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An economy that only serves the prosperity of the protected top 5% is an economy doomed to rising inequality, stagnation and widespread social discontent.

If we seek a coherent context for the new year, we would do well to start with the foundations of widespread prosperity. While the economy is a vast, complex machine, the sources of widespread prosperity are not that complicated: abundant work and a low cost of living.

When work is abundant, there are opportunities for many skill levels, and employers must bid for the most productive, reliable workers. This supports wages and widespread employment.

When the cost of living is low, even low-wage households can not only get by but put a little aside if they are prudent and thrifty.

This may seem obvious, but the conditions required for work to be abundant and the cost of living to be low are not so obvious. For work to be abundant:

It must be easy to start a business.

It must be easy to operate the new business.

It must be easy to make a profit so the business can survive the first few years and,

It must be easy to hire employees.

All these factors require an environment of low-cost compliance with regulations, low tax rates, low costs of transactions, reasonable transport costs, reasonable cost of money (but not near-zero), reasonable availability of capital for small enterprises, local and national governments that actively seek to smooth the path of new enterprises and existing enterprises seeking to expand, and a transparent marketplace that isn't dominated by politically dominant cartels and subservient-to-cartels government agencies.

This matters because the number one cause of the high cost of living is artificial scarcity created and maintained by monopolies, cartels, and the government that serves their interests. Artificial scarcity imposed by cartels and a servile state is the primary cause of soaring costs in a variety of sectors.

There are many factors that generate artificial scarcity: regulatory capture/ regulatory moats designed to protect cartels and monopolies from competition, a lack of affordable capital available to small enterprises, thickets of regulations that don't really serve the public interest, educational institutions that don't teach the fundamentals of entrepreneurism and how to start and operate a small business, and so on.

Real-world limits also impose costs. Energy costs are rising for a variety of structural reasons; the easy-to-extract oil has been extracted, the full lifecycle costs of alternative energy sources remain substantial (maintenance is not free for the 20 year lifespan of the windmill/solar array, for example) and so on.

Land for new housing is scarce in many cities, and that imposes scarcity costs as various entities compete for the scarce resource (land).

If we look at eras of widespread prosperity, we find that work is abundant,private enterprises and trade are vibrant, the currency is stable, the cost of doing business is low, inflation and the cost of living are low, so even low-wage households can slowly improve their lot.

This doesn't just describe America in the 1950s and 1960s — it also describes the Tang Dynasty in 700 A.D. China and the Byzantine Empire in its heyday. These are the core dynamics of economies throughout history that generate and distribute widespread prosperity and opportunity.

Prosperity is limited to the few at the top when the cost of living soars. When wages for the bottom 95% stagnate while the cost of living (housing, healthcare, college, taxes, etc.) soars, the bottom 95% become poorer — though borrowing money masks this reality for a time.

Economies stagnate when the few at the top limit competition, not just for customers but for capital and political power. Economies designed to maintain an exploitive elite and its servile class of technocrat factotums become sclerotic and unproductive, as the unearned privileges of the few act as a crippling tax on the entire economy. (See Inequality and the Collapse of Privilege and Why Our Status Quo Failed and Is Beyond Reform for more on this.)

No wonder inequality is rising: the only possible output of an economy devoted to artificial scarcity and maintaining the privileges of the few at the expense of the many is rising inequality and stagnation.

We can do better, but only if we discern the systemic reasons why wages are stagnating, small business is in decline and the rich get richer while everyone else gets poorer.

An economy that only serves the prosperity of the protected top 5% is an economy doomed to rising inequality, stagnation and widespread social discontent:

Reprinted with permission.