Gary Stevenson wants us all to know that he’s a new model of the economy, one that explains all. As is usual with a model of everything that springs from the single brow not quite enough testing of it has occurred. The sort of testing that needs to happen being “Well, why am I wrong?”
Or, to be more scientific about it, how would I set up and experiment that would disprove my theory? If it passes that then my theory lives to meet another attempt at disproof. If it fails, ah, well, back to the drawing board.
So, this theory of everything:
By late 2010-early 2011 I began to become shocked at the ongoing and phenomenal failure of markets to predict correctly. Using my education in economics, and my job analysing the real economy, I tried to understand and work out what was missing in the theories of mainstream economics that was causing such phenomenal failure to predict. By the beginning of 2011, I was starting to finalise a theory focussing on Wealth Inequality, which explained how Wealth Inequality could cause low wages and high house prices, crushing people’s financial positions and ability to spend. Wealth Inequality was, and still is, I believe, almost completely unmentioned in mainstream economics university education. So, if my theory was correct, that Wealth Inequality was becoming the true driver of the economy, it would explain the market’s phenomenal, and continuing, inability to predict accurately.
Even though GDP was beginning to recover by the end of 2010, Wealth was becoming rapidly more unevenly distributed – zero interest rates were pushing up the price of assets, such as houses, while wages stagnated or even fell. According to my theories, if Wealth continued to become more unevenly distributed, wages would continue to fall relative to housing costs. This would squeeze people’s pockets further and further, hurting living conditions and recovery prospects. According to my theories, if Wealth Inequality wasn’t addressed (and nobody, at the time, seemed keen to even consider it, never mind address it), the recovery would never emerge, housing affordability, real wages and living conditions would continue to fall over time, and interest rates would probably never be able to be raised.
Hmm. UK housing – before coronavirus – stopped rising in price, wages continued to rise. Housing thus became more affordable. Wealth inequality was not falling at the time though. Economics being replete with natural experiments, the things we also call history.
I believe that this theory is very important. It explains why wages struggle to rise, despite continual improvements in technology, and why good quality housing seems to be less available and affordable now than it was even 50 years ago.
An alternative explanation – one that better fits the facts – is available. The Town and Country Planning Acts have reduced the supply of housing, thus increased the price. Wages have risen but not as fast as house prices.
We can even test this. The US contains areas that have a similar planning induced shortage of building plots, others that do not. Those areas without that induced shortage have seen a fall – relative to wages – in house prices (note that’s for housing of exactly the same size and standard. Of course, richer people generally desire larger houses….) and those with the planning restrictions have seen a rise similar to the UK.
Oh, and wealth inequality is higher there too.
We seem to not have much of this theory left.
Moving on to a few details. In the discussion on wealth inequality itself this is said:
The Wealthy devote the vast majority of their income to saving.
Not so, richer people do have a higher marginal propensity to save, true, but people with a savings rate of over 50% of income are rare birds. It’s an untrue statement that is.
Further, anyone who is going to write about wealth inequality without at least mentioning lifetime income smoothing and so on is simply not grasping the most fundamental basics of the subject under discussion.
The crux of the argument here is that the wealthy don’t spend enough to create the demand for the non-wealthy to have jobs. That marginal propensity to save isn’t actually enough to cause this effect. But, imagine that it is. Then mix back in lifetime income effects. Those who save for a pension are, of course, saving. This is, in fact, the largest depositary of wealth in the UK economy, pensions (without looking it up that is. Could be housing equity but think it’s pensions). And what happens when someone retires? That capital in that pension is consumed down. People do not live on the income from their capital when they’ve a pension. They eat the capital too.
That is, our largest form of savings in the UK – even assuming that the marginal propensity to save etc causes a problem – reverses itself. Sure, people have a marginal propensity to consume (the inverse of save) of less than 1 while they work and build their pension. But their pensions income, when they retire, leaves them with a negative savings number. They consume some of their capital each year.
This is easiest to see with an annuity. £100 in gives £6 a year in income and at the end the capital sum is zero. The £100 in capital has been consumed over the period of retirement, that’s a negative savings rate.
So, even if it were true that saving is a problem and etc etc, it solves itself as the savings are consumed in the end.
Oh, and one other thing. So, the wealthy don’t consume their cash they save it. OK. Savings become investment and the demand for investment goods is also a source of demand. Which is why the basic imbalance being thought about doesn’t happen anyway. The rich bloke might be investing in a factory but it’s still an income to that brickie which creates demand etc.
This of course being why governments are told to invest when there’s a shortage of demand……
We have other errors here as well:
This is the first crucial thing to understand about the Wealth Unequal Economy. When a huge number of people are desperate to work (because they have no other way to support themselves), and the people who are able to spend are very small in number and unwilling to spend a lot of money, then wages will inevitably be very low. This is then extremely compounded if the Wealthy have amazing technology that means that they don’t have to employ people.
If you don’t have to employ people to make stuff then the stuff being made will be cheap to make. The point being made. Add competition and the price you can charge for it is low. Which means that stuff to buy gets cheaper – which is an increase in real wages. As William Nordhaus pointed out, take it to the extreme, the robots make everything, the plutocrats get all the profits. And yet real wages in that case would be rising at 200% a year. This is not a problem.
Another way to approach the same point. Assume that the economy has changed, that all those profits are just piling up. We should therefore see the capital share of the economy rising to extreme levels. And if it isn’t then it isn’t true – just ain’t – that all the income is going in profits to those wealthy. And – the capital share isn’t rising. Leaving out the 1970s dip in it it’s at about post-war average. The idea is disproved.
And the miracle solution?
Land and property should only ever be on long leases, never perpetual ownership. Which brings us back to one of our natural experiments in history. The Ottoman and Mughal Empires operated on this basis. Which is why no bugger would ever invest in anything.
That is, we’ve tried it and it doesn’t work.
So, the predicted future for Gary’s economic theories is that it’ll all be a Wow! in the Guardian comments sections until any actual economists – however lefty they may be – have had a read of the stuff. At which point I think it’ll be back to radio silence from Planet Stevenson.
And to the actual problem here? Not a wide enough education in economics. Most of the points being made have been considered before. Answered before too. More time spent reading the libraries of already answered questions being a useful part of an education in a subject.
One further point, Stevenson is doing/has just got his M. Phil from the Oxford Martin School. I think so, at least, I’ve seen a presentation by him of his work there. The Institute for New Economic Thinking or some such. And my real thought here is that Stevenson has been extremely badly served by his thesis advisor. These are the sorts of errors in basic thinking that really should be pointed out by that academic. So much so that if this were the sort of thing that happened to me I’d be considering suing said advisor for being incompetent. Well, no, you can’t sue for that but you can for false advertising. Taking someone’s money for a course then allowing them to commit these sorts of errors – no, really not on. As bad as that bird who thought all those gays were executed in the 19th century – based her PhD upon the fact – when in fact the notation was that they were not executed. Something her thesis advisor neglected to point out to her.