Why the rich are getting richer

19 November 2014

One of the problems in economics, an academic discipline that consists of little else but problems, mostly intractable, is that the models used to describe human activity tend to be static.

There is little attempt to alter the models as the system changes. History is ignored. Instead, there is an attempt to establish supposedly timeless rules, to mimic the physical sciences.

One example of the folly of this approach is the emergence of the absurd casino that has taken over the global monetary system, the so-called derivatives market (gambles ‘derived’ from conventional transactions). This has never been seen before, and it undermines traditional economic theories.

The global stock of derivatives, according to the Bank for International Settlements, is about $700 trillion, an unthinkably large (albeit notional) amount. It is so large that traditional economic theories about money supply, and its relation to factors like inflation and growth, have been undermined. It has become difficult to define what money actually is. That is why the US monetary authorities jettisoned M1, the most commonly used measure of money supply. It meant that one of the most popular economic theories, monetarism, was rendered useless because it is no longer possible to be confident about what money supply is.

Another example of the shortcomings of conventional economic theories is identified by economist Alan Nasser. He does something that is unusual for economists. He observes history, noting that as industry has matured, the fundamental rules of economics have changed.

The argument is that in the nineteenth century, during the early phases of industrialisation, growth was dependent on the level of investment and the formation of capital (China is still in that phase). Up until about 1920s, that net investment was necessary to keep economies growing.

But as companies became more efficient and innovative, their requirement for surplus net investment eased. Once the basic infrastructure of industrialisation was established the need for additional funding eased. The cost of producing goods also declined because of technical innovation. Capital formation became less significant because businesses became more innovative, a process that has continued ever since.

But economics has stayed firmly fixed in the nineteenth century, focusing on capital formation and its relationship to output. Nasser questions this assumption, which continues to underpin most economic policies in the developed world: 'We are to believe that the surplus that is currently channelled into financial speculation in derivatives and foreign exchange markets, or sitting idle in the

ECONOMICS

Why the rich are getting richer

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