The unbearable lightness of the economic being - I

Let's face it. French economist Thomas Pikettys 'Capital in the Twenty-First Century' told us what we kind of knew - the rich have started getting rich again while the poor, well, remain the same. In fact, the book explains, the 2 world wars, it seems, were the anomaly that reduced income inequality and ensured a more broader distribution of economic wealth. However, the last few decades have seen a return to the 'patrimonial capitalism' that Marx was worried about.

And here, in my humble opinion, is why modern economics is contributing towards the ossification of the fissures between the haves and the have not’s: too much of modern economic policy making is centered on monetary policy over and above any other forms of public policy. And given the increasing conservative bent in recent times towards government size (smaller the better mantra), monetary policy carrys a disproportionate burden for a countries economic management.

There is no doubt effective (and better understood) monetary policies are one of the key reasons behind global post-ww2 prosperity. However, its importance has trumpeted all other forms of economic policy making - especially fiscal policy. Controlling and managing inflation is necessary for sustainable economic development – that’s the 11 commandment. Low inflation, amongst many things, keep inequality in check and labor, as not just a factor of production, is able to sustain a lifestyle. Low inflation, as it should, also protects owners of capital. High inflation destroys debt; what you lend/invest is worth lot less over time. By keeping inflation in check, monetary policy has ensured the value of credit AND allowed credit markets to flourish.  

However, in todays world, monetary policy exists to protect the interest of capital rather than labor . That is because the monetary transmission mechanism is flawed. How? At the end of the monetary transmission spigot are the banks and other financial intermediaries and these intermediaries do not easily lend to the poor. For the poor (labor) to recieve loans, there needs to be a strong business case. Unless the poor pay a steep premium (anyone remember sub-prime?) over and above what other borrowers are paying, they are not considered \good credit. In fact, even if they pay steeper premiums, they still not considered good credit (anyone remember the shorting of subprime?).

So hence....

....the modern private financial system, inadvertently, suffers from a moral blind spot as poverty alleviation is not a business goal

....despite the best intentions of central banks (and they actually do have noble intentions), financial intermediaries make monetary policy an ineffective tool to improve the livelihood of labor (poor)
 

... Picketys conclusion is quite logical - the main beneficiaries of prosperity has been owners of capital and not labor. And this will remain so, as all policy making is skewered towards protecting the interest of the former over the latter.