Wednesday, November 2, 2011

the financial equality game

As I stood in the shower this morning, hot water cascading over my firm naked flesh (*cough* sorry, wrong site *cough*) ......

*ahem*

Just before I dived in the shower this morning I'd been reading a few arguments in different internet spaces about the #occupy protests, capitalism, money, social order and mobility, benefit cuts, austerity and it got me thinking. If we were to balance the current financial inequality in the world, redistribute ALL of the wealth equally, what would be the outcome?

I think I know what I think would happen but I'm curious to know what everyone else believes the consequences of such a move would be.


So here's the mental game I was playing for you join in with

Assumptions:

1. At Midnight on Dec 31st 2012 the newly formed Entire World Transitional Government Concord (EWTGC) declares that on Dec 31st 2020 they will redistribute the wealth of the planet so that every person alive has an equal share. Children under 8 years old will be entitled but cannot access their share until they are 8, anyone born after that date will not be entitled to a share.

2. People can do whatever they want with their wealth. It will belong to them after the redistribution and the EWTGC will not interfere with their actions, apart from enforcing contract law and basic common law or acting as arbiter to resolve disputes.

3. There is no escaping from the action. The super wealthy will not be able to hide any assets from the EWTGC and access them after the redistribution.

Additional (from comments): 4. For the sake of the exercise "wealth" refers to financial/fiscal/monetary wealth and not human skills/abilities/attributes.


Question:
What are the various future impacts of the action? Discuss the probable outcomes for 2025

Answers:

Once you've thought about it write it up and post it online. Leave the link in the comments and I'll add it here (Equally if you think there's any 'assumptions' that I've missed feel free to suggest them via the comments. I'll add them as appropriate).

6 comments:

Richard Allan said...

I think it largely depends on whether or not you can commit to never doing it again. If people think it's going to happen again in 10 years their savings rates will plummet.

Other than that you would see some firms get liquidated because they had too much of a long-term perspective for the new shareholders (who pretty much by definition would have much shorter time horizons than the current investors). But if you liquidate a firm, the business doesn't just disappear, it would be sold on... presumably on credit to some Oligarch type who's already proven he knows how to run a business.

I'm assuming human capital wealth isn't being redistributed, although you could almost do that as well by mandating a minimum working week to prevent people enjoying the people's labour as their own personal leisure time. You then have to make sure they do the most socially productive labour, WITHOUT differential wages. Of course it's a practical difficulty but no greater than all the others in this scenario.

The crux of the matter as I see it is that all things that can un-equalise human wealth are in themselves a form of wealth, ie. greater ability, greater propensity to work and save, or greater endowments. If you "equalise wealth" and then people's incomes start to diverge then pretty much by definition you haven't equalised all wealth, just some of it.

As for practical consequences, suppose you equalise all material wealth (ie. not capabilities). I would say that savings would plummet so much of the capital stock could no longer be maintained. The effect on labour supply is more ambiguous; some people would supply more labour with their independent incomes gone, others would supply less for the opposite reason. However I'll say here that on aggregate, labour supply would increase. Incomes would start to diverge again as a result of different capabilities and luck. This would allow savings to restart.

Ultimately I would say you would have a distribution much like we have now, but with a "lost generation" or two with lower output. The distribution would be more equal overall but of course you would still have destitute people and plenty of people who were just getting by.

Henry Crun said...

If all the worldly wealth was divided equally among the inhabitants of the planet, we'd all be left with less than a quid each.

Antisthenes said...

The answer is quite obvious from day one some would accumulate by enterprise by fair or foul means and grow richer while others would lose out and grow poorer and within a short space of time the distribution would return to where it was.

manwiddicombe said...

Interesting responses so far .... thanks for them .... I've added another 'assumption' to clarify that it's only financial/monetary/fiscal redistribution that I was toying with, not the human wealth you describe RA.

Simon Cooke said...

Might I focus on the inevitability of inequality...

Having redistributed the wealth under the concord, we witness a scramble as people seek to generate income from their new wealth - after all it's income rather than wealth that feeds us.

Some people with valuable skills find themselves being paid in parcels of wealth, other people develop financial products that lend against wealth while some owners simply cash in the wealth and go back to being renters.

In a relatively short while we will find that the wealth begins to concentrate - land ownership consolidates and the ownership of other assets accumulates to those with surplus income.

And if the world government spots this problem and redistributes say every 5 years the result will be a return to subsistance living.

Equality was always a nonsense

manwiddicombe said...

I don't disagree with any of the thoughts so far. I too think that financial wealth will re-accumulate with an ever reducing number of people.

After deciding that that was my answer I also started thinking about other effects. If every African has the same spending power as every European, for example, what impact would that have not just in financial terms?