Tuesday, September 17, 2013

Distribution of Income and Wealth

This is probably the hardest subject in the entire field of economics - the distribution of income and wealth. (Unless of course you are studying the theory of uncertainty which is a deterministic system trying to describe the indescribable - you know what is uncertainty when you think about it - that's why you pray.)

For one thing, it is very easy to get tripped right from the first step the difference between income and wealth. In economic jargon, income is a flow and wealth is a stock. One does not lead to the other. A person can have a large income, but may not have any surplus at the end of the day - for he overspends, by buying a car, a house and a watch that are far more expensive than he is actually warranted (although he may have imagined to be of a superior grade). A person may have huge wealth - usually inherited - and he may have little or no income if he is poorly invested - many stories of this from actors and actresses and those who won lotteries. A windfall gain - another favourite economic jargon for "money from the sky" or "manna from heaven" - is a one-off and the theory says, if unexpected, will be quickly spent because more than imagined - and once frittered away will not have neutral impact but the creation of a spending lifestyle that is far exceeded the person's ability to generate future incomes.

There is a tendency for discussions of income distribution to be confused with wealth distribution - the classic economic example of wealth (natural resources) not being able to create high incomes (value-added activities). There should be no difficulties in seeing the difference. Wealth is god-given and therefore is made available without much effort or even expectation. Value-add is the explicit provision of a service that is needed by society and other people and it engenders a mental orientation of serving and be of use to other people and society. Wealth you can just consume one your own in silence; income you can only create by serving others - and there is an immediate positive social impact. We can juxtapose wealth and service by thinking about how a rich person or family treat their poor maids. There is a saying in some community that some unenlightened people can use their wealth to weigh down on a person.

If we look at the distribution of income, we will see that its distribution is the result of the return on some capital or wealth. For those who do not have rich grandparents - and to be fair, most Malaysians at the start of independent Malaya or Malaysia - have nothing in their pockets, except for the famous one dollar in the pockets of immigrant Chinese (I do not know the oral tradition of other communities). This is the start of entrepreneurship. It does not matter where you start. You start with blood, sweat and tears to earn the daily wage of the day, starve yourself and save to build up capital. With a little spit of working capital, you have dreams of being a towkay (the old version of a Bill Gates) and you begin to deal with others (network). You borrow, you lend, you buy, you sell - in other words, you trade. In the days of zero current accounts nor credit cards, if you are lucky, you can have trade credit - the big towkay who give you the goods on credit (30 days, 60 days) or the small community banks that lend you on some small credit (the early version of micro-credit). The only collateral of those who wear loose blue pants are their words - their honesty and integrity. It is the promise to deliver and the ability to deliver as promised that is source of profit and income of the entrepreneurs - those who rely on some equity or even non-financial assets. Like farmers, the small towkays try not to eat their seed capital away - the teochews are famous for being able to survive on one salted egg a week, with porridge (rice with water). If you are lucky, you may own a little shop which is also your house (hence, shophouse) and this may be all that the small towkay has at the end of his life; he may have educated his children in the interim (tales of severe rationing in education; for boys only, when daughters of towkays were of maid quality only) and probably a big debt with the bank. When telling stories, we must tell the story to the end - like the tales of the three kingdoms. After the old man dies, the poor children may be still poor and unable to repay the loan and have to sell that property to some wannabes who have dreams of owning properties as a sign of wealth. The lucky ones, who do not have to sell their inherited property, want just use it as a house, not as a shop because the business has grown tough or the trade has died or the children has got a job in the bank as a clerk. The whole family is stuck in this old rundown shophouse, quarreling over cashflow and inheritance.

There are of course who do very well by any standard - and they are not you and me. They get big contracts to build public works. They connect with the big suppliers in town, and they wine and dine to seal deals. This makes the more flamboyant part of life in the city. The big shots and their dolled up mistresses, their big cars and fancy talk. They are the ones with the big assets and the big debts, borrowed from the banks that take our deposits at low interest rates. If the bankers are good (meaning prudent), the town will grow slowly and steadily. If the town is going very quickly, it means that the bank is an employee who has no responsibility except to lose his job when things go back, by which time, he would have made big bucks (last time, no big bonuses) with the big contractors and probably the giver of contractors (we have to be careful here about smearing the reputations of important people). This is the real battle field of business, high finance and politics. Gangs are formed. You fight me, I fight you. Intrigues are played in corporate news. This is the battle for the distribution of wealth.

Now, if the party you are fighting against is the government, then you better be prepared to lose. The government takes the taxes of all the people in the nation and use it for the betterment of a section of the community. This is the real distribution of wealth - or, to put in fancifully, the inter-generational distribution of income. Those who lose out leave. As the winners grow in numbers, the endgame is that all wealth belongs to the majority - and this is when the real war of intra-racial battle starts. Because the nation has been built on one group cannabalising the other, there will be no peace in such a nation for many generations to come, no matter how justifying the intervention of the government may be. The government does it because the people want it. Be careful of what you wish for.

There is only one just intervention for any government - to help the poor to rise above the daily drudgery of life. Provide a solid platform for everybody to stand. When the government is just, people will help each other and the government will play a support role. The people must be given sound ground rules that everybody can play to clear goals. This is an ideal, one that can be liberating.

The Malaysia today is proudly 50 years old and many of the immigrant families are probably in the third or fourth generations - at least. Their families were born here and they have died here. In the natural distribution of talents and abilities, they too are poor as well as rich. It would be fair to say that most many of the Malaysia families are probably be of about the same lower middle class groups. The battle for wealth are among the politicians and the big elephants. The poor man and woman on the street struggle to make ends meet, and to have a vision of the future of their own. The values that are now attributable to jammed congested housing in urban setting - they are urban for an economic reason - must be very much higher than broad and sparse farm land in the countryside - they are broad and sparse for an economic reason as well. The supply and demand factors set in. It is well know that the terms of trade between the rural and urban centres are no good - and the natural consequence must be rural-urban migration to equalise value - (but the World Bank in its recent wisdom prefer big conurbations for high income as opposed to more geographically distributed spread out of wealth).

Talent is rare, and we need all the talent we can get to build this nation further. You cannot suppress talent. You can build capacity. When we are all brilliant, we should all have high incomes equally.


walla said...

Going by the given distinction between income and wealth, the factor that maintains wealth is the factor that generates income.

Income is generated by value-added services. Such services engender a certain attitude towards life. Basically a pragmatic approach, itself requiring personal sacrifice or the forfeiture of present comfort for some envisioned future gain.

Most of the immigrants who succeed anywhere in the world start on that premise. And as their personal sacrifice and effort increase over time, they gamble that the next extra-effort will take them into a higher and easier league. Their lives become a daily tango between risk and reward.

Those who fail are not likely to advertise their failure for doing so may reduce their credit worthiness for their next round of recovery.

Even when drowning they gasp for the oxygen to revive themselves. They are motivated to live.

But their motivation to live is not just to prove they can make it. It is also to prove that when they save their face in business and life, it is with the reason to save the face and honor of their family roots.

A family root may start with lineage or geneology but soon enough in the increasing inter-dependence generated in doing business or growing an enterprise, it becomes local networking. As success grows, that local networking expands to become connections between networks. As those connections become more meshed due to global competition, they form a matrix that is not just made of a rolodex of first-name contacts but also the net of ideas and solutions.

So what starts as just the shirt on the back and the sole coin in the pocket can by evolutionary dictates of life become an intangible but real enough operational survival for that matter success system.

Therefore it may be considered an awesome tragedy when a government in straight jackets about the national situation can only go through the motion of rehashing old plans in new names and then use the same policies in new garbs to try to rebrand itself as caring and concerned.

walla said...

But by doing so for just one community in a nation of many communities, it fails itself immediately on many scores.

First, it shows it is biased. A biased entity will never receive the trust that is mandatory to operate any system of improvement.

Second, in calling it a national agenda but to only a particular community albeit in the majority, it shows it is prejudiced against the minorities.

Third, in ignoring the poor in the other communities, it shows it is not caring and concerned for them even as it wants to show it is caring and concerned for those whom it presumes to represent.

Consequently for the fourth, it cheapens the meaning of what being a citizen of the country is all about, and that is the ultimate sin which a government can commit.

The minorities who work hard and honest will wonder why they should continue to support future programs when the money they pay as taxes is not even allocated for their poor.

The majority who receive the largess will have to force themselves to pretend that they have a right to it even when they know they don't; in the very process of self-pretense, they blight those amongst themselves who have shunned unearned aid, thereby taking the entire locus of values of their society further away from the very factors of hard honest and intelligent work required for success systems.

In short, they kill the very attitude towards life that is the linchpin of all improvements for success.

Initially, they may feel a sense of personal satisfaction and thankfulness. But soon enough, time will reveal that there is one single underlying factor which is absolutely necessary for any form of success.

That factor is interdependence.

walla said...

Whether it is the new agenda that has just been announced or its older forms from which it was resynthesised, that single factor has been omitted completely.

The entire agenda omits the interdependence factor which is mirrored in how the wretched immigrant had finally made it on his own by the paradox of making himself inter-dependent on others around him in similar situation with singular objective.

It is easy to see how things will pan out. If the new agenda is required, it means the old agendas have failed. But if the new agenda is a rehash of the old agendas, then one can ask how it can possibly succeed.

If one looks at all the old agendas and policies, the same cluster of target matters may be discerned and written out on the back of a used envelope. Human capital, equity ownership, entrepreneurship, delivery system and non-financial assets. But where is the interdependence factor that is the key to generating income in order to grow wealth?

Therefore the same premise of going it alone based on recognition of a single race will be the same factor that will torpedo any program emanating from such an agenda.

For no man is or ever was an island.

Adding more numbers and funds and emphasis on something isn't going to arc the failure curve over the hump to become the success curve.

Because a curve can only be as smooth as the ecosystem in which it is drawn allows it to progress.

And the ecosystem in such a plural complex is already distorted by biases and perceptions that will become more entrenched in the coming days.

walla said...

How did the blind spots come about?

They came about from hitching onto the wrong targets. There are two. X can only do well if and when it can match Y in wealth. And X can only do well if and when X is only supported by X for X and of X.

Actually the answer is neither X nor Y. Therefore it is Z.

Z is a generic creature of the world. It thrives according to the circumstances and ecosystem in which it happens to find itself.

It is resilient and persevering, focused and intelligent, pragmatic and optimized. It doesn't waste time, it uses the minimum to achieve the maximum and it is constantly looking for continuous improvement. And in most cases, it is miserly and frugal, some will add parsimonious.

In doing so, it may gather some deficit in character and personality but then again still, everyone loves a winner. And thee days real winners are made by incremental accretions of minor advantages summed over all the ups and downs of life.

Now, would such a trait be formable in the case of someone given free things? Anyone will say a br1m's five hundred looks and feels different from the other five hundred that has had to be earned in the field or kitchen or counter or street. One is to be spent vicariously, the other to be saved because it was so hard earned.

Or, take the case of providing more openings and infrastructure. Say the opening is for education. Fine. Education is an equalizer. But it is only optimized if it can be used for what it was intended. And no ecosystem will welcome it heartily if its generation is at the expense of others - because any ecosystem, market if you will, abhors zero-sum games.

One may say it is only a perception. Prove that it is not by passing over some for the others. After all, most of it had come from them.

Next, take the case of infrastructure. Say, a row of rent-free mini-lots for just one community. How often have we to lament that they all sell the same nondescript things that no one will want to buy?

After all, poor buying from the poor will make no one rich.

Because the multi-level interdependence factor is missing. From how and by whom the planning was done to how and what of things to display to what and when to learn how to do it right...leading to doing everything right the first time.

walla said...

Anything that causes divisiveness will break the interdependence factor needed for mutual success.

When that divisiveness becomes entrenched, trust will fly, people will literally mind and mine their own business, talent will remobilize elsewhere and a recursive loop or vicious cycle will spiral the ecosystem to its inexorably cold turkey state.

In such a state, no next new agenda will kickstart anything. Because the remnants will be too busy kicking themselves for missing the boat.

note: this is just a quick breeze on the matter posted. therefore it is a social escort service. you get escorted through the minefield of blinkered policies.