Abundance of wealth and scarcity of capital: solving the paradox

It seems that one of the major economic phenomena of our time is the massive accumulation of elite wealth amid growing inequality within states, even as output and productivity, especially since the Great Recession, have been modest in most part of the world.

In his book Capitalism Without Capital, Alan Shipman collects a host of economic ideas, from the global surplus saving theory and the Cambridge controversies on capital theory to Thomas Piketty’s writings on inequality, to say that we live in a it was one of abundant “wealth” along with a lack of capital assets. Real producer. The growth of the latter continues to be the engine of the increase in the standard of living of the majority.
Shipman spends some time discussing the meanings of wealth and capital, something that remains neglected in mainstream economics. He criticizes Piketty’s combination of the two, arguing that assets such as housing may be wealth, but their value does not contribute much to rising living standards and long-term capital accumulation. Fluctuations in house prices tend to redistribute wealth rather than create the economy as a whole. More generally, housing and financial assets are subject to “capital” gains and losses, which confuses things when it comes to defining wealth and capital separately.
The global saving surplus hypothesis states that the surplus of total saving over investment in economies such as China, Japan and Germany, especially in the early 2000s, led to lower interest rates around the world, causing asset price spikes in many countries. Of economies, first in financial markets and then in housing. This helped fuel economic growth for a time, but ultimately proved unsustainable when the trend associated with rising debt proved impossible to continue.
Therefore, many of these excess savings found their way into financial assets rather than investing in new capacity to drive faster growth in productive activity. Incentives to invest in new productive capital appear to have diminished as rising financial wealth encouraged asset price inflation relative to the expectation of higher asset prices.

If we agree with the functional separation between the two meanings of wealth and capital, then the growth in the value of the former has exceeded the latter. As a result, there has been a relative lack of supply of new assets “capable of reliably storing and increasing wealth,” according to Shipman, which inflated asset prices and brought new savings to financial assets.
Asset price inflation has fed on itself, reducing incentives to invest in expanding real productive capacity. Thus arose an excess of investable wealth along with a lack of funds for industrial investment. In other words, we have a shortage of real capital goods, as opposed to a growing concentration of wealth resulting from inflation in asset prices and a shortage of issuing new financial assets to finance more productive investment.
This process is not sustainable, because the increase in the prices of financial assets ultimately depends on real economic growth, which in turn depends on higher productivity from higher productive investment. Despite the recent expansion of definitions of capital, in areas such as human capital, social capital, etc., investment in new equipment and skills remains vital to raising the standard of living in rich and poor countries alike. But today the global economy is witnessing a disconnect between wealth and capital, separately.
Shipman’s book looks at all kinds of questions and raises questions that it doesn’t try to answer. But what I will try to answer is the reason for the decline in investment in terms of excess saving.
To me, the most compelling argument is that the abundance of savings itself is the flip side of underconsumption, or a reduction in consumption’s share of GDP relative to output. The difference between consumption and production is savings. If these savings are not accompanied by an investment in new production capacity, this can weaken domestic demand. Alternatively, excess savings could find their way into financial asset speculation, or could be exported abroad. Since global savings and investments must be balanced, an increase in savings over investment in one country must mean that there is excess investment over savings in the rest of the world. If excess savings were actually exported from the home country, it would result in a combination of higher investment, lower saving (and therefore more consumption), and higher debt in the rest of the world.

* نشر في: The socialist economy and development politics

Subscribe to «News» on YouTube here