You used to be able to afford a good retirement from a guaranteed pension earned on the job. In the decades following World War II there was a strong demand for workers in industrial jobs and the building trades. Unions were strong representing as much as 35 percent of our workforce. Unions had countered the power of companies to control block of jobs and drive down wages. By unionizing workers, wages moved back up closer to what would have been the equilibrium wage under free and fair competition. Under the Theory of the Second Best, union power countered company power to restore relatively efficient allocation of labor resources in our economy. Our economy’s productivity was rising and wages rose at about the same rate as productivity rose.
But then starting around 1975 all that changed. After the government brought in the military to break the air traffic controllers’ strike, unions began to decline. As revealed in “Optimal Money Flow” the second invisible hand of market power overcame Adam Smith’s first invisible hand of free and fair competition. Union representation dropped to less than 10 percent of the workforce. Productivity continued to rise, but wages flattened out in real terms after adjusting for inflation. The money that would have gone to workers on Main Street was increasingly being diverted to the financial markets on Wall Street.
You are asking: What does this money flow distortion have to do with becoming really wealthy? If you are already old, not much. But if you have young children or grandchildren, it is crucial to understanding the system, how it works, and how they could easily make a fortune over time.
It is hard to get rich the easy way (win the lottery), but easy to get rich the hard way (saving and investing every penny you can in the stock market). Capitalism won’t work very well for you if you don’t have any capital. But people have been discouraged from saving money because the flood of money into the financial markets has driven down interest rates. What is the point of saving money if you can’t earn much on your savings? The low interest rates have caused many people to go deep into debt with almost no savings at all.
It is true that bonds and certificates of deposit, not to mention savings accounts, pay so little that it is hardly worth bothering with them. But what if you save every penny you can and put it into a broad-based stock index fund? The difference is rather dramatic. With dividends and the rise in stock valuations, it is easy to average around 7 percent per year which allows you to double your money approximately every 10 years. Compound interest comes into play in using your wealth to build even more wealth all by itself.
But won’t you feel guilty if you have millions of dollars while so many others are struggling to get by with many elderly having to taking jobs at hair salons or fast food joints to get by? No doubt, you will. Bill Gates and Warren Buffett are suffering from this sense of guilt and have been giving away a lot of money through the Gates Foundation. You may suffer the same fate if you carefully and consistently follow the “get rich game plan” and actually become wealthy yourself.
As long as the wealthy cannot find more lucrative places to put all their ever increasing wealth, the stock market will continue to rise over time. This does not mean a smooth and continual increase in valuations. What is most interesting about the stock market is that it will fluctuate for a while or even drift upward or downward a bit, before making a sudden and unexpected move upward to a new higher trading range. What this means is that trying to play the ups and downs of the market is generally a fool’s errand. Just keep putting money in month after month, year after year regardless of where the market is at, and in the long run you will get an enormous return.
What does this tell us about capitalism? After all, in primitive times everything was thought to be owned by God so no one other than God owned anything. For native Americans, the spirit world owned everything. In reality, without the rule of law, the big guy owned everything. If you had a chicken, it was the big guy’s chicken. If you had a pear tree, those were the big guy’s pears. The King, the Pharaoh, the Emperor or the Czar then told us that God had granted them dominion over everything. You could not hunt deer in the forest or take fish from the stream without the approval of the King.
The direct ownership of capital came about under John Locke’s conception of private property. Locke’s idea was that you owned your own body so you could gain sweat equity over some resource from the woods by putting your work into cutting a tree branch into a spear and shaping a spear head from a stone. Your work with an object translated into the ownership of capital through sweat equity. This implied that hard work paid off. The incentives drove you to work harder to earn more capital.
This worked great for a while as long as the craftsmen and craftswomen could afford to create their own tools which became their property as a result of their sweat equity in creating them and working with them. Land on the frontier in America became the farmer’s property through the sweat equity of working that land. But then bigger machines were needed that required more money to obtain than could be justified with one person’s sweat equity. The nobility or aristocracy stepped in to supply the water wheel or factory equipment. The ownership of capital then became separated from the sweat equity of using that capital. You could drive a truck for 40 years and gain no ownership stake in that truck or in the corporation that owned that truck no matter how hard you worked. The incentive structure broke down with no acquisition of capital through sweat equity.
What is the situation today? You work hard in production, services, retail or delivery and earn no capital and get a rather modest return for your efforts. Those with capital (large portfolio of stocks) might spend a few minutes adjusting their stock portfolio each day, before heading out to the golf course. They are eager for you to work hard every day, so that their stocks will pay higher dividends and rise in value. After all, they have to be able to pay for their yacht, private jet or many vacation homes. Whether you are part of the rich getting richer or poor getting poorer really depends a lot on how little debt (if any) you have and how much stock (hopefully lots of stock) you own.
This Excel Spreadsheet shows how your money grows.
To sign up for this monthly Money Flow Newsletter, go to: https://optimal-money-flow.website/ Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.”
You can donate the entire purchase price of the book to student scholarships by buying a printed hard-bound copy of the book at the Avila University Press website at: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
|For additional details see the Optimal Money Flow book website at:|
or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
The full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh