Beruflich Dokumente
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American
Inequality
Precapitalist
GENERAL PRINCIPLES
Adam Smiths Invisible Hand and Inequality
Invisible Hand
Definition: The unobservable market force that helps the demand and
supply of goods in a free market to reach equilibrium automatically
Adam Smith assumed that an economy can work well in a free market
scenario where everyone will work for his/her own interest. He explained
that an economy will comparatively work and function well if the
government will leave people alone to buy and sell freely among
themselves. He suggested that if people were allowed to trade freely, self
interested traders present in the market would compete with each other,
leading markets towards the positive output with the help of an invisible
hand.
Anyhow, this has lead to disastrous for society because of self-interest.
There is conspiracy amongst trade people against public to raise price.
There is role for government to correct the market failure. The government
may design policies such as taxes and regulations that bring private
incentives and social return into alignment.
However, government never corrects market failure perfectly. The
financial sector used its political muscle to make sure that the market
failure were not corrected, and that the sectors private rewards remained
well in excess of their social contributions one of the factors contributing
to the bloated financial sector and to the high levels of inequality at the
top.
Shaping Markets
i.
Private financial firms and business people act to ensure that markets dont work well.
Their focus is not to enhance societal well-being broadly understood or even to make
market more competitive. Their objective is simply to make markets work for them, to
make them more profitable.
o When markets are competitive, it is difficult to maintain profits above normal
return. This is because when a firm makes grater profit, their rivals will attempt to
steal customer by lowering price. As firms compete, prices fall and it is a disaster
for profit seeking firms.
ii.
Market transparency
iii.
Those at the top make money by taking advantage of their market and political power to
favor themselves and to increase their own income.
Rent seeking
Definition: when a company, organization or individual uses
their resources to obtain an economic gain from others
without reciprocating any benefits back to society through
wealth creation.
Example: when a company lobbies the government for loan
subsidies, grants or tariff protection. These activities dont
create any benefit for society.
Those in financial sector take advantage of the poor and
uninformed, as they made enormous amount of money by
preying upon these groups with predatory lending and
abusive credit card practices.
Tax system
Those at the top managed to design a tax system which they
pay less than their fair share. They pay a lower fraction of
their income compared to those poorer.
RENT SEEKING
ADAM SMITH =
RENT SEEKERS
Wealth distribution (Americas inequality) many investors or scientists who made such a large
contributors to our well being, none of them are among those most rewarded by our economics
system.
Geniuses at business, Steve Job and Mark Zuckerberg listed at Forbes list worlds wealthier
billionaires but there also have a such important people who never list on Forbes such as Tim
Berners- Lee (World Wide Web).
Carlos Slim (Mexican business, telephone industry)- able to charge price that are multiple of
those in more competitive markets, acquire large share in Mexico telecommunication.
Top flight lawyers (become wealthy by helping people) help people write the complex tax laws,
design complex and transparent derivatives market, design contractual arrangements that
generate monopoly power to loopholes.
Monopoly rents : creating sustainable monopolies.
Government sanctioned monopolies The copyright monopoly is not a natural right. It is a
government-sanctioned private monopoly, granted under the assumption that no culture would
get created if theres not a profit motive behind it, and that this profit motive can only be realized
in a monopolized setting.
Firms can create entry barriers maintaining standards, restrictions on entry.
Factors contributed to increased monopolization of markets.
i)
There was a battle over ideas about the role that government should take in ensuring
competition.
ii)
iii)
There are many leaders in these sector (FCC and SEC) use their political influence to get people
appointed to the regulatory agencies who are sympathetic to their perspectives.
Regulatory capture : Regulatory capture happens when a regulatory agency, formed to act in the
public's interest, eventually acts in ways that benefit the industry it is supposed to be regulating,
rather than the public. the interests the agency set out to protect are ignored in favor of the
regulated industry's interests.
Cognitive capture : For Timothy Geithner this meant relying on, and appointing to powerful
positions, financial executives from the firms he was connected to and felt comfortable with. But
then, there is no guarantee that these people would not give advice favoring their firms,
knowingly or perhaps subconsciously
Government munificence
Example case : 2008 09 crisis, the derivates market played a central role, was responsible for
the $150 billion bailout of AIG.
A provision of one of the key bills deregulating the financial derivate market ensuring
that no regulator could touch it, no matter how great the peril to which it exposed the
economy also gave derivates claims seniority in the event bankruptcy.
Another example : when Federal Reserve lend unlimited money to banks at near-zero interest
rates, allows them to lend the money back to the government / foreign government at much
higher interest rates.
Protect firm from foreign competition (tariffs, taxes) as a gift to domestic company.