So far, most of this blog has been focused on the question of productivity – how do we create an economy that can produce enough for everyone.
But you could argue that the question is redundant. In 2017 global GDP – or rather, Gross World Product (GWP) – was estimated to be $17,000 per person. Now in the UK $17,000 is barely enough to live on – you could survive, but life would be a constant struggle (many people in the UK are on this kind of salary, but then receive significant in-work benefits, so their actual disposable income is much higher). However, in many parts of the world $17,000 a year would be more money than people know what to do with – they literally wouldn’t have access to goods with which to spend the money on.
So is the answer simply to redistribute the world’s income? Well as mentioned, people would only be able to utilise this income if they moved to places where they had access to goods they could purchase with it. It would prompt mass migration on a scale likely to lead to the breakdown of most societies! Rather, we need an economy where all the inhabitants of the earth are able to earn enough and have access to goods and services, without requiring mass migration or the concentration of everyone in cities with all the environmental challenges this presents. So this brings into focus another dimension to the question of distribution: how do we distribute the capacity to produce.
There is another potential problem with my focus on productivity. Our current political and economic system is based around growth – we’re always obsessed with economic growth. But you cannot have infinite economic growth on a finite planet. If we reached a point where the whole world is lifted out of poverty, where all production is environmentally sustainable, and where no-one is working long hours in terrible conditions for subsistence wages, couldn’t we then stop growing and wouldn’t all the focus on investment in productivity in this blog become irrelevant? The answer to that is almost yes – but we are light years away from this point right now! Many parts of the world still desperately need investment in their productivity (and I don’t mean building factories everywhere – planting nitrogen-fixing trees alongside fields would be a form of investment). And even when we do reach this stage in global economic development (and I do believe we will get there, just not in my lifetime) – even then, the identity between saving and investment will always hold, and there will always be a need to ensure that credit in general, and in particular the savings of society, are directed towards investment that maintains and renews the level of productivity (the core proposition of the earlier sections of the blog).
I mentioned above (and have mentioned on the blog before) that we want to see a world in which some people in the world are not working 12 hour shifts in factories for subsistence wages to produce goods for the richest countries (for us) that are so cheap that they basically become disposable. Now you could think that this is a question of productivity – wouldn’t it be great if these factories were so productive that they could produce the goods in half the time, then their workers wouldn’t need to work such long hours. But in fact this is a question of distribution. All that would happen is the factory owner would lay off half the workers. And for reasons we will get into next week, the country where the factories are based would get even poorer, and global wealth inequality would get even worse.
Think about it – in the West we buy endless cheap tat, including clothes, and we don’t worry about whether we really want it or if it breaks or we lose it or forget about it in our cupboard – it’s so cheap it doesn’t matter to us. The problem is not that these factories are unproductive – it’s that all the benefits of their incredible productivity are distributed to the West, not to the producing countries.
The opening section of the blog, “Models” (see the menu bar above), introduced essential economic concepts by using highly simplified models of the economy. Most of the analysis was focused on saving, and I’ve drawn on this analysis throughout the subsequent sections, particularly “Productivity” and “Financial Markets”. The foundational concept established in that first section, and referred to many times since, was:
“Decisions about who to allocate credit to, and how much credit to allocate, are absolutely fundamental to the path the economy takes in the future.”
But there was a second foundational concept introduced in one post in that section:
“The distribution of wealth is critical to the future path of the economy.”
In the relevant post I went to explain:
“There is an obvious point about distribution – if a few people are extremely rich, and many are in poverty, one way to alleviate poverty is to re-distribute the wealth. This is not, in any way, what I am talking about here. There are huge implications when you start considering how you will redistribute, and my point here is nothing to do with the rights and wrongs of redistribution. I am making the technical point that the way wealth is distributed is a major factor influencing the future direction of the economy, because of the different ways in which different people spend their money. Two economies of the same size, based on the same industries, will advance on completely different paths if they have different distributions of wealth.”
When I was writing that section I knew that these were two concepts I wanted to explore on the blog – the use of credit and the impact of wealth distribution – although I didn’t have a well-developed plan in my head of exactly where this was going to take me. And I didn’t realise that I would spend so long looking at the question of credit and productivity. I hadn’t even discovered Pozsar when I wrote those posts! His empirical analysis confirmed what I assumed must be happening in financial markets in terms of why they are not funding productivity, but we’ve also noted his conclusion that to stabilise financial markets we need to redistribute the huge concentrations of wealth in institutional cash pools.
Now I want to take a proper look at this essential issue of distribution. And I will begin next week by considering in more depth what happens when an increase in productivity in a company reduces the number of person-hours required to make its products.