My first lesson in Social Economics came from Looney Tunes’ Elmer Fudd. It goes like this: Elmer is making shoes, but by hand. And all of the shoes he sells, Elmer keeps the profits. Except Elmer’s business is failing, and he can’t understand why.
Then along comes Bugs Bunny (or one of them), explaining that he’s not supposed to keep all the profits, but instead, pay himself a salary, while reinvesting profits into modernization (machines making shoes), which increases his output, which increases his profits, which leads to more expansion, which leads to increased profits, and a higher salary for himself.
At the end, Elmer Fudd becomes a kazillionaire, lots of people had jobs, and everyone is happy. Basically, Elmer Fudd grows his pie, instead of trying to allocate the resources of a limited pie, which is making him go hungry.
Even Karl Marx understood that Capitalism is a system in which Capital reproduces itself exponentially through his theory of the money circuit of capital.
However, in today’s economic world, the pie is no longer growing. We are in a new normal of 2% (or less) GDP growth. And economists seem to be happy with that, as opposed to the 5%, or 7%, or even 9% GDP growth that we became used to in the post WWII years.
The Fed’s target inflation rate is 2%. GDP growth is averaging 2%. So if the Fed had their druthers, inflation would kill any GDP growth.
So how is this happening? I think partly because Elmer Fudd went back to keeping all the profits, and it started in the 1980s. CEO pay is mind-boggling, and no longer based on performance. Profits are rarely reinvested into capital expenditures (expansion) and are instead reinvested into Wall Street. And the result is that society is back to a time of scarcity – where instead of growing the pie, we have to allocate the resources of a limited pie. And everyone, except Elmer Fudd, is growing hungrier.
If a child can understand the basic premise of Capitalism through a Looney Tunes cartoon, then why can’t Wall Street?