What’s “Scarce” These Days? Borrowers, Spenders, and (Hence) Profitable Investments

November 11th, 2013

For the moment, let’s go with old saw that “economics is the study of scarcity.” (Though I disagree with it; the proper study of economics is human reaction functions.)

What’s scarce these days? Certainly not supply. In an 80%-service economy suffering high unemployment and a unprecedentedly low labor/population ratio, higher demand for massages is not gonna slam against resource-supply constraints. And in the goods sector, there’s just-in-time inventory/supply chains (making it essentially a service industry). If Apple gets an extra million iPhone orders, supply constraints won’t prevent those orders being filled (or cause a price increase).

So what is scarce? Borrowers. Spenders. People to buy those massages and iPhones.

I’ve gone on at length about the shortage of loan demand, even in the depths of the so-called “credit crunch.” (See Related Posts at the bottom of that post for yet more.)

How about spenders? Let’s consider what it could be, could have been. If wages had increased since the 70s at the same rate as worker’s productivity, median wages today would be about $90,000 a year — nearly double what they in fact are.

You really gotta ask: would there be more spending (hence demand, hence production) if that reality were…today’s reality?

Would savers and entrepreneurs have more incentive to invest in risky ventures if hundreds of millions of Americans were enjoying those kinds of incomes, and spending to match?

As Francis Coppola, John Aziz, and others have been explaining at length of late, economics today should be concentrating on the study of abundance.

Cross-posted at Angry Bear.

  1. Effem
    November 12th, 2013 at 08:11 | #1

    how do you reconcile this with record corporate profits? Wouldn’t that indicate excess demand? Or does capitalism no longer work properly?

  2. November 12th, 2013 at 09:46 | #2

    @Effem
    The high profits are the cause of low wages. Individual entrepreneurs have little incentive to invest in workers, and every incentive not to. But in aggregate, they’re killing the golden goose.

  3. Effem
    November 12th, 2013 at 11:08 | #3

    “The high profits are the cause of low wages.”

    Seems overly simplistic. If there is an excess supply of goods (and/or too little demand) then low wages should be passed to the consumer in the form of lower prices due to excess competition. This is historically what happened.

  4. November 17th, 2013 at 01:02 | #4

    But this is also a situation of competition among workers driving down wages — the same theoretical argument could be made that in a time of unemployment (abundant supply and low demand for labor), any drop in prices is passed on to employers in the form of lower wages, as any excess utility you get beyond that which is enough to make it worth working leaves room for others to undercut you.

    Both wages and prices are held down in this situation, and we have in fact seen both price inflation and wage growth at historic lows. You’ve given a reason inflation should be low, and it is, but you haven’t given any reason that prices should be more depressed than wages.

  5. November 17th, 2013 at 07:40 | #5

    @Eric L

    Here’s how I’ve been thinking about it: the turnover of financial wealth.

    Some monetary transfers (buying produced goods and services) cause, sort of by induction, a transfer of those goods and services from seller to buyer. Those transactions create the incentive for sellers to produce (and hire, and create new real “capital”).

    Other monetary transfers (financial-asset purchases) do not have that induction effect, or have it only loosely as second- or third- order effects.

    The first, pretty much by definition, increases GDP/income/production. The latter do so only tentatively.

    So an economy in which there are more inductive transfers (real purchases) relative to existing financial wealth results in more prosperity.

    Now if we assume for the moment a fixed amount of financial assets, if those assets are more evenly distributed, there will be more inductive transfers due to declining marginal propensity to consume from wealth.

    That distribution is determined by institutional structures and power relations — expressed in the body of law and regulation. If our institutional structures result in wider distribution of financial wealth (within limits), inductive turnover of wealth will be faster/moire, and we’ll all be more prosperous because of 1. higher incomes from more purchases/sales, and 2. more wealth due to the surplus generated when those purchases spur production.

    I did a little model of this here:

    http://www.asymptosis.com/modeling-the-wealth-income-and-saving-effects-of-redistribution-more-is-better.html

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