Notes on money and excess

Notes on Money and Excess Prof. Mark Lindley University of Hyderabad School of Economics 15 September 2015 Is getting more money your top desire in life? If not, why are you studying economics? (Do you have a better reason?) Karl Marx said that people make a “fetish” of money. (What he was getting at was based in part on his acceptance of the classical “labour theory of value”.) In anthropology, however, “fetish” is a term for inanimate objects which savages mistakenly believe to have magical powers, whereas the social power of money in modern societies is real. (The word “miser” does imply a spiritual sickness. Keynes was IMHO correct that “The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – ...is a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” Yet he also said that “The importance of money [for normal people as well] essentially flows from its being a link between the present and the future.”) The monetary “fetish” has to be widespread in order to be effective, i.e. for the money to have social power: it has to have command over commodities. Hence legal tender – which is normally supposed to be more reliable than tokens not authorized by a national government. However, if the legal tender undergoes galloping inflation, then other currencies (formal or informal) backed by value will be used instead. (This was pointed out in 1840 by Adolph Thiers, an historian who later became the founding president of the “Third Republic” of France.) In the post-World-War-II world, fear about the instability of this or that national currency has been a basic reason why dollars have been popular abroad. (I will say more about this later.) Before legal tender existed, a well-known precept (stated by Thomas Gresham in 1558, and by others before him) was that “bad” coinage drives out “good” if they exchange equally: the velocity of use of adulterated coins (chipped, for instance) would exceed that of the unadulterated ones. Hence the proverb: “The bad penny always returns.” In 1696 the Warden of the English royal mint recalled its coins and had them melted down and remade with a design more difficult to counterfeit. One feature of the new coins was that the edges were milled – grooved – as a preventive measure against chipping. The British were very concerned about money, way back then. The Warden was Isaac Newton. Karl Kautsky, the most eminent Marxist a hundred years ago, has been among the many writers on economics according to whom the most important social function of money – indispensable for “any kind of society with a widely ramified division of labour” – is to facilitate the exchange and circulation of commodities. (Adam Smith put it even more strongly: “The sole use of money”, he said, “is to circulate consumable goods. By means of it, provisions, materials and finished work are bought and sold, and distributed to their proper consumers.”) A mid-19th-century German philosopher, Arthur Schopenhauer, said that “Meals are good only for the hungry, wine for the healthy, medicine for the sick, a fur coat for the winter, loose women [Weiber] for the young, etc. [He was a rather weird person.] Thus they are all ... only relatively good [i.e. good in relation to some particular kind of need]. Money alone is the absolute good, for it meets not just one concrete need, but Need itself, in the abstract.” A T-short worn this year by a young lady at the Gokhale Institute said: People who think money can’t buy happiness don’t know how to shop What is your opinion? John Ruskin said in the 1860s that the social power of the money in one person’s pocket depends on its lack in his neighbour’s. (Footnote: Ruskin’s book on economics, Unto this Last, had a profound effect on Gandhi in 1904, and also in 1906 on the founders, in the British House of Commons, of the Labour Party.) The lack is real in many people’s pockets in modern societies, but in many cases the reality is more psychological than material, due for instance to advertising and to “keeping up with the Joneses”. This “pecuniary pressure” to perform work for someone else (Under what conditions?) may be distinguished from “nonpecuniary” pressure such as in slavery and serfdom. When money ($) which has been somehow accumulated is invested by a capitalist in the production (by wage labour) and sale of commodities (C ), the intended result is more money in his pocket, $ 1, which he can then invest in the production and sale of a more valuable batch (market-wise) of commodities, C 1, and so on: ... C 1 ! $ 2 ! C 2 ! $ 3 ! C 3 ! $ 4.... James Buchan (who was for many years a correspondent for The Financial Times) has argued (1997) that before the historical development of money, people would tend to regard their material needs as specific and finite, but that because money can buy so many different things, modern affluent people tend to feel that their needs are abstract and limitless. This point fits in with the findings of Happiness Economics and puts into an historical and potentially macroeconomic context the microeconomic point which I have cited from Schopenhauer about money potentially meeting any kind of need – even a need to get things which you had never before bothered to want. Buchan thus, in effect, sees monetarization of the economy as an underlying cause of (1) a phenomenon described as follows by W.S. Jevons (a leading British economist 150 years ago): “There is hardly a limit to the desire for articles of aesthetic taste, science or curiosity, when once excited” – and hence (2) Lionel Robbins’s famous definition (London, 1932) of economics as the aspects of human behavior that are “guided by objectives” and “deal with scarce means [my italics] which have alternative [possible] uses”. Robbins never referred to any present or potential environmental scarcities; his concept of “scarcity” was entirely abstract. A Nobel Prize laureate in chemistry, Frederick Soddy, discerned already in the 1920s a dangerous mismatch between (a) the potentially infinite amount of money which banks can generate by lending far more than they have in deposits, and (b) the finite amount of Earthly natural resources which money can be spent to pay for using up or destroying. According to Steve Keen, the author of Debunking Economics: The Naked Emperor of the Social Sciences (2001), we live in “a creditmoney system which has had a relatively small and subservient fiat money system tacked onto it”. Two of the top academic economists in the USA in the 1920s, Irving Fisher and Frank Knight (Milton Friedman’s teacher), said that it is dangerous for socio-psychological reasons that banks can lend far more money than they have in deposits. (What if a lot of the depositors panic and want to withdraw their money immediately?) (Footnote: Friedman agreed about this in 1960, but later ostensibly changed his mind as it became clear that the argument would remain distasteful to powerful people such as had funded his career in the 1940s. Upon studying his career you could find some other examples of intellectual dishonesty. For instance, when he said, in Newsweek in 1976, that ‘‘the Great Depression was produced by government mismanagement”, he surely knew – he was certainly sharp enough to know it – that his readers would take him to mean that the Depression wouldn’t have happened if government had practiced laissez faire; but his actual argument in Monetary History of the United States, 1867-1960 was that the Fed might have prevented the financial crash in 1930-31 by rescuing the overextended banks, i.e. that vigorous government intervention in the free market – promptly lending money to those banks – might have saved the day.) According recent studies (undertaken because of the financial crisis of 2008) by Alan Taylor of the University of California and Moritz Schularick of the West Berlin Freie Universität, a newly constructed historical data-set for several developed countries shows that today’s advanced economies depend on private-sector credit more than ever before, and yet credit-growth is a powerful predictor of financial crises; and, leverage in the financial sector increased strongly in the second half of the 20th century: there has been a decoupling of money and credit aggregates, and a decline in safe assets on banks’ balance sheets. Here is a graphic summary of some of their data: Yale University professor Robert Shiller, who published in 2007 an article entitled “Bubble Trouble” about the housing market in the USA, has ever since the 1980s been calling attention to irrational exuberance in stock market dealings, as evidenced by (a) surveys (which he has conducted) of what investors and stock traders say about their motivations for making trades, and (b) their willingness to pay high prices for stocks with relatively low earnings: Here are some hints that current techniques of professional financial dealing are conducive to weird volatility: In May 2010, major US stock indices fell by almost 10% within half an hour (but then recovered rapidly). In the Spring of 2013, US long-term interest rates soared by 100 basis points. In October 2014, US Treasury bond yields dropped by almost 40 basis points in less than an hour. In May 2015, German ten-year bond yields soared within a few days from 5 basis points to nearly 80. In 1919, Otto Neurath, a Communist philosopher and economist who had helped manage the economy of the Austro-Hungarian Empire when there was galloping inflation during World War I, said that a modern economic system could be planned entirely in terms of quantities of specified natural resources and of goods and services, and hence with no need for monetary currency. Ludwig von Mises replied in 1920 that not even in a socialist state could such “in natura” calculations successfully replace monetary calculations. (Kautsky agreed, as we have seen.) Von Mises’s top disciple, Friedrich von Hayek, later won the Bank of Sweden’s “Prize in Economic Sciences in Honour of Alfred Nobel” for saying (in 1945) that the market-price system is the only feasible way of coördinating the economic information which is dispersed among the various different agents in a modern society. (Hayek gave no empirical data. He and von Mises believed that economic theory must not depend on data, but only on intuition.) In the 1670s, King Louis XIV of France’s prime minister, JeanBaptiste Colbert, said that a nation well endowed with natural resources should import no kinds of goods that can be produced domestically. A modern counterpart to that primitive “mercantilism” is the belief that the nation’s exports should be worth more than its imports and that the greater this positive “balance of trade”, the better. But the worldwide totals of positive and negative in this regard have to equal each other. In 1817, David Ricardo (who argued powerfully against Colbert’s mercantilism, and whom many economists regard as the greatest classical follower of Adam Smith) said that a rise of wages usually has “a great effect in lowering profits”. Sir Arthur Lewis, an economist whose famous “two-sector” theory of “developing” countries’ economies (i.e. with small capitalist sectors and large traditional sectors) won him high honours, pointed out in 1954 that “the level of wages in the capitalist sector depends on the earnings in the subsistence sector”, and therefore “the capitalists have a direct interest in holding down the productivity of the subsistence workers”. This helps to explain why the BJP weakened the MGNGREA. “Demand-side” economists (the most eminent of whom in the 20th century was John Maynard Keynes) say that when consumers spend money to buy things they need, this causes employment. (Hayek declared, in the question period after his first lecture (1931) at Cambridge University, that when consumers spend money to buy useful things, this causes unemployment. He was wrong.) Demand-side economists generally suppose that people’s current flows of income determine how much money they currently spend. But Friedman found (1957) that how much stock of wealth one has tends to determine how much one currently consumes. (This would presumably be due to the psychological and social impact of one’s relative level of wealth, regardless of one’s current income.) It is generally accepted that if the interest rate on loans increases, then businesses will be more cautious about borrowing money, and so there will be less investment and hence less employment and/or productive innovation. However, Keynes pointed out that if the interest rate is very low, banks will be cautious about lending money (even if they have plenty of it), and this syndrome as well would mean that there would be less investment (and hence less employment and/or productive innovation). In the ISLM model (first published, in 1937, by Keynes’s disciple John Hicks), the downward slope of the IS curve is due to an assumption – supported by empirical evidence – that a moderate increase in the interest rate does not cause substantially more money to be put into savings accounts and the like than had been put in at the lower rate. (However, C. R. L. Narasimhan (Business Editor, The Hindu) has published last week and again this week a howl, on behalf of retired middle-class people in India, about their anxieties due to recently falling interest rates. See www.thehindu.com/opinion/ columns/C_R_L__Narasimhan/falling-interest-rates-a-concernfor-depositors/article7648720.ece.) Friedman theorized that given qP = Mv (where P stands for the overall level of prices in the national economy, q for the overall rate of production for the domestic market, M for the total supply of money in the national economy, and v (“velocity”) for the rate at which the monetary unit passes from one holder to the next), v is basically steady and thus cannot be strongly influenced by fiscal policy. So, P can best be kept reasonably steady by controlling M (an independent variable) so that its rate of increase is steady, year in and year out, regardless of q. But in 2003 he admitted that “The use of quantity of money as a target [in central bank policy] has not been a success.” (Also in 2003, Paul Samuelson said: “The Keynesianism, which worked so well in Camelot [i.e. during the presidency of John Kennedy, 1961-63] and brought forth a long epoch of price-level stability with good q growth and nearly full employment, gave way to a new and quite different macro view after 1966. A new paradigm, monistic monetarism, so the tale narrates, gave a better fit. ...[But let us] contemplate the true facts. Examine ten prominent best forecasting models 1950 to 1980: Wharton, Townsend-Greenspan, Michigan Model, St Louis Reserve Bank, Citibank Economic Department under Walter Wriston’s choice of Lief Olson, etc.... M did matter for almost everyone. But never did M alone matter systemically, as post-1950 Friedman monetarism professed.”) (Footnote: Robert Solow had said in 1987: “Everything reminds Milton of the money supply.... Everything reminds me of sex, but I try to keep it out of my papers.”) Keynesians say that the velocity (i.e. how fast money gets spent in a given society) is naturally variable and can be significantly influenced by fiscal policy (i.e. government taxing and spending). Other economists say that the supply of money in the national economy depends on the rate of production as well as on the velocity of the money. A.W.H. Phillips said in 1958 that somewhat high inflation has been (i.e. had been) associated historically with low unemployment, and vice versa. But Friedman said in 1967 that the correlation between high inflation and low unemployment cannot be sustained for long: stagflation (which then did characterize the American economy in the 1970s – especially after the “oil crisis” of 1973) is bound to occur after sustained palpable inflation. Robert Lucas won the Bank of Sweden’s prize in 1995 for arguing that in a society where stagflation has once occurred, no correlation between inflation and a lowering of unemployment can ever occur thereafter, not even in the short run. Lucas said in 2003 that “the problem of depression-prevention has been solved, for all practical purposes”. In this graph, based on US government data, the numbers in the columns are percents: The Fed made in September 2012 an open-ended pledge to keep buying bonds with newly printed money until the outlook for jobs in the USA would “improve substantially”. (It tapered this down in 2014.) Peter Bernholz, an economics professor in Switzerland, had said in 2003 that a continuous flow of new money into a national economy leads to inflation only after a more or less extended time if the same national currency is meanwhile also used abundantly abroad. From the point of view of any one nation, foreign currency spent on acquiring its currency represents theoretically a set of claims on goods and services performed in those other countries. But if inflation in those currencies exceeds the rate of earnings in those holdings, then the amount of potential goods and services decreases. The USA, by importing more manufactured goods than it exports, not only promotes gainful employment abroad but also conveys, to foreigners, dollars representing claims on its goods and services. Since heaps of billions of dollars are nowadays held by foreign interests, the USA has a patriotic interest in long-term dollar-inflation (so as to dilute those foreign claims on USA goods and services); and hence the other nations holding dollars have a latent interest in spending them soon on whatever real estate and other increasingly scarce sources (outside their own borders) of natural capital can be bought with them. (FOOTNOTE: I am tempted to cite a remark which the first American ambassador to France, Benjamin Franklin, made (in a private letter written on 22 April 1779) about dollars and the recent war for the USA’s independence from Britain: “This Currency, as we manage it, is a wonderful Machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition; and when we are obliged to issue a quantity excessive, it pays itself off by Depreciation.”) The Writings of Benjamin Franklin: Collected and Edited with Life and Introduction by Albert H. Smyth. (Macmillan, New York, 1905-07), vol.VII, pp.293-94 According to the most successful recent American financier, Warren Buffet, big short-term financial transactions frequently act as an “invisible foot” kicking the society in the shins. According to an experienced hedge fund manager, Nicholas Taleb (2001), the modern stage of globalization has created interlocking financial fragility while giving the appearance of stability, and thus gives rise to economically devastating “Black Swans”. According to John McMurtry, in The Cancer Stage of Capitalism (1999), a ‘pure’ $ 1 ! S 2 ! $ 3... circuit (i.e. with no use-value production between transformations of money into more money) became in the 1990s the dominant form of capital investment. The McKinsey Global Institute reported in 1995 that the ratio of currency speculation to trade in goods/services, daily, was 50:1. But the most powerful late-20th-century economist, Alan Greenspan, said in 2000 that the new “financial products” which had been created in the last decade of the century – “derivatives” etc. – contributed “economic value” by reallocating risks “in a highly calibrated manner”. The rising share of finance in the “business output” of the USA and elsewhere was, he said, a measure of the economic value added by the ability of those new instruments and techniques to “enhance the process of wealth creation”. Luigi Zingales, who is the University of Chicago’s “Professor of Entrepreneurship and Finance” and who recently served a term as president of the American Finance Association, has posted at http://faculty.chicagobooth.edu/luigi.zingales/papers/research/ Finance.pdf a text entitled “Does Finance Benefit Society?”, pointing out that academic economists’ view of the benefits of finance “vastly exceeds societal perception” and saying that this dissonance “is at least partly explained by an under-appreciation by academia of how, without proper rules, finance can easily degenerate into a rent-seeking activity”. Keynes had proposed in 1936 “the introduction of a substantial [USA] government transfer tax on all [Wall Street] transactions ... with a view to mitigating the predominance of speculation over enterprise in the United States”, and a year later he extended the idea to a multinational and international context. James Tobin proposed (in 1972, and then on several occasions thereafter) a small tax on all “spot conversions” of one currency into another, in order to “cushion” exchange-rate fluctuations: “...let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis.... My tax would return some margin of manoeuvre to [currency-]issuing banks in small countries”. Tobin saw that “National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.” In 2009 Joseph Stiglitz said that modern technology could render the implementation of such a tax more feasible than in the previous century. In that same year Britain’s top financial regulator (under a Labour Party prime minister who lost the next election) advocated the adoption of a comprehensive financial-transactions tax, and Paul Krugman in the USA said this “could be part of the process of shrinking our bloated financial sector”. But, the idea was successfully opposed by the American Secretary of the Treasury, Timothy Geithner. Francis Fukuyama, whose famous book The End of History (1989) had said that with the decline of the USSR (and with the presidency of Ronald Reagan), “the end point of mankind’s ideological evolution” had been reached, now says that rent-seeking extractive elite coalitions have captured the state in the USA. I have heard a similar statement viva-voce by Daron Açemo™lu, the MIT economics professor and co-author of How Nations Fail (2012). Simon Kuznets found in 1955 that as the development of a market economy proceeds from a traditional low level to a “modern” (in those days) high level, income inequality at first increases for a while and then decreases. But Thomas Piketty (the most eminent 21st-century French economist) found in 2014 that although the middle class in some top countries raised its share of wealth and incomes at the expense of the rich during the three decades between 1914 and 1945, overall increases in the degree of monetary inequality have been a historical feature of capitalism in general. He said the historical data show that the rate of return on capital, r, tends to be higher than the rate of economic growth, g. While the historical data (assembled by Piketty and a number of colleagues) on which this conclusion is based are impressive, the conclusion is not novel. In late-17th-century Japan, for instance, Ihara Saikaku, who was the son of a wealthy merchant in Osaka and observed vividly the financial and amorous affairs of the merchant class, found that “In these times it is not so much intelligence and ready wit that bring a man profit, but simply the fact of already possessing capital.” (This slide shows estimates of what percent of the total amount of incomes was going to the ten percent of the households that were getting the most in the USA during the last 60 years.) The World Bank has said (1992) that once the level of monetary incomes has become high, further growth of GDPs – i.e. further spending of money – leads to environmental improvement. This is, IMHO, an ideologically convenient but dangerous halftruth. The other part of the truth is that people who spend lots of money tend thereby to spend lots for using up natural resources. A recent example is that Japan, Germany, Britain, France and Italy each burned more coal in 2013 than in 2009. (Their aggregate increase was 16%.) Apart from the fact that some of the economists’ precepts which I have described were never true, some others have been true to a limited extent only (and you should assess accordingly everything that your teachers say is “scientifically true economics”). And, there are now some new truths. A take-away point should be a modified version of Alfred Marshall’s insight that “Every change in social conditions is likely to require a new development of economic doctrines.” The modified version is: “Every big change in material conditions may call for innovations in economic theory.” I have removed the word “social”, to allow for what was – rightly — worrying the great chemist whom I cited earlier in this lecture: the diminishing ratio between how much indispensable natural capital the Earth provides and how much money can be spent on destroying it. Let me turn now to monetary inequalities. And let me include (for those who may need it) some rudimentary descriptions of two ways in which inequalities of wealth or income are often estimated by economists: 1. Graphing it – in regard, for instance, to incomes – by a “Lorenz Curve”, and reducing the result to a “Gini Coefficient”. This is normally done for people within the same country (and hence mostly the same currency). 2. Reckoning “Purchasing Power Parity”, for comparisons between different countries. A Lorenz Curve in regard to, say, the incomes in a given national population will show, for each part of the population (poor or rich or anywhere in between), how much of the total incomes it is getting. The percentage of people is plotted on the horizontal x-axis (starting with the poorest 1% on the left and going to the richest 1% on the right), while the percentage of total national income is plotted on the vertical y-axis: Each point on the curve represents a statement like “The poorest 20% of the people got 15% of the total income." (The reckoning is actually done in terms of households rather than of individuals. All the individuals in any one household are reckoned as having equal monetary incomes.) The “Gini Coefficient” tells what percent of the triangle lies between the Lorenz Curve and the diagonal “Line of Equality”, which is what the “curve” would look like if all the incomes were equal. The smaller the inequality of incomes in a given population (annual incomes might be the easiest to estimate, from tax returns), the closer the Lorenz Curve would be to that Line of Equality. If the Gini Coefficient were nearly zero, then the poorest 1% of the people would be getting almost 1% of the national income while the richest 1% of the people would be getting hardly more than 1% of it. The bigger the Gini Coefficient, the greater the monetary inequality. Some estimated Gini Coefficients for incomes in various nations have been as follows: 23 for Sweden in 2011; 70 for Namibia in 2011; 40 for the USA in 1967; and 47 for the USA in 2011. The shape of the Lorenz Curve doesn’t have to be symmetrical (as it was in my abstract illustration). For instance: From rough data about each 20% of the populations in 1996 in Hungary and in Brazil, a less asymmetrical Lorenz Curve for Brazil than for Hungary can be derived: »This remarkably long black bar corresponds to the remarkable steepness of the top part of the green line in this graph: The USA has recently been experiencing a great increase of such “asymmetrical-Lorenz-Curve” inequality at the top. (See the following slide, and James K. Galbraith’s Inequality and Instability, Oxford Univ. Press, 2012.) (Footnote: This J. K. Galbraith is the son of the famous John Kenneth Galbraith (1908-2006) of Harvard University, who served in the 1960s as the USA’s ambassador to India, and who said: “Under capitalism, man exploits man. Under communism, it’s just the opposite.”) (This slide shows estimates of how much of the total monetary wealth was held by the richest one-tenth of the richest one percent of the households.) According to Columbia University’s Prof. Jeffrey Sachs (Director of the university’s “Earth Institute” and Professor of Sustainable Development at its School of International and Public Affairs – and a critic of the IMF’s policies), “[President Ronald] Reagan helped plant the notion that society [in the USA] could benefit ... by cutting [rich people’s] tax rates and thereby unleashing their entrepreneurial zeal. Whether such entrepreneurial zeal was unleashed is debatable, but there is little doubt that a lot of pent-up greed was released, greed that infected the political system and that still haunts America today.” Later I will say more about this notion of greed as a social disease when there is (too much) monetary inequality. The informative value of Lorenz-Curve data is limited in certain ways. On the one hand, the monetary conditions of the very rich and the very poor are more difficult to ascertain than those of the folks in the middle. (Have your teachers lectured to you about “black money” and “the gray economy”?) On the other hand, monetary inequality is only one aspect of economic inequality. If two households have equal monetary resources, the one in the less polluted and otherwise less dangerous local environment is materially better off. If two countries have the same Gini Coefficient, their levels of economic inequality may still differ a great deal if much better public services are provided in one of them than in the other. Differences in social mobility – think of barriers on account of race, gender or caste – also affect the levels of economic inequality. Now I come to “Purchasing Power Parity” (PPP): It is mainly a way of trying to compare quantitatively the average economic conditions in two different countries. It is reckoned by dividing the ratio between the estimated levels of average monetary income in the two countries by the ratio of estimated average monetary costs of living in them. From figures published by the World Bank, it can be reckoned that between the USA and China in 2004, the approximate ratio of per-capita annual income was 32:1, and in terms of PPP 7:1; between the USA and India, 67:1 and 12½:1; between the USA and Mauritania, 98½:1 and 19½:1. Since the PPP ratios are less drastic than those based simply on comparisons of estimated average income, let us note that PPPbased comparisons worldwide are of limited validity as they depend on estimates of “cost of living” in many different countries, i.e. costs for different ways of living at very different average levels of material consumption (in some of the comparisons). The cost-of-living concept was originally, in the 1930s, developed to compare costs in successive years (or even months) in the same country, not costs in different countries at the same time. Such an index reflects changes in the price of a fixed “basket” of products and services deemed to be characteristically needed. But the basket is different for folks in different countries. How many hamburgers do you eat in a month? Do American families ride on motorcycles? Do remember, however, that average differences between one country and another are not the only kind of extreme difference in wealth. There can also be extreme differences within a country. To cite just one example: While quite a few Brazilians are destitute, and while more than half of them are poorer than virtually anyone in France is, a few of them are very rich by worldwide standards (Does this sound familiar to you?) and a tenth of them are more affluent than half of the French are. Reckoning global economic inequality is an even more intricate challenge than these remarks about PPP may suggest. It is impossible, for instance, to know how much money the very rich have, because their power is such they can conceal the financial facts if they like. A deeper problem is that economic inequalities – inequalities in people’s material well-being – have to do with far more than (a) how much money they have and (b) regional differences in cost of living. Indeed, some of the inequalities that are now beginning to become more and more significant have to do with different degrees of ecological/environmental vulnerability, and involve risks so difficult to quantify that insurance companies don’t even try to assess them. Here are some data, however: According to the University of California’s Atlas of Global Inequal ity (see http://ucatlas.ucsc.edu/income.php), global income inequality is now probably greater than ever before in history; the ratio between the average income of the top 5% in the world to that of the poorest 5% increased from 78:1 in 1988 to 114:1 in 1993; the 1% with the highest incomes are now getting a lot more than the bottom half; and, even when the statistics are adjusted for the estimated different monetary costs of living in different countries, the best-off 1/4 of the world’s population today have 3/4 of the local purchasing power (which leaves only 1/4 of it for all of the remaining 3/4 of the people). Nearly 18 thousand million people are now said to be living on no more than $1 a day or the equivalent in another currency (e.g. ca.65 rupees). (FOOTNOTE: It seemed to Adam Smith that “The rich ... consume little more than the poor.... They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants....” Do you think this is true nowadays?) Theory of Moral Sentiments, Part IV, Chapter 1, 10th paragraph. Having said all this, I ought to share my opinion that to advocate monetary equality for everyone would be silly at best (since elaborate social structures can hardly be maintained without some organizational hierarchy, and since money is important in such structures) and would be dangerously utopian at worst. (I think this latter point was shown by the hypocritical horrors of, say, China under Mao. He ignored Karl Marx’s own admonition that only in “a higher phase of communist society”, after a great deal of further socio-economic development, could society “inscribe on its banners, ‘From each according to his ability, to each according to his needs!’”). A real issue today is whether the degrees of monetary inequality that we now have are (a) beneficial on balance or (b) seriously toxic. The degrees of inequality differ in different countries, so we can get some relevant evidence by plotting those differences against some indices of social malaise or well-being. This has been done, in a book entitled The Spirit Level (2009), for some countries in regard to which detailed indices of this kind have been compiled. Let me show you five of the graphs, in regard to: • Prisoners per 100,000 of the national population. • Homicides per year per million of the population. • Percent of the population with mental illness. • Percent of adults with obesity.* • Ratings vis à vis the UNICEF index of child well-being. (*The American Medical Association recognizes obesity as a disease, since it is very unhealthy and since “The suggestion that obesity is not a disease but rather a consequence of a chosen lifestyle exemplified by overeating and/or inactivity is equivalent to suggesting that lung cancer is not a disease because it was brought about by individual choice to smoke cigarettes.”) Kids fare better in countries with less inequality. Did you happen to notice that the countries with less inequality and better social conditions are not suffering from worse economic conditions than are the countries with more inequality and worse social conditions? It seems to me that healthy social conditions are a good thing in their own right, and that it is shameful not to seek them. How would you answer questions like this: To what extent can people who have lots of money in the modern world, and who are clever at shopping, buy happiness with their money, regardless of how much material inequality there is in the society? If to a very great extent, then how? At the 2015 conference of the Association of Indian Economic and Financial Studies, Sugata Marjit (VC of the University of Calcutta and RBI Chair Professor at the Centre for Studies in Social Sciences, Calcutta) proposed a theory based on the following two axioms: (1) “Inequality hurts” [in modern societies, by damaging practically everyone’s status, since practically everyone is aware of someone else getting more than [s]he is]. (2) “Inequality thus increases the marginal utility of the ‘status good’”, i.e. of feeling (or at least hoping) that you’re “catching up” with those who have higher status than you do since they have been getting more than you have been getting. The theory says that since many of the others are trying to mend the hurt to them, most people are not “catching up” after all, even if their material circumstances may be improving. (I would add that if the cumulative effect of all this striving is to cause galloping environmental degradation, then many people’s material circumstances may be deteriorating in important ways.) And meanwhile, certain status symbols, such as a lakefront rural villa or cottage, as distinct from a rural cottage or villa that’s not actually on the shore of a lake, can be possessed by only a limited number of people. (Fred Hirsch in the 1970s wrote brilliantly about issues of this kind in his famous book, The Social Limits to Growth.) Progressive taxation – i.e. with percentage rates higher for highincome than for low-income people – is a way for government to try to mitigate extreme monetary inequality. Does it work in a socially beneficial way? Trolls say that it cripples investment, but the claim is not supported by data. An objective assessment, “Progressive Taxation and Happiness”, in the Boston College Law Review (2004) concluded that “happiness research is consistent with the strongest justification for adopting a progressive tax structure”, i.e. that “income has declining marginal utility”, and so a certain amount of monetary redistribution “can increase total welfare in a society”; and, a study based on the Gallup World Poll (with data from 54 countries) and published in Psychological Science (2012) found that progressive taxation is associated with increased levels of subjective well-being and that this association was “mediated by citizens’ satisfaction with public goods, such as education and public transportation”. Inequality in “holding” other people’s money is just as important nowadays as inequalities of wealth and income. Bankers and government officials hold other people’s money, and are thus like trustees. Some trustees, however, are not trustworthy. The money held by the government belongs to all the citizens and not to the government officials as such, but since the amount held in a big modern country is very big, there are opportunities for gross mismanagement due not only to innocent mistakes but also to self-aggrandizing corruption. (Such corruption is an application, in governance, of the Economic-Man precept of neoclassical economic doctrine which has been taught to many of the officials who have had the benefit of higher education.) The consequences include (a) mismanaging government and (b) aggravating the excessive inequalities of personal wealth. But also: if the government follows a laissez faire policy in regard to banking, then the bankers can gamble recklessly – for their own personal profit – with their depositors’ money. Because the big banks are “too big to fail”, the irresponsible bankers never themselves pay the costs of their mistakes. Instead, the taxpayers pay when the banks are bailed out in keeping with the kind of policy which Friedman advocated (as we have seen) for such circumstances. As far as the bankers are concerned, the gambling is on a “Heads I win, tails you lose” basis. Some Conclusions: Much of this lecture, including the title, has implied a causeand-effect relation between money and excess. Here is a broad generalization from my remark that a sensible normative objective in regard to personal monetary inequalities would not be to do away with them, but only to trim the excess: In regard to all sorts of differences and inequilibria, a direction of change that is beneficial or tolerable at one time may later become intolerable or deadly. (We need to be sensible!) Two Appendices: 1. Kenneth Boulding stated (in 1981) an underlying reason why every big change in material and/or social conditions calls for innovations in economic theory, and thus the would-be “scientific laws” of neoclassical economic theory have much less reliable predictive validity than the “laws” Newtonian physics have for “celestial mechanics” (i.e. for the orbiting of the planets around the sun): “Prediction of the future is possible only in systems that have stable parameters like celestial mechanics. The only reason why prediction is so successful in celestial mechanics is that the evolution of the solar system has ground to a halt in what is essentially a dynamic equilibrium with stable parameters. Evolutionary systems, however, by their very nature have unstable arameters. They are disequilibrium systems, and in such systems our power of prediction, though not zero, is very limited because of the unpredictability of the parameters themselves. If, of course, it were possible to predict the change in the parameters, then [this would mean that] there would be other parameters which were unchanged; but the search for ultimately stable parameters in evolutionary systems is futile, for they probably do not exist.” 2. It seems to me OK for economists to envy the physicist’s ability to predict reliably whether an airplane of a certain design can take off smoothly and land safely, but not OK to derive from their physics-envy a concept of a “positive” economic science based on such intuitive but mythical and inaccurate (in relation to reality) concepts as “perfect markets” and “market equilibrium”. (Footnote: The concept of a general market equilibrium had, when Léon Walras worked out in 1870s his mathematical theory of it, a common-sense appeal because one could readily imagine that since buying and selling at the stock market was not happening during the night, the prices at the moment when the market closed at the end of the day represented an overnight equilibrium. But now that the bidding never ceases globally, anyone can tell that equilibrium is just a mythical theoretical ideal. Nothing in reality corresponds to it. It is not like “marriage”, “government” or “water”; it is like “paradise” and “eternity”.)