Some Thoughts on Capital:Part 1

As readers of this blog know, I have some real problems with what I consider simplistic thinking in economics.  I am currently on an anti-market-fundamentalism kick, partially inspired by my recent reading of Schumpeter as well as some poverty reading I've been doing.

A New York Times article this morning looking at how companies are spending made me think of some of the issues related to this, so I thought I'd do some thinking out loud on this blog on this subject (which is what about 75% of the posts on this blog amount to).  The primary issue here I think, is that many economists seem to look at factors such as investment and capital without paying much attention to who has the money.

However, I think who has the money matters a very, very great deal.  Culture matters, and elite culture tends to be different from the culture of other sectors of society.  Also, the amount of assets possessed tends to alter incentives, this lead to different outcomes involving innovation.  I think the concentration of wealth may be behind some of the lack of innovation that Cowen is writing about in another article in today's NY Times. 

This is an observation with a long historical presence.  To quote Jan De Vries' in The Economy of Europe in an Age of Crisis, "the true industrialists were still... among the humblest and least wealthy bourgeois."  (de Vries The Economy of Europe in an Age of Crisis, 1600 - 1750. 235)  While many industrialists today are of course among the very wealthiest individuals, I'm suggesting a more general application of this idea.  To paraphrase Schumpeter (oh, how I wish dead tree books were searchable) capitalism is an evolutionary process characterized by creative destruction.  To foster this, I think it matters very much who has the money. 

The truly wealth elite tends to become socialized into a set of habits and ideas that lead to them having a greater sensitivity to economic stability and current ways of doing business that tends to erode the evolutionary change of creative destruction.  They become hyper-sensitive to small changes in regulation that wouldn't phase their entrepreneurial peers of less pecuniary fortune (who don't have large existing capital stocks to be threatened, those without large assets are motivated by the possibility of change, those with large assets are primarily motivated by the potential downside of any changes, listening to those with a lot too lose hardly gives a balanced perspective on the net benefit of change to society) and are far more sensitive to opportunities to create wealth through more conservative means, such as land investment, acquisition, and mergers than they are through creating a new, disruptive business that may have a negative impact on their existing economic holdings. 

When wealth is highly concentrated, the wealthy have the means to forestall the upsetting of the stable existing economic system by acquiring new challengers and integrating them into the existing social structures and leading former disruptive elements to assimilate to the social norms and ideas that are necessary to maintain social prestige and station among these individuals.  The individual that chooses to thumb their nose at these conventions is a relative rarity, though often remarkable for their success relative to their peers (once they reach this live, non-conformity without assets is often a road to poverty, not prosperity, adaptive behavior is situational, not a constant, and tied to an individual's other personal qualities).  More often, individuals find themselves better off by acclimating to existing norms and selling their new businesses to those in the existing upper social strata to buy their own membership at this level as well as to begin to play the game of maximizing returns through investment in existing economic assets rather than the creation of new, disruptive, and innovative ideas.  The social forces trump the economic factors, as always in human society.

[To be continued...]