As though Part 1 weren’t long enough…

Let’s delve a little further into Henry Blodget’s rant:

Over the past couple of decades, the disparity between “the 1%” and everyone else has hit a level not seen since the 1920s.

That is true, but it behooves us to examine that assertion a bit more closely. This disparity, as I mentioned in Part 1, expanded during the “Roaring 20’s,” and collapsed in the Great Depression and World War II. As we can see in one of the charts that Blodget provides, we see that era of collapse going from the 1929 Crash through the Korean War. Through the 1950’s and 1960’s it is relatively flat. We see further collapse in the thick-and-heavy of the Vietnam War and Carter-era “stagflation.” We also see this disparity narrow in the Reagan recession and the post-9/11 recession. The chart stops at 2007, after which there is another narrowing of this disparity during this Pelosi-era recession.

In short, the disparity widens in good times, and narrows in bad times.

So the question arises, which is cause and which is effect? Economic output can only increase as employment and productivity increase. Economic output is the product of employment and productivity. Similarly, an individual can increase his own output by a combination of working more and being more efficient. It is no secret how to work more — just work more. Improving efficiency is harder. Skilled labor can improve efficiency fairly simply. Plumbers, barbers, programmers, and other skilled workers get better and faster at their jobs through experience, training, and study. But how does the efficiency of unskilled labor increase?

Unskilled labor efficiency improves through process and equipment improvements. For a simple example of equipment improvement, let’s look at a plowman. With an ox or two, a plowman can get through about an acre a day. (That was the original definition of an acre.) Now, the farmer buys a tractor, and the plowman can now sit, instead of walking behind the oxen, plow much more than he could before, and has a better view. So his work is easier, and he accomplishes more.

For a more complex example, let’s look at a custom ammunition reloading shop. As the business grows, the owner hires more workers. Each can have a simple, single-stage press. For a batch of ammunition, he will go through three steps: decap/resize case, prime case, expand the case mouth (for straight-walled cases), add powder, and seat bullet. After each step, the die on the press needs to be changed. To improve the process, each could have one of those stations, and the round can pass for one worker to another assembly-line fashion. To improve the equipment, the owner could opt to buy a turret press for each worker, or even a progressive press, and can add case feeders, powder-through case expanders, and bullet feeders. More automation leads to more efficiency.

Process and equipment improvements also benefit skilled labor. A cabinetmaker with power tools can work faster than he can with hand tools. Better equipment allows programmers to debug code faster. Better processes allow multiple programmers to work together on large projects, and allow programmers to move on and off projects with less impact. Programs such as Matlab, Mathcad, Mathematica, and AutoCAD allow engineers to create better designs faster.

In almost every case, it is the owner who implements these improvements — especially the equipment improvements. These are also known as capital improvements because they require capital to purchase. The owner is making an investment — taking a risk — with his own money, his own capital. That’s why the system is called Capitalism.

So, when the owner makes capital investments, and more gets done while the work gets easier, should the benefits of the improved productivity go to the owner, or to the workers? Nominally, they go to the owner. This is the reason for income disparity between the 1% and the 99%. The 1% are owners, and the 99% are workers. Or, as Blodgett calls them, “capital” and “labor.”

But the reality is that the benefits accrue to both capital and labor. The owners get the return on their investments, but the workers get cheaper goods. In real terms — in terms of the number of hours one has to work to buy something — the price of almost everything has been coming down. Food is vastly cheaper than it was even in the 1950’s and 1960’s, and more convenient. Automobiles are less expensive — and faster, safer, and more fuel efficient. Houses are cheaper, and twice the size they were in 1960.

And there is a widespread and growing sense that life here is not fair or right.

How is that not fair? How is that not right? You pay for the improvements, and you get the benefits of the improvements. You produce more stuff in an hour of work, and it takes you fewer hours of work to buy other stuff.

Yes, the income gap has been increasing. That is the result of improvement in productivity — in equipment and processes. The income gap is the natural, expected result of a growing, vibrant capitalistic economy. That is a Good Thing.