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.
Land.
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?
Land.
(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?
KatM says
Consider the compulsory superannuation and how all Aussie workers have to ‘tithe’ their wages into a huge honey pot while they wait for the preservation age. This diversion of wages smells like a quasi-socialist semi-capitalist scheme that’s likely to get more distorted. Who knows what’s going to happen to Australian publicly-listed company values and profits? Possibly there’ll be less of the pie getting divided among more people. Let’s hope the governments shrink a little and simplify the taxation regime so there’s 20% company tax, 20% income tax, 20% tax on goods with added sugar, etc.
Screwed Over Worker says
Unrealness? I say pure INSANITY. When wages fall so low workers can’t pay the rent – good luck keeping this fraudulent system going then it will completely implode. In fact I say all workers must STOP working now! Collectively if we all stop working for our slave wages we can destroy this f**ked insane system and rebuild it properly for all humanity. Trump gets this! And everyone wants to kill him?? Like I said we’re in one massive mental asylum.
Kiwi says
“All of the growth since 1980 can be explained by the increase in housing income.”
Ummmm…. Yeah, nah!
I don’t think you’ve got that right. This is simply proving what Mark Twain said: “Three kinds of lies. Lies. Damned Lies. And Statistics.”
If you look at the whole housing line, it’s shown a pretty steady increase, since 1948. If you look at it closer, like from 1948 to 1972-78, Housing doubled. Nothing else followed that trend. Then, from ’78 to 2007, it’s gone up by about 80%. If anything, housing growth has decreased. But from 78 to 2007, the Total only went up by about 7 percentage points, or a growth of about 35%. They don’t match, and what proves any linkage anyway?
Just because two lines are now heading in the same direction on a chart doesn’t mean there’s any connection between then. As a simple example, take a car’s fuel consumption. Fuel consumption goes up with speed. It also goes up when climbing a hill. So, if you JUST looked at fuel consumption, you would not be able to tell what the car was really doing.
The fuel consumption has gone up. So, is it climbing a hill, or is it going faster now?
Just to clarify that, say you are graphing fuel consumption and speed only. Looks to match. But then, the car goes up a hill. Speed goes down, but consumption doesn’t. Or, speed stays the same (in Jonno’s Merc), but fuel consumption goes up even more. What the hey?
Add another factor, say Merc Driver’s heart rate. Probably goes up with speed. And up with corners. And with traffic. And the sound of Police Sirens and Flashing Lights in behind. And up at the sight of hot girls in tiny bikinis. And lots of other things. Now graph heart rate against fuel consumption and tell me what you can work out.
Tom says
Kiwi, your theory is valid – as far as it goes.
In an urbanised society, most people need to live within a reasonable distance of services and employment. We cannot just wish such land into existence. It is inevitable that urban land prices must rise as populations increase, regardless of nice lines on charts, be they inter-related or not. Houston. We have a problem!
Unfortunately the current world economy is by no means a state of the art Merc. It is a primitive forerunner of the T Model Ford – trying to find hoe to replace the horse.
The increasingly technological world urgently needs a new system of satisfying the needs of all, not just the wealthy.
Keynesian theory is all based on an expanding economy, but Gaia’s resources are running out and Humanity is growing like a cancer in her gut. If we can avoid misters Kim and Trump obliterating us entirely, we have to find ways of reusing those resources. This will at some stage DEMAND a change from an increasing, to a steady state model of economics. Also, society MUST find a more equitable way of sharing the fruits of our labours. The current system will inevitably implode, unless there is a fair go for all.
Europe is feeling the birth pangs of a new social order. The world’s poor are flooding in, hoping to get a share of the wealth generated by their forbears and stolen by the First World. With the increasing pool of workers competing for jobs, wages will probably stagnate, even decline. Our own Governments knew that the high Aussie wages could not be maintained in a globalising world. So they have been increasing our population, to reduce any upward pressure, while the Third World tries to catch up and improve the lives of their people.
The US has been making a mockery of the ‘Fiat’ currencies of the world – spending paper money which they keep printing without any relevance to productivity.
In Latin, ‘fiat’ is ‘a wish’. The world runs on wishful thinking.
The fiat currency fiasco has been manipulated by big bankers, solely for their own benefit. The financial disruption we see in war-torn areas is what we will see world-wide, unless Humanity gets some humanity and treats the poor with respect.
Kiwi says
Hi Tom,
[Wasn’t really meant to be a theory, just an explanation of why the graphs don’t prove anything.]
Otherwise, I completely agree. The world as we know it is heading for an inevitable, massive collision, and no one wants to stop it. I know there’s a master plan behind all this, but I don’t know what it is, nor who is going to benefit. (I can guess who thinks they will come out on top, but will they?)
I think you are right – the rich will continue to make “war” (of many kinds) on the poor, for the obvious advantages and disadvantages. In my mind, this means that the rich meet the definition of parasites.
Not nice, I know!
Funny thing is, I can’t see any positive end to this process. It leads to some horrifying thoughts…
Antichrist says
whats happened to whacky Ron?.