a ground-up view of economics

[lemur]

I wonder what people would think of the following approach to viewing economics: all people contribute money to GDP when they spend it or give it to others. The effect is like a food-chain where the amounts of money changing hands snow-ball into ever larger sums. If you look at economics in this way, it would seem that the faster money concentrates (snow-balls) into larger amounts, the less people can participate in higher-class pricing/exchanges. In the simplest economy, there could be just two classes: 1) the masses who make and spend very small amounts of money and 2) the elite who serve the masses and concentrate the income they receive into very high expenditures. For example, these two classes could have separate currencies where one unit of the masses' currency is valued at a tiny fraction of the value of one unit of the elite currency. Obviously, actual economics is much more complex than this but I think this simplified model describes the basic 'trickle-up' of spending. The interesting issue it raises, imo, is whether price-growth and revenue/income-expectations among higher-classes can produce feelings of recessionary-lack simply because elites are depriving each other due to the level of value-concentration produced by their "snow-balling" of currency from the lower-classes.

[Marat]

I'm not sure if I understand your thesis. Are you suggesting that the excess concentration of wealth among the richest people makes others feel poorer than they should by comparison with the standards set by the prominence of the wealthy? This could create an artificial sensation of widespread decline in prosperity just because the relative prosperity of those in the middle and lower classes was lower compared to the wealthy than had historically been the case.

 

Some data to measure this are:

 

In 1985, the richest 5% of Americans controlled assets worth 2.05 times the GDP.

 

In 2010, the richest 5% of Americans controlled assets worth 2.74 times the GDP, about a third higher concentration of wealth at the top than a generation ago.

 

The GINI index of income inequality in the United States at various periods shows this same trend (perfect equality of incomes throughout the society would yield an index number of 0.0, perfect inequality 1.00):

 

1968: .39

1980: .40

1990: .43

2009: .47

 

The real question has to be, why does the population consistently vote for policies which worsen the maldistribution of wealth?

[Realitycheck]

Actually, GDP is defined as all goods domestically produced, has nothing to do with goods consumed. What you are talking about is a theoretical consumption-based economy which favors the rich because they don't have to consume with as much of their income as everybody else, though it does stimulate saving.

[lemur]

I think you're both misinterpreting the thesis. Let me give a simple example:

 

1) 100 people make and spend $10,000/year.

2) 50 people each collect $10,000/year from two spending $10,000/year, which gives them incomes of $20,000/year.

3) 25 people each collect $20,000/year from two spending $20,000/year, which makes their income $40,000/year.

4) 12 people . . . $40k/year . . . their income = $80,000/year.

5) 6 people . . . $80k . . . their income = $160k.

6) 3 people . . . $160k . . . their income = $320k.

7) 1 lucky winner gets $960k/year from the three spending $320k.

 

Ok, this model is obviously unrealistic for various reasons, but the point is that money can "snowball" as it "trickles up" from lower-revenue businesses and incomes to higher revenue/incomes. Then, as incomes increase, people spend larger amounts for similar products such as housing, insurance, cars, clothes, electronics, etc. So as the average expenditure for a middle-class person goes from, say, $50k/year to $100k/year; that also means that such a person has to squeeze more revenue out of their business(es) to meet their income expectations. This in turn means that her/his clients must also come up with more money, which requires extracting more from their clients, and so forth.

 

The point is that increasing revenues and incomes generate greater expectations for revenue and income, which causes businesses to either raise prices or sales-quotas. Likewise, individuals raise their threshold for how much income they are willing to work for. All this revenue/income 'demand' tightens the squeeze on everyone, but especially lower income people, because they are the ones struggling hardest to keep up culturally, and whose incomes go up the least as a result of GDP growth. I suppose you could sum all this up as inflation, but I think it goes beyond that because we're talking about spending producing income for others that snowballs and drives competition for ever-greater income, which may result in price-inflation, increasing product-marketing, and/or other business methods designed to extract maximum spending from clientele.

 

Marat, btw, what do you think happens to everyone else's incomes/revenues when the top earning people/businesses get taxed to increase the spending of the lowest income people? If someone's income goes from $30k to $60k, they also spend more pushing someone else's income from $60k to $120k, etc. Then, how much more do all those people squeeze each other to maintain their higher income-expectations? Higher incomes require higher spending to maintain them. That translates into more work, more energy-usage, and more resource-exploitation, doesn't it? And for what? More material consumption?

Edited May 16, 2011 by lemur

[Realitycheck]

All depends on the value of the work being done and there's nothing guaranteed about peoples' saving/spending habits.

[Edtharan]

It sounds a bit like a Ponzi scheme ( http://en.wikipedia.org/wiki/Ponzi_scheme ) or perhaps a Pyramid Scheme ( http://en.wikipedia.org/wiki/Pyramid_scheme ).

 

I think the problem lies in the fact that many people conflate money to value. Although money has value, it is different from value itself.

 

Money is an abstract potential of value. It is abstract because although it is not value, it does represent it, and it is a potential because it can be used to exchange for things of value (it has the potential to be traded for things of value).

 

What this means is that money can not be seen as the fundamental unit of an economy, but that "Value" is. Basically, everything that is traded has a value, and that a trade depends on the value of the items being traded. If money was the fundamental unit of an economy, then it would be impossible for any trade to occur without money being involved (I couldn't trade my Spider-man comic for your Batman comic if we didn't also exchange money at the same time as part of the trade).

 

If you think of economies in terms of value, a lot of things become much easier to understand and to deal with. For instance, any trade can now be seen as exchanges of value, and that for a trade to take place (or at least be fair), both parties much increase their net value (and the trade must increase the total combined value).

 

As an example: Just say I have a Spider-Man comic and you have a Batman comic.

 

I value your Batman comic more than my spider man comic because I have already read my Spider-man comic and want something new. You value my Spider-man comic more than your Batman comic because you have read your Batman comic and not my Spider-man comic.

 

We value the entertainment we get from reading a new comic.

 

As I value your comic more than mine, I would be willing to trade. As you value my comic more than your own, you are willing to trade.

 

But, because we each get an net increase in value (I loose the value of my Spider-man comic but gain the greater value of the Batman comic), out net values increase (it is a fair trade), and there is also an increase in the total combined value of us as we both have got the value that each of the comic brings us.

 

It is actually hard to see this if we just use money.

 

To extend the example: Just say we only use money.

 

I am willing to sell my comic for $1, and oyu are willing to sell yours for $1 too.

 

You buy my comic for $1, and then I buy your comic for $1. Now in this, there has been no increase in money, so if we were just looking at money, then we could not have seen that there was an increase in value for each of us, as well as for the group as a whole (total combined value increase).

 

Now, of course, that is a trivial example, but its intent was to show what I am talking about rather than being a case study.

 

But, as you can see, by looking at Value rather than money, there is so much more you can understand about a transaction/trade than you can by looking at the exchange of currencies.

[zapatos]

Actually, GDP is defined as all goods domestically produced, has nothing to do with goods consumed. What you are talking about is a theoretical consumption-based economy which favors the rich because they don't have to consume with as much of their income as everybody else, though it does stimulate saving.

Goods and Services...

 

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

 

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

 

http://www.investopedia.com/ask/answers/199.asp

Edited May 19, 2011 by zapatos