There are always two markets operating in tandem. One is the "actual" or "real" market in goods and services, the one we rely on for necessities and amenities: food, clothing, fuel, rent, health care, etc. To the degree we buy insurance, pay interest, have retirement accounts or own a little stock, we are dabbling in the "other" market in international finance. In this graphic the "actual" market is represented by the thick green layer under the balloon's surface, and the "other" market by the small space in the middle. That's a decent relationship: 70 - 80% of the value is in the market for goods and services, 20 - 30% in cash, savings, investments, etc. The profit and wealth created by the material market is used, through investment, taxes or subsidies, to build infrastructure, invest in new industry, etc. Great idea. Unregulated, in actual practice, it yields terrible results. Since the first day that interest was paid on a loan, the market in money has been turning money into an abstraction with less and less relationship to the "actual" market. Value in the "real" market is stable and linked directly to the public good. Value in the money market changes with time, guesses about the future, high level gambling and emotion; it SHOULD shift in proportion to the real value in the "actual" market, and its value SHOULD support the stability and expansion of the economy as a whole. But the rules have changed and nobody seems to notice, understand or care.
How? First, SCALE: the financial market has inflated (in some unknown mix of real and imaginary value) to be many times the value of the labor and materials, goods and services in the "actual" economy, and has become a separate market operating "on top" of the real, but with little connection to real value, less concern for stability and none for sustainability. Second, COMPLEXITY: a dense network of "financial instruments" has turned this huge quantity of cash into a more abstract, less accountable, more powerful but far less stable unknown quantity. Futures, hedge funds, currency markets, B to B loans, the mass reselling of mortgages, deregulation and the national debt have created a situation in which millions and billions of dollars or euros can appear or disappear with the weather, emotions on Wall Street, political scandals in Japan or the national mood in, say, India. Third, SPEED: the global financial market can move billions in seconds, 24 / 7 / 365. Rooted in mass production and the time clock, the market thrives on speed. It accelerates everything from the work day and energy consumption, to the pace of TV, the turnover of loans, the continuous buying and selling of corporations ... and the quantity of waste produced.
Get this: In any single day or year, for every one dollar ( $1. ) exchanged for goods and services, in the U.S. and in U.S.- international trade, more than ninety five dollars ( $95. ) is exchanged in currency speculation, futures, options and hedge fund trading, some actual stocks, B to B loans, interest, and a bunch of other transactions that have nothing to do with the real economy. NINTEY FIVE TO ONE. The ratio may be even higher; some estimates push it over 100:1. This mentality started some time in the fifties, when men in business became "businessmen" and stopped caring about what they actually MADE or DID or its value to the public good. The MBA strategy shifted, from efficiencies and innovations in making and doing, to transforming every business into a money machine. This led directly to businesses themselves becoming "products" to be bought, looted, downsized, outsourced, conglomerated and sold at an inflated price for a quick profit. Every market bubble and crash is rooted in this displacement of real value, the greed that inflates the bubble and the denial that precedes the collapse. The S and L scandal and the Enron collapse, both caused by Republican deregulation, each costing the U.S. taxpayers over $1 trillion, are perfect examples of both: the shift in focus and the balloon bursting effect.
Stephen Bezruchka, arguing the impact of obscene wealth on public health, makes the point brilliantly. Every year, every man, woman and child below millionaire status in the United States puts ANOTHER $3000. of their money into the pockets of the super- rich, so they can play inside the balloon. Who did you give your $3000. to last year? What would you have spent it on? Health insurance? At least we now know that the $3000. I gave up in 1988 went to S and L speculators, and the $3000. you gave up in 2002 went to Ken Lay and Jeff Skilling. And a lot of it just evaporated.
So the bubble financial market is a hundred times larger than the "actual" market. Somebody is throwing around billions and trillions of dollars, euros, yen and yuan, in an international casino of speculation, bets and bluffs, overnight interest plays and leveraged investments (only a fraction of which is actually invested in "actual" industries). While we worry about health care and retirement, the infrastructure goes to hell and the environment approaches collapse.
Money only has value because we agree that it does. It is an inherently "abstract" construction we use to keep the real market flexible and dynamic but stable. The global financial market, modeled on the de- regulated U.S. model, has inflated to the point that there is vastly more cash than there is real value in the "actual" market. There is real power in that wealth, as long as we all agree on it and as long as there is some money moving between it and the real economy. The wealth in the financial balloon market should help to prop up, stimulate and stabilize the "real" market through investments in infrastructure and innovation. Ideally a portion of it would provide safety nets for the aged, poor and ill. Problem is most of the money moves in only two directions, up or sideways: up into the pockets of the super rich or sideways into solidifying control over the media, military spending and the political process.
The lure and power of this massive wealth makes Social Security and Health Care seem like trivial luxuries that waste government money. Infrastructure as an investment is too long-term and has too little return to be worth it. Starvation and isolated genocides are mere unfortunate happenstance ... um "externalities." Small wars represent but a tiny segment in this market. Big ones, for oil and regional dominance, only matter when they slow the real economy down or drain more cash from the balloon than they create. The money markets will always make money, largely independent of the political scene, environmental conditions or the "actual" market, until the whole thing starts to crash. Use your imagination. Any one of a dozen global tipping points can pop the balloon. If the balloon / bubble economy collapses, most of the already questionable value that inflates it will be lost. On the other hand, if a visionary government in a powerful country (ahem) choses to regulate and control this market, and to gradually, democratically shift some of that wealth into an "actual" and sustainable market, one that supports the public good (health care and education for example) the wealth will hold most of its value and will still be able to do some work. And it can begin to repay and repair the damage its acquisition has caused.
Question: Are there differences between a pyramid economic structure and a "pyramid scheme"? Answer: Yes, the real value involved and the potential for unlimited growth. Most economic structures look something like a pyramid. The horizontal areas reflect population, the height represents income and wealth: greater numbers at lower wages at the "bottom," supporting the mass of the work and the economy, fewer in the middle making more money - "middle management" - and a very few at the top making a lot - executives, investors, politicians. A flatter pyramid is inherently more fair - in the sense of income and wealth distribution - and more stable, but with limited potential for vertical expansion. A taller pyramid is less fair and less stable. The metaphors are valid. Flatter pyramids are literally more stable, taller ones tip over more easily.
A pyramid scheme is a financial scam in which a person "buys into" a program with an investment, and is promised a multiplication of his / her investment by in turn selling more investments to more people with the same promise, and they in turn sell to more and more people. These scams can work for a while if the hype is powerful and seductive, if additional buyers can be persuaded, but only as long as there is an unlimited number of willing new "investors." Pyramid schemes collapse when participants run out of new investors. Unregulated capitalism becomes a pyramid scam when: One, it convinces us that everyone in the country, or world, can get rich in their lifetime if they just buy into the system; Two, we believe there is an unlimited number of people at the bottom competing to move up, thereby allowing markets to expand forever; and Three, there is an unlimited supply of resources to feed into the consumption required by the expanding market, and the planet serves as a bottomless landfill that will absorb all the waste. These premises were true, or at least believable until some time in the middle of the 20th century, when the relationships between population, resources. investment and waste all reached a tipping point. Fifty years later, we are just beginning to notice that, in my terms, "the rules have changed."
The pyramid metaphor breaks down. An ideal "socialist pyramid" would be like a thick, flat slab, with the point, if any, representing prestige or administrative power. "From each according to his or her ability, to each according to her or his need" creates a very level playing field; security at the bottom, little room for vertical movement, limits on wealth and rapid growth, fair and equitable for everyone, rather boringly stable. The failure of Communism is not due to the mistakes of Socialism, rather to the failure of Communist states to evolve into democracies and open economies, as many more or less Socialist countries have done.
The outlaw capitalist pyramid scheme, scam and global shame, is actually represented by two pyramids. One is very flat, representing the vast majority of the population, stuck somewhere between the lowest classes and the middle of the upper class, roughly between zero income and a couple million a year. If it were not for the pointy pyramid on top, the lower one would look "normal" like the original pyramid. But there's another pyramid on top of the flat one. This has very few people involved but the greatest segment of the wealth.These two pyramids, illustrating in principle the obscene gap between rich and poor in the U.S., are out of proportion to an accurate graph of real wealth. In our economy the bottom pyramid, representing 97% of the population, would be proportionally a hundred yards across and only a few inches tall; the tall pyramid, representing the super- rich, would be only a few inches thick at its base, and .... THIRTY MILES TALL. And guess what, if the two pyramids represented the relationship between GLOBAL population and wealth, the proportional difference would be perhaps ten times more extreme. This graphic is borrowed from "the L-Curve."
The L-Curve pages mention a point I make in the Relationship argument: we think we understand huge and tiny things represented by numbers and verbal descriptions, but we really have no experiential frame of reference and therefore have no real sense of PERSPECTIVE or PROPORTION for this huge variation in scale.
Google "L-Curve" to see two illustrations: graph and movie.