Income dispersion and economic crises E-Book

Maurizio Pasquino

• Herausgeber: Booksprint
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2021

Beschreibung

Current economic theories do not provide the elements to understand the causes and processes that provoke economic crises. In this book, Maurizio Pasquino explains the underlying reasons and introduces the new concept of income dispersion. Income dispersion provides a much broader vision of how an economic system works, setting the bases for a more efficient way of identifying and resolving the problems of the society in which we live today.

Leseprobe

Maurizio Pasquino

INCOME DISPERSION

AND ECONOMIC CRISES

An Essay

Acquista la versione cartacea adesso in 48 ore a casa tua:

Clicca qui

www.booksprintedizioni.it

“Forecasting a crisis is not the problem;

Foreword to the english version

The original text of this book was written in Italian. The bibliography lists the books in the author’s personal library, often in translation, which he consulted to ensure compatibility between Say’s Law and the concept of dispersion of income, as well as to verify that the ideas set out by the author are original. The author also consulted many other books in various libraries across Italy, but he is unable to provide the relative references.

The English translation was carried out with the help of Juliet Hammond Smith.

1

Introduction

There is a fool-proof method to find out whether the stranger with whom you are discussing the weather is an economist or not. If the person you are talking to is annoyed when weather forecasts are wrong, then that is a normal person, but if you are talking to someone who is downcast because the forecast is right, then that is an economist, or better, an economist who is never lucky enough to get a prediction spot on.

This and other mocking jokes about economists go around every time an economic crisis is severe enough to warrant front-page newspaper coverage.

In truth, economists are still somewhat bad at making forecasts, despite the great advances in economic science of the past two centuries.

If we consider the following three phases of a crisis – to forecast, to get a clear picture and to intervene – it is in the third phase where improvements in economic sciences have mostly taken place, and today we are much better at knowing how to intervene after the crisis has manifested itself.

Governments learnt from the Great Depression of 1929, and they then used that experience to take appropriate measures during the equally serious crisis of 2008 and worked to limit its negative impact.

While it is perfectly clear that economists do not excel in the first phase, that of forecasting, what is less well-known is that economists also come short in the second phase, that of identifying the causes and processes underpinning economic crises.

Economists are unable to predict economic crises or even see them when they emerge. My point is that the elements and processes that trigger economic crises have yet to be clearly identified, and their consequences are equally unclear.

Current economic science cannot come up with an explanation for the phenomenon of economic crisis and this is the starting point for the considerations set out in this book.

Following a lengthy thought process, my intention is to show how and why economic crises occur by introducing the new concept of income dispersion.

This involves looking at how the economic system works not only when everything is functioning normally, but also when the system is going through unhealthy phases.

Economists may be able to develop more effective forecasting models on the basis of my results, but my objective is somewhat different.

Seeing is more important than predicting.

It is easier to foresee an imminent crisis if you know what elements and processes cause it to happen.

If I achieve my objectives, there may be unexpected consequences, and these, in turn, will direct my gaze towards other even more ambitious goals.

2

Definition of economic crisis

The concept of economic crisis is easy to understand, but it should be explained clearly in order to make sure it is not confused with a commercial or financial crisis.

Three elements must be taken into consideration when determining whether an economic crisis is underway. These three elements are a population, the population’s total income and a predetermined period of time.

The following definition applies.

An economic crisis occurs when a population’s total disposable income decreases over a predetermined period of time compared to the previous period.

The consequence of an economic crisis is the impoverishment of the affected population, as the result of the reduction in average disposable income.

The average disposable income measures the well-being of a population, and the extent of an economic crisis can be measured by the ensuing decrease in disposable income.

The impact of a crisis can be more or less serious and be felt for a longer or shorter period of time.

Some crises can be resolved relatively quickly and easily, while others have dire consequences and require long-term structural intervention.

Commercial and financial crises differ from economic crises, as they usually only involve transfers of wealth from one section of a population to another, without lowering the average level of well-being.

It should be clear that none of the considerations contained in this book relate to crises of this kind. What is difficult to explain is how the overall prosperity of a population can actually decrease, and this is the issue that will be addressed in this book.

Conversely, the mechanisms that determine a shift in wealth within a population without affecting the average disposable income can be more readily understood.

Explaining the phenomena relating to commercial or financial crises is not among the objectives of this study.

3

The economic system

Economic crises are crises in the “economic system”, so here it is also expedient to give a definition of what is meant by economic system.

The concept of economic system has evolved from the concept of nation. Starting with Adam Smith (1723-1790), economists have used the concept of nation to define an economic system.

A nation is a community of people with its own territory and government. The people in question are usually born in the territory and speak the same language.

Over time, the concept of aggregate income increased in importance and the concept of economic system was necessarily developed and placed alongside the concept of nation.

The notion of “economic system” can encompass existing economic systems, namely nations, while it can also describe abstract descriptive models.

National income is the aggregate of the entire income produced by the economic subjects of that nation.

All the individual components of economic systems can be combined with the single homogeneous components of other systems.

If we consider the total income of two or more nations chosen at random, for example, the United States of America and Japan, and aggregate their incomes, we obtain a further entity that is not the income of a single nation, but that of both the nations in question. This two-nation set is an abstract economic subject in its own right and clearly cannot be considered as another nation, but it is instead an “economic system”.

The following definition applies.

An economic system is a group of subjects that carry out activities with the aim of procuring the goods and services necessary to satisfy their needs.

Economic systems are composed of economic subjects.

All the entities that interact with the aggregate income, and contribute towards producing it, distributing it or consuming it, are economic subjects.

It follows that, by economic subjects, we mean all natural persons and all the associations that interact with the aggregate income. Any kind of association is an economic subject, even non-profit making organisation and those not recognised in Law. An association has merely to interact with the aggregate income to be an economic subject.

Every economic subject is an economic system.

The simplest economic system consists of a single natural person.

Complex economic systems are composed of one or more smaller economic systems in the form of an aggregate group of individuals and/or associations of any kind.

4

The crisis model with five elements

In setting out the objectives of this book, I designed this descriptive model to help explain what I mean by saying that we cannot rely on current economic theories to understand the phenomenon of economic crises or to distinguish between economic crises and commercial or financial crises.

This descriptive model is based on the principle of completeness and simplicity. It considers all the necessary elements and only those.

The five elements are: population, income, income distribution, savings threshold and minimum subsistence level.

These elements should be considered in order to understand the dynamics, gravity and typology of the crises.

One element of particular importance is the “minimum level of subsistence” (or “subsistence threshold”), which relates to all economic subjects, whether natural or legal persons, and indicates the minimum income that allows a subject to subsist. Individual companies belonging to the economic system also have their own specific minimum threshold of subsistence.

In its simplest form, the model specifies that the population is composed of only two natural persons, the total income is equal to one hundred Value Units (VUs) and distributed equally between the two subjects, the individual savings threshold is 20 VUs and the minimum individual subsistence income is 10 VUs.

Subjects spend all their income up to their individual income threshold of 20 VUs; above that, they allocate a part at will to savings, so the “savings threshold” is set at 20 VUs.

The starting situation is not one of crisis but is, rather, a situation of wealth, since every subject has 50 VUs, giving a level of income allowing subjects to set part aside in savings while offering a good standard of living.

This initial situation can be compared with a new position, where the only change is to the distribution of income. On comparing the two following situations:

Income 100

Distribution 50/50

Subsistence Threshold 10

Income 100

Distribution 93/7

Subsistence Threshold 10

The second situation is one of crisis, which may have arisen as the result of commercial or financial transactions. One subject earns an extra 43 VUs at the expense of the other.

It is clear that the new situation is critical, since half the population’s income is lower than the minimum subsistence level.

While highly unpleasant for some, this new situation is not the result of a decrease in total income and, therefore, there is no crisis in the system as a whole.

Crises arising from income distribution can easily be resolved through fiscal measures, by taxing the richest to help the poorest.

A tax of 4 VUs out of 93 is sufficient to bring the entire population above the minimum subsistence level, giving a distribution of 89/11.

Even from a theoretical point of view, commercial or financial crises do not present particular problems. Things are clear: we know how much income was lost, who lost it and who gained it, and we also know the details of the commercial or financial transactions that generated this situation.

If, on the other hand, we discard the hypothesis of constant total income and assume that there is a progressive decline in income, there will be an economic crisis. It then becomes difficult to come up with a theoretical explanation of the decline in income, as we do not know what happens to the part lost.

5

Aggregate income and economic crisis

The five-element crisis model can be used for a range of purposes, requiring only one or more of the variables to change. It can, for example, produce useful sociological indications if the simplified hypothesis of only two economic subjects is altered to increase the number of subjects and diversify their typology. Another option is to modify two or more variables simultaneously, making it possible to describe the relationships between commercial and economic crises and their effect on the population. Sociological considerations can be useful to disclose the effects of a crisis on the population, but they do not go back to the root causes of the economic crisis and, for this reason, will not be covered in this book.

This simple crisis model contains five elements but, in order to understand the arguments outlined in the next chapters, we will be focusing our attention on a single event, that of the progressive reduction of total disposable income over time.

One consequence of economic crises is that they decrease the population’s aggregate income, and the aim of this book is to explain how this decline can be so serious as to cause the collapse of the entire system.

The initial situation of prosperity will now be compared with a situation of crisis caused by the aggregate income decreasing from 100 VUs to 60 VUs. All the other elements remain unchanged.

Income 100

Distribution 50/50

Savings Threshold 20

Subsistence Threshold 10

Income 60

Distribution 30/30

Savings Threshold 20

Subsistence Threshold 10

Considering that in our case the population consists of two natural persons and that the income of 100 VUs is distributed equally between them, each subject has 50 VUs and the distribution is set at 50/50.

As long as the subject’s individual income exceeds the savings threshold of 20 VUs, the subject can decide to save part of whatever exceeds this threshold.

When income drops to 60 VUs, the distribution is 30/30 and both subjects have, therefore, 30 VUs and will spend 10 VUs to subsist, another 10 VUs to improve their quality of life, and they will use the additional 10 VUs that exceed the saving threshold of 20 VUs as they please, to spend or invest.

The economic crisis that occurs when the subjects’ aggregate income drops from 100 VUs to 60 VUs is certainly disagreeable but, the two-subject population, which has 30 VUs per head after the crisis, can still live with some dignity and, if it wants to, can still put aside part of its income.

The next step is to examine a further drop in disposable income, from 60 VUs to 40 VUs, and compare this new situation with the previous arrangement.

Income 60

Distribution 30/30

Savings

Threshold 20

Subsistence Threshold 10

Income 40

Distribution 20/20

Savings

Threshold 20

Subsistence Threshold 10