on control over financial assets misleads our understanding of human flourishing. However, control over financial assets plays a more relevant role in the influence money has over politics.

My point is that in most exchanges the bulk of the surplus is captured by the consumer.

You buy the banana for 20 cents but would have been willing to pay 80 cents.

That 60 cents of surplus doesn't show up in any account. The 5 cents of surplus captured by the seller is more readily accounted for because costs are not subjective.

We see the 5 cents in accounting profit, we don't see the 60 cents in consumer surplus.

So we observe concentrated profits but not dispursed surpluses. The owners of capital are getting more and more money, but consumers are flourishing.

The legitimate concern with concentration of capital is when it turns to use that capital to influence politics.

My usual solution is to more tightly constrain the scope of politics.

Others prefer a broad scope for politics, and so seek to influence the concentration of capital. I would point out that one consequence of that strategy could be decreased surpluses to consumers.

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