Comments on: The Game of Trade http://banker1986.wordpress.com/2009/04/25/the-game-of-trade-2/ Finance, Economics, Rambling... Thu, 10 Sep 2009 22:37:15 +0000 http://wordpress.com/ hourly 1 By: JD http://banker1986.wordpress.com/2009/04/25/the-game-of-trade-2/#comment-122 JD Wed, 29 Apr 2009 03:09:16 +0000 http://banker1986.wordpress.com/?p=48#comment-122 The model outlined above implicitly makes an erroneous assumption: that people live forever. You point out that capital is really a measure of deferred consumption. If people die eventually (as they do), they will want to convert that capital into some sort of consumption. Now, there are decreasing marginal returns to consumption. That translates into decreasing marginal returns on capital--which presents a big challenge for the model laid out above. However, the human desire to secure success for one's progeny complicates matters. Many people choose to 'consume' their accumulated capital by bequeating it to their children. To the extent that evolutionary urges result in this, my previous comments about eventual consumption are effectively without consequence. Individuals won't accumulate capital as you describe, but lineages become the new agents, meaning it doesnt matter that individuals don't. This can all be fixed with a very high estate tax, which is basically a tax on a certain form of consumption (leaving capital in a will) in order to discourage it so that agents fully internalize the costs (the long-term downsides of concentration of capital) that lead to market failure. The model outlined above implicitly makes an erroneous assumption: that people live forever. You point out that capital is really a measure of deferred consumption. If people die eventually (as they do), they will want to convert that capital into some sort of consumption.

Now, there are decreasing marginal returns to consumption. That translates into decreasing marginal returns on capital–which presents a big challenge for the model laid out above.

However, the human desire to secure success for one’s progeny complicates matters. Many people choose to ‘consume’ their accumulated capital by bequeating it to their children. To the extent that evolutionary urges result in this, my previous comments about eventual consumption are effectively without consequence. Individuals won’t accumulate capital as you describe, but lineages become the new agents, meaning it doesnt matter that individuals don’t.

This can all be fixed with a very high estate tax, which is basically a tax on a certain form of consumption (leaving capital in a will) in order to discourage it so that agents fully internalize the costs (the long-term downsides of concentration of capital) that lead to market failure.

]]>