Saturday, 5 September 2015

Deadweight loss of excess inequality.


Fair economic system=fair distribution of the factors of production=aligned incentives=optimal economic efficiency

For the above to be true, a deadweight loss due to the unfair distribution of Land, Labour and Capital must also occur. However, on the face of it this isn't necessarily the case. 

Let us assume I own all the land in the UK (unfair), which I rent out. Not the buildings just the land. The rental income I receive from this is £250bn per year. Assuming nothing in the current tax system changes, my discretionary income would be roughly £100bn each year, and everyone else’s in aggregate £100bn a year less.

Because there have been no other changes apart from who gets the land rent, incentives to produce have not changed either, so despite the now massive gap in equality between me and everyone else, GDP should remain the same.

However, I postulate there is a deadweight loss due to a “thinning of the market”, hence a drop in output.  

In other words 25 million households demanding one item priced £40 brings the scope for more economies of scale and cost innovation than one person demanding one item worth £1bn.

All the wealth we see around us comes from agglomeration effects, which are bigger when markets are thicker.

A concrete example of this may be England after the Black Death in 1375, in which the remaining workers were able to demand higher wages and lower rents. The economy started to flourish. This transfer of wealth from the hands of the overlords to the masses seems to be the point where feudalism died and the free-market capitalism we know today took root.

20 comments:

Random said...

"the point where feudalism died "
Haha.
New shifts grow within old ones and never really die out. When they do the shift ain't pretty and usually violent.
Rent seekers save most of their money, resulting in inadequate demand. This results in the govt stepping in by running larger deficits.

Random said...

"incentives to produce have not changed either, so despite the now massive gap in equality between me and everyone else, GDP should remain the same."
If people have little money there is low aggregate demand and/or a credit/debt bubble is needed to fill demand.
MMT primer on profits and where they come from (macro/in aggregate):
http://www.nakedcapitalism.com/2011/08/philip-pilkington-profits-in-a-capitalist-economy-%E2%80%93-where-do-they-come-from-where-do-they-go.html
Surprisingly dividends ADD to profits. Dividends are counted as distributed profits but are then spent and generate profits.

Mark Wadsworth said...

Agreed, but R makes a similar point to mine of yesterday. You wouldn't spend it all. I think that basically you would put it in the bank in other words lend it back to people.

To your main point, all rental income is ransom value. It is no different to kidnapping. High time rates are bad for the economy.

Mark Wadsworth said...

Ah,… here we go:

"Every extra dollar going into the pockets of low-wage workers, standard economic multiplier models tell us, adds about $1.21 to the national economy. Every extra dollar going into the pockets of a high-income American, by contrast, only adds about 39 cents to the GDP.

These pennies add up considerably on $26.7 billion in earnings. If the $26.7 billion Wall Streeters pulled in on bonuses in 2013 had gone to minimum wage workers instead, our GDP would have grown by about $32.3 billion, over triple the $10.4 billion boost expected from the Wall Street bonuses."

From here.

Ben Jamin' said...

@R

Over the long run, and all else being equal aggregate demand can only shrink because of a deadweight loss.

So, although inequality doesn't cause a deadweight loss, excess inequality due to an unfair distribution of the factors of production does.

As does a load of other things, like taxes on production, and the mis-allocation of land due to owner occupiers imputing rent instead of paying it, conditional welfare benefits etc, etc.

It's quite easy to calculate if we do have excess inequality simply by comparing the taxes people currently pay (% of total tax) compared to the rental value of land they own (% of total land rent).

And low and behold it turns out the top 1% of households own twice as much land than they currently pay in tax.

In other words, their tax liabilities should be around £80-£100bn per year more than they are now if we had a fair distribution of the factors of production. This is how wealth and welfare trickles up to the top 1% (or rather a minority within that minority) not only creating excess inequality but economic dysfunction too.

LVT really should be called the bird killer.



Ben Jamin' said...
This comment has been removed by the author.
Ben Jamin' said...

@mw

The fact that poor people spend vs rich people saving is a separate issue to the one I'm trying to highlight. Although I dare say exacerbates things.

I'm really trying provide a watertight proof for the theory we can empirically say that fairness and efficiency are one and the same thing.

Just tidying up the loose ends :)

Random said...

BJ, so if I burn all the money I earn it has no effect on aggregate demand.

Random said...

Mark, Wren Lewis, Krugman etc misuse the fiscal multiplier. It is totally debunked here:
http://www.3spoken.co.uk/2013/05/the-misuse-of-fiscal-multiplier.html?m=1
Since govt spending "costs" less than tax cuts, we need more govt spending according to the geniuses. People may save money or even pay back bank loans with their tax cuts. Shock horror! It is never mentioned that this results in higher spending in the future due to them feeling more secure.
The end result of this taken to its logical conclusion is 100% govt in other words communism.
MMT on the other hand is compatible with any size of govt although most MMT "proponents" are Large Govt.
Hence why right-libertarian groups funding the "debt crisis" meme is unhelpful.

Random said...

"I think that basically you would put it in the bank in other words lend it back to people."
Banks don't lend out reserves. The bank would receive an asset (vault cash or reserves) and a liability (demand deposit.)
When a bank lends it expands both sides of its balance sheet.
Banks want most their assets to be loans, rather than reserves or cash.
They would most likely swap it for govt bonds.
The problem is you are thinking in a microeconomic perspective. Think macro. Aggregates.
The money you got must have come from somewhere. It came from bank lending or govt spending (sources of money creation.)
Banks with excess vault cash and reserves will lend to banks with less via the interbank market.
If a bank is short of reserves it borrows from the banks with excess or the central bank via the so-called "discount window."
When govt deficit spends, banks as a whole have an excess of reserves. This drives the interbank rate down to its "natural rate" (zero.)
Govt sells bonds that can are purchased by either people or banks to push the rate up.
MMT says just let things stay at the "natural rate."

Mark Wadsworth said...

R, the fiscal multiplier is nonsense, but that is not what they are talking about.

Random said...

Really? What were you talking about when you said:
"Ah,… here we go:

"Every extra dollar going into the pockets of low-wage workers, standard economic multiplier models tell us, adds about $1.21 to the national economy. Every extra dollar going into the pockets of a high-income American, by contrast, only adds about 39 cents to the GDP.

These pennies add up considerably on $26.7 billion in earnings. If the $26.7 billion Wall Streeters pulled in on bonuses in 2013 had gone to minimum wage workers instead, our GDP would have grown by about $32.3 billion, over triple the $10.4 billion boost expected from the Wall Street bonuses.""
Twas that comment I was responding too :b

Lola said...

MW "all rental income is ransom value. It is no different to kidnapping. High time rates are bad for the economy." I like that way of thinking. No-one has any choice but to rent somewhere. You cannot live nowhere.

However the point about the black death that is really being made is one about competition. Landlords had to compete for tenants.

This, IMHO, is key. And a key part of LVT. LVT ought to increase the supply of land, since the tax would be paid if land was tenanted or not, landlords would be incentivised to get it on the market PDQ. Rationing would be discouraged. The greater supply would both ensure competition and increase demand (the 'supply creating its own demand thing').

R. Your posts are far too complex. People buy things that can be simply explained and in the aggregate simple things, especially simple solutions, are the ones that work best. MMT does not fall into this category.

So, we need to 'sell' LVT to the demos. MW point about being held to ransom has potential when communicating the benefits of LVT.

We need USP's.

Lola said...

Oh, I forgot. and FWIW LVT-ing the UK would likely deal with all sorts of inequalities, since the vast majority of those stem from rent seeking from land. Combine that with small government/low taxes/very little intervention, which would go a long way to stop cronyism, and you'd have more real competition.

Mark Wadsworth said...

R, there are different multipliers.

The 'fiscal multiplier' relates to the impact of government spending.

The multiplier they are referring to above is a different multiplier.

L, thanks.

Random said...

L, true. I am explaining to MW, so trying to make posts accounting-y.

Random said...

https://en.m.wikipedia.org/wiki/Money_creation
Wikipedia lies! Down with the lying authoritarians!

Bayard said...

R, it's Wikipedia. If you think it's wrong, put it right. That's how Wikipedia works.

Random said...

I did. They reverted it. That's why I'm pissed off.

Bayard said...

Well they would, wouldn't they? Whoever wrote that article originally is just as convinced that you are wrong as you are that they are wrong. Perhaps you should write a new article called Money Creation (MMT) and append whatever theory the writers of the original article are following to their title.