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So today my partner asked me, "Why is it that I am not getting paid what I am worth at my job?" and I tried to explain that the reason why is because the 1 percenters are sitting on all the actual wealth, while we 99% are chasing currency, but I don't think he really understood it. So here's my understanding, and I ask those of you who are better at general economic theory than I am to help me explain it better.

Our economy, and indeed all economies, depend on two things: supply, and demand. Supply is stuff. Things to be purchased. Food. Water. Shelter. Durable goods. Services that are necessary. Demand is how many people are willing and/or able to purchase the supply.

As supply goes up, demand (and thus price) goes down, because there are more cows, computers, and cars available to buy. And as supply goes down, demand (and thus price) goes up, because there are fewer cows, computers, and cars available and thus the people who have the cows or computers or cars can charge more since it's a limited supply. This is very, very basic economics.

So far so good?

Okay.

We have two additional things that our economy depends on, however, that are not discussed as often, which may be why this made so little sense to my partner. Those two things are wealth and currency. Wealth is what generates more wealth. Fields, factories, machines, tractors, gardens, harvesting machines, processing plants, and all those things which produce stuff that allows us to produce more stuff - that's wealth. It's what Marx called "capital." Currency is not wealth. It simply represents wealth, or should. At one time, we tied our currency to gold. But it can also be tied to the production of goods - so many dollars equals so many bushels of potatoes.

We have both a currency problem and a wealth problem in this country. A lot of our currency has left the country because we're paying people outside of the nation to do work at a much cheaper rate. This brings down how much currency is available to buy things, so the Treasury has printed more currency several times when the economy dips, in an attempt to stimulate people to spend. But the problem is, there aren't more carrots, cars, cows, corn crops, or computers out there that justify printing that currency. The number of carrots, cars, cows, etc. has not changed. People are not buying more with more currency. They are spending more currency to buy the same amount of things. Supply has not gone up. Demand has, though, and as a result so have prices. To try to fix this, the Treasury prints more money so that we can afford the inflated prices, but we're not actually getting more for our dollars. We're just spending more dollars to buy the same amount of stuff.

That's called inflation.

The kicker is this: Inflation will only go down if more people are spending money and if wealth is being invested to create more wealth, more assets, so that the amount of money tied to a particular good or service goes down because more of that good or service exists. Both of these things must happen to reduce inflation and balance out this supply-and-demand issue. But the problem is, we are no longer manufacturing goods or even most services here in the United States. We've outsourced production and even service, so there isn't any money coming in to create jobs, and so we don't have enough jobs out there paying people a living wage in order for people to spend money to buy goods, so instead they use pretend money - credit - to buy goods. This gives a false impression of prosperity, but people are going deeper and deeper into debt (whether student loan debt, credit card debt, mortgage debt really doesn't matter - it's all debt) to sustain this impression of prosperity.

Unlike currency, which is at least nominally related to real wealth, credit is not connected to wealth at all. It's one step removed from currency in that it's based in future earning power of the borrower - in other words, it's a bet against the chance that you will be able to continue to work and pay your debt. Credit doesn't have any connection to actual wealth.

And the fact of the matter is, the 1% are holding on to an enormous amount of real wealth which they are refusing to reinvest in us, the 99%, because they won't make as much profit on American jobs as they do by outsourcing the jobs to India and China. They won't create jobs here because it's cheaper and more profitable to create jobs over there. So we have relatively little production (creation of wealth) in this country, and as a result, we cannot sustain our economy with wealth-backed money, so we've moved to debt-backed money instead. That's worked for a while, sort of, but the bubbles are bursting everywhere now and it isn't going to work for much longer, if it ever did.

This amazing piece by David Korten in an issue of Business Ethics (from 1999!) explains why money isn't wealth. Here's a money quote from that, and my commentary:

When a defender of global capitalism asks, "What is your alternative? We've seen that central planning doesn't work," one can respond, "Adam Smith had a good idea. I favor a real market economy not centrally planned by governments or corporations." The vital distinction here is between the market economy Adam Smith had in mind, and the capitalist economy, which he would have abhorred.

In a healthy market economy, enterprises are human-scale and predominantly locally owned. People bring human sensibilities to bear on every aspect of economic life--resulting in self-organizing societies that maximize human freedom and minimize the need for coercive central control.

Capitalism, by contrast, is about using money to make money for people who have more than they need. It breeds inequality. Though capitalism cloaks itself in the rhetoric of democracy, it is dedicated to the elitist principle that sovereignty resides in property rather than in the person.

A real market economy creates real wealth. Global capitalism creates out-of-control speculation, which destroys real wealth.

All well and good. And he's right - capitalism is not the same thing as a healthy market. We need to be aware of the fact that a healthy market is not just take and take, but give and take, and that all parties need to be both giving (spending and investing) and taking (receiving income and/or profit). The real money quote, for me, however, is from later in Korten's piece: "When too much money chases too few assets, those assets artificially "inflate" in price." This goes back to the basic law of economics: as supply goes down, demand and price go up. But I only just realized how it connects up to my partner's problem and why he's not being paid a living wage, any more than I am. It's not about how much we're being paid. It's about how, by withholding wealth production, the 1 percent have created a situation where we're being paid the same but goods cost so much more that our incomes have effectively tanked in comparison to the cost of living.

This is why $8 or $10 an hour is no longer even close to a living wage. It used to be. When I was in my 20s, I earned between $8 and $11 an hour and I was a homeowner and my partner and I each had a car. My partner at that time was earning about $14 to $16 an hour, and we both worked full-time. We were able to put a little away in savings every month, go out to dinner three or four times a month, and pay our car payments and our mortgage without hassle.

Now, however, there is not enough available wealth (assets) out there, and we have way too many dollars out there chasing the few assets that are available. Meanwhile, wages have stayed right around the same level that they were in 1990 (or earlier) while prices have shot through the roof. It isn't how much we're getting paid that's the problem. It's how much actual wealth and assets are not out there and the resulting inflation of prices that's the problem.

Paul Krugman, in a recent column for the New York Times, said this about the OWS protests:

"I, at least, am a lot more offended by the sight of exquisitely tailored plutocrats, who owe their continued wealth to government guarantees, whining that President Obama has said mean things about them than I am by the sight of ragtag young people denouncing consumerism."

But you know what? It isn't even consumerism that we're denouncing. It's creditism. We had consumerism in the 1950s, the 1960s, the 1970s, and it wasn't driven by debt. It was driven by consumer spending, of currency backed by wealth, on durable goods and services, because wealth was being invested in jobs and in more wealth creation by the production of durable goods and needed services.

It's not consumerism, the need to spend, that's the problem. By definition, we must consume or we will die off (food and shelter are part of what we consume). It's the method by which we've been forced to spend in order to survive day to day that's the problem. It's not about consumerism. It's about the assumption of mandatory debt and the creation of a system that forces us to live in debt in order to live at all, since wealth is being withheld and no real investment is happening.

This must stop.

End consumer debt. Restore consumer power. Tax the rich and forgive consumers their debts - mortgages, consumer loans, credit debt, student loan debt - so that the economy can start running on real money instead of pretend money again.

We are the 99%.

Originally posted to Killer of Sacred Cows on Sat Oct 08, 2011 at 05:25 PM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement, Progressive Hippie, DKOMA, Global Expats, and Occupy Wall Street.

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Comment Preferences

  •  Tip Jar (8+ / 0-)

    Calling it "Playing Devil's Advocate" still doesn't excuse defense of evil beliefs, opinions, and actions.

    by Killer of Sacred Cows on Sat Oct 08, 2011 at 05:25:02 PM PDT

  •  Good diary (1+ / 0-)
    Recommended by:
    Killer of Sacred Cows

    "It isn't even consumerism that we're denouncing. It's creditism."

    Your piece really clarifies how it is for me and why we should all support OWS.   Our wages are simply buying less and less.

    The problem is--what is the "solution" to a cuthroat competitive global economy?

    •  Take it down globally (2+ / 0-)

      it is not inevitable or natural or too big to fail. It is a con, a scam, just the latest in oppressors who seek global dominance. Jeeze it's on top of everything else a fail. We the people are the ones who are too big too fail even Krugman has enough sense to see this. We have a good start on it now so lets all get behind it. We really are the change we have been waiting for. solidarity and unity for democratic societies and economic equality/ justice.  We have the power we need to use it.

      •  I totally agree (1+ / 0-)
        Recommended by:
        Killer of Sacred Cows

        Thanks for replying and I agree that capitalism is headed for a 100% bust.  It's only a matter of time.

        Capitalism has historically relied on economic unevenness that is slowly disappearing from the world and lately only being artificially created by subsidies from a government or the IMF.

  •  Take home message is good (0+ / 0-)

    The problem isn't an unwillingness to invest capital.  The economy is awash with capital.  The capital already deployed is not performing well, applying more won't help.

    A key problem is incompetent corporate management.  Today's corporations cannot do perform as they did 40 years ago yet their top management is paid ten times more.  Basically they are spoiled, just as a teenager gets if you give him anything he wants and absolve him of any consequences from his actions.

    There are other problems but the details are not germane.

    The solution is a popular movement that pushes for economic ideas that are scary to holders of the conventional wisdom.  Thus the call to tax the rich and absolve debts is a good start. But we need more.

    How about protect workers from unfair competition! with A simply tariff is easy to understand and tough to argue against.  The only simplistic argument against a tariff is A tariff is terrible: Smoot-Hawley gave us the Depression!

    The answer is simple:

    1. Tariffs reduce trade.
    2.  Trade surpluses add to GDP.  Reducing trade in 1930 when we had a surplus was bad policy for America; Republicans were for it.
    3.  Trade deficits subtract from GDP.  Reducing trade today when we have a deficit is good policy; Republicans are against it.

    Another idea is tax financial transactions.  

    Anything that reduces the size of Wall Street should be easy to defend to ordinary Americans.

    Another good meme would be Invest in America! Tax investments going overseas, that is, penalize capitalists who make their money here but then want to send it abroad.

    Most of these things do not even need to be made policy to have their desired effect.  They simply have to be on the agenda, that is issues that elect/defeat politicians the way deficit reduction was suddenly on the agenda in 2010.

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