Law of conservation of real wealth and rising inequality

Yashin, Pete (2020): Law of conservation of real wealth and rising inequality.

Abstract

Nonfinancial and financial capital conflated in modern economy. Using accounting approach we separated them and compared the corresponding total values of nonfinancial capital and wealth. We consider these values to be equal. This statement is named “law of conservation of real wealth”: real value of aggregate wealth is equal to the total value of nonfinancial assets. The law holds automatically by virtue of balance sheet identity, if financial assets’ value equal to the counterpart obligations securing them. However such equality can be violated when securities freely circulating in modern financial markets lose their link with corresponding obligations. The resulting difference is equal to the divergence between the aggregate wealth and total value of nonfinancial assets, which indicates a violation of the law in nominal terms. We consider this divergence as excess unsecured component of wealth, whereas the real wealth continues to match the nonfinancial assets’ value. Such unsecured wealth can only arise due to discrepancy between savings and investment, along with difference between total Haig–Simons income (including capital gains) and expenditures in real sector. It makes impossible to display correctly flows simultaneously with stocks. Deviations of securities' value from corresponding obligations commonly accepted as temporary. However, along with cyclical fluctuations the unsecured US financial assets value has been steadily growing since the 1980s, exceeding $11 trillion in 2016. We consider the observed nominal violation of the law of conservation of wealth is a consequence of unlimited capitalists’ enrichment aspirations. Marketable securities are the tools they use to embody such desire; the effect enhanced by the procedures of corporate mergers and acquisitions. Yet, the unsecured wealth inflate financial bubbles; its growth turns out a sufficient condition for wealth and income inequality rising. Then the aggregate consumer demand growth is hindered, and appetite for capital investment decreases. Unsecured component of capitalists’ profit is absorbed by an (unsecured) increase in the value of financial assets; it is not a source of capital investment; on the contrary, high financial returns contribute to crowding out investment from the real sector. Productivity growth slows down. Thus, increase in inequality reduces both aggregate demand and supply, which inhibits economic growth. US statistics confirms the above trends which led to the global crisis of 2007-2008. It has not cured the economy; unsecured wealth continues to grow increasing inequality, which dumps output growth. Black swans in 2020 have inspired inevitable arriving of new crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: capital; wealth; inequality; accounting identity; Haig–Simons income; crises
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth ; Environmental Accounts; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Atkinson A B and Morelli S., 2011. Economic crises and Inequality, United Nations Development Programme, Human Development Reports Research Paper 2011/06 November 2011

Baker, D., 2016. Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Washington, DC: Center for Economic and Policy Research. ISBN 978-0-692-79336-7. OCLC 961184821.

Bernardo J.L & Martinez F.L & Stockhammer E., 2014. "A Post-Keynesian response to Piketty's 'fundamental contradiction of capitalism'," Working Papers PKWP1411, Post Keynesian Economics Society (PKES).

Bernstein J., 2012 Another Excellent Inequality Study, Blog post, Available at http://jaredbernsteinblog.com/another-excellent-inequality-study/ Bezemer D. and Hudson M., 2016, Finance Is Not the Economy: Reviving the Conceptual Distinction; JOURNAL OF ECONOMIC ISSUES Vol. L No. 3 September 2016

CRS Report for Congress, 2011, Changes in the Distribution of Income among Tax Filers between 1996 and 2006: The Role of Labor Income, Capital Income, and Tax Policy Thomas L. Hungerford, December 29, 2011. Available at https://taxprof.typepad.com/files/crs-1.pdf

Cohen A. J.; Harcourt G. C., 2003 Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies? The Journal of Economic Perspectives, Vol. 17, No. 1., pp. 199-214.

Domar E. D., 1946 “Capital Expansion, Rate of Growth, and Employment”, Econometrica,14(4), 137 – 147.

Facundo A., Atkinson A.B., Piketty T., Saez E., 2015. The World Top Incomes Database Available at: https://www.gov.uk/dfid-research-outputs/the-world-top-incomes-database

Fitoussi J. P., Saraceno F., 2009. How Deep is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances, OFCE / POLHIA N° 2009-31, November 15, 2009.

Fisher, Irving, 1919. “Economists in public service”, Annual address of the President, American Economic Review, vol. 9, no. 1, Supplement, Papers and proceedings of the 35th annual meeting of the AEA, March 1919, pp. 5-21.

Flamant F., 2015. Again on Piketty’s Capital in the Twenty-First Century or Why National Accounts and Three Simple Laws Should not be a Substitute for Economic Theory, World Economic Review

Frank R. H., Levine A. S., Dijk O., 2010. Expenditure Cascades, Available at: http://dx.doi.org/10.2139/ssrn.1690612.

Frank R. H., 2010. “Income inequality: Too big to ignore”, New York Times, 17 October 2010 Available at http://www.nytimes.com/2010/10/17/business/17view.html.

Friedman M., 1956. Studies in the Quantity Theory of Money, Chicago: University of Chicago Press.

Galbraith, J.K., 2012. Inequality and Instability. A Study of the World Economy Just Before the Great Crisis, Oxford: Oxford University Press, 2012, 324 pages, ISBN 978-0199855650

Galbraith, J.K., 2014. Kapital for the twenty-first century? Dissent Magazine, Spring 2014.

George H.,1879. "Progress and Poverty, Chapter 2". www.henrygeorge.org. Bob Drake. Retrieved July 22, 2017. Homewood: Richard D. Irwin.

Godley W. and Lavoie M., 2007. Monetary Economics: An Integrated Approach to Credit, Income, Production and Wealth (London: Macmillan/Palgrave).

Hudson, M., 2018. ‘...and forgive them their debts: Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year’; Dresden : ISLET-Verlag.

Haig, R.M., 1921 ‘The concept of income – economic and legal aspects’, in R.M. Haig (ed.), The Federal Income Tax (New York: Columbia University Press), pp. 1–21.

Harrod R. F., 1939. “An Essay on Dynamic Theory”, Economic Journal, 49 (193), 14 – 33.

Kaldor, N., 1955-1956. “Alternative theories of distribution”, The Review of Economic Studies, 23, 94-100. ________. 1957. "A Model of Economic Growth". The Economic Journal. 67 (268): 591–624.

Keynes J. M., 1936. The General Theory of Employment, Interest, and Money, New York: Harcourt.

Kuznets S., 1941. National Income and Its Composition, 1919–1938. New York; National Bureau of Economic Research.

Marx K., 1867. Capital: A Critique of Political Economy, (Moscow, USSR: Progress, 1978). Piketty T., [2014], Capital in the Twenty-First Century, Harvard University Press, 2014, ISBN 978-0674430006

Milanovic B. 2013. The return of “patrimonial capitalism”: review of Thomas Piketty’s Capital in the 21st century, MPRA Paper No. 52384, posted 21 Dec 2013 Available at https://mpra.ub.uni-muenchen.de/52384/

Milanovic B. 2015. Increasing capital income share and its effect on personal income inequality, MPRA Paper No. 67661, posted 5 November 2015. Available at https://mpra.ub.uni-muenchen.de/67661/

Piketty T., 2014. Capital in the 21st Century (Cambridge, MA: Harvard University Press).

Piketty T. & Zucman G., 2014. Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010, The Quarterly Journal of Economics (2014), 1255–1310.

Piketty T. , Saez E., Zucman G., 2018. Distributional National Accounts: Methods and Estimates for the United States; The Quarterly Journal of Economics (2018), 553–609.

Rajan, R G, 2010. Fault lines: How hidden fractures still threaten the world economy, Princeton University Press, Princeton.

Ray Debraj 2014. “Nit-Piketty: A Comment on Thomas Piketty’s Capital in the Twenty First Century. http://debrajray.blogspot.co.uk/2014/05/nit-piketty.html.

Ricardo, D., 1817. (1951), On the Principles of Political Economy and Taxation, P. Sraffa, ed. with the collaboration of M. Dobb, “The Works and Correspondence of David Ricardo”, Cambridge, Cambridge University Press.

Roine J., Waldenström D., 2012. On the Role of Capital Gains in Swedish Income Inequality, Review of Income and Wealth Series 58, Number 3, September 2012

Roine J., Waldenström D., 2014. Long-Run Trends in the Distribution of Income and Wealth, IZA DP No. 8157, April 2014

Samuelson, P. A., 1970. Law of conservation of the capital-output ratio. Proceedings of the National Academy of Sciences, 67(3):1477–1479.

Sato R., 1981. Theory of technical change and economic invariance. Economic theory, econometrics, and mathematical economics. Acad. Press, New York.

Sauerbeck A. 1895. Index numbers of prices. Economic Journal 5:161-74.

Simons, H.C., 1938. Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (Chicago, Il: Chicago University Press).

Smith A., 1776. An Inquiry into the Nature and Causes of the Wealth of Nations (London). Richard Swedberg; Ola Agevall (2005). The Max Weber dictionary: key words and central concepts. Stanford University Press. pp. 22–23. ISBN 978-0-8047-5095-0.

Solow R., 2014. Thomas Piketty is Right. New Republic. Retrieved from http://www.newrepublic.com/article/117429/capital-twenty-first-century-thomas-piketty-reviewed

Stiglitz, J. E., 2012. The price of inequality: How today's divided society endangers our future. New York: W.W. Norton & Co.

Tobin J., 1981 Money and Finance in the Macro-Economic Process; Nobel Memorial Lecture

Varoufakis Y. 2014. Egalitarianism’s latest foe: a critical review of Thomas Piketty’s Capital in the Twenty-Frist Century. Real-world economics review, 69.

Weber, M., 1905. The Protestant Ethic and "The Spirit of Capitalism" Transl. by Stephen Kalberg (2002), Roxbury Publ. Co.

Werner S., 1913/1953, "Medieval and Modern Commercial Enterprise," in Lane and Riesmersma, Enterprise and Secular Change, (pp. 25–40). Weil D. N., 2013. Understanding Economic Growth, Brown University and NBER Johns Hopkins SAIS, April 18,

Zucman G., 2016 Global Inequality and Growth: The Interplay between Inequality and Growth, Available at http://gabriel-zucman.eu/files/econ133/2016/Econ133_Lecture8.pdf.