Wealth and Closed-Loop Economics

Here's more follow-up on taxes and the rich.

I didn't understand economics either until rather recently. It turns out that economics is my specialty-- control theory applied to living systems -- writ large. Economics is very clear and obvious when looked at from a high enough (macroeconomic) level. It's just people collectively controlling, via specialized production, for the goods and services they want and need

As far as whether or not the rich (wealthy) create jobs or not, I think we first have to distinguish the rich (who have a lot of money) from producers (who do create jobs). Job producers are often rich; but Bill Gates (and the Google guys) were not rich when they first created the jobs. And the scions of the Mars family are rich but they are mainly clipping coupons now. Their candy company certainly creates jobs but most of the rich heirs of Mr Mars no longer do.

My point is that jobs are not created by people with excess capital but, rather, by people (management, who are sometimes rich, sometimes not) who are running companies producing goods and services using people (and capital equipment) in jobs. Management will increase or decrease the number of jobs depending on demand for those goods and services (there's the market at work). Demand depends on people (consumers, who are the same as the people occupying -- or not occupying -- jobs) having money that they can use to purchase what is being produced. If many people don't have jobs, there is less demand and, thus, no need for more jobs.

In a closed loop economy (as all economies are), it is the existence of jobs that creates and maintains jobs. It's not the wealth of the producer that "drives" job creation (and maintenance); it's the wealth of the consumers who have the jobs (and that includes the job of manager; in a closed loop economy producers and consumers are, to a first approximation, the same people) that creates and maintains the jobs; because without jobs there is no demand for what is being produced.

You are right about the "middle class" being an arbitrary concept. Where one draws the line for where the middle ends and the rich (and poor) starts is rather arbitrary. I think of these terms (middle class, poor, rich) as just a way of talking about the skew of the income distribution.

The data on wealth discrepancy (http://www.mindreadings.com/WealthDiscrepancy.jpg) shows that the income distribution is very positively skewed, which means that the main (middle) "bulge" of this distribution is way down toward the low end of possible income values. So the "middle" income bulge, representing probably 90% of the population, gets lower and lower as the upper .01% control more and more of the wealth. So when I say the middle class is disappearing I just mean that the middle income "bulge" is going lower and lower relative to the range of possible income values; wealth discrepancy is increasing.

There is a real problem for a closed loop economy when you get very high levels of wealth discrepancy. Wealth is just demand potential; as more wealth moves to the upper .01%, middle income consumers have less ability to consume. And the upper .01% has more than they can possibly use to consume; they are basically hording demand capability. The result is recession or depression. That's what the graph shows. Note the 2 dates when wealth discrepancy peaks: 1929 and 2007.

I think the economy didn't tank as quickly in 2007 as it did in 1929 because these days we have a cushion (like a capacitor) in the system that maintains demand and prevents (at least for a few months) a precipitous collapse (as happened in 1929); that cushion is credit. Nowadays, consumer demand is maintained, to some extent, because people have credit cards and can take equity out of homes. Of course, when that became impossible (the "credit crisis") then the economy tanked, just as I had predicted it would as soon as Bush was re-elected.

Conservatives just don't understand closed loop economics. Liberals don't either but their bias toward egalitarianism leads them to adopt policies that are typically better for the economy because they reduce wealth discrepancy. That's why the economy has always fared somewhat better under Democrats. But it's really just been a lucky side effect of their "liberal" social biases. There is no science of closed loop economics yet; until there is, all economic policies will basically be based on voodoo.