Although most economic theory suggests that markets should distribute both income and wealth fairly within a society,
Most economic theory doesn’t say that at all. It says they will be distributed efficiently. And also that often enough efficiency and equity will be in conflict.
There are good economic reasons why this is the case. With regard to income it is because the spending patterns of those with different levels of income vary considerably. For example, those on very low incomes tend to spend all of any additional income that they might earn precisely because they have unmet needs and wants. They also, very commonly, spend that additional income on consumption. This means that if they earn additional income it circulates back into the economy very quickly. They have what is called a high marginal propensity to consume.
In contrast, if the wealthiest in a society receive additional income they very often save it because they have few or no additional consumer spending that they need to undertake. They have a low marginal propensity to consume. Alternatively, if they do spend, they might buy items with either a long-term benefit, such as property, or items that reflect their social status e.g. artwork, antiques and other such items, which very often add very little overall value to the level of current economic activity in a country.
Which is to forget that a low marginal propensity to consume means a high one to save. Savings becoming the capital with which society builds the productive assets to increase future growth.
Jeez, doing economics without capital, eh?
The consequence is that countries with relatively low levels of income diversity tend to see overall higher levels of growth when compared to those with higher levels of income inequality.
And you know what? I’d really love to see that proven. No, not waved at as being obvious, but shown. Because I don’t believe it for a moment.
China, for example, is quite amazingly unequal but the growth rate is something to envy, no?
This is also true of countries with relatively low levels of wealth inequality. In this case this is because those with high levels of wealth tend to be very risk averse and overall do not invest in new risk-based or entrepreneurial activity: they do, instead, tends to invest in existing businesses, land and buildings or other stores of value which may suit their purpose of preserving existing wealth but which do not stimulate new economic activity in the economy as a whole.
Again, I’d love to see this shown. The US has fairly high levels of wealth inequality. The investment world over there is quite risk loving, isn’t it?
In contrast, those with lower levels of wealth tend to have greater risk appetites, and so are inclined to invest in new business activities that are more likely to encourage economic growth, new employment opportunities, and higher wages. Economies with lower levels of wealth diversity do, then, tend to have higher appetites for risk taking. As a result they also tend to have higher rates of growth.
It’s amazing how we can get more investment creating more wealth from the wealth distribution, but not more growth from greater savings from the income distribution, isn’t it? Seriously, he’s telling us that marginal propensity to spend – more of it – leads to growth, then talks about how investment – the savings that don’t happen – improve growth.
If a government does, then, wish to stimulate economic growth within its jurisdiction it is likely that it will wish to limit the diversity of incomes and wealth within that country to help stimulate this outcome, and by far the best way to do this is to use progressive taxation systems. A progressive tax is one that overall charges higher rates of tax on a person as their income or wealth rises.
A stunning answer, eh? The way to encourage people to risk and invest to make a fortune is to tax fortunes more heavily. Wouldn’t have thought of that answer myself you know.
And I’d really, really, love to know where that proof comes from.
Proof! Here Oberst Kartoffel don’t need no steenkin’ proof.
I buy a loaf of bread. ‘most economic theory’ has FA to do with it.
Murphy wants government involved in all trade. People cannot be left alone to trade with each other. Cos reasons.
‘markets should distribute both income and wealth fairly within a society’
Murph doesn’t know what ‘markets’ means.
Just by observing differing economies in differing times and places, it would appear that there is an inverse relationship between equality and prosperity. The more equal your society is, the poorer it is.
The Murphy method.
1. First establish the conclusion you want to demonstrate.
2. Systematically search for evidence that supports your conclusion.
3. Discard evidence that does not support conclusion.
4. Make some stuff up that supports your conclusion.
5. Lie.
6. Apply for grant.
@ BraveFart
+1
Firstly those with wealth are less risk-averse than those without it since they can afford to lose a little without falling below the breadline. Anyone who is looking to invest in the stockmarket is (or at lest *should be*) told “do not invest in equities money that you cannot afford to lose”.
So Murphy is either stupid or a liar.
Secondly, the countries with highest GDP/head are those which have had the highest GDP/head growth since Jethro Tull’s agricultural revolution and these are almost all countries with some rich people investing their money to generate greater wealth – often monarchies such as Lichtenstein, Qatar, Monaco, Brunei, (the only Republic in the top ten is Singapore) so inequality is not a bar to economic growth.
Thirdly, building a country house, or Mayfair, does create economic activity in the country – unlike holidays in Benidorm or Ibiza.
@BraveFart
Well, it’s a successful strategy for CAGW, so why not copy it?
Prof Will Davies at Goldsmiths might be even more raggable than the Potato. He has a blog as well
“most economic theory suggests that markets should distribute both income and wealth fairly within a society”
Does he quote examples? I thought economics tried to describe the world as it is rather than the world as I think it should be. Or at least, economists start with a description before going into prescription mode. Even twats like Piketty do that
Has any one a link to a scatter plot of GINI v g (GDP growth)? If one isn’t readily found on the web then it’s probably because no regression line can be drawn from the data.
When most of the wealth is held by a few who control the main asset; land, that does deem to have stalled growth. Compare North America with South America. The different visions were a sub texs of the Civil War which went on as the West was being opened up. Would it be a new land for the aspiring small holding and businessman, or a web of vast plantations with no interest in change.
That conflict was sort of avoided in the Uk which did not have a revolution and also had a very porous aristocracy it was not elsewhere where capital and the old regime collided usually before the proles rose up against capital ..
I think the example of South America is usually the on lefties have in mind though ( rather illogically ).
China is still,despite its sudden growth, less unequal than the US, I`d say that was surprisingly equal under the circumstances.
It may be plausible that equality is good for economic health in some circumstances but even if that is true it does not mean that progressive taxes to enforce that state are good for growth.
The UK already has about as re distributive a tax regime as it can stand, more so than other much more equal countries like Denmark and Sweden ,..which as we all know ..are much nicer than this drizzly dump. They start more equal , that was what “Red Ed” was on about when he talked about pre-equality , Blair had the same idea hence edukashun x3
When are you moving to that paradise Denmark, Newmy? I hope you integrate well with your total ignorance of Danish
Mind you, I have to admit being mystified by his post. Can anyone interpret it for me?
Surely this whole “marginal propensity to spend” argument’s a red herring. It only looks at one side of transactions. Sure the rich might choose to save. But as Tim says, the other side of savings is the money’s available for investment. It doesn’t just disappear. But say the rich choose to invest in land or fine art or antiques. Or buying Aston Martins or yachts, for that matter. They have to buy them off of someone. Then the someone’s got the money. So they spend it. Unless you put it under the mattress, money is always out in the economy somewhere.
The cretinous potato reckons he had the Coronavirus. From his recent inane bollocks it looks like it was not the coronavirus but the MORONavirus – and a pretty bad case as well. For gawds sake Murphy – put the keyboard away and go play with your trainset and leave the thinking to the adults in the room.
@Philip
I prepared one at Gapminder plotting Gini versus per capita GDP growth over the following ten years. Not surprisingly, it doesn’t show what the spud claims it will. In fact, to my eye, it doesn’t show anything – there is no correlation, with countries with quite different Gini having similar growth rates, and vice-versa.
That looks like Brownian motion, dcardno. Definitely not a clear linear relationship. Whichever blob you follow goes all over the shop
He says “most economic theory”, I suspect, because he is an ignorant cretin, and doesn’t actually know where that comes from.
Of course, that is being generous and assuming his general prattling can be interepreted in a way that it is possible to relate it to at least one economic theory. On balance I suspect that is flawed!
Feynman, in his inaugral lecture to CALTEC identified the idea of “cargo cult science”. Had he known Murph, I suspect he would have coined a related but more apt derivative – cargo cunt science
Like Karl Marx, he is worried about inequality.
Like Karl Marx, what little economics he knows, he misunderstands.
Like Karl Marx, he doesn’t want to work for a living.
Like Karl Marx, he invents economic theory that confirms his prejudices, not his observations.
Like Karl Marx, he’s fat.
Like Karl Marx, he is intolerant of all opinions that differ from his.
Has anyone been close enough to get a whiff of him? To know if Spud bathes? If he smells like a goat he’d be Karl Marx incarnate.
(Unlike Karl Marx, he doesn’t have a wife, or a wife’s family, or a dimwitted businessman to mooch off of. But since he has the university system and left-wing nonprofits, he is still mooching.)
He says “most economic theory”, I suspect, because he is an ignorant cretin, and doesn’t actually know where that comes from.
I thought he’d dismissed all economic theory as neoliberal, unless it was invented by one R Murphy, Ely, England?
And all this fine discussion has sidestepped that magic word “fairly”, as in “fairly distributed”
He doesn’t mean “fairly”, which in common usage implies some respecting of contribution as an element of the distribution
He means “uniformly”.
Gah!
“Can anyone interpret it for me?”
Not worth the effort. Best to ignore it.
Ritchie believes the wealthiest have mountains of cash maturing in their basements
I’m not in “the wealthiest” and I’ve saved for everything I’ve bought eg Bikes, Cars, Hols, Watches, Paintings… For House I saved 50% and borrowed 50%. Never had piles of cash in basement, cash is made to work
imo that’s bollocks, poor are necessarily risk averse as home & food are imperative
@BraveFart
+1 it’s called Policy based evidence making and used extensively by EU
Bravefart +1 (also applies to climate ‘science’ in spades).
Newmania, I have experienced first hand the results of Blairs “education, education, education”: Thick as mince, over educated idiot snowflakes, lacking critical thinking ability and experience but with an extremely high opinion of themselves = “of course I can be a Train Driver, I’ve got a degree for Christs sake”.
@Addolff
+1 My mother observed how thick young Grads on BBC Pointless are. BBC Apprentice showed same: didn’t know when WWII was or who was fighting