Economics: Impact of Perfectly Equivalent Income

For those of you who can remember way back when to this post I made last week - a long time, I know - I promised at the end to continue with a discussion of how one could preserve the benefits of capitalism in an environment where incomes are frozen at a perfectly equivalent level.

I'm going to do that now, and hopefully I can wrap it all up in a single post. Otherwise, you're due to wait another day to finish this topic up, and that's yet another day before I can get back to the mainline wealth redistribution topic I've been researching the past while.

Here we go.

What Is Income?

Income, for the sake of this discussion, is money earned through providing a good or a service.

This is important, because it does not include methods of gaining money through investment - usually referred to as capital gains.

Perfectly Equivalent Income

To hold income perfectly equivalent, then, some outside agency need only decide on such a level, keep strict records on income, and at the end of the year, take income from those above the level and give income to those below the level to make everything even out.

Obviously this has a number of specifics that need to be ironed out, so here we go...

1) Only those who work full-time, as defined arbitrarily, will earn the set income. From unemployment to full time one would use some sort of function to determine what portion of employed income part-time individuals would be allowed, while unemployed individuals would receive a baseline income to ensure they can purchase life's necessities, such as food, clothing, and basic shelter.

2) Wealth gained through investment is not considered part of one's income.

3) Corporations are not considered entities for purposes of being granted income. Anything they have not given out as dividends or reinvested in the corporation at the end of the year will be taken from them.

In most other ways - not all, I'm sure there are instances where things would have to be mucked up to preserve the system - this system can be treated as a free market.

Math

GDP = Inv + Con + Gov + Exp - Imp.

For out setup, the portion of GDP that is equivalently redistributed is that denoted by consumption. Investment goes and stays where it normally does, as do the remaining three variables.

Incentives and Benefits

Investment is the only way for an individual to gain wealth in this system. If you hearken back to this discussion. you will remember that investment is a major driving force of growth in a capitalist economy. Considering the free nature of the market we are discussing, and the increased investment as a result of this incredible incentive, one would probably find similar growth here as in a more ordinary free market.

One could say that money being spread over more individuals means that fewer investments will actually be made, but I do not, myself, support this idea. If one were to look at, for instance, Kickstarter, you would find a model by which many individuals can all invest in the same idea quickly and simply, with a great deal of information about what is being done with the money.

This results not only in more people investing and a greater incentive for investment, but it also ensures that more small businesses will succeed, as the majority of investment in a model such as that on Kickstarter involves direct interaction with probable customers - something that helps to ensure that demand for funded projects actually exists.

Now, if you remember, feudalism had the major benefit of being incredibly stable. The economy didn't grow much, but it didn't shrink much either. This system takes the latter part and latches on to it, albeit to a much lesser extent.

How? Well, by giving everyone who works the same income, while giving even those who are unemployed an amount that they can live on, you are setting a lower bound on demand. This helps to stabilize the business cycle, especially since you will see fewer gluts in demand as a result of heavy borrowing.

(That list bit is not immediately obvious, but comes as the result of fewer demand gluts arising from less consumption-driven lending. This, in turn, comes as a result of the ability to accurately predict future incomes and act accordingly.)

There are a number of other fringe benefits, and here they are...

Since companies cannot simply sit on money or shell it out as bonuses to executives, you will see larger and more frequent dividend payouts and more reinvestment, both of which help to increase investment spending.

As everyone is given enough money to survive on, even if only barely, you will see a decrease in the number of homeless people, uninsured individuals, starving children, and other things of that sort.

As a result of an important and widely reproduced result from the behavioral sciences, many positions will likely see an increase in productivity as a result of decreased extrinsic motivators. That is, there are many sorts of tasks that suffer a decrease in productivity when monetary incentives are given, and that the decrease increases as the incentive increases.

There's also the whole bit where everyone will be able to afford college, if they so choose, and no one has to stay in a job they don't like or perform well at just because they need the money, but those are largely fringe benefits.

Conclusion

I'll start by saying that I don't think any of this is a good or viable idea.

I don't think the idea of arbitrarily reassigning all income is particularly fair, nor desirable. Implementation would also be incredibly difficult, and you couldn't adapt a current system to move into one of this sort.

On the other hand, there are some definite potential benefits, even discounting the fact that you will almost certainly end up closer to the socially optimal point of wealth distribution in a system like this than in any currently operating free market system.

So, yeah, I guess this was more of an interesting thought experiment than anything else. I'm fairly certain you could preserve most of the benefits of capitalism while moving towards a more stable economy by implementing this, but there isn't any real way to know - even with all the maths I've done outside of what has been discussed here, I wasn't able to come up with any real conclusion one way or the other.

I hope you enjoyed it anyways. Leave your comments below, follow to the right, or maybe just read some more random stuff I have on here.

Only if you want to, of course.