How to rob the world: the main problem of the modern economy
Here Stiglitz shared his fears of increasing stratification in society. It's hard not to agree with him, although, in a sense, this is already a trivial matter. But behind it there is one really very interesting question, namely, what is the mechanism for the redistribution of wealth? This is not a banal robbery, it is not a permanent direct reduction of salaries through fines, etc., etc. What is the mechanism? And what are its global implications for the economy?To begin with, let us remember the ideas of perfect competition. Its essence is simple - all market participants have equal rights. It is clear that in reality this does not even happen, but in itself perfect competition has one very important effect. Imagine a certain production chain, from raw materials to finished products that are sold to consumers. The cost of this product is determined by the market - since, on the one hand, there is competition with other similar products, on the other hand, demand is limited. Question: How is the profit from the sale of this product distributed along the production chain?
Answer. If there is perfect competition, then - evenly. All participants will have approximately the same profit (not in absolute terms, but as a percentage). Why? Yes, because if someone has an advantage, entrepreneurs will immediately rush there, it is in this link that competition will grow, and profits along the chain will become equal. A similar situation with competing chains - theoretically, the profit of all economic entities should be approximately the same over a sufficiently long interval. It’s like a raging sea - at a particular moment you can be on the crest of a wave or in a depression between the waves, but on average, any sailor is at the same height - at sea level.
We will not now talk about the mechanisms that destroy this most perfect competition in the framework of purely industrial-trade schemes (for example, about monopoly effects). It will be about the mechanism that fundamentally changes the distribution of profits and is not formally related to competition within the production chain - about the financial mechanism. In the financial system, there is not just no, but there can be no perfect competition for a hundred years since the adoption of the law on the US federal reserve (December 23 1913), and this system fundamentally affects the redistribution of profits.
Firstly, it forms a description of the risk system (and the cost of their insurance) - and thus significantly affects the cost of any production or trading process. Secondly, it (through control over the supply of a loan) affects its value and, thus, creates competitive advantages (cf. production credit conditions in Russia and the European Union or the United States). It forms the entire financial infrastructure, which has an impact on the cost of production. Finally, thirdly, the financial system stimulates final demand, and quite differently in different sectors of the economy. Moreover, the scale of this influence is so great that today we can safely say that the cost and profit of production in almost all sectors are determined by financial technologies.
In the financial system, I repeat, there is no competition and there cannot be - due to the fact that it is tightly regulated within the framework of the single coordinating institutions. One can argue whether these institutions are more private or more public, but the essence does not change - these institutions proceed from the general corporate interests of the financial sector. Only in the last couple of years the situation began to change, but at the level of an ordinary business this difference will be noticeable very, very soon. And perhaps it will not be noticeable at all, since the emergence of several competitive centers will in no way affect individual industries located in the control zones of each of these centers.
Using coordination mechanisms, the financial system began to actively redistribute profits generated in the economy in its favor. Thus, the share of this sector in profits in the United States has grown from less than 10% to World War II, to more than 50% at the current stage. There is no competition between the real sector and the financial one and there is no question - in fact, the financial sector has overcome the real “dryness”, if we consider the real, without taking into account credit incentives, final demand.
And this is where the fun begins. For example, for the USA, private demand is overestimated with respect to the normal level of real disposable incomes on 20-25% - that is, about 3 trillion dollars a year. Partially, this value is due to the savings being lowered, partly due to budget incentives (in various ways, from direct subsidies to student loans), and partly due to private lending. But these three trillions are somehow distributed among producers - which significantly changes the structure of normal, natural demand. Roughly speaking, financiers pay themselves high salaries - and, as a result, they themselves place a demand for all sorts of elite entertainment. The share of which in the US GDP is much higher than it should have been, ceteris paribus.
We saw well how the structure of the economy is changing due to a drop in demand in the 90s (only we had demand, mainly from the state, but for the economy, this changes little). There is its terrible simplification, all more or less complex production chains with a high proportion of added value gradually "die." Significant parts of the economy that worked for total consumption are moving into the premium segment. And so on. Something similar should happen in the western economy - the only problem is that relevant research simply does not exist. It is clear that there is little experience here (USSR / Russia 90-s, USA and Western Europe 30-s of the last century, maybe in some countries of Eastern Europe, although they are not a pure experiment, since the full reproduction contour in the economy does not had), but this is not a reason for refusing to work. The reason here, most likely, is of a political nature (if something is not discussed, then it does not exist), but the problem does exist! And what to do with it?
Just in case, I repeat this problem again. The use of financial technologies and the promotion of private (and government) demand has led to two fundamental effects. First, the real sector of the economy has become almost completely controlled by the financial (including in the part of the redistribution of profits). Secondly, the structure of production costs has fundamentally changed, which, with a drop in demand, will inevitably cause serious problems in all technological chains.
Moreover, the use of financial technologies (that is, in fact, very complex coordination, impossible with perfect competition) has greatly complicated the production chain, creating, in fact, a system of intertwined vertical and horizontal links with a high level of division of labor. This system itself is a serious source of increasing production costs, so as the demand decreases, it will inevitably collapse, which will create additional factors for changes in the structure of the economy. For example, at some point a completely demanded production of “something there” may unexpectedly find that it is forced to close its production, since some of the tens of thousands of components are missing. At the same time, their restoration from scratch and especially for one manufacturer is too expensive, it will take the main production beyond profitability.
Russian production workers with such problems are encountered regularly, for Westerners this will be a revelation. But the trick is that for Russia in the 90s there was a Western market where you could buy everything you need. And who will play the role of the same market today? Given the fact that the financial system of the modern economy is the same as the markets.
In general, the main problem of the economy today, I think, is the need to find approaches to determining the equilibrium structure of the real sector after the crisis. Its solution will allow to solve a lot of problems and not to make a lot of mistakes.
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