Topic: Growth, Interest and Wage Inequality - To the austrian economists here - page 3. (Read 6013 times)

I dont see the difference. If prices are going down, they are lowered.


Maybe, but they did not know. The probably just saw something cheap and bought it.


Yes, but this does not mean a reduction on consumption.


Once people have their basic needs covered they can start thinking more about the future, meaning they can start saving more, which in turn lowers interest rates. When production grows, f.e. there is more or better food, prices go down, people can access those basic goods cheaper. With what they have left they can increase consumption, increase savings (thus lowering interest rates and promoting investment) or a combination of both.

If we forget Bernanke, growth leads to price deflation. Right?
Also high capital yields encourage investments.


Lowered prices don't stop consumption, falling prices do. Maybe the people who spend their bitcoins when their price in dollars rose were expecting the price to go down again.
You said yourself that falling prices promote saving.

On the other hand, as you say, lowered prices (or more valuable products) lead to consumption.
I don't understand how can growth lower interest rates.
It is really a complex topic.

On the subject of growth springing inequalities, I agree that some innovations can in fact eliminate those inequalities.
I can't watch the video right now but, for example, I'm very excited about Arduino and Google's ADK, and I believe that many small business will emerge.

The text you tried to read assumes you've read the whole book.
Maybe you should read this (skipping the first two parts about land) to understand it properly.
I think you're confusing the basic interest with the inflation premium (Hausse-premium).
The basic interest would be, on your words, selling your money's time, which is only possible because money never rots (nominally).
My point was that basic interest puts an upper limit to capital accumulation by putting a lower limit in real capital yields. For Crussoe that lower limit is zero, but with non free money, that lower limit is the basic interest. Also the yield of money (not a real capital) is this basic interest and is subtracted from other capitals yields and from wages, because money doesn't produce anything on its own, it's just a symbol of value.
Anyway, I'm sure Gesell can explain you this better than me. I hope you read the book.

And thats why they dont invent anything else of worth anymore. 

But seriously, when I talk about inventions Im not talking necesarely about discovering how to produce fision energy. Im talking about this kind of stuff: http://uk.reuters.com/video/2011/07/11/bringing-light-to-the-poor-one-liter-at?videoId=216968892&videoChannel=82 Really fulfilling the needs of the people with the resources available.

From what I've been reading regarding recent explosive growth in BRIC, Brasil is an example of what you're saying, where the high inequality is mainly due to high regulation, with lower income people just not having the connections, resources, or will to deal with the bureaucracy to move up. China, despite being communist, seems to have a cultural reason, where people are just used to doing what they have been doing (like farming), so they are left behind while others keep going up. And Russia is just pretty much corruption-based... And sure, there are people who are ingenious, and they'll end up wealthy, but not everyone will move up the wealth ladder with them. That's kind of the point.
As for the last sentence, even free market entrepreneur types prefer to partner up with people who have the paperwork to prove that they know what the heck they are talking about. Brilliant inventor types do happen, but they're very rare, and once they do invent, they usually look for people with good VCs to implement their ideas

There is more demand and less supply for skilled labour, no?

Yes, but what I am saying is that the type of growth that you are getting or the distribution of such growth is because of politics. Im saying that the inequality is not inherent to growth, but to the politics that are happening.

If you study the USA XIX century you will be surprised by how resourceful and ingenious some people without studies can be (and I have an engineering degree, so Im not saying this out of ego) if they dont have regulations on their way. The problem about regulations like licenses and controls is that it stops and discourages people with ideas but not much credibility from being able to try new things. F.e. the plane was invented by some guys in a bycicle shop, when there were re-known people trying. Studies is only a factor if you are judged by your CV, but not if you opperate in a free market.

Why? I dont think growth necesarely leads to a specific change in the balance between investing and consuming. It can go anyway.


As I said, I dont think the balance between savings and consuming needs to change in a pre-determined way. In general growth leads to lower interest rates because there is more resources available (and this can happen even if the relation between savings and consumption has not changed because the overall production is bigger). The only case where growth does not lead to more savings is if all the increase goes to consumption.


High interest rates yes, falling prices not necesarely. In fact, you have an empirical evidence with Bitcoin. The merchants have reported that when the exchange usd-btc was raising for bitcoin people spent more in the Bitcoin economy lured by the lower prices. The meme about lower prices stopping consumption is just false.


Savings.

Sorry, I tried reading that, but it's rather convoluted. It sounds like it's "interest" that the lender charges only because they expect the borrower's product prices to grow, so the lender wants a chunk of that profit, too? Can you maybe give a simpler example of this interest?
From my perspective (and I guess biased business college training), I charge interest for taking on risk and for selling my money's time (money worth more in my hands now than later), and I'm competing with others based on their level of risk tolerance and worth of money. So... I am just having a really hard time wrapping my head around this.

In those cases it actually is due to growth, simply because the growth is not due to politics repressing people, but certain people really outgrowing others in a "free" market. There are kids getting education and experience, starting up businesses and starting to earn a lot of money, while their parents are still basically middle-age farmers or random stuff (leather, kitch, etc) makers. I think the only "political" effect here is the distance: the new technology and business practices these wealthy people are learning and taking advantage of were just too far and unknown to them.
Even in a US economy, though, entrepreneurs who seized on the Internet opportunities are millionaires, and compared to their income, the rest of us are dirt poor Though the level of inequality is just not as blatantly obvious here as it is in BRIC countries.

But if growth also leads (apart from an increase in demand for money to invest) to lower prices (or more valuable products) which promotes spending over saving. Doesn't it also leads to high interest?
On the other hand, high interests and falling prices incentive saving.
What promotes falling prices? Saving, spending or both?

I should have been more specific. I meant basic interest (or liquidity premium) as described by Gesell, that is, the interest of money when you subtract the risk and inflation premiums to the gross interest.
Money doesn't produce anything by itself, that's why it shouldn't be capital. It "steals" this basic interest from the financing costs of all other capitals.


I see.
So the basic interest/liquidity premium increases with innovations and growth because more people demands money to invest in those capitals with high returns.
Thank you for the explanation.
Now I have to think deeply how growth would affect a Ripple based economy and about the implications of this for the free money theory.
I think Gesell thought that the basic interest remained approximately constant through history.

Well, Im asuming a free market. Bernanke changes the game.

I think you are missing one point though. If people decide to consume more or less at some point, it will change the money they can save and therefore the money there will be availabel for investment. In an extreme case if people got fed up of saving and increased consumption a lot, therefore not being able to save interest rates could raise even when growth was happening. Obviously, since people is consuming like crazy and not investing for the future, future growth would suffer, but theoretically you could have interest rates raising infront of strong growth. But such a change in behaviour from everybody at the same time is not probable at all (in a free market).


I still think that saying development always leads to higher inequality is too broad. It can go one way or the other depending on the effect of the new technology.


In my opinion, austrian economics has the most developed theory about how interest rates affect the economy. Interest rates give information to entrepreneurs about what type of business society wants/needs/can afford. Higher interest rates signals less savings which means business man will start more business that are closer to the consumer, while lower interest rates signals more savings, more resources available, so long term projects, that are father away from the consumer become viable.

Its quite academical but if you want to read about interest rates and how they affect the economy I would recommend you "Time and Money" from Garrison.


But you are assuming that the inequality is due to the growth and not to the political reality of the country. In my opinion is a big stretch. There are very poor and underdeveloped countries with big inequalities.

You're right. I guess in my example, you would call the "unskilled" people "skilled in use of telephones technology," similarly to how a manager of an engineering firm may actually earn less than the highly skilled engineers. The German problem is also somewhat evident in India and Russia, where they have a lot of idle high-degree types, or people with master's degrees running middle-management of call centers. The scary thing about that is that due to their volume their wages are way lower than ones in USA/Europe, and all they really need is someone with business and entrepreneurial sense to put them to work producing some REALLY high level products for very little money, which would result in educated Europe being underpriced, and very under-uneducated USA being just wiped out...

Can you elaborate on this a bit? In my understanding, interest is a return on productive business, and money can only return interest if invested in a productive business. It can't return interest just by itself, and banks/owners of money won't loan it to anyone unless they expect that someone to be productive, and thus provide the "money interest" through their own work.



The other side of the equation is the risk involved, with some companies being more risky, and some investors being more averse to risk, but in a large economy, the $ per extra "unit" of risk tends to trend to a preset equilibrium, too, so, overall, every company's interest rate is basically based on the amount of risk they have. i.e. what you're saying is true, and works in an efficient economy, but there is A LOT of noise there (Google may offer 20% and be very low risk, but if I think it's too good to be true without doing my research, I still won't invest).
Though if you just want to simplify the model with the assumption that efficient markets will correctly price interest, you can ignore all this


Only example I can think of with this is, again, the risk factor. People may hoard more, reducing the supply, if they think the economy is at risk and they'll need more money soon, or they may spend and invest more if they fear that their money may be at risk, and is best invested elsewhere.

I would argue, that the abundant mid-level manager would penetrate the more thriving unskilled-market, so that the wages in the two sectors can at a max converge. For germany for example I can tell how the labor market changed after the so called "Bildungsexpansion" lit: education-expansion. The government put a lot of effort to get the masses to get higher educational degrees, resulting in 50% people with higher school certificate (Abitur) and tenfold the number of university students. One result is, that people with medium education replaced the unskilled workforce which now has a much higher risk of being unemployed. A lot of people with a masters degree dont do any academic job. This is also somehow dissatisfying, because everybody feels a bit unchallanged. But this gets too far into politics (equal opportunities) and away from theoretical considerations I think.

exactly. What my theorey would predict is, that every time, a great invention is made, there is a phase of higher inequality until the full potential is reached. After that, you have enough programmers, special engineers etc. I would name this a Kondratiev wave of inequality. 


Its perfectly related I think:

All entrepreneurs and businessmen decide, how much capital they need and what price they are willig to pay (maximum their expected returns of investment). When there is a lot of growth in the economy - probably due to a new sector emerging - there is a lot of demand for money in the market. The price (interest) is given by supply and demand. Imagine Google offering 20% interest if you give them your money, this would convince a lot of people to supply their beloved money for some time. So some really profitable entrepreneur is always given money if he can "outbid your timepreference".
Here you can also derive the growth-interest-relation. If there are 9 companies having returns of 5% and one company having a return of 4%, the latter might be outbidden by the others when interest rate climbs towards 5%. As 5% ist reached, there is an equilibrium in the moneymarket and the 9 companies won't borrow more money, unless supply increases (and interest frate drops) or their expected return rises beyond 5%. So growth determines the interest rates (as long as central banks leave their noses out) into an equilibrium where there are only companies beyond that interest rate. One could disagree and point out to the moneysupply as the second determinant, but I somehow assume the supply curve to be fix and supply is determined by demand, because I dont have an idea yet, how supply would be varied exogenously in a theoretical freemarket framework. (Maybe this assumes a natural savings rate curve) This might be a problem if inventions and growth opportunities also affect saving behavior. but this argument might be circular.

Very interesting topic.
It seems that growth leads to inequalities, but they're later reduced by competition and by workers moving to other sectors.
If certain skill (human capital) like programming becomes very valuable, people invest in that new capital with high returns (study it) until that capital has a similar return that other capitals. I would say that all capital returns satellite around the the one of main capital, which is money. Money return is interest.
Interest is the rock bottom of all capital returns: if a sector, the investments in that sector stops until (by deterioration of capital or an increase in demand of what that capital produces) it returns more than the money itself again.

The relationship between growth and interest is not trivial for me. Can you elaborate on this?
How is this related with the time preference theory?

I'm not an Austrian economist, nor do I know any books where you can get quotes, but what you are saying is indeed fact, and is readily evident in our emerging economies, such as China, India, and Brasil, where rapid growth has created an ever widening wage inequality between those who are educated (either formally, or just with personal experience in management/business) and those who aren't. Though a simpler explanation for all this is just supply-demand. If demand for skilled/educated workers is high, their wages will go up. Uneducated, untrained workers are available en masse, so their wages are generally very low. Though, China and India are now reaching a point where they are actually running out of unskilled cheap labor to hire, so wages for unskilled labor are starting to go up alarmingly fast, too.

India actually has a very... strange issue. In their job culture it is actually assumed that you will be allowed to grow very fast and become a manager within a year or two. If that's not the case, then the job is not worth it, and so the employee turnover for low-level service jobs is very high. If this trend actually continues, and the companies go along with it, they may end up with a situation where mid-level (self-described, not necessarily skillful) managers are abundant, but low-level workers who are skilled in basics such as answering phones are in lower supply, which may (though unlikely) result is unskilled low-level workers being in higher demand and earning more than the skilled but overly abundant mid-level managers.

thanks for your thoughts.

I assume a strong longterm relationship between growth and interest, since at a certain rate "r" of interest, only firms with higher growth expactation than "r" would borrow money to expand. Furthermore I assume, with more and more investments, the return of investments lessens. So despite other factors affecting interest, growth is the one, which determines an equilibrium around which the interest rates should theoretically fluctuate (fluctuation is probably mostly because of bernanke and his colleagues).

The next step I take is to assume, that human capital investment like other investments must follow the same trace along the growth path. Aquiring human capital must be profitable, else one would do 3 years of work instead of a bachelor degree and leave some of the money in stocks and bonds or something. In fact there are studies which claim the return of human capital investment to be around 6-7.5% per year of schooling. This is pretty much the average interest rates of the past decades plus some compensation for the years where no income could be obtained.


I will try to break down the invention thing to the micro level:

- some new invention is made (steam engine, railroad, car, electronics, pc, internet)
- from now on, the economy might grow by exploiting the new invention
- there are some entrepreneurs (e.g. a railroad company, ibm, volkswagen, google) who are able to generate tremendous profits (far more than rate "r")
- those will pay above average wages to people willing to enter this sector and if neccessary adopt new skills
- on the other hand some workers of the "old sector" might even get unemployed (the only potentially negative part)
- other sectors will also grow (but at a lower rate) and pay higher wages because the new high-paid workforce of ibm, volkswagen, google has more purchasing power

You wrote: "When unqualified workers have access to new machinery they produce more and can bargain for better wages."

This is exactly how I think inequality of wages arises. Workers of IBM, Google etc. can bargain for way higher wages. But I guess you are right if some invention can easily be exploited by untrained or former low-income workforce (railroad might be an example or three-field (crop) rotation) and not only by trained people (like in electronics or it). Actually, measured with the Gini-coefficient, inequality almost always drops when some random wages rise! not sure if the gini is a proper measurement then

But to come back to the original question for a moment: The relationship between growth and interest seems so trivial, that it must be mentioned by some austrian economist. Any idea in which book to look that up? Reason is I need some sources of quotes from where to start with my ideas. Furthermore it would be neat to have some austrian texts about human capital.