Freitag, 17. April 2015

Economists (like Paul Krugman) are like babes in the wood

During a recent conference in Brussels Paul Krugman gave an interesting insight in his thinking about the impact of inequality on current economic developments.


While I agree with most of his points, I am wondering why he considers inequality only a political risk and not! an economic issue. He seems to be so obsessed with the common equilibrium kind of economic thinking, that he can't see that inequality is a clear symptom of a systems out of equilibrium and that an ever increasing inequality is a typical symptom of a system that is driven out of equilibrium by a process that uses a continous flow of energy/work to build and maintain a hierarchical structure. He obviously never questioned the base of equilibrium theories and never asked the question, how is inequality created in an economic system and what process drives it to increase further and further until things break. When I asked my self that question, I came across the work of Fargione et al.. And while Fargione et al. were writing about enterpreneurs, I just generalized that finding and found out that inequality develops out of a very basic economic behaviour almost everyone applies every day when he/she engages in economic activity.

Only three very basic things have to be valid to generate an ever increasing inequality.

1.) Humans are capable/productiv enough to generate a surplus.
2.) Humans reinvest this surplus continously to increase their productivity in an aim to improve the (material) future for them self and their children.
3.) The success/returns of these reinvestments vary over population and time (for the purpose of a model in a random fashion).

As long as these three points are valid, inequality increases and the rate of increase is determined by  the variance of the returns. Large variances generate high increasing rates, low variances (= a more homogeneus growth over population and time) reduce the rate with which inequality rises.
So inequality has its roots in very basic economic behaviour as long as these three things are valid. And as long as that is not recognized the economic and political problems that are a direct result out of that ever increasing inequality will also increase until things break.
But such a view appears to be way to far out  for economists stucked in equilibrium theories. And they will never get it, when they never ask the question:
What economic process generates and drives inequality = disequilibrium?

Sapere Aude!

Georg Trappe

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