alt Hacker News>If everyone pays higher wages, there's a greater supply of money for buying stuff / solving problems (assuming the higher wages aren't eaten by rents). No individual form recoups all of the higher wages they pay their workers, obviously, but there's a larger market for the goods of everyone has more money.
Does this actually work? Suppose you're on an island where the economy only produces coconuts. How does giving workers more coconuts make the economy grow, such that there's more coconuts to go around overall? Unless the workers were absolutely famished, giving them more coconuts isn't going to increase productivity. You might argue this model isn't representative of the real world, but that's approximately how the economy works. It can produce a certain amount of "stuff" (ie. coconuts), of which some portion can be given to workers, and the remainder can be given to the kings/elites/capitalists/whatever. Unless you improve productivity, there isn't going to be magically more stuff to go around.
Giving each worker a car can plausibly increase their productivity (less time spent commuting?) but the effect is small, and unlikely to be recouped by car companies. The situation looks even worse in the current economy. If everyone's paychecks were 10% bigger, what marginal item do you think it'll be spent on? A bigger car? A new iPhone or big screen TV? How would any of those increase productivity?
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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.
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.
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.
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.
> 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.
> 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.