I meant this to sound argumentative (consider it a little marketing ploy), but I wanted to discuss how money in a free market flows from one place to another, and how the "evils" of the market actually produce the very type of economic redistribution of wealth socialist parties are asking for, without destroying the abilty to accumulate wealth.
So, the 99%/1% argument in particular is one that gets me. One of the natural market flows is for the wealth of the rich to flow out of their hands and back into the market, and I wanted to talk about how everything (except one) that a rich man does makes the rest of society better off. The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress. And I mean to truly save it up for a rainy day, not investing it for a profit that's a different function.
So, the first thing I'd talk about is ridiculous (by middle class and upper-middle class standards) purchases. Think about a 100 ft yacht or a $13millon mansion or a collection of sports cars, etc. In this case each of these type of purchases involves creating wealth to produce them. You and I may not feel that a 100ft yacht is a very good investment, but in terms of raw materials that go into any of them there's very little but the craftsmanship that is required for these products is highly labor intensive. Every laborer is paid a large amount of money on a regular basis to produce these products and that money flows out into the economy. The money spent on the initial purchase of most of these goods will rarely be recouped in sale, especially on consumables. But all of the money spent in the initial purchase flows back out into the economy and into the wallets of workers and some small percentage (6-8% on average) flows into the pockets of the business owners who create those products.
The second way wealth from the rich flows out is in investment. This is my favorite one, because win or lose, the capital (factories and equipment, computers and furniture) they purchase, is money in the pockets of workers who produced them. The business they run sells goods and services that are provided via labor they pay for through they money they invest. If the rich investor is lucky, they make a profit. If they are unlucky, they lose their money. But regardless, money flowed out into the economy. That wealth, especially when they lose it, transfers to those who have less.
Now when they lose money in investments, the capital they invested in gets sold off. Some (like useless factories) may in fact get destroyed. But much of it can be sold off for a percentage of the initial costs. Some other investor gets to startup a new business, or expand it in some new way.
If they make money in investments, the capital returns to them as profit. Jobs and capital are malinvestments, they are good investments. The workers don't have to find new jobs. They keep the ones they have, they become managers, they move up. The capital gets used for it's intended purpose. The profits REWARD the risk of the investor, and can be reinvested into a winning organization so it can grow and provide more jobs, invest in more capital, and simultaneously provide cheaper and better goods in the market. Remember those profits? Yep, you guessed it they end up in one of these 3 places again.
So, to the rest, what other ways in a free market does capital get transferred?
In particular, in what ways does it prevent a poor person from losing what little wealth he has, or more importantly from ending up buried under debt himself?
Cause it seems to me that the complaints of the 99% are from the interference in government with these natural and proper transfers of wealth.
The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress.
Nope.
Clayton -
I started thinking about this a few days ago. Redistribution of wealth isn't a problem when done on the market. In fact, by definition, redistribution of wealth on those terms is voluntary, stable, and profit maximizing for everyone. Cool post, Dave B.
If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH
@Clayton, nice post
I don't view bank savings as investing. Saving truly meant saving. Investment banks are different types of accounts.
In the moment I forgot that money not spent is also money being held on the sidelines, waiting for economic conditions to change like drops in prices or raises to interest rates. Thanks for that link.
David B:The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress.
Where the hell do you think the capital in "capital investment" comes from but underconsumption, i.e. savings, e.g. "money in the bank"? Where the hell does a business get it's financing from?
This is basic econ. I honestly don't understand how you can be so off on something so basic, and then not only get so offended when I offer you some links that would help correct your understanding on this sort of stuff, but also suggest that I need to "dig deeper and look behind the curtain". Perhaps it would be advantageous for you to mind your own garden and look at some basics before you start digging behind any more curtains.
@DavidB: I would also recommend chapter one from Bastiat's Economic Harmonies to your attention. In particular, this passage has always stuck with me:
... in this really incalculable number of transactions that have resulted in maintaining a student for a day, not one millionth part, perhaps, was done directly. The things he has enjoyed today, and they are innumerable, are the work of men many of whom have long since disappeared from the face of the earth. And yet they have been paid as they intended to be, although the one who profits from their work today did nothing for them. He did not know them; he will never know them. The person who is reading this page, at the very moment he reads it, has the power, though perhaps he is unaware of it, to set in motion men of all lands, all races, and, I could almost say, of all times, whites, blacks, redskins, men of the yellow race; he makes generations dead and gone and generations still unborn work for his present satisfactions; and this extraordinary power he owes to the fact that his father once rendered services to other men who apparently have nothing in common with those whose labor is being performed today. Yet such balance was effected in time and space that each was remunerated, and each received what he had calculated he should receive. [Emphasis mine]
Clayton:@DavidB: I would also recommend chapter one from Bastiat's Economic Harmonies to your attention.
Uh oh. Now you gone and done it.
Another point, I thought about was the bookie, loan shark, pawn shop functions in the neighborhood setting.
Bain Capital is like a pawn shop. Companies that focus on recapitalizing depressed businesses and assets.
The person to be betting with the bookie (investing) is the man who can afford to lose it. But instead we see in the last 10 years (maybe more) that more and more people at lower and lower incomes, with less and less proof of their ability to live beneath there means (which is how you become profitable) are being encouraged to borrow from the loan shark to gamble with the bookie. The market seems to have natural protections that prevent this kind of behavior.
This is how the market protects the poorer members of society from running a negative balance. So basically the poor in the market can't lose money they don't have. They also can't put themselves on the hook for amounts of money (think 100k student loans) that they can never get out from under.
It always seemed to me that the most ridiculous place a man could be is upside down when he balances debt to assets. Or upside down on an annual/monthly budget. Now a rich man can afford it, but a poor man cannot. Nor should the market economy put him in a place where he can be.
John, do you know the difference between savings banks and investment banks? In the last 20-30 years they've been bound together, there was a time before that when by law they could not be conjoined because of the moral hazard. Fractional reserve banking is the fraud that occurs when the two types of accounts at the same institution aren't held separate. Putting one manager in charge of both types of accounts is a huge risk, because the temptation is very high.
But hey... Maybe I am a novice and don't realize that there is a difference between savings and investment. Savings is underconsumption that results in accumulated wealth. Capital investment is a process of taking accumulated wealth (savings) and turning it into specific goods (factors of production) that are put into a process to produce a product.
Let me repeat some words back at you. "This is basic econ, I honestly don't know how you can be so off on something so basic." Would you like me to link you to some stuff that would correct your misunderstanding? Or would you think that I would be "pulling back the curtains and encouraging you to look deeper?"
Here's a link that's not even Austrian... But now we'll go to the Austrians...
Here's an article about the history of the Glass-Steagall Act.
My offense is at feigned expertise, that's actually brash ignorance.
So, I'll say it publicly now, instead of in a private message. Keep it civil, you know better. This tone and indiganance of yours is no better than mine was in that post, and I'm not going to repeat it, no matter how much you want to stalk my threads looking for "error and ignorance." I don't look the fool in these situations. Speak with humility and curiousity and respect. I tried to say this to you privately, and I apologized for my behavior in that thread. One several occassions publicly and privately I've since encouraged and applauded your readiness with links to helpful information.
Do these things fall on deaf ears? I'm really hopeful that someone who seems to want to be helpful and relevant, is smart enough to figure out when he's simply hurting himself with his arrogant and brash behavior. If not, I'll simply ask that you beg off interacting with me. "If you can't say anything nice..."
And yes savings is a prerequisite to investment... But again, that's econ 101... I didn't think that needed to be said...
Bottom Line John, stop acting like you think I'm stupid... I'm one of the smartest men I know... ;)
David B:Fractional reserve banking is the fraud that occurs when the two types of accounts at the same institution aren't held separate.
Really? That's what fractional reserve banking is? Well shiver me timbers I'm glad you came along to set me straight. Here all this time I thought it was banking in which the holding institution only kept a fraction of the deposits on reserve.
But this is great. You might want to make sure you share this information with all the Austrians who have been bitching about fractional reserve banking for the last thirteen years, and let them know we only had such a thing in the United States since the 1990s!
I'm sure they'd all be just as shocked as I am right now!
So, I'll say it publicly now, instead of in a private message. Keep it civil, you know better. This tone and indiganance of yours is no better than mine was in that post, and I'm not going to repeat it, no matter how much you want to stalk my threads looking for "error and ignorance."
I'm not stalking anything nor looking for anything. You post in a thread or create a new one, it goes to the top of the thread list. I'm sorry if that is a problem for you, but I guarantee you I didn't have to do any "stalking" to come across any threads you create.
And I'm sorry that in my simple reading of your posts I come across error or ignorance. I'm not the one who put it there, so I'm not sure why you're blaming me.
I'm not even the first person to point out this error to you in this thread.
David B:I tried to say this to you privately, and I apologized for my behavior in that thread.
You did no such thing, and if you keep this kind of thing up I might be inclined to call you a liar.
One several occassions publicly and privately I've since encouraged and applauded your readiness with links to helpful information.
Unless you're talking about private conversations with other people, you're a liar. And I'm not exactly sure how you encourage someone without communicating with them, so...
David B:Do these things fall on deaf ears?
No. Because you never said them. You never offered any apology, and you sent a single private message to me, in which you called me a "valuable and useful member of the community"...after you suggested I offer nothing to the community other than "link spam". I am the only one who has apologized here, mutliple times, but you wouldn't have it, so I'm not sure where you get off on this high road you seem to think you're taking.
I'm not quite sure how you expect to have a rational discourse by making false statements.
I'm one of the smartest men I know... ;)
Maybe that's part of the problem.
Many parts of Glass-Steagal were slowly chipped away at. from 1933 until it was essentially wiped out in 99 which brought back the co-mingling of the two separate functions under a single institution, and yes the third part of that law was insurance. There were some really interesting mergers that happened during that time.
If you thought I said this no longer happened in commercial banks between 1933 and 1999, you misunderstood me. If you thought I said it was no longer happening, you misunderstood me. But you did do what I hoped which was to look at the history of that Act.
Now, even under Glass-Steagal the law (FDIC related I believe) allowed commercial banks to maintain a fractional reserve, and I believe this is how the commercial banks are able to engage in a variety of credit functions. Car loans, home loans, personal business loans, credit cards, etc. These fractional reserve issues were present also before Glass-Steagal was repealed in 99.
There are liquidity expectations with savings accounts (immediate access), and yes, the fractional reserves that they hold are just as much a moral hazard as any other type.
However, the point of my post was that savings and investment are two different functions. It's inappropriate to correct someone who was right.
Dave B: I'm one of the smartest men I know... ;)
John : Maybe that's part of the problem.
Maybe, thus the wink, but maybe not.
Clean up your own mistakes, gently point out things you think might be mistakes in others. This is twice now where I said what I meant, and had to point out to you that I knew what I was saying... And just in this thread...
Back to the point of the thread.
I'd like to clean up the idea a little from the original post.
So Wealth Redistribution happens under capitalism (free market). Now in the current political environment in the US, and I'm sure in some other countries. The weatlh distribution to the "top 1%" is growing as we are frequently reminded. The Fed, the mega-banks, Fannie/Freddie, and other organizations have played a direct role in this.
I see how wealth flows to the poor in the market, but other than the investment function how does wealth flow to the rich?
Capitalism (free market) seems to put an upper bound on wealth. But doesn't it also enforce naturally a lower bound? meaning it's should be hard to get into debt such that you don't have the assets to cover it?
I guess that's a balance sheet, not a cashflow/budget question.
John : I'm not even the first person to point out this error to you in this thread.
If you'd read the link posted by Clayton, I inferred he was making a different point from "savings is investment".
It made the point that by not consuming (saving), the resources one would have consumed are allocated differently in the society and thus enrich others.
The investment function is a completely different function and benefits society in a much more direct and focused way, while miserly saving is a much less directly visible benefit to others but is nevertheless a boon to all.
David B:If you thought I said this no longer happened in commercial banks between 1933 and 1999, you misunderstood me. If you thought I said it was no longer happening, you misunderstood me. But you did do what I hoped which was to look at the history of that Act.
I looked at nothing. I opened a browser page, and typed in "Gramm-Leach-Bliley" into wikipedia so that I might provide you with some link spam with which you might look at the history of the act, and realize that that piece of legislation effectively allowed single institutions to act as any combination of an investment bank, a commercial bank, (and insurance company)...which is what you defined fractional reserve banking as.
However, the point of my post was that savings and investment are two different functions.
Um.
"Fractional reserve banking is the fraud that occurs when the two types of accounts at the same institution aren't held separate."
- David B.
That is what you said. And it is some of the most blatent, unintelligible nonsense I've seen in quite some time.
David B:It's inappropriate to correct someone who was right.
Good thing I didn't do that.
This is twice now where I said what I meant, and had to point out to you that I knew what I was saying... And just in this thread...
Evidently you still don't understand what you're saying because you're still wrong.
One more time.
I don't really know any other way to say this. No. It isn't.
"The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress."
No. Just no.
I also find it quite telling that you completely ignore my response to your claims of apology and praise, and my outright calling you a liar. I can only assume that means you have no obejction to anything I stated there. (Which of course you shouldn't, because it's true, but I figured if you were going to lie in the first place you'd have no problem coming out and doing it again.)
David B:If you'd read the link posted by Clayton, I inferred he was making a different point from "savings is investment".
I have read that article. Clayton has linked it a number of times. He really likes it.
miserly saving is a much less directly visible benefit to others but is nevertheless a boon to all.
Gee. That's weird. I could have sworn you said "The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress."
Maybe "boon to all" doesn't mean the same thing to you as it does to everyone who refers to dictionaries? *shrug* I mean by all means, feel free to tell me (again?) you meant exactly what you said.
John James: David B:If you thought I said this no longer happened in commercial banks between 1933 and 1999, you misunderstood me. If you thought I said it was no longer happening, you misunderstood me. But you did do what I hoped which was to look at the history of that Act. I looked at nothing. I opened a browser page, and typed in "Gramm-Leach-Bliley" into wikipedia so that I might provide you with some link spam with which you might look at the history of the act, and realize that that piece of legislation effectively allowed single institutions to act as any combination of an investment bank, a commercial bank, (and insurance company)...which is what you defined fractional reserve banking as. However, the point of my post was that savings and investment are two different functions. Um. "Fractional reserve banking is the fraud that occurs when the two types of accounts at the same institution aren't held separate." - David B. That is what you said. And it is some of the most blatent, unintelligible nonsense I've seen in quite some time.
I'm absolutely flabbergasted by how ridiculous and petty you are.
Yes, fractional reserve banking is fraud. And it happens when the first function is fraudulently used for the second function. "aren't held separate" in my opinion meant, that the two functions, savings and investment were overlapping and working from the same "general fund" within a bank.
So, let me ask you this : "That is what you said." That line I understand the point of saying, that line demonstrates curiousity. "And it is some of the most blatant, unintelligible nonsense I've seen in quite some time." <- What's the purpose of it? Agitation? Irritation? Are you looking to drive people away?
David B:It's inappropriate to correct someone who was right. Good thing I didn't do that.
I still read what I said as correct, and here's why. Savings can be held as savings, or it can be used to invest in production or to consume. Lending is a form of investment, now technically one could borrow to consume, and it happens, but regardless they look identical to the investor, and to the lender. If I put money in a bank to save and they lend it out without my knowledge and consent, then they do not have the money to cover their reserves. This is fractional reserve banking. Tying the lending/investing functions together with the saving function leads to fractional reserve banking. Lending the reserves IS fractional reserve banking. Investing or lending someone elses reserves IS fractional reserve banking. If you lend me your money to invest, that's a different behavior. When I said "and these two types of accounts at the same institution aren't held separate." I thought it was clear, that by this I meant that reserves were being invested as part of the investments from the investments that the account managers are purchasing. I stand by that statement as the definition of fractional reserve banking. Savings deposits are loaned out or invested. Loans are investments. They are risk-bearing devices both of htem. This is fractional reserve banking... ugh.
This is twice now where I said what I meant, and had to point out to you that I knew what I was saying... And just in this thread... Evidently you still don't understand what you're saying because you're still wrong. One more time. "Fractional reserve banking is the fraud that occurs when the two types of accounts at the same institution aren't held separate." - David B. I don't really know any other way to say this. No. It isn't.
and I'vae now done it a third time... and you're focused on purposely misunderstanding what I'm saying to specific effect.
"The only thing a rich man can do that doesn't improve the economy is put his money in a bank or under a mattress." - David B. No. Just no.
that was a mistake, but not for the reason you think :). I elaborated the mistake the Clayton was referencing. And within the context of my original argument it is actually correct. The question was how does wealth flow from the rich to the poor. In fact, saving and holding money in a miserly function by definition doesn't transfer his wealth to poorer elements in the same society. However, by not competing for prices, other wealth that is generated comes to the poor and everyone else at cheaper prices.
Yes, just yes?!
I also find it quite telling that you completely ignore my response to your claims of apology and praise, and my outright calling you a liar.
Ok, I'm responding, and I don't know what to say. An apology is when you acknowledge doing something wrong, and then don't do it again, otherwise it's empty words that have no meaning. I've been polite since. I'm being polite now in spite of you.
I'm not a liar. There I responded to it. Where do you want to go with this? This is bullying behavior. Quite frankly I'm wondering how much more of this I have to take. It's not even the substance, I don't mind that you misunderstand me or ask for clarification or offer what you perceive as corrections. It's the vitriol and anger. It's inappropriate, cut it out. It's the form of argumentation, but instead becomes about character.
I can only assume that means you have no obejction to anything I stated there. (Which of course you shouldn't, because it's true, but I figured if you were going to lie in the first place you'd have no problem coming out and doing it again.)
I object, I'm not sure what else to say to that though. You quite obviously could care less about how your behavior is perceived or impacts others.