Friday, February 18, 2011

I Wonder

To what degree does the level of economic inequality in a society influence the length and severity of recessions? It seems to me that a high concentration of wealth in the hands of a few people would exacerbate the problem, as the capital that would be needed to jump start things is more tightly controlled. Wealth, from my understanding, can be simply defined as being able to survive without working. Therefore, the lower one's overall level of wealth, the more one is in a position of having to carefully ration one's expenditures, or ratchet up the level at which they save. This would seem to play right into the Paradox of Thrift, which says that a high level of saving (or, perhaps more accurately, hoarding) is good for the individual, it's not so good for overall economic activity, which does better with a higher velocity of money. (While most economists seem content to link saving and the making of money available for investment, investment implies risk, and a person who feels that they need to hold on to every dime they have would be unwise to place it in a position where they could potentially lose it.) And even people with quite a bit of money are generally reluctant to invest it in the sorts of high-risk, high-reward activities that fund entrepreneurship and research and development.

I'm not sure if this theory holds water, but it seems worth investigating.

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