The collapse of the Soviet Union in early 90s was a watershed event in our history. That’s because just like in the plains of Normandy during World War II it was a decisive triumph of righteousness, the only difference being unlike in the war here it was not the victory carried out by the superiority of the fusion of man and machine rather in this case it was the victory of the right way of life. So after such a decisive verdict delivered just two decades ago it’s hard to believe that today we are questioning the very basis of these free markets.
A large part of the blame emanates from the fact that the world in which we are living is hardly free markets. Infact the seeds of its demolition were laid not by excesses of the last decade but long back in 1970s when we abandoned the Bretton wood system.
We loathe when any country undertakes a “five year plan” or controls the production through licensing/rationing, so isn’t it ironic that the supply of the currency which constitutes one side of almost all economic transactions is determined by few men rather than the forces of free markets. So let’s get this straight, “price” is the critical signal in determining the supply of any product in the economy, currency is this unit of account whose supply is totally dependent upon the whims and fancies of the sovereign governments. It’s not free markets that have failed rather it’s socialism/communism again in the clothing of free markets that has failed.
This kind of interference in the free markets is actually worse than socialism because the biggest folly of socialism is that it doesn’t reward performance and improvement in productivity and thus takes away the incentive to perform. Whereas our existing economic model based on monetary intervention actually ends up skewing the rewards towards owner of capital over Labour much more than warranted. Thus this results in an ever increasing gap between the owners of capital and Labour.
This is because most of the salary increase is tied to the inflation rate as published by the governments. The labour like in most other countries is paid in currency. So in essence like any competition the labour force is competing for the x amount of cash that exists in this economy. To take an example, the increase in M2 over the past year has been 6.5%. Netting off a 0.5% increase in the workforce the average wages should rise by atleast 6% for the labour to be at par with the holders of capital and even if you get this raise, some of you may still need to be rewarded for your improvement in productivity that would have happened because of the experience that you gained at work and the knowledge and skills you added in the last one year. However we find that last year the wage growth instead has climbed by just about 1.5%-2% (inline with published inflation rate).
Part of the increased money supply is spent and would thus reflect in the inflation numbers while some part of it is saved as an increase in money supply generally leads on a reduction in the velocity of money initially, these savings generally goes in bonds and stocks. So while the labour could at best manage an increment equal to the rate of the inflation, the capitalists under the controlled monetary environment gets rewarded by the increments in profits due to the increased spending and the increase in the price of his stock due to increased savings.
So for the system to be just the raise should atleast be equal to the increase in the money supply in the economy net off the increase in labour supply and if we add to that the increase in your productivity because of improvement in skills and knowledge only then we would truly say that you have been justly compensated.
Ofcourse it’s not the fault of the owners of capital that they are getting overly compensated at the expense of labour, the fault lies in this monopolized system of the issuance of base money. I am not suggesting going back to the gold standard as it pins down the supply side of this complex economy to just one product which can restrict the credit growth. The right solution is to go back and traverse the path shown by Adam Smith. The currency system should be let free so that everyone can issue it and let the invisible hand determine whose money is sound. Such a step would not only lead to the right distribution of rewards between various factors of production but would also ensure that economic cycles lead to the credit cycles and not vice versa, thus ensuring the re-dominance the free markets.