America’s economy is the pride of it’s people, the envy of it’s enemies and fuels it’s citizens domestic dreams. Little can be contested in the statement that the American economy has developed a previously unknown wealth, and the same goes for the assertion that this novel wealth has been inequitably allocated amongst a select few. Recent years have seen a sharp increase in this trend. Voices the world over have attributed this shift, partially or fully, to the role of several factors: systemic social conditions impacting class ascension, the rise of outsourcing and automation fuelling a global spread of employment previously reserved for American talents, and the inherent greed of corporations. All are valid points. But what is often overlooked is a theory that can be offer insight by examining a question with a wider perspective: what exactly is an economy, and how does the make-up of a specific economy impact who benefits from what?
At it’s core, an economy is a system of exchange and valuation active within a set region or jurisdiction. This definition bears importance when considering how the make up of an economy (the base components that are valued and exchanged within an economic system) impacts how the value created through it is generated and distributed. An economy made up of a two types of goods, as anyone who has taken Economics 101 can attest, will directly enrich those parties selling goods for a higher price than they are purchased. An example is if the entire economy of a deserted island with two inhabitants were made up of coconuts and fish, with 1 fish being worth 4 coconuts (it being much trickier to trap a fish in a net than a coconut). If one party collects only 3 coconuts, the other has 10 fish, and there is no knife vendor in our economy, the ability of the coconut holding party to participate within the formal economic system is limited. This is because they cannot participate with their current earnings, and have no opportunity to do so unless they find more coconuts. As it would be for any additional third party who landed on the island and possessed neither good necessary to exchange for the other, forcing them to subsist off of seaweed and sand. This economy, through a lack of effective design and high levels of concentration, has created an environment where wealth is concentrated, and others lack the means to fully participate and receive set market value for their work.
This example, although notably exaggerated, serves to illustrate a broader point: the degree of concentration within an economy impacts the distribution of it’s returns to market participants, as does the valuation of goods. This can be directly seen in an economic system only slightly more complex than the island: the American financial sector. As New Deal regulations imposed on the financial sector were slowly dismantled following the 1970s, the sector within the United States grew from contributing 10% to overall GDP in 1970 to 20% by 2010. This shift denotes a notable concentration. Within this 40 year time period, the manufacturing industry’s share of GDP contributions fell from 30% to 10%. This trend was noted repeatedly by onlookers throughout the 1980s and 1990s, but was not formally identified until 2005 as financialization, a term used to denote the accumulation of profit through primarily financial channels instead of trade or commodity production. Supporters of this argument (who often misrefer to the trend as “post-industrialism”) point to indicators: the role of portfolio income as a percentage contribution to corporate incomes has drastically increased since 1950 and the growing percentage of profits generated in financial sectors of the economy versus non-financial sectors has equally increased.
It is important to note that structural shifts within a economy towards greater service-dependence for growth are normal and natural elements of development. Rostow’s 5 Stages of economic growth model highlights that all economies move from traditional subsistence-basis to the eras of mass consumption and sophistication. This issue here lies not in the transition towards a higher service base, but rather the concentration that accompanied this shift within the US economy. The increased wealth brought by financialization has been concentrated in the hands of those who work within the sector. Given that the field requires a skilled and highly educated labour force, it can be safely assumed that the majority of wealth generated by this sector’s growth has not been equitably distributed amongst the traditional American labour force.
This is not merely a problem for farmers in the American heartland – the world should worry. Unlike the commodities sector, financial sectors do not generate value through product creation or provision – rather, value is derived from the current value of already existing goods. This leads to wealth for some and higher prices for all. When executed at scale, issues can befall the populous from financial sector mismanagement, with the Great Recession serving as a recent example. And with the American dollar serving as the global reserve currency, interest rate raises within the Fed have much more of an impact upon global financial flows when the financial sector is relied upon as a growth engine. This will only exacerbate the risks to developing nations with high volumes of dollar denominated debts accrued, who may face periods of devastating turbulence in an increasingly volatile world.
Inequality within an economy is a tragic, but as of yet unresolved consequence of free market economics. Distribution of rents remains a key concern, and ideological divides exist within this debate that often temper our assessments of initial questions. But when considering economic design, from trading coconuts to commodities derivatives, it bears remembering that drivers within the system cannot fully be blamed for the design flaws within the system itself.