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Inequality, where it comes from

by on 13/02/2018

The model of relating the increased economic inequality development since the seventies to basic character of capitalistic economy is misleading and wrong. If the aim is unchanged distribution of wealth, the equilibrium should be between GDP growth + plus inflation = equals capital income – minus bankruptcies, and not simple Wages equals Capital income.

In general term:
GDP= Cap.inc – bankruptcies +wages.

The reality is, that wages are not compensation for hours of work, but price for work, while capital income is the price for accumulation of the capital in the past, plus entrepreneurship, plus innovation.

If delta Wages= delta Capital Income-bankruptcies then there is no change in distribution of the income.

Price of any economic item is scarcity dependent. In times of big economic growth, that are times when new technologies and know how in different fields, discovered in previous era, or when there is a need for post war reconstruction, the demand for labor happens to grow above the capacity to supply it.

The marxist view would be that the reward for innovation and entrepreneurship is only other form of wages. But it is not. Definitely not in the modern era.

Who are the super rich in the modern societies? They are the top musicians and performers, then the new technology entrepreneurs, who were followed by internet barons, etc. Before and between the world wars the wealth was generated in the hands of entrepreneurs and inventors of different kinds, who exploited opportunities and/or were lucky, like adventurers as gold miners, oil explorers, but also inventors, new management systems inventors as new production processes initiators, corporate businesses initiators, new marketing technique inventors, etc. After they introduced their novelties to the public, others copied them, and their inventions and novelties were institutionalized and teached in Universities. Other kind of wealth accumulation were done by business ventures, that exploited the opportunity of dramatic political-economic system change, as it happened with the collapse of the Soviet Empire.

Even in the last fifty years of relatively calm economic development in the West, there is quite a lot of mobility as to who accumulates the wealth. It’s enough to check who are the most wealthy people in the West now, and who they were at the seventies. Also in corporate level there was a big shift from car and oil producing companies to know how and high tech novelty based companies. The profit making activities are always based on local temporary deficiencies, like lack of production capacities to satisfy the demand, or temporary monopolies, when a new technological or scientific invention is introduced to the market. On the long run the new inventions are copied, and lack of facility capacities are satisfied, many times creating over capacity, that cause eventually bankruptcies and causing wealth dilution.

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To make law, based on temporary situation, as it is locally done in the Western world in the last few decades, is misleading.

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