Growing wealth inequality is driven by one of three things – business income, labour income or housing income. Guess which one it is.
Okay, I know we’ve been spinning round the outer-reaches of the academic universe these last few weeks, but do you want an edge or not?
Do you want to see the trends that the big players see? Or do you want to keep taking your financial play book from the Sun Herald? See how far that gets you.
The whole point of these blogs is about helping you see a bigger picture. The higher up the mountain you go, the more you can see.
If you want gags and ramblings… well, that’s what Friday’s for.
So bear with me a little longer here. I’m building to something. I need more than a few blogs to do it. Nothing worth having is easy. But trust me, it will all come together soon and you’re going to be amaa-aazed.
Ok, so last week, I showed you how falling wages are driving property prices higher. You never thought that sentence could even make sense, but I think you got the point I’m making.
The economy is a bunch of relativities. Everything in relation to everything else. The usefulness of labour is falling, so the relative price of labour must fall. That’s another way of saying that the price of housing, relative to labour must rise.
And that’s what we’re seeing.
But let’s slap a little more nuance on this picture. Let me pop a little swan made of meringue on top here.
Ok, so typically economist divide the factors of production – the stuff that makes stuff – into three groups – Land, labour and capital (machinery, factories etc).
Since land is fixed, economists just tend to put it to one side and focus on labour and capital.
(I know, you’ve got to wonder what they’re thinking.)
And so Marx said all history is the history of class struggle, between labour and capital.
A few years ago, Thomas Picketty, that French economist wrote “Capital” – which argued that wealth inequality was getting worse because capital owners were able to capture more of the surplus, at the expense of their workers.
And in all of this, land is just the place where they grow cheese.
And you can kind of get why. Land is just dirt to most people. It kind of has no character, no personality. It’s not able to rise up against its oppressive overlords.
The battle between labour and capital on the other hand – oh boy is that a story. It’s a theatre for all the hopes and dreams of the working class, all the aspirations of our entrepreneurs and captains of industry.
Land just doesn’t care about any of that. And it will still be there once all the workers and managers and capital owners are dead.
So it gets written out of the story.
And so then you see charts like this one:
This is the share of total income going to workers and to capital owners (in the way of profits).
The argument that people make – people like Picketty – is that labour’s share is falling and that’s a bad thing. That means workers have less power. Businesses have more. And that’s one of the factors driving inequality.
And that might all be true, but it is missing a huge piece of the puzzle.
Recently I did come across one economist who tried to put land back in the picture. This chart comes from a young grad student at MIT. It breaks capital income (from the chart above) into capital AND land (rather than just lumping profits and land income in together.
Look at what happens:
This is for the developed world since 1948. You can see that since 1980 in particular, capital’s total income share has been growing. That’s Picketty’s story.
But look at why. It’s not that regular business profits have been growing – the non-housing share of capital income has been pretty much flat.
All of the growth since 1980 can be explained by the increase in housing income.
Let that sink in for a second. If the rich are getting richer, if income and wealth inequality are getting worse then it’s got nothing to do with businesses, it’s got everything to with housing, and the way the rich uses property as the number one way, to build, protect and transfer wealth across generations.
I know as a business owner it may sound like I’m talking my own book here, but a careful and measured analysis of the above, highlights that the balance of evidence suggests that, taken together, all you pinko-lefties should take your redistributive business taxes and shove them up your bum!
(Nah, just kidding. You’re great. I love ya.)
But the central idea is that this hasn’t been a golden age for capital. Technology hasn’t made it easier to exploit workers and earn super profits.
If anything, technology has made the game harder. Technology depreciates in value and usefulness incredibly quickly (anyone want to by my Iphone3?), and the digital market place has meant that disruption is coming at you from every which way.
No sooner do you have a great idea, than a dozen firms in China are ripping you off.
Think about what AirBnB did to the hotel industry, what Uber did to taxis, what Amazon is doing to retail.
This is no capitalist utopia.
So labour income is falling. Capital income is falling, or it’s on the way down. The relative price of these two must decline.
Relative to what?
(Gee, it’s like you’re not even listening sometimes.)
As I’ve said before, in an economy where everything is getting less and less real, where more and more activity is moving into the unlimited infinity of unrealness, the relative scarcity of real things, commodities and real estate, increases.
As their relative scarcity increases, so does their price.
We’re still in the middle of a commodity boom that continues to surprise, and the real estate boom…
Well, we’ve put some great runs on the board…
But the game is nowhere near over.
Will capital’s share of income start to fall?