The Home of Steven Barnes
Author, Teacher, Screenwriter


Friday, October 24, 2008

Rising Complexity

A thought on economics. Don't know much. But certain things make sense to me, mapping knowledge over from other arenas.

In yogic discussions of the raising of "intrinsic human energy" or "Kundalini", one looks at the chakras, ranging from core survival up to emotion and eventually to intellect and spirit. The goal is to have this energy alive in all seven "chakras" simultaneously. "Awakening the kundalini" its called. Now they say some thing that is of interest in terms of economic theory. It is that you can awaken the kundalini from the bottom up, or from the heart outward, but NEVER from the top town. This is called "Awakening the Kundalini backwards" and is basically the door to insanity and black magic.

I perform a thought experiment: can you have a healthy, happy working class without a healthy middle class and upper class? It would seem to me that, given the differential in values, capacity, and inherited wealth, that if the lower classes are healthy, there will always be an even more prosperous "middle" and "top."

How about middle class? If you have a healthy and prosperous middle class, you have an attainable ladder for the lower classes--a target within reach, so to speak. And upper class? Well, a bell curve handles that. Of COURSE there will be those considered rich, and in essence the middle class provides a safety net for them: if their fortunes collapse, they don't fall through the bottom of the world.

How about upper class? Would it be possible to have a healthy and prosperous wealthy class, without a healthy middle class and working class? Unfortunately, I think the answer is "yes." It would be completely possible to find a society in such a position: rich people who think life is great, and grinding poverty at the bottom. And this is where I feel "Trickle Down Economics" ultimately sounds great, but is the expression of a theory of humanity that applies the Parado Principle to say that 20% of people create 80% of the value. If you believe that, then the idea of giving those at the top every benefit of the doubt, every advantage, and total social support makes sense.

Of course, hidden within this group will be those who believe it's more like 10-90. Or 5%-95%. And those are some pretty poisonous people. It would also be poisonous to believe that all good in society comes up from the bottom.

I think that the healthiest, safest approach would be to protect and nurture the middle class, while providing a safety net for those at the bottom, and opportunities for the best and brightest to get rich. But the idea that if you raise taxes people stop working only applies to those who work primarily for money. That is some people, but hardly all. Most of the wealthiest people I know will at least SAY that it isn't money...its the game of seeing how good they can get, what percentage of the market they can dominate, how much they can contribute...expressing themselves in an art form that happens to be financial instead of virgin marble or something.

That makes sense to me. The difficulty is setting the proper tension between greedy people at the bottom, and greedy people at the top. Those of good will will work things out just fine, I think.

#

Really enjoying the "Big History" course from the Teaching Company. Just gotten to the creation of life on earth. The organizing structure is the increasing complexity of the universe: from pre "Big Bang" to Nebulae, to stars, to planets...at each step, we are becoming more complex. Then a chemical soup, and then the first life forms.... I love the idea that a yeast cell and a 747 have a roughly equivilent level of complexity.

Can't wait to watch Dr. Christian apply the same structure to human society. This may turn out to be the absolutely perfect course to give an aspiring SF writer.

31 comments:

Anonymous said...

To some extent, the Pareto Principle (80/20) is nested--so of the 20% that generates 80% of total output, there's an inner 4% (20% of 20%) that generates 64% (80% of 80%) of total output. And within *that* fraction, there's a tiny group (0.8%) that generates an astounding 51% of total output...In a *lot* of fields, the productivity of the best workers can be orders of magnitude greater than that of the average worker.

AF1 said...

I've been having those same thoughts too, about how it's better when wealth "trickles up" instead of down.

When the working and middle classes are relatively happy, it seems there is a stable platform from which both can then reach higher.

And the wealthy then have a large pool of people to sell to or employ.

Marty S said...

Steve you are completely misinterpreting the motive and reasoning behind "trickle down economics". You have to think in terms of bets. Here's some examples.

1) You put up ten dollar. We flip a coin. If it come up heads I give you five dollars, if it comes up tails I keep your ten dollars.

2) You put up ten dollars. We flip a coin. If it comes up heads I give you ten dollars. If it comes up tails I keep your ten dollars.

3) You put up ten dollars. We flip a coin. If it comes up heads I give you fifteen dollars. If it comes up tails I keep your ten dollars.

Only the most addicted gambler would take the first bet, most people could take or leave the second bet, and almost everybody would take the third. For industry, researching a new cancer drug, exploring for new oil reserves, developing an alternative energy source or even deciding to build a new paper mill are all bets, gambles that may succeed and make money or fail and lose money. In all three bets above the odds of winning or losing stay the same, but the changing payoffs make the bet worth taking or not taking. The same is true of the investments I mentioned above. The odds of finding a new cancer drug remain the same no matter what the payoff, but tax policy changes the expected payoff if the company succeeds. So trickle down economics is about making the odds right so that industry will undertake projects which will provide jobs and other benefits to society as whole.

Anonymous said...

From the stand point of the working poor and the middle class, trickle down economics has worked horribly.

Both during the Reagan years and under Dubya.

Marty S said...

Anonymous: I suspect that your statement is quite incorrect, but we have no way of knowing unless you have access to a parallel universe where different economic policy was followed and the working poor and middle class are much better off. At any rate I was just trying to make clear the basic economic reasoning behind the philosophy. Everything a company does cost money. If the return on the money is insufficient the company goes out of business. Then the working poor and middle class become the unemployed poor. This generally doesn't make them better off

Anonymous said...

how about history prior to regan and bush?

Marty S said...

Anonymous: I'm not sure what a comparison with prior history would show, but it would definitely be completely irrelevant. First of all economic conditions in the U.S. are affected by the rest of the world and there have been dramatic changes in the world economic situation since Regan took office. Secondly, I personally take medication for diabetes, high blood pressure, cholesterol, enlarged prostate, and COPD. They work wonders. How will looking at history tell me whether these drugs would have been developed under a different economic policy.

Lynntaketwo said...

Hi, Steve. I don't really think economies are shaped as pyramids where things 'trickle down'. I think the new global economy will prove me right, too. There is no pyramid. We are a kind of circle. Everything is in some way connected. When one portion of the circle becomes too thin, the circle breaks and all will eventually suffer. As soon as people learn this, we will all be better off.

Lynn

(formerly of Spilling Ink in Public)

Marty S said...

Lynn: We are not dealing so much with a circle as a tightrope. Deciding who to tax and what benefits to give to what citizens is a balancing act. Go too much in the any one direction and you fall off the rope.

Lynntaketwo said...

I think perhaps your example of falling off the rope and mine of a circle being broken are the same things. The reason it is a balancing act is because it is all interconnected.

Marty S said...

A couple more thoughts on this subject. Back in the in the 1990's my company adopted a fad management approach called Participative Management. One of its prime precepts was "None of us is as smart as all of us." I always considered this BS. My view was if I had to bet on a chess match between Bobby Fischer and a committee of 100 random chess players I would pick Bobby Fischer. So I do believe that here are some people who can and often do contribute more than most of us. On the other hand these are not always the ones who receive the greatest monetary rewards. Life is a game which some people play better than others and it is those that play the game well rather than who contribute the most that get rewarded.

Anonymous said...

I think I might have misunderstood "trickle-down", but I always thought it *did* work. The problem was that it works only in a closed system and the USA is not a closed system. The planet is.

It seems to me (not an economist) that the people who benefitted from the trickling were in other countries because they were willing to work for far less than the Americans (but more than they used to make). So, yes, "trickle down" did work where giving money/breaks to the rich helped the poor ... it just wasn't the American poor.

To use Marty's motif: The not-rich (you) put up 10 dollars. Heads, the not-rich will get 15 dollars, tails the 10 dollars is lost. The problem is, the not-rich who get the money aren't always you. In *this* example, would you take the bet?

Like I said, maybe I misunderstood how it was supposed to work. If I did, could someone please clarify it further?

Jas.

Mike said...

I'm not an economist. But I know people who ARE economists, and the ones who favor "supply side" economics (which is generally what we're talking about when we talk about trickle down effects) say that it would work if anyone actually tried it. But that what Reagan and Bush Jr. implemented is NOT Supply Side economics in any useful way. The premise, as I understand it, is that you a) cut taxes; b) cut some spending; c) preserve other spending. Within c), the spending you preserve is the social safety net type spending - social programs are the price the state pays to maintain order. Reagan cut taxes, and cut social program spending (for a variety of reasons). He increased spending to the military (not as much as, say, Kennedy and Johnson, but he increased it.), and attempted to offload some of the social program load onto the military.

The problem that I see, then, is that the politicians who advocate "trickle down" economics are not really interested in the economics. Instead, they want to be able to justify slashing social programs.

Marty S said...

One of the fundamental principles of economics is the law of supply and demand(I consider it the most important by far).The way it works is that there is assumed to be a supply curve and a demand curve. The demand curve represents the quantity of any item will be purchased. That is people would drive a lot more and buy a lot more gasoline if it suddenly dropped to 25 cents a gallon and a lot less if the price rose to $10 a gallon. The supply curve represents how much of a particular item a supplier will be willing to produce and sell at a given price. The higher the price the greater the quantity produced and the lower the price the smaller the quantity produced. The actual quantity produced is in theory at the intersection point of the curve. Tax policy has the effect of changing the amount paid and the amount supplied. A consumption tax changes the effective price to the purchaser while leaving alone the value received by the supplier. This could be termed demand side economics and drives production down which also means fewer employees and a slower economy. The federal government can't practice demand side economics in most areas since we don't have a national sales tax. The federal government only puts special consumption taxes on items whose use it wants to reduce, like gasoline and cigarettes. Corporate taxes and capital gains taxes are taxes that don't directly affect the price the consumer pays but they do affect the amount the producer receives, so once again an increase in taxes drives the intersection point of the supply demand curve down reducing production and presumably reducing jobs and hurting the economy. This is supply side economics. So when ever you monkey with corporate or capital gains taxes you are practicing supply side economics. So both Democrats and Republicans practice supply side economics because that's what they have to work with. The Republican philosophy which has been given the label "trickle Down" with negative its negative connotations by its opponents takes the view that lower taxes leads to greater productivity and the greater good for all. Now this Republican policy follows directly from the economic facts described above and therefore is true, but only to a point. The actual truth is that just like with the law of supply and demand there are two curves involved and an intersection point that is optimal and so there is a point where further reducing corporate taxes causes more harm than good. The other two curves can be thought of in terms of taxes collected by the government and available to fulfill the obligations of the government.Decreasing corporate taxes helps the overall economy more people working and earning higher salaries, means more income taxes collected by the government. Also more items sold means higher profits can mean more corporate taxes and capital gains taxes collected in absolute dollars even though the rate is lower. However, at some point on the tax curve lowering taxes more does not give a big enough boost to the economy curve to keep taxes at the required level at this point we either have to reduce spending or increase the deficit. At this point one can reasonably argue against the Republican philosophy

Josh Jasper said...

Marty - Decreasing corporate taxes helps the overall economy more people working and earning higher salaries, means more income taxes collected by the government.

This is sadly not true. Overall, since corporate taxes have decreased, wage disparities have increased. The highest income earners have seen increases, and real wages of the middle class have stagnated.

You are assuming that the top level of society cares if the middle and low income earners get more. This is blatantly false.

Actually, it's much easier to keep the benefit of increased productivity and more hours worked for the top wage earners, because they, not the middle classes set the rules.

Alan Greenspan, who certainly does know far more than you about economics, just stumbled on this "flaw" in his economic theory. Corporate overlords are NOT heroes out of some Ayn Rand drivel. They're modern day robber barons, with a few exceptions. Given power (which they do have) they'll vote for giving themselves more and anyone else they have control over less.

Marty S said...

Josh: First of all I note you don't dispute that the economy grew or that there were more people employed, you just note the that the disparity in wages between high income earners and lower and middle class workers has increased. The theory I explained above makes no attempt to predict how the benefits of the increased wealth resulting from selecting lower corporate taxes would be dispersed amongst the population. That dispersion is affected by factors other than corporate taxes. One of these is the globalization of the economy. Lower and middle class workers face more competition from foreign workers than higher income earners. To the extent that this is the reason behind stagnation of lower and middle class wages, it is perfectly possible that without the decrease in corporate taxes we might have seen erosion of lower and middle class wages rather than stagnation. India just launched an unmanned moon mission. It is just one sign that our technological edge over the rest of the world has diminished. There are fewer and fewer reasons why this country should live at higher standard of living and that our population should have a higher standard of living than the rest of the world.

Josh Jasper said...

First of all I note you don't dispute that the economy grew or that there were more people employed, you just note the that the disparity in wages between high income earners and lower and middle class workers has increased.

"The economy grew" does not mean that people in the middle got any better off. If they're worse off, an the economy grows, even if new jobs are produced, they're less profitable to the middle class.

Are you of the opinion that this is a good thing?

The theory I explained above makes no attempt to predict how the benefits of the increased wealth resulting from selecting lower corporate taxes would be dispersed amongst the population.

Ah, so the theory is "the rich get richer". Yes, I've heard that before.

One of these is the globalization of the economy. Lower and middle class workers face more competition from foreign workers than higher income earners. To the extent that this is the reason behind stagnation of lower and middle class wages, it is perfectly possible that without the decrease in corporate taxes we might have seen erosion of lower and middle class wages rather than stagnation

Why? Because companies that see increased profits somehow pay workers more? That's not at all true. Quite the opposite.

It is just one sign that our technological edge over the rest of the world has diminished. There are fewer and fewer reasons why this country should live at higher standard of living and that our population should have a higher standard of living than the rest of the world.

You just don't get it. It's not that other nation are catching up, it's that, for the middle class, we're moving backwards, and have been for the last 8 years.

At least half the country seems to have figured out who's responsible.

Josh Jasper said...

In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.”

NY Times.

It's not outsourcing. It's just a game of "how much can we get away with?" played by the executives in charge.

Marty S said...

Josh: The law of supply and demand works for people too. The pay that an individual gets is related to the demand for that worker's skill and the supply of workers with the required skill. Factors like globalization and computerization have changed the supply side of the the equation for many lower/middle income jobs lowering the relative wages for these jobs. This does not make those who run companies and pay the market rate to workers evil/greedy. If there is bumper crop of apples one year and the price of apples drop at the supermarket are you evil/greedy because you don't run up to the store manager and demand to pay last years price for apples.

Marty S said...

Josh: First a slight correction to the above. Computerization has affected the demand not the supply side of the equation. Secondly and more important the Goldman Sachs statement does nothing to prove your point. The word labor is generally used to apply to those whose jobs are whose jobs are mostly in the manufacturing industries. Companies, like GM, Ford and Chrysler are hardly showing booming profits they are fighting bankruptcy and have been for a number of years. If national profits have been increasing due a boom for companies like Google, Amazon and EBay who use few laborers while declining for manufacturing companies it the nature of business in the country not greed or government that is driving the facts in the Goldman Sachs report.

Josh Jasper said...

Marty, your faith in the justness and lack of intense greed of executives is amusing, but not really in touch.

If a company's profits increase, and continue to for years and mid range employees don't see a benefit, it's greed and not globalization that's the cause. One has only to look at the policies of an employer like Wal Mart to understand how they take the axe to the least well paid.

As for you examples from the auto industry, can you chart executive compensation versus middle management and blue collar labor compensation? If not, your example is rather useless.

Or, if one were to go back and look at history, how workers were treated before the labor movement took up in force in the US.

If you're under the impression that workers in the early 1900's were fairly treated, though, I'll just give up on you as a hopeless case.

Steven Barnes said...

"How will looking at history tell me whether these drugs would have been developed under a different economic policy?"
##
by studying the history of the development of drugs, examining say twenty different leading countries, and seeing what relationship exists between economic system and productivity.

Anonymous said...

Hi, all. I'm not sure if comments are only supposed to be left the same day as the blog - I'm new to this - but here goes anyway...
Even if you believe in the Paretti principle, it doesn't seem to support the idea that we should give lots of support to the 20% most upper class. As far as I know there's no evidence that says that the 20% wealthiest are the same bunch as the 20% productivity-wise. You'd think that a lot of the inherited-wealth-types would be out having fun. Personally, I picture the 20% most productive as happy little underpaid techies working long hours under fluorescent lights somewhere.
(Just for the record, I don't think that the Paretti principle demands a specific 80/20 ratio - that was just one case he mentioned involving land ownership that's become the traditional number - but more says that the outputs are disproportionate to the inputs, whatever the exact ratio may be for a specific case.
And someone commented that the 80/20 figure is nested, which just doesn't feel right to me. I know that the author of a book about the Paretti principle claimed that, but is there any hard data to back it up? It seems as if, if you calculated a few iterations based on that assumption, you'd end up with a guy named Ted in Wichita doing 37% of the world's work, or some such. Possible, I suppose, but hard to believe...)

Regards,
Some guy

Marty S said...

Josh: When you use words like fair you take the discussion from the real of facts and objectivity to realm of personal opinion and then everybody is always right by the own subjective judgments. I never claimed employers were "fair", whatever that means, to employees. What I said was that employers treat employees just like commodities. That's why the law of supply and demand determines salaries which is just the price for buying somebody's labor. To the extent that a worker is paid his market value the employer is being "fair" in some sense of the word. Although I am sure this is not sense of the word fair you subscribe to.

Marty S said...

Steve: The Pareto principle doesn't say that the 20% of the people who control 80% of the wealth are any better or more valuable than the other 80%. It just notes the tendency for that ratio to exist. If one follows the Pareto principle one would expect 80% of the comments on this blog to come from 20% of the contributors. But again it doesn't mean the opinions of those 20% are any more valid than the opinions of less frequent contributors.

Josh Jasper said...

Josh: When you use words like fair you take the discussion from the real of facts and objectivity to realm of personal opinion Josh: When you use words like fair you take the discussion from the real of facts and objectivity to realm of personal opinion

Actually, what I was trying to say was exactly that - the system is heavily weighted in favor of the people with the power to set wages, and they'll consistently set them as low as is possible, even if profits increase.

Just about the only way to get around that is to actually bargain collectively.

That's why the law of supply and demand determines salaries which is just the price for buying somebody's labor.

Demand can be through the roof, but if employers as a whole get the idea that they can all stop giving raises, or cut salaries despite profits increasing, that's what they'll do. In fact, that's what they've done.

You're mistaking workers for a commodity - they're not. The price for an hour of any sort of labor is not set by the person selling it. It's set by the demand that person has for basic needs.

Marty S said...

Josh: If there are ten companies that need 1000 laborers and there are only five hundred laborers available then those five hundred laborers are going to be in a position to got work for the companies that offer the best salaries and benefits and the companies will compete with each other in salaries and benefits to get the these five hundred laborers. The have no choice. If there are ten companies that require 1000 laborers and there are 2000 laborers available then you will see the situation where a worker will take a job for subsistence pay and be glad they have a job. This is the law of supply and demand at work. The employers don't actually set wages they simply pay the lowest price the market allows just like when you go out to shop for a car, or refrigerator you pay the lowest price you can find. Increased profits for a company are like increased income for an individual. If you get a pay raise of ten percent do you now look to pay ten percent more when you purchase an item in order to be "fair" to the people who make and sell the item.

Josh Jasper said...

Marty - . Increased profits for a company are like increased income for an individual.

This is flat out untrue. Only the top earners actually profit. Corporations that find ways to cut wages and slash benefits pass those savings on to stockholders or owners, and get paid more to do it as much as they can.

Marty S said...

Josh: Funny you should mention stockholders. You see ultimately the benefit of increased profits go to the stockholders, who are individuals. In fact about 70 million individuals in this country own stock either directly or indirectly. Now people who run a company are paid to make the largest profit they can. The incentive to do that is higher pay. This is the American system. It's not just corporate executives. Salespeople, including the broker who sells your house work on commission. The more they sell the more they make. Now you can try another economic system if you don't like this one. How about China. Oh, did you know that virtually every PC sold in this country is made in China. That's because labor in China is so cheap. What we call subsistence would look good to most of these workers.

Josh Jasper said...

Let me try one last time. Marty, you're *wrong* about increased profits meaning increased pay for all I mean factually incorrect. Pay has been flat for the last decade, while profits have increased, and executive salaries have increased. This is a fact. It's not a political opinion.

It's not a question of like or don't like, it's a fact.

Now you can try another economic system if you don't like this one. How about China. Oh, did you know that virtually every PC sold in this country is made in China. That's because labor in China is so cheap. What we call subsistence would look good to most of these workers.

This is truly stupid of you. Someone points out a truth about a system you can't accept, and you get angry at them and tell them that if they don't like it, get out.

Attitudes like this were trotted out when women were agitating about getting a vote. They were told that, while they couldn't vote, they should feel happy they weren't "in china".

Marty S said...

Josh: I wasn't telling you to get out, what I said in not so many words is that if you don't like our system and then you have to replace it with some other system and used China as an example because it is the growing world economic power, but its growing by treating its labor even worse than ours.