Hal posed a question yesterday: "I'd be interested in a new blog post outlining your ideas about how MM could lead to greater wealth concentration. That seems an unconventional suggestion, I think most people would expect the opposite."
I'll start with a caveat: This post is a product of my reasoning, not an attempt to explain a standard economic theory.
Next, a definition: Wealth concentration is what happens when a business's income from sales greatly exceeds its necessary expenses, leading to a large surplus of capital which then gets dumped into a few people's pockets.
Let's take an example.
A publicly traded business makes a software product that it sells for $100 million per year. It pays its non-executive employees $10 million per year, its physical plant needs another $10 million per year, and it pays $20 million in taxes. That leaves $60 million to be dealt with.
It could put the $60 million in the bank, or in investments. This makes the stock value of the company increase, at least modestly; this is not yet wealth concentration, because a lot of small investors benefit, and the money is not yet owned by individuals. But holding money appears to create at least one problem: as the money builds up, a temporary dip in stock price might make the company a target for a hostile takeover.
The company could buy back its stock. This increases the value of the remaining stock. But it can only do that for so long before it's a privately held company again.
It could spend money on R&D. But that would require spending five or six times as much on R&D as on its entire productive staff. Companies just aren't structured that way.
In theory, the money could be paid out as stock dividends, but that doesn't seem to be done anymore; I'm not sure why. And the money could be paid to employees, but that would look like waste--and quintupling their salaries might encourage fiscal irresponsibility or early retirement.
So the only thing left to do with the money is to pay it to the executives. And that is wealth concentration. No one has been cheated; the company has created lots of value, and its customers and employees and stockholders are all better off than they were. But at the end of each year, another $60 million has been taken out of circulation and concentrated in the pockets of a few corporate executives.
If the company is privately owned, then its owners get to divide the money with the executives; either way, it goes into private pockets. Large-scale private investors likewise can be counted along with executives. (Most of the public will have no chance to engage in such activity, and in fact there are legal barriers to them doing so.)
It could be argued that the executives will invest the money, and it will thus work its way back into the economy. But investments are not a source of free money--they keep the economy going, but they do not directly return money to the economy's participants. Some of the invested money will create new jobs, but another fraction will pay executive salaries--and note that executive salaries have now been inflated.
Meanwhile, the company's customers will be looking for their share of income to pay for a $100 million expenditure. But the company only paid $10 million in salaries. If a lot of companies do that, it'll be an employer's market, deflating salaries and further cutting corporate costs.
In the end, even after taking reinvestment into account, more money goes into a few inflated salaries, and less money goes into a large number of deflated salaries. And there is no apparent way for someone with a budget based on a deflated salary to keep up their share of the payments without going into debt.
Now let's look at nanofactories and money concentration.
Let's start with an extreme, distributed, unmonitored situation, where anyone can build anything they can download, at minimal cost, using factories and solar power supplies and material processors that they own themselves. (And let's ignore the security aspects for this discussion, since we're talking money.)
Let's suppose that one type of free product is a multimedia computer interface that is good enough to make online time very attractive--with the right software. This may not require full virtual reality--even today, people spend many hours on online games.
This picture already includes two things that can't be built by personal nanofactories: access to the Internet, and online environments. Both of these things can be billed for, and both may be worth far more to the user than they cost to produce. And this means that the companies that provide them can make large profits with low expenditures. This seems to be all that's needed for concentration of wealth.
Let's look at a second case. Let's assume that although nanofactories are still unrestricted, there is at least some monitoring of what is made with them. Although nothing physically prevents the manufacture of knock-off or rip-off designs, this can be detected after the fact, and the user can be prosecuted for IP infringement. Today, people may pay up to ten times as much for name-brand or institutionally-approved items, and this seems likely to continue.
Suppose that you have a choice between three products. One is an open-source shoe that costs almost nothing to produce and own. One is the identical shoe, but with a Nike swoosh added; it costs $25. And one is a shoe with a bootleg Nike swoosh that costs almost nothing, but if you forget and wear it into a shopping mall or other monitored space, you will be fined $250 per shoe. I would argue that a lot of people will pay the $25, rather than be seen wearing logo-less "poverty shoes." $15 of that $25 price will go straight into the pockets of Nike executives. $5 will be paid as taxes. And $5 will be paid to lobbyists who will argue to the government (while spending $3 of the $5 on gifts to government people) that the $5 tax money will be well-spent prosecuting intellectual property crime.
Both of the above scenarios are more permissive than reality is likely to be. It seems quite possible that possession of an unregulated nanofactory will be declared an act of terrorism. There may also be a "piracy tax" placed on chemical feedstock or nanoblocks, on the theory that some percentage of products will be illegal; this "piracy tax" will be free money for the corporations (minus the percentage they spend on lobbying for it). In Canada, there is already a "piracy tax" on blank CDs.
Time for a bit more theory. Corporations have always taken a profit, so why has not all the people's money been sucked away already, since people have been buying corporate goods for centuries? This has several answers. One answer is that as long as the cost of production was close to the sale price, most of the money did eventually trickle back to the workers/consumers.
There are also several sources of privately available resource--in effect, "found money"--that may have made up the shortfall. One is growing food. But it's worth noting, in connection with natural resources, that corporate interests have on occasion even forbidden the collection of rainwater (e.g. in Bolivia); and also that in the US, there are a lot of regulations that make it very difficult to convert privately produced food into money. Another source of found money is corporate bankruptcy liquidations. Opinions will vary as to whether redistributive taxation and/or inflation may perform this function, and even if so, whether they are worth their various costs and drawbacks.
It should also be remembered that until recently, corporations have only had to deal with 5% or 10% profits, not 100% or 1000% profits. 5% can easily be spent on R&D, employee incentives, and so on, especially in an economy where employees are valuable. But today, there are few places for money to go other than executives' pockets.
Until recently, then, the magnitude of wealth concentration has been small, able to be compensated by found money and perhaps by redistribution. But what happens when 10% or 20% of the GDP goes directly into the executives' pockets every year?
I'm just guessing here, but it seems likely that the economy will split into two sectors. In one, optional goods will remain high-priced. People will buy as much of these optional goods as they can afford. This will suck money out of the other sector of the economy: the necessary goods. The price of necessary goods will deflate, because people will have less money to spend on them, and because the high-profit corporations will leave those sectors. Eventually, the aggregate necessary goods budget may deflate all the way to the level of the found money, and only the executives will be able to afford the optional goods.
In effect, money and economic activity will be transferred from the sector where things cost what you pay for them, and moved to the sector where things cost less to produce than you pay for them.
The key to wealth concentration is not the number of things that can be made free. It is the number of desirable things that can be provided at low cost but high price. Already, a number of industries are proving that they can sustain order-of-magnitude differences between the production cost and the price of goods as diverse as music and medicine, including maintaining the high barriers to entry that such pricing schemes require.
We may already be seeing signs of this kind of economy. It may be relevant that in the past decade, a huge supply of artificial "found money" has been spent. This of course is the increase in housing values, which has been extracted by refinancing and "flipping." The US also gets a significant supply of "found money" in the form of trade imbalances--about $6.50 per person per day in 2005.
It is easy, today, for a household to spend more on information than on electricity. $50 a month for broadband Internet, $40 for landline phone, $60 for cable or dish, and another $100 for cell phones and text appliances--not to mention online subscriptions--it adds up very quickly. And yet the price of many of these services has fallen far slower than Moore's Law. That tells me that someone is making a vast profit.
Suppose that, in a nanofactory future, most goods and services had the economics of information. How would the money spent by consumers return to them? Not through employment. Not through corporate taxation. Not even through investment. What mechanisms will exist to counterbalance wealth concentration? Even if by some miracle all necessary goods and services are free, that just means that people won't starve while their economy deflates.
The one bright spot (no pun intended) is solar energy. If solar collectors are free, then every landowner can have a large "found resource." But there are already rules in many communities restricting solar panels, and other rules that make it very difficult to convert solar electricity into money.
I'll close with one of my favorite questions: Will we be retired, or unemployed?