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Trust in markets

 Salomons Judgement

Capitalism is under attack and many no longer believe that wage setting is honest. In this past week, I discussed income distribution with three academics from different political backgrounds. We discussed inequality and didn’t reach agreement. There was agreement on the facts, but disagreement on the causes. Let alone the solution.

In recent years, income growth has lagged behind the growth in productivity and profit. In some political circles, there is an immediate call for action. As an investor, I obviously preached the utility and necessity of the market, but I also had three topics for debate.

The most exciting part of the debate was about income inequality. The increase of inequality wasn’t up for discussion. I added some nuance by bringing up the elephant chart of the World Bank economist Branco Milanovic. In the past two decades, especially the middle class in the developing countries and the global elite have experienced some income growth, while the middle class in the Western world did not. Within countries, inequality is increasing, but worldwide it’s decreasing. That’s annoying, but not unfair. It’s a logical effect of globalization, when the supply and demand of labour exceed national borders.

As long as everyone who works hard has the opportunity to get ahead inequality is no issue. The outcomes may differ, but the odds must be equal. However, I’m getting concerned when inequality within countries inhibits growth and progress. The place of the cradle, the salary of the parents, or the social background should not be decisive factors for success. Upward mobility, however, is decreasing and talent ‘wasted’ as a result. That is a problem. Some find the solution for this in more government. I believe in education.

Another hot topic was the yield difference between labour and capital. Corporate earnings are growing considerably, while wages are rising only gradually. Supply siders will argue that this is not a problem as eventually everyone will benefit from the trickle-down economics. But I doubt it, as this is only the case when markets work properly, whereas companies tend to protect their surplus profits with monopolistic behaviour. In that case we need an enforcer to make markets work. Part of the skewed relationship between labour and capital is the result of globalization, technological developments, and free money. Only the latter can and should be dealt with.

We did not come closer together in the inequality debate, but it’s a good thing that it was being discussed.. One issue remained disconcerting. Trust in markets is low. I can understand this. But, if everyone gets the chance to earn a lot of money by working hard, it shouldn’t. As an economist I would also argue that only market economies are able to deliver sustained growth. But that we sometimes need enforcers to make markets really work and tear down barriers that inhibit it from doing so.

The author

Roelof Salomons

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