Tuesday, September 04, 2012

The Game of Economics

Mrs T once famously used the household budget as a metaphor for the UK economy. So I’m going to try and use a game to illustrate one aspect of how an economy works, or doesn’t. The game is Waddingtons Monopoly. I’m sure you must be familiar with it, it’s been around for years and you can even get a Star Wars version, they are due at Toyology in Barkingside High Street in November, get in quick before they run out. What I want to do here is to use this game to describe how our economy got to be in the state it is. So first we have to leave behind those apsects of the game that do not represent reality – like rich people having to pay taxes and going to jail even if only by Chance.


Let’s start at the beginning, which is a very good place to start. You can have up to six players each with their own symbol made of plastic these days but in my set made of metal. All the players start off equal, they are “given” the same amount of money by the “Bank” and they all get a Citizens Income, that is £200 for passing Go. And we’re off. Not much happens at first. But then the players start to buy properties and an economy develops. An economy being the sum of the value adds of all the financial transactions, ie the GDP of the game. Properties are bought and sold, or mortgaged with the bank, and houses and hotels built on those properties. True they are plastic houses and hotels these days instead of wood like mine but bear with me here. Players land on these properties and pay rent for their stay, increasing the financial activity of the game and the GDP of the game. This can go on for days, weeks, even months.

But eventually and inevitably one player will get into financial difficulties, go bankrupt and drop out of the game. But the game carries on. And then another. And another. And as each player gets excluded from the economy of the Game, the economy of the game suffers – the number of financial transactions diminishes. Until one player has all the money and all the property. That player cannot sell or rent their property because there is no one left with any money to buy or rent. The other excluded players cannot buy or rent because they don’t have any money. The economy of the Game is Dead and the Game is over. The Moneygoround has stopped. The only way to recover the vibrant economy that was, is to restart the game with all the players being equal.

Now, in reality we do not all start off as equal and we do not (at least as yet) get to the stage where one person (or very few people) has all the loot. But we do fluctuate from a point somewhere in between and tend to move towards either extreme from time to time. When this happens towards income equality the economy gets a boost because poor people spend all their income whereas rich people don’t. When we tend towards greater income inequality, where very few people control most of the money, that is when the economy starts to show signs of a wobble and the further it goes in that direction the worse it becomes. That is where we are and where we have been for quite some time. The trouble is that those who have sucked all the money out of our economy and stashed it in a tax haven are the very people who fund our three Tory political parties to implement policies to maintain that very situation. Our Tory politicians (blue, red and yellow) are stuck between a rock and a hard place and none of them have the balls to break the cycle.

There is a correlation between income inequality and bank failures (see graph here and this is where I found it) which means the supply of finance to get the next generation of creators, innovators and entrepreneurs started has dried up and in any case there will be no customers because everyone is cutting back due the austerity phase.

The problem is that when we, ordinary people, suggest that mega-rich people should pay taxes commensurate with their wealth, it is portrayed by the Daily Mail and it’s readers as the politics of envy. In truth it is the politics of economic reality.

The job of government is to ensure that the economy is maintained in balance so we can all benefit from it, so that new innovators and entrepreneurs can develop, new technologies can thrive and gain a foothold in the market where there are customers who have some money to spend. And government can then tax wisely to provide community infrastructure and amenities.

We are being sold a pup by the media, which is owned and controlled by those very same mega rich people. There is no such thing as “Trickle Down”. It is a lie. The truth is that the flow is in the opposite direction and at the moment it is a flood.

Discuss.

Footnote: I am not suggesting for one moment that we should all be equal. Only die hard commie trots and Swappies do that these days. Nor am I suggesting that people should not get rich or better themselves. I am saying that those who benefit from society should put something back in commensurate with their wealth and not stash it away, or pull up the ladder so that nobody else can do so.

If global corporations or rich musicians threaten to leave if they are not given tax breaks then let them. I would gladly pay the fare for some of them. We have the talent to replace them - they just need the opportunity.

32 comments:

  1. The top 1% of wealthy individuals in this country pay close to 28% of the tax cake. Expand this to the top 5% of the wealthiest, and they pay 47% of the tax cake.

    Many of our financial problems have been caused by Government - any and every Government - buying votes from different sectors of society, committing us and our heirs to unbelievable debt so that the politicians can stay in power.

    And other financial problems are caused by Government - any and every Government - chasing after extremely expensive fantasies: the European Union, windfarms, overseas aid to China and India, Middle Eastern wars etc etc.

    Discuss.

    ReplyDelete
  2. Precisely Judith! If very few people have all the money they are the only ones you can tax!

    Those figures would change if we had a more equal income distribution.

    Can't argue with your other points, except Windfarms.

    ReplyDelete
    Replies
    1. Who do you propose should decide upon/organise the more equal income distribution?

      Why should someone who labours hard and honestly see most of his income get distributed to the scrounger. the crook and the workshy?

      Delete
    2. Another day another Daily Mail diversion tactic.

      Judith,
      We are not talking here about taxing the rich to give to the poor (scrounger/workshy). Neither are we talking about a minimum or maximum wage. What we are talking about is having an economy that encourages the creation of new wealth for a wider range of people, rather than stifle it as it has been doing for some time. This is done through investment and government policy.

      (Have you noticed how government “invest” in roads but “subsidise” railways? “Invest” in Coal and Nuclear but “subsidise” renewables?)

      A more equal income distribution (that’s earned income, Judith, not state benefits) means a more equal tax distribution. It is in the interests of the rich for this to happen because it reduces their tax burden.

      Incidentally, Judith, your tax figures for the 1% and 5%. Are they for Income Tax only or do they include VAT, Duty and all the other stealth taxes that disproportionately affect the poor?

      Delete
    3. Sounds to me, Judith, just like the attitudes of our governments - whether Bliar's New Labour or Camerclown's Blue Labour.

      Delete
    4. ".... and all the other stealth taxes that disproportionately affect the poor".

      Weggis - some of these "stealth" taxes are in a sense voluntary and incurred because of personal decisions. How is it that "the poor" can always afford cars, TVs, alcohol, tobacco, mobile 'phones, and all the other non-essential things that cost money (including VAT and, in some cases, excise duties and other licence charges) but cannot "afford" to take whatever work may be available? Answer: a ridiculous and costly benefits sytem paid for by the assiduous minority.

      Delete
    5. I take your point Morris.
      But I was thinking more along the lines where well-off people can afford to self insure (cover the risk) for their household appliances whereas the poor need Insurance and pay tax on the premiums.

      Delete
    6. The figures I quoted were for Income Tax.

      The best way to encourage growth/employment is to get The State or The Government out of sticking their noses and their oars in.

      The absurd restrictions and regulations that have been brought in (many of them EU-generated) are the things that are stifling the economy. They have been designed to favour Big Corporations/financial institutions that are hand in glove with Government, and public sector employment.

      And here I am agreeing with Morris again - how much 'need' is there for huge TV's, fast food, computer games, alcohol etc if you are poor? By the way, before accusations of being one of the insensitive wealthy class are hurled at me, I've known what it is like to have watch every penny for years on end, especially while the breadwinner is out of work.

      Oh,I never EVER read The Daily Mail. On principle.

      Delete
    7. Judith,
      For someone who doesn't read the Daily Mail you sure do seem to know what's in it...

      Now, these absurd EU regulations that the Daily Mail keeps going on about. Can you please say which ones and how they are stifling the economy?

      Like Health & Safety (Hygiene) rules stifling the growth of eateries in Barkingside High Street, Perhaps?

      Or that if I hire a tradesman to paint my eaves or repair my roof he now has to use scaffolding instead of just a ladder, perhaps? Er, this is extra cost to me, more work for scaffolders and more financial transactions which contribute to GDP and er, economic growth. The exact opposite of what you are suggesting. Comment?

      Delete
  3. with you Weggis on that one about the windfarms....I thought that it was the top 1% that payed for the bottom 26%,with benefits/NHS/education etc,,I would also ask the player who has the ship not to overload it with too many people as it may sink (big metaphor there).....
    (well written in my opinion mr b-side21)

    ReplyDelete
  4. Firstly if the richest 1% in the country have about 1/3 of the wealth of the country why is it unfair that they pay just less than 1/3 of the tax? That's why we should look at the % of income that is taxed as well as the overall % of tax that comes from various parts of society.

    Secondly focusing on tax rather misses the point I think B21 was trying to make. The issue is that a very small % of the population have a very very large % of the country's wealth. Aside from debating whether this is fair there is also the practical point that the richer you are the smaller the % of your income you tend to spend. So if we could encourage a more even distribution of wealth we could expect to see more £ being circulated in the economy.

    ReplyDelete
    Replies
    1. The very principle that was espoused by failed and defunct Marxism.

      Delete
    2. Capitalism doesn't seem to be too healthy at the moment!

      Delete
    3. So any redistribution of wealth is Marxist. Well that makes this discussion easy then doesn't it.

      Delete
    4. Not exactly what was said - just your interpretation of the comment.

      Delete
  5. "Why should someone who labours hard and honestly see most of his income get distributed to the scrounger. the crook and the workshy?"

    That doesn't happen. Your scrounger etc aren't most of the population.

    "How is it that "the poor" can always afford cars, TVs, alcohol, tobacco, mobile 'phones, and all the other non-essential things that cost money (including VAT and, in some cases, excise duties and other licence charges)"

    Maurice bravo - let's make sure people on low or no income become further disadvantaged by denying them society norms like TVs and mobile phones. Or, wait - what about those non-essential houses and beds? If we're honest all most people really is food, water and shelter. They should be rehoused in a big tent on Fairlop Plain and be fed on a ration of plumpy-nut. Beggars can't be choosers.

    We are wealthy by global standards and given our comparative advantage and inequality which Alan points out is built in from birth I find it comical when people insist that the wealth is ours because we deserve it, and by implication that those who don't have, don't deserve to. I find it similarly comical at the national level and for the same reasons.

    ReplyDelete
    Replies
    1. All that bile, Mira, and you cannot do somebody the courtesy of spelling his name correctly.

      Delete
    2. Oh I just love that 'society norms' - says it all really. Mira, when you give children or adults everything instead of asking something in return you end up with a dependent, instead of an independent, society.

      As for Weggis' example of ladders and scaffolding, what actually happens is that rogue traders just work without regard to the rules and help to destroy the legitimate tradesmen.

      Delete
    3. But Judith, Rogue Traders are the ultimate result of an unregulated Free Market, which is what you seem to be arguing for?

      Delete
    4. No, rogue traders are the unintended consequences of excessive regulation.

      "That government is the best that governs least" = Tom Paine, author of Common Sense and The Rights of Man.

      Delete
    5. Judith,
      I am a fan of Tom Paine myself.

      I note that you use the term "excessive regulation".

      So you do seem to accept that "some" regulation is required.

      It would be very helpful if you could describe where you think the boundary between reasonable regulation and excessive regulation lies and illustrate this with some examples.

      Delete
    6. While we are waiting for Judith to come back on this, let’s do a little logical analysis of her view.

      “rogue traders are the unintended consequences of excessive regulation.”

      The logic behind this is quite simple. Regulation incurs a cost which is passed on to the consumer. This opens a market niche for “rogue traders” to operate outside the regulatory framework and offer a cheaper product or service thereby undercutting “legitimate traders”.

      However, since all regulations incur a cost (and if you know of one that doesn’t do let me know), then all regulations will tend to produce this effect to a greater or lesser degree depending on how much they cost. So, the ultimate view is that all regulations are bad and can be viewed or described as “excessive” by those who don’t like them.

      This begs the question: why have the neo-Liberal governments of the last 33 years introduced so much of it, despite claims that they want to reduce it? Well, the answer is simple. It increases economic activity which creates an illusion that the economy is doing well, when it isn’t.

      But it’s not been all one-way traffic has it? The deregulation of the Banks didn’t produce “rogue traders” did it? And it didn’t do the economy any harm did it?

      It seems governments consider that regulation is good for the bottom end of the income distribution but bad for the top end … which is sort of where I came in with the original post.

      Delete
  6. Let’s have a closer look at this notion that the “poor” can afford things like cars, TVs, alcohol, tobacco, mobile 'phones, and all the other non-essential things that cost money.

    The first VCR I bought cost me £500 in about 1982. The last one I bought cost £50 at least 20 years later. That’s a 90% reduction in price and that does not take into account at least 20 years of inflation.

    The reason for the reduction in price is volume of sales and economies of scale in production. These things, TVs, Mobile Phones, Computers and Second hand cars are no longer luxury goods (I know I’m excluding tobacco and alcohol here, which are another debate).

    It has been a deliberate policy of western governments to encourage and support the “poor” to engage in “consumerism” of this kind to bolster flagging economies and without which GDP “growth” would have been in double figure negatives. Not only that, but without the volume from the 95% “poor” those products would have remained luxury goods which only the rich could afford and who therefore would not have benefited from the price reduction that volume brings.

    Another example of how the “poor” indirectly benefit the rich.

    ReplyDelete
    Replies
    1. Really Weggis? Wouldn't be anything to do with low rates of pay in SE Asia would it?

      Delete
    2. Yes, indeed Morris, that is another factor in the equation which underpins the original notion that started this thread.

      If the global elite exploit SE Asia to undercut workers here in the UK our government have no alternative but to "support" the umemployed (Judith's scroungers and work shy) to maintain some semblance of a functioning economy.

      Delete
    3. "to maintain some semblance of a functioning economy".

      Or, in other words, a charade to disguise a lie.

      Delete
  7. Replies
    1. And another.

      Click here

      "That is also when we started the three decades of deregulation ..." Hmmmm!

      Want to comment Judith?

      Delete
  8. seems mr moribund has found a place to store his spare "p"

    ReplyDelete
  9. I was reading my Daily Telegraph last Saturday (1st September) , it doesn't do my blood pressure any good but one must be tolerant, and there was an article by the editor of the Spectator, Fraser Nelson, pointing out how much landowners are currently subsidised. He used this fact to make a rather strange case for shale oil fracking (extracting oil from shales by blowing them up) but it was interesting to see the editor of what I have always taken to be a Conservative periodical, writing in a generally Conservative paper, to make this point.

    Elsewhere in the DT Ian Cowie, who was the personal finance editor, has argued several times that the people in Britain who pay the highest marginal rates of tax are those coming OFF Benefits and into work. Not something we hear much of, too awkawrd for the powers that be.

    Over in the good ole' USA Warren Buffet, not a man short of a bob or two, has pointed out how little tax he pays compared to some of his lower paid staff.

    So I am not feeling sorry for the poor overtaxed rich. Curious how the myth about these impoverished rich folk persists. It was around in Edwardian England and for all I know long before.

    Roger Backhouse

    ReplyDelete
    Replies
    1. Perhaps it's worth recalling that income tax was a temporary measure for the then government to fund the Napoleonic wars. Afterwards it was abolished but the so-called "working classes" demanded its return......

      Delete
  10. Wealth doesn't trickle down – it just floods offshore, research reveals

    http://www.guardian.co.uk/business/2012/jul/21/offshore-wealth-global-economy-tax-havens

    ReplyDelete