Who Gets the Spoils of the Economy?
A modern economy produces an amazing abundance of products and services. Modern grocery stores are filled with a mind-boggling abundance. A Costco store contains a stunning array of high quality goods. Car dealerships are filled with enticing products. Modern homes are comfortable and often have as many washrooms as people. Entertainment is abundant. Communications services are instant, reliable and ubiquitous.
But all of this great abundance is neither created equally nor shared equally.
How is the abundance shared?
In economics, it is recognized that the economy must pay both the wages of labor
and the wages of capital.
A good deal of what the economy produces can be purchased by people in proportion to their incomes from working or their incomes from social programs. This is the share of the economy that goes to pay the wages of labor.
But a large slice of what is produced can be purchased by people in proportion to their incomes from owning shares in businesses or from interest on lending money to businesses and individuals. This is the share of the economy that goes to pay the wages of capital. Sadly, most people have no income from this category because they own little or productive capital.
An example of the wages of labor versus the wages of capital
A farm needs land, labor, machinery and supplies to produce food. If the farmer owns and supplies everything then he or she rightly is entitled to all of the income that the farm produces. But what if there is a tenant farmer who supplies only labor and perhaps also purchases the supplies (seeds fertilizer). Few people would argue that the tenant farmer should then receive all of the income.The owner of the land and machinery should also receive a share of the income.
One could argue endlessly about how the income of a farm should be shared between the owner of the land and the tenant farmer. In modern economies the sharing “formula” get set by the market and in part by government taxation policies.
The price that a tenant farmer has to pay to rent farmland depends on the relative supply and demand of farmland. And the total price received for the crops or other farm production gets set largely by supply and demand.
Governments have an impact as well as they set tax rates for the tenants farmer’s rental income and the land owner’s rent income and the land owner’s gain in land value (usually no tax until the land is sold and then the gain is taxed at half the rate of rent and farm income).
Observations and conclusions
A key observation is that in a modern economy a significant share of the income of the economy is always going to go to the owners of land, machinery and businesses.
That is, a share of the income of the economy is always going to go to the owners of productive capital. This being the case it occurs to me that the logical thing to do is to become an owner of productive capacity.
Individuals should attempt to save some of their income and invest it and become owners of productive capital. Eventually the ownership of productive capital can provide an income larger than a typical income from employment.
In effect the choice is to remain forever the tenant farmer or to take steps to eventually become the land owner.
A strategy of becoming an owner of productive capital can apply not only to individuals but to families on a multi-generational basis.
For most people the easiest route to becoming an owner of productive capital is through the stock market. It typically takes decades but it can be done.
Many people don’t like the fact that the owners of productive capital receive such a large share of the spoils of the economy. Some people continue to complain, others work to become owners of productive capital.
Each of us must choose.
END
Shawn Allen, CFA, CMA. MBA, P.Eng.
President, InvestorsFriend Inc.
April 6, 2014