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> Suppose you're on an island where the economy only produces coconuts.

This is why nobody takes economists seriously. What you lose in simplifying down to this model is literally everything. The coconut economy has zero predictive power.

In the real world, distribution effects dramatically affect the functioning of the economy, because workers are also consumers and owners of capital are siphoning off the purchasing power of their customers. Productivity isn’t the question in the modern economy - we’re already massively overproducing just about everything - our problem is both our wealth and production allocations are borderline suicidal.

>This is why nobody takes economists seriously. What you lose in simplifying down to this model is literally everything. The coconut economy has zero predictive power.

A simplified model is needed otherwise rigorous analysis becomes impossible, and people make handwavy arguments about how paying workers more means they can spend more, which means factories, and it's a perpetual growth machine!

>we’re already massively overproducing just about everything

No we're not. If we weren't, we shouldn't have seen the massive inflation near the end of covid. The supply disruptions hit almost immediately, but it wasn't until the stimmy checks hit that inflation went up.

>our problem is both our wealth and production allocations are borderline suicidal.

If you read my previous comments more carefully, you'd note that I'm not arguing against better wages for workers as a whole, only that contrary to what some people claim, they don't pay for themselves.

> A simplified model is needed otherwise rigorous analysis becomes impossible, and people make handwavy arguments about how paying workers more means they can spend more, which means factories, and it's a perpetual growth machine!

I'm no economist but you can't live on an island that only produces coconuts, because the people on that island would quickly start producing other stuff, breaking your premise.

This is like saying cash is useless because amoeba haven't evolved a cash economy.

> A simplified model is needed otherwise rigorous analysis becomes impossible

If your tools aren’t capable of rigorous analysis of a model that retains enough detail to capture the salient features of the thing they’re trying to model, they’re not the tools for the job.

What's the "salient feature" that's missing? From all the other replies it sounds like people are still relying on the handwavy argument that "pay workers more -> workers spend more -> you can pay workers more -> repeat", but can't articulate where the actual growth is coming from. If this is true, the communism would have beaten capitalism, because they would be able to exploit this better than any capitalist system, but obviously that didn't happen.

Overall this feels like troll physics[1]. Yes, the idea that having a magnet pull you forward, which itself is pushed forward by you moving forward sounds superficially plausible as well, but it doesn't pencil out in reality. The only difference is that "the economy" is complex enough it's non-trivial to disprove, and people can handwave away any objections.

[1] https://knowyourmeme.com/photos/74256-troll-science-troll-ph...

> What's the "salient feature" that's missing?

Multiple products. Multiple employers. A currency distinct from a consumable product.

A simplified model could be useful, but yours goes too far.

It doesn't take into account effects like that by paying more you can attract more, and more productive workers. Or that it puts pressure on other employers to increase wages.

> but can't articulate where the actual growth is coming from

I am not an economist, but I think one situation where this works is where you are competing for workers with other employers that have high margins, and pay their workers relatively little. In that case one of two things happens. Either other employers also increase wages, leading to their workers also having more money, which they can spend on your product, or they don't compete on wages, and you can outcompete them in getting the best workers.

The key is that total productivity doesn't necessarily improve, but wealth distribution becomes more equitable.

> What's the "salient feature" that's missing?

As it sits, all of the members of your coconut economy are going to be dead of malnutrition or exposure in relatively short order, so maybe address that and then we can work our way up to the flaws in the economic theory that drove the greatest wealth expansion and boom in consumer spending the world has ever seen.

The salient feature is that people consume a higher percentage of their wages than investors do of their wealth. Redistributing some profits to wages means that money gets spent, inducing demand. This also has a higher multiplier effect than profits, because consumer spending can move through the economy multiple times in a measurement period.

> No we're not. If we weren't, we shouldn't have seen the massive inflation near the end of covid. The supply disruptions hit almost immediately, but it wasn't until the stimmy checks hit that inflation went up.

What? The first Covid stimulus checks were April 2020. 271 billion in 2020 here per here: https://www.pgpf.org/article/what-to-know-about-all-three-ro.... 135B of the second round by Mar 2021. The third started about then. Inflation - and consumer activity in most areas - was low because nobody was going anywhere still, but at least we did a fair job of avoiding mass unemployment and homelessness.

Then inflation started accelerating during the economy's broader reopening in April 2021 (2.6 -> 4.2 percent from March). It didn't peak until near the end of 2022. Those stimulus checks were LONG gone by then for most people, since a huge portion of the country lives paycheck to paycheck, and the stimulus checks weren't available to people making more than 80-100k (single or avg-per-person in a married couple), which is the higher-income demographic that would have the disposable income to really drive inflation across the board by a "let's buy stuff we wouldn't otherwise" splashy purchase.

Instead, inflation was driven by people getting back out and doing/buying all the shit that had all been scaled down. The first stimulus checks didn't drive it because people weren't purchasing as broadly yet, and were still more in panic mode. Textbook bullwhip effect; at steady state we produced more than enough and never saw shortages, then in Covid demand types and volumes shifted enough to cause shortages of certain things and surpluses of far more other "non-quarantine consumer" things, so production changed, and then when things started to go back to normal ALL those things got hit again. I don't know if I'd agree that we're "massively" overproducing everything now that we're not in a quarantine scenario again, but the consistency of supply of most normal things suggests a lot of excess capacity in the system to absorb normal fluctuations in a way that nobody ever has to think about where their next roll of toilet paper is coming from again.

This is how we had a major boom in middle-class wealth int he US post WW2.

If you are only selling coconuts, a single raw material, yes, you will run into supply constraints such that prices go up. But that isn't how economics works. Your zero-sum economics example is only applicable in short-term scenarios: over the longer term, new industries develop to solve persistent problems that people are willing to pay to solve.

Money solves the problems of the people that have the problems. If the problem is 'we need to eat', producers will diversify into new food sources to meet the demand, solving the problem, and capturing the money of the people who have that problem.

There is an enormous space of problems people have which cannot be solved due to lack of access to money. Increasing costs in childcare, elder care, and education are good examples.

>This is how we had a major boom in middle-class wealth int he US post WW2.

The fact that Europe got bombed no doubt helped too, same with the elites being concerned that communism was on the rise and giving workers a better deal in an effort to stave that off.

>Your zero-sum economics example is only applicable in short-term scenarios: over the longer term, new industries develop to solve persistent problems that people are willing to pay to solve.

>Money solves the problems of the people that have the problems. If the problem is 'we need to eat', producers will diversify into new food sources to meet the demand, solving the problem, and capturing the money of the people who have that problem.

I'm not how you got the impression that I thought the economy had to be zero sum. I even specifically mentioned the possibility of more stuff to go around if productivity goes up. That's the problem with your "new industries develop" argument. Unless productivity goes up too, there will only be different stuff, not more stuff overall.

>There is an enormous space of problems people have which cannot be solved due to lack of access to money. Increasing costs in childcare, elder care, and education are good examples.

All of those are service industries that are resistant to scaling, and as a result productivity growth have been abysmal. Giving people more money to spend on those things just means productive capacity is removed from the economy elsewhere. Going back to the coconut economy example, it would certainly be nice if workers could have a maid to do the cleaning or a chef to do the cooking, but you still need people do the cleaning or cooking. At the end of the day you're just shuffling people around, not growing more coconuts.

>This is how we had a major boom in middle-class wealth int he US post WW2.

>The fact that Europe got bombed no doubt helped too

Europe also had a massive boom in middle-class wealth post WW2. I don't understand how this myth continues to live on, when the evidence against it is total.

It's a frequent refrain, but I actually don't believe that blowing up European factories would really make Americans materially wealthier.

It smells of the "if we go break the windows and sink the yachts of all the billionaires, it'll create a lot more jobs!" logic that the top-0.1%-of-earners doesn't seem to endorse...

> The fact that Europe got bombed no doubt helped too, same with the elites being concerned that communism was on the rise and giving workers a better deal in an effort to stave that off.

Workers got a better deal because the US intentionally passed massive top-end marginal tax rates pre-WWII with the goal of leading to less income-hoarding (or at least more charitable giving etc) at the top-of-the-top.

Wasn't the idea to give people more money (i.e. higher wages) so they could buy more cars/coconuts/etc? That's different than just directly "paying" them in the goods.

So in your simplified coconut economy, you'd at least have to keep two distinct kinds of entities, the goods to be paid and the payment. You sort of replaced both with coconuts and concluded the resulting system wouldn't work.

If the economy is 100% coconuts — all supply is coconuts, all demand is coconuts — then coconuts are all. Business owners sell coconuts in exchange for coconuts in order to acquire more coconuts. Employees are paid in coconuts which they trade for more coconuts. Paying workers more coconuts gives them more of what they want, which is coconuts, that they turn around and spend on coconuts.

That's exactly the problem. At the end of the day, unless you increase production of "stuff" (or coconuts), there isn't going to be magically more "stuff" (or coconuts) to go around just because people are shuffling "stuff" (or coconuts) around.

Not for coconuts, but in the real world, most products have economies of scale. If one rich guy has 99% of the money, the entire economy will be structured to serve his needs and yet nothing he buys will reach economies of scale. He just doesn't care to have that many Rolexes. So production methods will be fairly inefficient.

But if everyone has a bit of money, stuff can get mass produced, which actually makes for much greater total welfare, because the production methods are just a lot more efficient.

I don't understand what compels you to continue down this line of thought when its obvious flaws have been so clearly elaborated by other commenters.

I think you are more than capable of understanding what compels them, it's just not a very fun conclusion and one you'd rather not draw.

<3

Nobody will increase production of stuff if all the money is increasingly concentrated into a shrinking percentage of people who have far more than they can spend on stuff.

That's how you get high asset inflation and "K-shaped" stuff as the rich increasingly look for any value-storage vehicle to "invest" in, since they can't get a return on producing stuff to sell to the people with less money...

> Does this actually work?

Higher wages means workers and businesses have to be more effective. So more goods and services are produced and available. It's not a zero-sum game.

"But workers are already as effective as they can be"

Great, in that case you have the margins to pay higher wages.

A high wage / high cost society is great for workers and for businesses which actually do real work and produce real goods and services. It's not great for everybody else. Ie those who don't work, and businesses who doesn't make a high contribution.

Let's say you skewed income distribution a bit more like 1950s US, when high marginal tax rates resulted in more equal distribution of revenue through mechanisms like deductions or simply not taking that extra bump from 3 to 4 million. Now the upper 1% has lower income, but they were already mostly not-limited in purchasing power by their income. The upper 5-10% gets more. They go out to eat more, etc, etc.

We tried that experiment after passing "soak the rich" taxes in the early 20th century, and it seemed to work out pretty well for economic growth and living standards. But then we moved back towards "let there be oligarchs with immense wealth" instead. One of the claims was that the "investments" from allowing the powerful to keep most of the revenue streams for themselves would foster enough development to make it more than worthwhile, but instead... the broad base of consumer spending power has tanked, so businesses to supply the masses haven't found spending power to justify new investment/development outside of ad-powered ones participating in an arms race for the constricting consumer spending power that remains (or those industries benefiting from wildly subsidized-in-weird-ways spending like healthcare/pharma). And so it has also inflated asset classes across the board as there aren't enough startup ideas to eat up all the investments because of the general decline in spending power. Which hurts spending power further. (IMO the ability to capture higher and higher amounts of corporate profits as personal income also correlates to the massive financialization, outsourcing, and other short-term number-juicing moves we've seen.)

We can point to a lot of problems that have occurred from taking revenue shares away from the average worker, so it shouldn't be rocket science to think that returning a greater share of revenue to workers would return some purchasing power and guide the economy back towards development and growth instead of zero-sum asset bubbles.