I think you've got your cause/effect chain a little muddled. I would also assert that the system dynamics are neither linear nor singular in the way you frame it.
> How does increasing wealth inequality drive price increases?
i'm not the person you asked, and i'm just spit-balling, but here's a way: wealth inequality means there's a group that has substantially more wealth than normal, let's call that group A, and the complimentary group of people who don't have substantially more wealth than normal, let's call them B. A's wealth ultimately comes from B-- you know, you got workers who make you more money than you pay them, you extract rent from them, they buy your stuff.
past a certain point of inequality, A controls so much wealth that they could exert power over the market to squeeze B even more-- wages lag further behind productivity, rents go up, goods cost more. this is inflation, yeah?
i'm not the person you replied but if wages lag furhter, how rents going up? it should go down since there is noone to be able to pay higher rents. they have no choice but either convince homeowner or downgrade. and Group A(rich + upper-middle) won't rent since they have enough wealth to buy a house, they may upgrade and cause inflation in luxury houses/goods.
Rent can continue to go up as long as there is room (literally physical space) in whatever housing is still on the market. Ten years ago you might have been able to afford your own apartment. Now you need three roommates. Soon you'll need seven, and then fifteen, and that can just keep going up as long as that number of bodies can be crammed into the same lodgings.
> How does increasing wealth inequality drive price increases?
When poor people receive money, they tend to put it to circulate in the economy, by spending it. When super-rich people receive money, it goes mostly to tax havens, removing it from circulation. Business lose scale, as there is less consumers, raising unitary prices.
Obviously I'm not an economist, nor do I play one on TV.
One would indeed expect removing currency from the economy to be deflationary, but in GPs example we didn't just remove currency, we removed demand too. If less people have money to buy a car, less cars are produced. When you are making 1k instead of 1m cars, you no longer benefit as much from scale and must raise your prices, which only the rich can afford.
Now why might this happen instead of prices dropping to the point the now-poorer people can afford them? Maybe the cost of inputs can't go much lower, or maybe other less-stratified markets are picking up the slack, so demand shifts there. Or maybe the rich have enough money they don't care about the higher prices. Or some combination of all of the above.
Economies are complicated beasts, it's rarely as simple as X leads to Y. Instead you have the whole alphabet pulling in different directions and the forces that win out may be quite unintuitive.
> Doesn't the lack of liquidity in an economy cause deflationary behavior?
Which seems to accept the given premise.
But ok, let's look at yours:
> the issue is that the GP's premise ("When super-rich people receive money, it goes mostly to tax havens, removing it from circulation.") is invalid.
Is it? I thought it was well understood at this point that the best place to stimulate the economy was from the bottom, because every dollar put in goes directly back into circulation, creating demand, while the wealthy and middle class will save some portion of it. Certainly I don't think the money in my savings account is doing much to create the kind of demand that would stimulate job growth, and while one might argue that the stocks in my 401k are doing something the idea that it's driving more growth than buying a car is... Dubious.
> > the issue is that the GP's premise ("When super-rich people receive money, it goes mostly to tax havens, removing it from circulation.") is invalid.
> Is it?
Yes, it is an inaccurate belief. The super-rich don't take most of the money (did the person mean money or did they mean wealth?) they receive, remove it from the economic system, and stash it unproductively in a tax haven.
I mean, apart from the open question of whether the majority of money gets moved into tax havens, if the money is out of the economic system entirely, won't it just inflate away? I presume rich people want to put their money in instruments that return interest, which means that it has to be used /somehow/. I mean, potentially just speculative assets like gold or art, but those are high risk.
Ok, what do they do with it, and how does effect the economy compared to the way lower wealth people behave when they receive money?
FWIW I do agree that if we give Jeff Bezos or Elon Musk more money, it's not headed straight for an account in the Caymans, but I also don't think the exact destination of said money is core to the point.
> what do they do with it, and how does effect the economy compared to the way lower wealth people behave when they receive money?
Most of the wealth of the top 1% (to pick an arbitrary "small group of people") is not sitting as cash in the bank; it is concentrated in financial and business assets: equities & mutual funds, private businesses, real estate, bonds and other fixed-income investments, alternative assets.
In the US, over half of all publicly traded stocks and mutual fund shared are held by the top 1%, meaning their wealth is overwhelmingly tied to ownership of productive assets rather than wages or savings accounts (and is therefore illiquid).
Great! So how does that compare in economic impact to spending it?
I can help with that: it doesn't. If I buy stock, it doesn't create demand for... Anything. Unless it was stock bought from the company itself it doesn't give the company any more funds to work with. It doesn't help the company produce more, nor does it create demand that would encourage them to do so.
> So how does that compare in economic impact to spending it?
I can help with that: it doesn't. If I buy stock, it doesn't create demand for... Anything.
1) Many of the super wealthy have the shares because they created the company and get awarded stock each year as compensation. Of the 10 richest people on the planet (in order: Musk, Ellison, Zuckerberg, Bezos, Page, Huang, Brin, Balmer, Arnault & Family) 8 or 9 of them were the primary founder or co-founder.
2) Even if they didn't, then it is worth knowing that trading shares benefits the economy in several interconnected ways; some direct, some more subtle: Efficient Capital Allocation, Liquidity and Confidence, Price discovery, Risk transfer, Wealth effects, Global capital flow. Or in short: Trading shares doesn’t just “move money around” — it helps connect savers with businesses, keeps capital moving toward productive uses, and makes the whole investment process safer and more flexible.
If you will please allow me an oversimplified example:
A restaurant is limited by the amount of food a person can eat in a meal. So this hypothetical restaurant can sell a $20 meal to 100 people (with $20 expendable income to spend,) and thus will generate $2,000 revenue for that meal service.
However, if fewer and fewer people have $20 expendable income, then obviously it becomes harder and harder for that restaurant to generate that same $2,000. Especially as the cost of bills, ingredients, and employee wages increase, for example.
So they are left with a dilemma of: 1) Raise prices knowing that there will be fewer customers with enough expendable income to buy the expensive food, or 2) Lower prices and hope that more customers will offset the lower prices (this usually does not happen.)
Also it's important to point out that 1 person with a lot of money won't come in and order 100 people's worth of meals. The human stomach doesn't scale in that way.
This example is obviously oversimplified for the sake of showing the point
> How does increasing wealth inequality drive price increases?
Increasing wealth inequality means fewer owners of more assets and market share, which means there's less competition and more monopoly pricing that cause higher inflation.
If the majority of wealth is centralized to a small group of people, why would you bother trying to extract smaller amounts of money from the other group?
> If the majority of wealth is centralized to a small group of people, why would you bother trying to extract smaller amounts of money from the other group?
That's a fantastic question that I don't think I've heard before, but I have a practical answer to.
Most of the wealth of the top 1% (to pick an arbitrary "small group of people") is not sitting as cash in the bank; it is concentrated in financial and business assets: equities & mutual funds, private businesses, real estate, bonds and other fixed-income investments, alternative assets.
In the US, over half of all publicly traded stocks and mutual fund shared are held by the top 1%, meaning their wealth is overwhelmingly tied to ownership of productive assets rather than wages or savings accounts.
So as a tax authority you have to balance getting cash (to run the government) against reducing the productive capacity of the economy (by asking businesses to reduce their capital).
When i said extract money from, I didn't mean taxes. I meant why would businesses target the group of people with very little wealth, instead of making products that target the rich? At some amount if wealth inequality, the majority of commerce has to be targeting the rich instead of everyone else, no? What does that economy look like?
The missing dynamic is that businesses are encouraged to increase growth in profit YoY.
Each year, a business needs to grow faster than it did the previous year.
If business owners get wealthy more rapidly than workers, then eventually the business will not be able to maintain increasing rates of growth, as its profit velocity exceeds the wage velocity of households. Think of a car fuel pump: you can accelerate all you want, at least your until the engine explodes, but if your fuel pump can’t pump more than 50mph of fuel, uour acceleration will crater into the negative and then flatline at 50mph when you hit that threshold — unless your efficiency gearbox has another upshift in it.
The only solutions that maintains profit growth velocity in that scenario is for the business to decrease wage velocity relative to profits velocity, and to decrease labor dollars per product. Namely, wage stagnation (which leads to wealth inequity), enshittification (which reduces customer brand investment), and layoffs (which decreases customer spending).
If, instead, businesses ensured that wage velocity matched profit velocity, then households wouldn’t have increasing wealth inequity and would be able to continue funding the growth velocity through spending. Businesses are prohibited from this by their fiduciary duty to shareholders.
AI is a last ditch attempt to discard 95% of the human creative labor force in all industries rather than face the rapid deceleration of profit growth going negative market-wide as household spending power (after inflation) continues to decrease. If AI succeeds, the eventual crash of growth velocity is delayed a few years until AI saturates the market. If AI fails, the market crashes, as investors can no longer expect positive growth acceleration from the market as a whole.
For any economic system where business profit growth acceleration exceeds wage growth acceleration, the eventual collapse of business is assured unless a miracle of productivity delays it. That’s why AI workers can get paid a quarter billion dollars: pocket change, compared to the wage inequality reckoning. That’s also why economists can’t explain inflation: they’re not yet willing to confront profit growth vs wage growth acceleration inequity as a primary cause of inflation.
Job growth has decelerated rapidly because otherwise profit growth decelerates rapidly. If this seems like killing the golden goose, that feeling typically correlates with a lack of faith in AI providing the necessary efficiency factor to permit sustaining profit growth after the one-time, profit-accelerating, inflation-spiking layoffs.
> The missing dynamic is that businesses are encouraged to increase growth in profit YoY.
> Each year, a business needs to grow faster than it did the previous year.
It is very reasonable for an investor or a worker wanting the business they have hitched their financial wellbeing to to do very well, which means growing profit. It gives the business more strength and stability.
The difference between “I earned a tidy profit for me and my investors, as well as for my non-investor workers” and “I earned the maximum profit possible for me and my investors, moreso by denying workers as much of those profits as possible” compounds detriment at the difference in profit and wage growth rates, which steadily decreases the maximum profit possible to all firms due to household purchasing powerlessness. Eventually they’ll reach a lower maximum profit than could have be reached if they’d shared more profits as worker wages rather than as investor payouts. Oops.
> Increasing wealth inequality, drives prices inflation
How does increasing wealth inequality drive price increases?