Posts Tagged ‘finance’

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Special mention

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oligopoly

One story that can be told about today’s announcement is the Royal Swedish Academy of Sciences’ own explanation: that French economist Jean Tirole has been awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 because he “has clarified how to understand and regulate industries with a few powerful firms.”

The other story is: Tirole has shown how much the real world of capitalism—industries that are dominated by a few firms that have extensive market power, which can charge prices much higher than costs and block the entry of other firms—differs from the fantasy taught in countless introductory courses in economics: a world of perfectly competitive firms, which have no negative effects on society and which therefore don’t need to be regulated.

In addition, Tirole (in “Intrinsic and Extrinsic Motivation,” an article with Roland Bénabou, published in the Review of Economic Studies) has challenged a central tenet of neoclassical economics, that individuals always respond positively to managerial supervision and incentives. He has demonstrated, instead, that both close supervision and monetary rewards can often times backfire, especially in the long run: they can undermine intrinsic motivations, thus explaining why workers find behavioral punishments and rewards both alienating and dehumanizing.

Last year, the Academy tried to have it both ways, offering the Prize to both Eugene Fama and Robert Schiller. This year, the message is both clearer and yet unspoken: the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world.

And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.

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According to the new census by Wealth-X and UBS, almost half (45 percent) of the world’s billionaires partially or fully inherited their wealth. In fact, over the past year, the number of billionaires with partly inherited wealth experienced the largest growth in both relative and absolute terms.

But, clearly, the largest number of billionaires (some 80 percent) acquired their wealth at least partly through their participation in either privately held or publicly held businesses. According to the report, 63 percent of billionaires’ primary businesses are private companies, compared to only 31 percent that are public companies and 6 percent that are other types of institutions (education, government, non-profit, and social organizations).

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Opportunities for significant wealth gains can be found across most, if not all, industries. But certain industries have been particularly important sources of billionaires’ wealth generation. The largest share of the world’s billionaires have made their fortunes through finance, banking, and investment. But, outside of Europe and the United States—for Latin America and the Caribbean, Asia, Africa, and the Middle East—the largest proportion of new billionaires made their fortunes in industrial conglomerates.

In other words, most billionaires acquired their fortunes—either now or in the past—by helping themselves to the surplus created by their employees.

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Special mention

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Heinrich Kley, "Sabotage" (Betriebsstorung)

Heinrich Kley, “Sabotage” (Betriebsstorung)

I have long argued (e.g., here and here) that capitalism involves a kind of pact with the devil: control over the surplus is reluctantly given over to the top 1 percent in return for certain promises, such as just deserts, economic stability, and full employment.

In recent years, as so often in the past, we’ve witnessed those at the top sabotaging the pact (simply because they have the means and interest to do so) and now, once again, they’ve undermined their legitimacy to run things.

First, they broke their promise of just deserts, as the distribution of income has become increasingly (and, to describe it accurately, grotesquely) unequal and the tendency toward high concentrations of wealth has returned, threatening to create a new class of coupon-clippers. Then, they ended the Great Moderation with speculative decisions that ushered in the worst economic crisis since the First Great Depression. And, now, the promise of full employment appears to be falling prey to the prospect of secular stagnation.

That’s the worry expressed in a new ebook edited by Richard Baldwin and Coen Teulings published by Vox. While secular stagnation can be defined in different ways, the basic idea is that, for the foreseeable future, economic growth—and therefore the prospect of full employment—is probably going to be much lower than it was in the decades leading up to the global crises of 2007-08. Moreover, what little growth is expected will most likely be accompanied by great inequality and financial stability.

If it becomes a reality, secular stagnation represents the end of the pact with the devil. It’s going to be impossible to keep any of the promises—just deserts, economic stability, and full employment—that have maintained capitalism’s legitimacy.

I don’t know if the members of the 1 percent are aware of or concerned about the extent to which secular stagnation may be their undoing (because, in fact, they may hold out the hope that more austerity can successfully be imposed to keep pumping out the surplus). But, to judge from many of the contributions to the Vox volume, the prospect of secular stagnation certainly appears to be worrying mainstream macroeconomists.

Why? Because their own promise was to analyze the uneven and shifting patterns of the macroeconomy and to devise the appropriate set of monetary and fiscal policies to ensure the continuation of the pact with the devil. However, secular stagnation—including the idea that the real rate of interest would have to be negative to maintain an equilibrium of savings and investment—calls into question the efficacy of the kinds of macroeconomic policies that have long held sway among mainstream macroeconomists. Now, they’re not sure they’ll be able to maintain the promise of creating a just distribution of income, avoiding financial instability, and creating enough jobs to ensure every able-bodied person who wants a decent, well-paying job can have one.

Actually, as we’ve seen, they haven’t been able to fulfill that promise for the past 7 years. And now, the threat of secular stagnation means they won’t able to do it anytime in the near future.

There just may not be a happy Disney ending to this one. . .

 

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Clearly (after reading James Kwak’s review), I’m going to have to include a discussion of Helaine Olen’s book, Pound Foolish, in my ongoing project on the Prosperity Gospel movement.

The underlying problem with financial advice—besides the fact that most of it is wrong, conflicted (in the conflict of interest sense), or covert marketing—is that, even in the best case, it rarely works. The underlying financial problem that most Americans have isn’t that they buy too many lattes or pick the wrong stocks. It’s that they don’t make enough money to begin with, at a time when many necessities like health care and education are getting more expensive. . .

But the big question is why this stuff is so popular. As Olen points out, we haven’t always had a personal finance advice industry, and it’s only recently that financial education has been embraced as the solution to all our problems. One reason, she suggests, is that we live in an age of stagnant real wages and rising inequality. Add that to a culture that fetishizes individualism and rejects government support programs, and you have a market that is ripe for self-proclaimed gurus or self-interested advertising campaigns that claim that you can get ahead by (insert your choice) drinking less coffee, or going into more real estate debt, or buying a variable annuity, or picking the right stocks. The governments (state and federal) that promote financial education are like Marie-Antoinette advising people to eat cake; if they could eat cake in the first place, they wouldn’t need financial education.

Many of the people Olen talked to were too embarrassed by their financial plight to let her use their names in the book. Somehow we ended up blaming ourselves for the fact that we don’t have a decent minimum wage, real national health insurance, subsidized child care that made it easier to hold a job, or long-term unemployment insurance (other than in special circumstances). If we saw individuals’ financial struggles as a political issue—or a class issue—things might be different.