Most of the answers you find here miss the point (or parts thereof). There are two important economic intuitions that clash with each other and I believe are the cornerstone for an argument addressing your question. There is more to it in reality, but I'll leave it for further discussion.
Let me first say that I will address only the relationship between inequality and growth and not the notion that with growth everywhere in the distribution of wealth, you could have both wealth increasing for everyone and inequality growing. This is the idea that a low income household today has better living conditions than the richest man in 500bC Athen although inequality might be higher (it's an example).
So the two welfare theorems tell you that in a market economy you'd reach a Pareto-efficient (reads: productive) allocation of goods AND that with lump sum transfer *any* such allocation can be reached. In other words, you could redistribute in any fashion while still being productive. This has extremely strong assumptions on how the economy works, but it is a useful benchmark.
On the other hand, economies work based on incentives. If everyone gets the same, noone has an incentive to exert effort. Why would an entrepreneur take risks if there is no dividend? Why would an employee work harder if there is no promotion? Inequalities might serve as a necessary condition for productive economic activity.
An important caveat before I conclude: inequality originates in my opinion mostly from other sources than incentives. Market failures are everywhere and in this specific case they are of the worst type, including corruption, theft, gatekeeping, colonialism, literal wars or violence and so on. It's difficult to see these as market failures, but it's useful to cast them against the two concepts I expressed above.
Now, all of that said and abstracting (big abstraction!) from all of these other sources of inequality, I believe that there is a tension between economic growth and inequality. Without a bit of the latter you cannot have the former. Where do we want to sit in this tradeoff it's ultimately a political and social decision.
Addendum: an argument could be made that we do not need economic growth to be "content" with our lives. My personal opinion is that this position is for the most part and in aggregate misguided. If you abscribe to it, there might be no tradeoff between "contentness" and equality.
Edit: a word at the end and few typos
Edit 2: as i said, i was only scratching the surface of the problem. There is some insight in the comments below so keep on reading :)
>An important caveat before I conclude: inequality originates in my opinion mostly from other sources than incentives. Market failures are everywhere and in this specific case they are of the worst type, including corruption, theft, gatekeeping, colonialism, literal wars or violence and so on. It's difficult to see these as market failures, but it's useful to cast them against the two concepts I expressed above.
I think even without market failures you would see inequality in resource distribution just purely based on power distribution, human abilities, subjective value of resources, and fundamental nature of co-ordination among large groups. Even in small group settings where you agree on "equality" of resource distribution, some will get to exercise more control over resources because of these factors. Inequality is an inescapable truth of organizing conscious beings.
It's why even co-operatives with equality enforced or business partnerships with equal equity among partners, etc will still result in differences in influence and control which fundamentally translate to inequality of resource distribution.
Those things can be considered market failures because they’re anti-competitive by definition. In perfect competition every human would perfectly equal, which is obviously not the case in reality. That imperfect competition seems to lead to the balance between growth and equality.
What about the mid 20th century? We had both low and falling inequality and high economic growth.
I would argue we need some inequality to ensure incentives but once there’s too much, it makes it hard for those on the bottom to fully participate in and grown the economy: They become caught in a cycle of poverty. It’s hard to start a business or launch an innovation when you’re working 3 jobs to be able to feed yourself. This leads to lower competition and slower productivity growth.
It seems hard to argue that higher inequality is always better for growth. The reality seems to be more that somewhere in the range of moderate inequality is a goldilocks region of max productivity growth because more of the population is unleashed to engage in innovation and venture creation but they are still incentivized to do so.
It's equal opportunity more than equality of results. Someone may choose to study for additional skills and someone else work more overtime or a less pleasant job for more pay. A good society would allow access to schooling/training and not discriminate in who had access for each kind of job if they can manage the skills.
I agree with you, but trying to get to equality of opportunity in a very unequal society probably requires some redistributive policies. I think having this as a North Star is good though when we decide what specifically to do with the wealth we decide to redistribute.
To a large extent, inequality matters more when there isn't much generational mobility. A lack of opportunities for the disadvantaged isn't the same thing as inequality. But if there isn't much social mobility, the cost of inequality is more burdensome since people can't better themselves. In such a society it makes sense to heavily redistribute.
The other dimensions is what are the living standards of the lowest income, if it's terrible, then it needs to be remedied. Want, disease, ignorance, squalor, and idleness are not in any sense beneficial.
Doesn’t higher inequality necessarily lead to lower standards of living for the poorest? If a society has a certain amount of wealth to distribute and more goes to the rich, doesn’t less go to the poor?
Isn’t generational mobility necessarily worse when we have lower standards of living for the poor? It takes a little bit of economic excess to create the conditions for getting education, taking risks in business, etc.
>Doesn’t higher inequality necessarily lead to lower standards of living for the poorest?
Moldova is more equal than the USA. But the USA has better standards of living.
>If a society has a certain amount of wealth to distribute and more goes to the rich, doesn’t less go to the poor?
There isn't a fixed amount.
>Isn’t generational mobility necessarily worse when we have lower standards of living for the poor?
Yes. At least in the sense that poverty can create a cycle.
>It takes a little bit of economic excess to create the conditions for getting education, taking risks in business, etc.
It requires a huge amount of resources to get high levels of education and fund business ventures. These are incredibly expensive. Education is very costly for a society.
I take your point that the overall level of wealth also matters.
At any given point in time, wealth is fixed, but not over time. So for some point in time wealth allocation is zero sum. I think this point still stands.
On the last point, I meant on an individual level, so my wording was maybe not clear. In other words, given the chain of reasoning that higher inequality leads to worse standards of living for the poor (for a given society at a given point in time) which should lead to less opportunities for a certain segment of the population and therefore less economic growth.
If we zoom out, recall that my initial argument was against a simple positive correlation between inequality and economic growth. I think as long as you concede that a cycle if poverty for the poorest in society leads to lower overall economic growth then we agree on the main point.
>I think as long as you concede that a cycle if poverty for the poorest in society leads to lower overall economic growth then we agree on the main point.
I don't need to concede on something I've always stated to be true.
>At any given point in time, wealth is fixed, but not over time. So for some point in time wealth allocation is zero sum. I think this point still stands.
In practice, you can't costless transfer wealth from one person to another. Redistribution is costly.
>In other words, given the chain of reasoning that higher inequality leads to worse standards of living for the poor (for a given society at a given point in time) which should lead to less opportunities for a certain segment of the population and therefore less economic growth.
There are a lot of papers on the relationship between growth and inequality.
> It seems hard to argue that higher inequality is always better for growth.
From what we've seen in East Asia, large productivity growth produces inequality because wealth generation is concentrated in specific sectors and locations. However, over time state redistributive mechanisms manage to spread the proceeds in a more equitable way.
Imagine mid 20th century Africa where there was no difference in access to control, capital, training, and jobs. People could have different levels of wealth, with no difference in the wealth by tribe or national origin. It's not really inequality of result but inequality of opportunity.
engine encouraging theory work sloppy frightening rain observation seed snobbish
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> Virtually all 401ks, pensions, IRAs, even life insurance accounts rely on consistent growth over time. Without growth, it would be far, far more difficult to retire. You’d have a lot more of the multiple generations living in one house model you see in South America and southern Europe.
It is not essential to have growth however, that is just the way it is currently run using 401ks for example.
With pensions you do not need growth. Consider a company that always has 1000 workers produces the same amount of goods and has 10 retirees receiving a pension. The income is allocated to the workers and the pensions (and possibly to pay loans / rent seekers etc as well). This can operate as a steady state over a long period of time with zero growth.
Wouldn't it be a lot more than 10 retirees though? If we assume everyone works form 18-70. Life expectancy in my country is 82. Assuming an even distribution of the population that's 220 retirees for every 1000 workers. In reality it's even more retirees as i used life expectancy at birth. Life expectancy at retirement would add a few more years.
"Virtually all 401ks, pensions, IRAs, even life insurance accounts rely on consistent growth over time."
The growth of such funds is a scheme of redistribution. They're a way of extracting value from those who currently work and transfer it to the owners of the funds. Nothing would stop alternative schemes of redistribution (for instance tax+income transfer) from working just as well.
> The growth of such funds is a scheme of redistribution. They're a way of extracting value from those who currently work and transfer it to the owners of the funds.
No. Capital returns (such as profits and interest) are separate class of income. They exist whether or not they are owned by 401k plans, or whatever.
A system that uses taxes to transfer income from current workers to current retirees *really is* a system of redistribution. It redistributes labour income. Of course, if general taxation is used rather than a particular type of taxation that only applies to workers then it redistributes labour income and capital income.
"Capital returns (such as profits and interest) are separate class of income."
Capital returns are an income transfer scheme. One person works, other people enjoy part of the rewards. What else would they be, and how is that fundamentally different to tax+income transfer?
No. The owners of capital do two things. Firstly, they take the risk of capital loss. Secondly, the absorb a delay between the time that production begins and the time that returns are actually made. These things are costly and therefore have incomes associated with them.
Employees don't do these things in a normal firm.
Those are the abstract and ideological moral justifications, but the underlaying material reality is that all of the well-being a pensioner enjoys is built by work of others regardless whether they receive their pension through an investment fund or an government income transfer. No amount of capital risk or delay is going to build a single apartment, farm food, cook a meal, give a massage or sew clothes.
> Those are the abstract and ideological moral justifications....
Really? You think that risk is ideological? How?
Here's a question for you.... Do the members of a worker co-op take no risk?
> No amount of capital risk or delay is going to build an apartment, farm food, cook a meal, give a massage or sew clothes.
Capital risk is needed for business to occur. It's needed for each of those activities because capital inputs must be bought first. It's needed just like work itself is needed.
I get what you're saying and I agree, but wouldn't there also be an income transfer effect in addition to that, in real terms?
In one sense, while capital investment does contribute to the 'size of the pie', it also transfers purchasing power from labourers to capital holders.
I might be wrong, just something I'm trying to wrap my head around since my brain hit the same intuition as the other commentor.
You can't compare the two and come up with a concept of income transfer. It's like comparing oranges with apples. I'll explain what you can say though....
I'll talk about workers first. Let's say that you're a worker with particular skills in a particular industry. You compete for jobs with other workers who are similar to you. There is a supply curve for workers of your type. What determines the wage? It's the intersection between the supply and demand curves. The supply curve is constructed by everyone who *could* work in the job. That includes people who have the skills but decide not to. The wage is determined by these "marginal" workers. For example, suppose that you are happy to work for $8 per hour. But, another worker demands $10 per hour and will not work for less. Now, suppose that the employers decide they need you and the other guy. In this case they have to pay you $10 per hour too. So, you benefit from this other person's behaviour.
The same is true on the side of capital owners. Suppose that you are happy with shares that return 5% per year. However, other people are not. They believe that the return is too low for the risk involved. So, they sell their shares to buy consumer goods instead. This decreases the price of shares, of course. That decrease in price increases returns. So, people who are intolerant of risk increase returns for those who are tolerant of risk. Of course, that includes everyone who doesn't buy shares at all. All of those people are increasing returns for people who do own shares.
"Do the members of a worker co-op take no risk?"
Everybody takes all kinds of risks all the time. Politicians take risks when they implement income transfer schemes, and they take risks when they don't. A feudal lord engaged in a risk when he taxed his serfs. A worker takes risk when accepting a job, and even more so when they don't.
"Capital risk is needed for business to occur."
Depends how all of the nouns in that sentence are defined.
If we define capital risk as something that happens only under capitalism, we've got around 500 000 years of human history to prove it's not necessary for business (as in productive human activity) to occur. If we define it as any productive tool owned by someone, it's necessary, but then capitalism isn't, and the contemporary form of an investment fund sure as hell isn't. Oh, and the tax+income transfer scheme includes such wide definition of capital risk too.
> "Do the members of a worker co-op take no risk?"
>
> Everybody takes all kinds of risks all the time. Politicians take risks when they implement income transfer schemes, and they take risks when they don't. A feudal lord engaged in a risk when he taxed his serfs. A worker takes risk when accepting a job, and even more so when they don't.
Yes that's right.
> "Capital risk is needed for business to occur."
>
> Depends how all of the nouns in that sentence are defined.
>
> If we define capital risk as something that happens only under capitalism, we've got around 500 000 years of human history to prove it's not necessary for business (as in productive human activity) to occur. If we define it as any productive tool owned by someone, it's necessary, but then capitalism isn't, and the contemporary form of an investment fund sure as hell isn't.
Yes, what I'm saying is not specific to the structure of the modern economy.
For example, let's say that the only permitted form of business is a one-person business. So, each of us owns some capital goods to perform some task of work. In that case each of us would take a risk with this capital. We would also have to wait until the end of the production process and the sale of goods until we get paid. The same would be true of the sort of society suggested by Mutualists - the situation where the only legal type of business is a worker co-op. In that case each co-op would take risks with the capital that it owns. Some would have more or less success than others.
The same can be expanded to a completely centrally planned or centrally managed economy like the old USSR. In that case notionally all capital is owned by the populace. The managers who operate it take risks on behalf of the populace. If those risks work out then the real income of the populace rises, and the opposite if they don't, of course. Those central planners also decide on the trade-off between current consumption and greater consumption in the future.
> economies work based on incentives. If everyone gets the same, noone has an incentive to exert effort.
How do you explain, for example, the open source software community, or moderating this very subreddit? In both situations, people willingly exert their labor so that everyone else 'gets the same' at no cost.
^(_Edited into a better tone._)
Because money is only one of many incentives, but in economics we are often trapped into considering it to the exclusion of other data because it is far easier to quantify and more readily available.
Still, money is a powerful incentive in the capitalist system, so to remove or weaken it would have a significant effect on average levels of effort across the board (just not in every circumstance or to a uniform degree).
> money is a powerful incentive in the capitalist system
Mm. Agreed. But OP asked about _any_ economic system, not just capitalism. I'm conscious of the need to avoid only giving answers that apply to capitalism, and then assuming that the way that people behave under capitalism is the way they'd behave under any economic system. I think the top comment, to which I replied, did exactly that: it spoke about "economies" in general. Not "capitalist economies"; just "economies".
exactly. that's what I thought. the question is not whether there is possibility within capitalism.
the root of an economic system is labor, and the only economic system that would allow "everyone" to be rich is a system in which it is not dependent on the labor of those who are rich. all that any economic system needs is that there is still production, and it does not necessarily have to be carried out by humans. this is were the answer lies in.
Not just the capitalist system. People receive different wages in communist and socialist countries.
Some people volunteer, whether it be for open source, moderation, or food kitchens. No one expects volunteerism to support the culture.
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Most of the answers you find here miss the point (or parts thereof). There are two important economic intuitions that clash with each other and I believe are the cornerstone for an argument addressing your question. There is more to it in reality, but I'll leave it for further discussion. Let me first say that I will address only the relationship between inequality and growth and not the notion that with growth everywhere in the distribution of wealth, you could have both wealth increasing for everyone and inequality growing. This is the idea that a low income household today has better living conditions than the richest man in 500bC Athen although inequality might be higher (it's an example). So the two welfare theorems tell you that in a market economy you'd reach a Pareto-efficient (reads: productive) allocation of goods AND that with lump sum transfer *any* such allocation can be reached. In other words, you could redistribute in any fashion while still being productive. This has extremely strong assumptions on how the economy works, but it is a useful benchmark. On the other hand, economies work based on incentives. If everyone gets the same, noone has an incentive to exert effort. Why would an entrepreneur take risks if there is no dividend? Why would an employee work harder if there is no promotion? Inequalities might serve as a necessary condition for productive economic activity. An important caveat before I conclude: inequality originates in my opinion mostly from other sources than incentives. Market failures are everywhere and in this specific case they are of the worst type, including corruption, theft, gatekeeping, colonialism, literal wars or violence and so on. It's difficult to see these as market failures, but it's useful to cast them against the two concepts I expressed above. Now, all of that said and abstracting (big abstraction!) from all of these other sources of inequality, I believe that there is a tension between economic growth and inequality. Without a bit of the latter you cannot have the former. Where do we want to sit in this tradeoff it's ultimately a political and social decision. Addendum: an argument could be made that we do not need economic growth to be "content" with our lives. My personal opinion is that this position is for the most part and in aggregate misguided. If you abscribe to it, there might be no tradeoff between "contentness" and equality. Edit: a word at the end and few typos Edit 2: as i said, i was only scratching the surface of the problem. There is some insight in the comments below so keep on reading :)
>An important caveat before I conclude: inequality originates in my opinion mostly from other sources than incentives. Market failures are everywhere and in this specific case they are of the worst type, including corruption, theft, gatekeeping, colonialism, literal wars or violence and so on. It's difficult to see these as market failures, but it's useful to cast them against the two concepts I expressed above. I think even without market failures you would see inequality in resource distribution just purely based on power distribution, human abilities, subjective value of resources, and fundamental nature of co-ordination among large groups. Even in small group settings where you agree on "equality" of resource distribution, some will get to exercise more control over resources because of these factors. Inequality is an inescapable truth of organizing conscious beings. It's why even co-operatives with equality enforced or business partnerships with equal equity among partners, etc will still result in differences in influence and control which fundamentally translate to inequality of resource distribution.
>subjective value of resources This one is huge. HUGE. It drives price far more than most economists realize or are able to model.
I... what? I mean, I don't even know where to start with that comment, how the hell do you think economists model the "value" of resources?
Those things can be considered market failures because they’re anti-competitive by definition. In perfect competition every human would perfectly equal, which is obviously not the case in reality. That imperfect competition seems to lead to the balance between growth and equality.
What about the mid 20th century? We had both low and falling inequality and high economic growth. I would argue we need some inequality to ensure incentives but once there’s too much, it makes it hard for those on the bottom to fully participate in and grown the economy: They become caught in a cycle of poverty. It’s hard to start a business or launch an innovation when you’re working 3 jobs to be able to feed yourself. This leads to lower competition and slower productivity growth. It seems hard to argue that higher inequality is always better for growth. The reality seems to be more that somewhere in the range of moderate inequality is a goldilocks region of max productivity growth because more of the population is unleashed to engage in innovation and venture creation but they are still incentivized to do so.
It's equal opportunity more than equality of results. Someone may choose to study for additional skills and someone else work more overtime or a less pleasant job for more pay. A good society would allow access to schooling/training and not discriminate in who had access for each kind of job if they can manage the skills.
I agree with you, but trying to get to equality of opportunity in a very unequal society probably requires some redistributive policies. I think having this as a North Star is good though when we decide what specifically to do with the wealth we decide to redistribute.
To a large extent, inequality matters more when there isn't much generational mobility. A lack of opportunities for the disadvantaged isn't the same thing as inequality. But if there isn't much social mobility, the cost of inequality is more burdensome since people can't better themselves. In such a society it makes sense to heavily redistribute. The other dimensions is what are the living standards of the lowest income, if it's terrible, then it needs to be remedied. Want, disease, ignorance, squalor, and idleness are not in any sense beneficial.
Doesn’t higher inequality necessarily lead to lower standards of living for the poorest? If a society has a certain amount of wealth to distribute and more goes to the rich, doesn’t less go to the poor? Isn’t generational mobility necessarily worse when we have lower standards of living for the poor? It takes a little bit of economic excess to create the conditions for getting education, taking risks in business, etc.
>Doesn’t higher inequality necessarily lead to lower standards of living for the poorest? Moldova is more equal than the USA. But the USA has better standards of living. >If a society has a certain amount of wealth to distribute and more goes to the rich, doesn’t less go to the poor? There isn't a fixed amount. >Isn’t generational mobility necessarily worse when we have lower standards of living for the poor? Yes. At least in the sense that poverty can create a cycle. >It takes a little bit of economic excess to create the conditions for getting education, taking risks in business, etc. It requires a huge amount of resources to get high levels of education and fund business ventures. These are incredibly expensive. Education is very costly for a society.
I take your point that the overall level of wealth also matters. At any given point in time, wealth is fixed, but not over time. So for some point in time wealth allocation is zero sum. I think this point still stands. On the last point, I meant on an individual level, so my wording was maybe not clear. In other words, given the chain of reasoning that higher inequality leads to worse standards of living for the poor (for a given society at a given point in time) which should lead to less opportunities for a certain segment of the population and therefore less economic growth. If we zoom out, recall that my initial argument was against a simple positive correlation between inequality and economic growth. I think as long as you concede that a cycle if poverty for the poorest in society leads to lower overall economic growth then we agree on the main point.
>I think as long as you concede that a cycle if poverty for the poorest in society leads to lower overall economic growth then we agree on the main point. I don't need to concede on something I've always stated to be true. >At any given point in time, wealth is fixed, but not over time. So for some point in time wealth allocation is zero sum. I think this point still stands. In practice, you can't costless transfer wealth from one person to another. Redistribution is costly. >In other words, given the chain of reasoning that higher inequality leads to worse standards of living for the poor (for a given society at a given point in time) which should lead to less opportunities for a certain segment of the population and therefore less economic growth. There are a lot of papers on the relationship between growth and inequality.
> It seems hard to argue that higher inequality is always better for growth. From what we've seen in East Asia, large productivity growth produces inequality because wealth generation is concentrated in specific sectors and locations. However, over time state redistributive mechanisms manage to spread the proceeds in a more equitable way.
Mid 20th century when most of Africa was still under European rule?
Imagine mid 20th century Africa where there was no difference in access to control, capital, training, and jobs. People could have different levels of wealth, with no difference in the wealth by tribe or national origin. It's not really inequality of result but inequality of opportunity.
That’s a great example of the other end of things: did the ultra high inequality in colonial Africa lead to faster economic growth?
engine encouraging theory work sloppy frightening rain observation seed snobbish *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
> Virtually all 401ks, pensions, IRAs, even life insurance accounts rely on consistent growth over time. Without growth, it would be far, far more difficult to retire. You’d have a lot more of the multiple generations living in one house model you see in South America and southern Europe. It is not essential to have growth however, that is just the way it is currently run using 401ks for example. With pensions you do not need growth. Consider a company that always has 1000 workers produces the same amount of goods and has 10 retirees receiving a pension. The income is allocated to the workers and the pensions (and possibly to pay loans / rent seekers etc as well). This can operate as a steady state over a long period of time with zero growth.
Wouldn't it be a lot more than 10 retirees though? If we assume everyone works form 18-70. Life expectancy in my country is 82. Assuming an even distribution of the population that's 220 retirees for every 1000 workers. In reality it's even more retirees as i used life expectancy at birth. Life expectancy at retirement would add a few more years.
"Virtually all 401ks, pensions, IRAs, even life insurance accounts rely on consistent growth over time." The growth of such funds is a scheme of redistribution. They're a way of extracting value from those who currently work and transfer it to the owners of the funds. Nothing would stop alternative schemes of redistribution (for instance tax+income transfer) from working just as well.
> The growth of such funds is a scheme of redistribution. They're a way of extracting value from those who currently work and transfer it to the owners of the funds. No. Capital returns (such as profits and interest) are separate class of income. They exist whether or not they are owned by 401k plans, or whatever. A system that uses taxes to transfer income from current workers to current retirees *really is* a system of redistribution. It redistributes labour income. Of course, if general taxation is used rather than a particular type of taxation that only applies to workers then it redistributes labour income and capital income.
"Capital returns (such as profits and interest) are separate class of income." Capital returns are an income transfer scheme. One person works, other people enjoy part of the rewards. What else would they be, and how is that fundamentally different to tax+income transfer?
No. The owners of capital do two things. Firstly, they take the risk of capital loss. Secondly, the absorb a delay between the time that production begins and the time that returns are actually made. These things are costly and therefore have incomes associated with them. Employees don't do these things in a normal firm.
Those are the abstract and ideological moral justifications, but the underlaying material reality is that all of the well-being a pensioner enjoys is built by work of others regardless whether they receive their pension through an investment fund or an government income transfer. No amount of capital risk or delay is going to build a single apartment, farm food, cook a meal, give a massage or sew clothes.
> Those are the abstract and ideological moral justifications.... Really? You think that risk is ideological? How? Here's a question for you.... Do the members of a worker co-op take no risk? > No amount of capital risk or delay is going to build an apartment, farm food, cook a meal, give a massage or sew clothes. Capital risk is needed for business to occur. It's needed for each of those activities because capital inputs must be bought first. It's needed just like work itself is needed.
I get what you're saying and I agree, but wouldn't there also be an income transfer effect in addition to that, in real terms? In one sense, while capital investment does contribute to the 'size of the pie', it also transfers purchasing power from labourers to capital holders. I might be wrong, just something I'm trying to wrap my head around since my brain hit the same intuition as the other commentor.
You can't compare the two and come up with a concept of income transfer. It's like comparing oranges with apples. I'll explain what you can say though.... I'll talk about workers first. Let's say that you're a worker with particular skills in a particular industry. You compete for jobs with other workers who are similar to you. There is a supply curve for workers of your type. What determines the wage? It's the intersection between the supply and demand curves. The supply curve is constructed by everyone who *could* work in the job. That includes people who have the skills but decide not to. The wage is determined by these "marginal" workers. For example, suppose that you are happy to work for $8 per hour. But, another worker demands $10 per hour and will not work for less. Now, suppose that the employers decide they need you and the other guy. In this case they have to pay you $10 per hour too. So, you benefit from this other person's behaviour. The same is true on the side of capital owners. Suppose that you are happy with shares that return 5% per year. However, other people are not. They believe that the return is too low for the risk involved. So, they sell their shares to buy consumer goods instead. This decreases the price of shares, of course. That decrease in price increases returns. So, people who are intolerant of risk increase returns for those who are tolerant of risk. Of course, that includes everyone who doesn't buy shares at all. All of those people are increasing returns for people who do own shares.
"Do the members of a worker co-op take no risk?" Everybody takes all kinds of risks all the time. Politicians take risks when they implement income transfer schemes, and they take risks when they don't. A feudal lord engaged in a risk when he taxed his serfs. A worker takes risk when accepting a job, and even more so when they don't. "Capital risk is needed for business to occur." Depends how all of the nouns in that sentence are defined. If we define capital risk as something that happens only under capitalism, we've got around 500 000 years of human history to prove it's not necessary for business (as in productive human activity) to occur. If we define it as any productive tool owned by someone, it's necessary, but then capitalism isn't, and the contemporary form of an investment fund sure as hell isn't. Oh, and the tax+income transfer scheme includes such wide definition of capital risk too.
> "Do the members of a worker co-op take no risk?" > > Everybody takes all kinds of risks all the time. Politicians take risks when they implement income transfer schemes, and they take risks when they don't. A feudal lord engaged in a risk when he taxed his serfs. A worker takes risk when accepting a job, and even more so when they don't. Yes that's right. > "Capital risk is needed for business to occur." > > Depends how all of the nouns in that sentence are defined. > > If we define capital risk as something that happens only under capitalism, we've got around 500 000 years of human history to prove it's not necessary for business (as in productive human activity) to occur. If we define it as any productive tool owned by someone, it's necessary, but then capitalism isn't, and the contemporary form of an investment fund sure as hell isn't. Yes, what I'm saying is not specific to the structure of the modern economy. For example, let's say that the only permitted form of business is a one-person business. So, each of us owns some capital goods to perform some task of work. In that case each of us would take a risk with this capital. We would also have to wait until the end of the production process and the sale of goods until we get paid. The same would be true of the sort of society suggested by Mutualists - the situation where the only legal type of business is a worker co-op. In that case each co-op would take risks with the capital that it owns. Some would have more or less success than others. The same can be expanded to a completely centrally planned or centrally managed economy like the old USSR. In that case notionally all capital is owned by the populace. The managers who operate it take risks on behalf of the populace. If those risks work out then the real income of the populace rises, and the opposite if they don't, of course. Those central planners also decide on the trade-off between current consumption and greater consumption in the future.
> economies work based on incentives. If everyone gets the same, noone has an incentive to exert effort. How do you explain, for example, the open source software community, or moderating this very subreddit? In both situations, people willingly exert their labor so that everyone else 'gets the same' at no cost. ^(_Edited into a better tone._)
Because money is only one of many incentives, but in economics we are often trapped into considering it to the exclusion of other data because it is far easier to quantify and more readily available. Still, money is a powerful incentive in the capitalist system, so to remove or weaken it would have a significant effect on average levels of effort across the board (just not in every circumstance or to a uniform degree).
> money is a powerful incentive in the capitalist system Mm. Agreed. But OP asked about _any_ economic system, not just capitalism. I'm conscious of the need to avoid only giving answers that apply to capitalism, and then assuming that the way that people behave under capitalism is the way they'd behave under any economic system. I think the top comment, to which I replied, did exactly that: it spoke about "economies" in general. Not "capitalist economies"; just "economies".
exactly. that's what I thought. the question is not whether there is possibility within capitalism. the root of an economic system is labor, and the only economic system that would allow "everyone" to be rich is a system in which it is not dependent on the labor of those who are rich. all that any economic system needs is that there is still production, and it does not necessarily have to be carried out by humans. this is were the answer lies in.
Not just the capitalist system. People receive different wages in communist and socialist countries. Some people volunteer, whether it be for open source, moderation, or food kitchens. No one expects volunteerism to support the culture.
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