The designation is important, because there is a growing tendency to focus on already existing wealth as the source of the flow (Piketty), rather than active wealth creation as a driver of hard asset and real estate definitions. Indeed, the capital which is most associated with wealth, can often be framed in moral terms at the expense of a better economic understanding, as Ryan Decker noted in a review of Thomas Piketty's book, "Capital".
As a result, inequality is too often addressed in the partial equilibrium terms which Ryan Decker also spoke of. For instance, we are still trying to impose some forms of flow definitions (minimum wage increases as obligatory on the part of business) as if monetary flow capacity were somehow the same across all geographical points. One only need step outside thriving cities or various regions, to note that this is not at all the case.
Unfortunately, only certain geographic points operate with the wealth enhancement provided by the additional impetus of international monetary flows. And yet service institutions make the mistake of defining knowledge use terms within the maximal valuations these international areas generate. If that were not enough, citizens of rural and less prosperous areas are somehow expected to be "folded in" to this system of knowledge use valuations, which international settings unwittingly backed. This also translates into potential wealth creation being denied in less prosperous areas, which in turn are forced to rely primarily on fixed assets. Over time, further taxation appears as the only solution. No wonder governments of all sizes are increasingly stretched to their limits.
All of which forces the idea of wealth creation - in time use and nominal income terms - to rely mostly on the "special" valuations of asset pools from international monetary flow in prime real estate locations. What that means is that much of the knowledge use which once derived from geographic points large and small, now has little means for absorption into the larger economy. When societies are forced to rely on existing wealth for redistribution and nominal income, over time that only reduces the ability to generate the idea of wealth itself.
If only it were as simple as existing capital being capable of permanent redistribution! If this idea really worked as advertised, economic thought would not present the ongoing struggles one actually observes. Instead, danger lies in the assumption that more is always and forever possible, from the fixed elements which are already in place. It's not hard to tell that too much reliance on fixed assets is already happening, because of the backup process which began in the U.S. at the onset of the Great Recession, with interest on reserves.
Those reserves are largely responsible for the Wicksellian roundabout problem, which Nick Rowe considers in a post this morning. Presently there is a traffic jam of monies not really intended for ongoing consumption, but to provide ballast for already existing investments. Or, additional monies - instead of flowing through all parts of the economy, are mostly being used to shore up the "dependable" and"reliable" capital of the world. Nick wants to know, how can the pile up in liquidity be addressed?
For me, the "pile up" exists for at least two reasons: 1) to maintain a single equilibrium of wealth to services valuation as best as possible, even if optimal use of said equilibrium is imaginary. 2) to have money "on call" if and when further flows become necessary, to maintain the artificial equilibrium. The problem is that even though entire populations are supposedly utilizing this circus, there still needs to be a bare minimum of services flows to those who are not still actively engaged (Obamacare, anyone?). Except, populations need to express consumption through a wider array of income and production possibilities than a sticky marketplace currently allows. Were this allowed, the issue of sticky wages could become a thing of the past.
The best way out of this logjam is to allow active wealth creation through time use to be representative of capital formation in its own right. Not for purposes of taxation, but for direct input in terms of service needs and coordinated activity so as to make taxation unnecessary. However, in a world still committed to supporting knowledge use within strict limits, it's hard to reintroduce knowledge use so as to allow broader economic activity to flourish. For instance, distasteful though interest on reserves may be - let alone the consequent distortions of primary monetary functions - it's not easy to just open that dam and let the excess flow back into a marketplace. Before money and knowledge use can once again be absorbed at multiple levels, communities need to coordinate so that it can happen.
By definition, interest on reserves serves as another excuse to short nominal income capacity as well. Why so? As production has been made possible with less input in terms of aggregate hourly participation, central bankers may be compelled to represent aggregates without the actual time element which serves as an anchor to production.
Even though time is nonetheless anchored in resource use at all levels (much capital exists in housing), central bankers are still less inclined to view the human factor as vital in the wealth of the present. That in turn gives less credence to the active aspects of economic life which create wealth. The result? People are downplaying the active components of the economy which defined GDP. But there is little point to be had in central banking, if it does not actually track active monetary flows in time based terms.
Any time a society becomes convinced the human element is not important to measure, the wealth they count on instead, can not hold up indefinitely. Indeed, the very idea of GDP as it was defined in the 20th century was a more positive affirmation of human potential than many recognize, even now.
Some may be confused by the way I present this, because it's not that knowledge is being downplayed in Piketty's arguments. Rather, arguments for the economic inclusion of knowledge are being presented in moral, rather than economic terms. While the moral argument is not all negative, it offers no solutions for sustainability in an overall sense. The problem is that knowledge use remains caught in a subservient - thus indirect - role, in terms of product creation. Under these conditions it cannot be considered as wealth in its own right. So long as knowledge use remains beholden to limited subsidies from other product creation, it can never fulfill the role of wealth creation which it actually deserves.