Tear Down Capitalism, or Scaffolding?

We keep hearing how many more times some CEO earns compared to his or her front-line employee. Or hear how many more times the average income the wealthiest person’s income is.

And that this is growing.

This is good.

For two reasons.

First, it indicates that our economy keeps growing. On Wall Street, this is what the liberal arts grads declare that they want: an economy that grows, not shrinks away from them.

Second: it indicates efficiency. Again, at the intersection of Occupy and Wall Street, the public-pee-ers keep claiming that they want things to be efficient. Well, they are.

What is efficiency? In economics, this is when the cost to produce some unit of good-or-service drops, or the cost drops for the buyer to find and make a deal with the the seller. This is “transaction cost.”

Some of us remember the County Fair. At the County Fair, along with the winning pig, you could look over tractors, and get a phone number for a tractor salesperson. Or two.

You might figure out that a new tractor attachment would make you able to bring in your crops with less time. At some point, the money you spend to get the tractor attachment is “paid off” by “return on investment.” This is the money you made, having spent some money. You have become more efficient.

If this goes well, you can either bring in more crops with the same number of laborers, or bring in the same amount of crops with fewer people.

This is efficiency. And job loss. The laborers picking the crops will not be needed.

Now, consider: you can lift up that new contraption they call a “telephone,” and call the tractor company. You ask a salesperson about specs. You call a couple competitirs. You make a decision and place an order. Well before the fall’s county fair. The salesperson devotes no travel time, and does not have to pay the County Fair host an exhibition fee.

Consider that the tractor has about the same sales tag either way. The tractor company has made more money on that tractor sale. The phone made the transaction, the seller and buyer meeting each other, more efficient: same work/result at lower cost.

Someone else is out of work. But whoever it is that sold the phone has a job. Laying phone line. Etc.

This is how an economy works. A zillion things change all at once. Some markets grow, some disappear. Whatever it is, it is not static.

You get a college degree in “Fall County Fair Hosting,” then the county fairs disappear.

You get a degree in tractor sales, and the telephone takes its value away, by letting neighbors use the phone to take away the uniqueness of the info.

To have more jobs, and more decent-paying jobs, we could get less efficient. Unions have figured this out.

Sadly, while this leads us to “full employment,” it leads our neighboring countries to trounce us.

Some farmer somewhere will buy a Kuboto. Some guy somewhere will even buy a Mitsubishi car, even though their Zeroes attacked us.

Price-for-performance will win the day.

The economy keeps developing opportunities for people to make money in new ways. Both by innovation, or by making more simple, mundane jobs.

A single-family farmer might have several family members doing all jobs. When that deal gets more efficient, a family member or two are free to go do something else. or nothing. Optimally, they find something where they are more productive for the same effort.

If the free family member actually works, the family can save up money. If they save a tenth of teir income each year, after ten years, they have enough money in hand to buy a farm of equal value. How do they do this? Decline the invitation of their neighbor to hang out and enjoy some corn whiskey once or twice a week.

What have they done wrong?

I cannot figure it out, yet.

Now, consider that the value of the neighbor’s farm is the same. After these ten years, the farmer can walk down the lane, and offer the neighbor full price for his farm. And offer that cash money and to hire a couple of the family members to work the farm.

Now, the neighbors look at the cash and consider how easy it would b e to simply buy the whiskey instead of waiting on the corn in the silo to turn. Plus send their one promising kid to college.

There ya go.

More crops coming out of those two farms, and fewer people doing the work, and the money going to one family, not two.

And a doctor in a few years, with no student loan.

And now, the greatest income earner is bringing nearly twice as much per year, while the lowest income earner, the college student, is lower.

Now, that farmer has a neighbor. Either one will buy out the other, or the other will buy out the one. Whomever ends up as the employee, that person is free to work for wages at that form, or walk down the road and sell tractors, or use those farming skills, or whatever.

That is the scaffolding. As an economy grows, the layers of employees increases. Management. Middle management. A millionaire. A billionaire.

The top “earner” gains from each successive level of scaffolding, below. The idea of a pyramid scheme helps to see this, but that is a limted analogy: here, someone is actually selling something to someone only if they voluntarily come around to buy. In fact, they are happy to buy, since the unit cost, or the transaction cost, keep dropping.

I just bought an $8 gismo from China with $4 shippping to the U.S. instead of paying $11 with $2 shipping from someone here in the U.S.

On Ebay. 24-7. Way better than the twice-a-year county festival.

So, as time goes by, we absolutely should expect the ratio of the highest-earner to the median earner to grow. The top earner is scaffolded on the many levels below, that keep getting differentiated and refined by developments in efficiency.

That means that, as time goes by, the poor can get things much more easily and much lower price than evar.

Are things worse, or better, for the poor?

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