That’s rich

It’s not unusual to hear a political debate where socialism and capitalism are portrayed as opposites.

In these discussions socialism is often depicted as Robin Hood taking from the rich to give to the poor.

The proponent for capitalism argues that entrepreneurs create jobs, and diminishing their returns acts as a disincentive, that if sufficiently severe will eventually drive the capitalist onto another country’s shores. Low taxes, they continue, will retain the entrepreneur’s skills and capital, and with them the jobs that they create.

The counterargument is that the capitalists contribution does not exist in a vacuum, and that their skills are frequently the product of a privileged background. The gross inequality between the rich and the poor is unjust and undeserved.

Often the parties accept the premise that capitalism generates greater aggregate wealth for the country – so a bigger cake, and so the capitalist argues everyone is better off, although it is the risk taker, the entrepreneur, that gains the most.

It seems from recent research that that belief is wrong. Socialist systems, at least those where the disparity between the richest and the poorest is small generate more aggregate wealth than those where the imbalance is huge.

Switzerland, the country with arguably the best socialist system in the world, also has the highest wealth per person ($468,200). Next down the list is Australia ($355,000), also with a good social system. Then Norway ($326,000) with a social system comparable with the best. The wealth per capita in the U.S. ($262,400) does not offer a convincing argument that raw capitalism makes everyone wealthier.

Part of the reason for this mistaken belief is the metric that is most often used to portray national wealth, the Gross Domestic Product (GDP). GDP is a measure of economic activity for a year, not the accumulation of wealth.

The narrowing of inequality in the United States in the period between in the mid-20th century also coincides with one of its strongest periods of economic growth. Claudia Golden and Larry Katz, two economists at Harvard, attribute this success to a dramatic boost in education earlier in the century.

Roosevelt designed trust busting regulation to weaken America’s robber barons, so making the American dream a realistic proposition to those reaching for it. Banking, a big source of wealth in the early 20th century, was heavily regulated after the depression.

Since the 1970s the inequality gap has widened again. This is coincided with a relaxation in the banking regulations and a fourfold accumulation of wealth in the top 0.01% of all households in the United States. In spite of globalization and the IT revolution economic growth during this period has slowed dramatically in the developed world.

So, the research suggests, a progressive balance of legislation, informed tax regulations, equitable social systems designed to protect the poor, without corruption and cronyism, makes the country’s people wealthier.

And that requires good leadership.

More at:
As you were
Credit Suisse Global Wealth Databook 2012
Credit Suisse Global Wealth Report 2012 
Inequality among World Citizens: 1820-1992 François Bourguignon; Christian Morrisson
English Workers’ Living Standards During the Industrial Revolution: A New Look* By PETER H. LINDERT AND JEFFREY G. WILLIAMSON
MEASURING ANCIENT INEQUALITY Branko Milanovic Peter H. Lindert Jeffrey G. Williamson
AMERICAN INCOMES BEFORE AND AFTER THE REVOLUTION Peter H. Lindert Jeffrey G. Williamson
AMERICAN INCOMES 1774-1860 Peter H. Lindert Jeffrey G. Williamson
Intergenerational Economic Mobility in the U.S., 1940 to 2000 Daniel Aaronson and Bhashkar Mazumder

The wealth trap

When one looks at a balance sheet, the value of the business attributable to the shareholders is the difference between the assets and the liabilities, the net asset value (NAV). The market value (MV) of a listed company is the value attributable to the shareholders. For companies that are growing, profitable, and high-tech the MV is usually a lot higher than the NAV.

A large proportion of the difference is a function of the growth, and when that starts to drop off, even though the company is still very profitable, the MV drops.

So the senior executives cannot afford for growth to drop off, otherwise the shareholders lose money and that makes them unhappy.

High growth is normal in the early stages of a market. The same is true for a company with a smart idea coming into an established market. As the market becomes saturated and the smart company starts to dominate, growth naturally tails off. After that growth is dependent on price increases, which at some point starts to chase customers away.

When executives start running out of ideas to keep the growth going they sometimes resort to dishonesty.

There have been a few examples recently: Barclays and the other banks manipulating LIBOR. GlaxoSmithKline paying $3 billion fine for committing healthcare fraud.

One company’s growth falling off is an unhappy event. Many companies sharing that fate is a crash. That mythical wealth is what underpins the stock markets.  As long as we keep believing the myth, we’ll be fine.

Just don’t stop.

More at:
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Corporate arrogance should be punished
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The wealth of nations

The way that nations present their accounts is badly flawed. The balance sheet figures, which are critical to the understanding of the health of an country, are not are readily available.

In a recent report, the UN has taken an interesting approach in valuing the assets of 20 countries. In addition to the assets normally appearing on the balance sheet, each country’s human capital and natural resources are included. This makes for interesting reading. It gives one a better idea of whether politicians are investing the country’s natural wealth into its people.

The data reflects the position in 2008. At the head of the table in aggregate wealth is the U.S. at about 10 times its GDP at the time. Japan, with its limited natural resources, has invested heavily in it’s people, and so heads the list in per capita wealth.

Let’s hope our leaders take note.

More at:
Inclusive Wealth Report 2012
National balance-sheets
The real wealth of nations
Current-Cost Net Stock of Fixed Assets and Consumer Durable Goods