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Justice for the 1%!

EconomicsPosted by Lee Waaks Wed, April 09, 2014 14:07:20

One of the many tired arguments left-wing intellectuals have been making for well over 100 years (including the uneducated man in the street) is based on the idea that the entire capital of the wealthy 1% (or 10%) is available for redistribution to the poor and middle-classes. All that need be done is to leave just enough money for the capitalists so that the incentives are calibrated to induce them to produce at (close to) the same rate as before. But this view is quite false, as explained below.

The wealthiest man in the world is Bill Gates, who is worth about $76 billion dollars. He consumes a small fraction of his fortune in the form of dividends (a lot of his consumption is charity). Let's imagine he decided to become a monk tomorrow and chooses to give away his entire fortune. To do this, he would need to liquidate all his investments -- funds that are currently being used to purchase labor and/or factors of production -- and distribute those funds to various charitable causes. Assuming nothing was saved, the recipients of the money would spend 100% of the funds on various goods and services. (And there is the additional factor that in order to liquidate his funds, someone must lower his/her cash holdings, or liquidate his/her investments, in order to purchase Bill Gates' stocks/bonds/real estate, etc.)

Yes, this money would find its way back into the economy, thereby generating some new jobs to "replace" the lost jobs, but it wouldn't change the fact that the public had consumed $76 billion in capital funds -- funds that would have been invested in new technologies, leading to expanded production and increased real wages. This expended capital would be gone forever (unless recycled -- but always at a cost of more expended capital).

The middle-class and poor obviously wants higher real wages in the form of more and better goods and services. Capital, in the form of machines/factors of production, is what is used to create these goods and services. However -- and this is the crucial point -- it is not the goods and services in themselves. The error of confusing the money value of capital with the actual goods and services allegedly "available" for redistribution has terrible consequences. Redistributing capital does not put more goods and services into the hands of the middle-class or poor; on the contrary, consuming capital, as Ludwig von Mises argued, is essentially equivalent to burning your furniture to heat your house.

When the left presents statistics (true or otherwise) about how the profits/incomes of the wealthy have increased in the past few decades, this is an implicit call for capital consumption. They want the rich to "share" (sound of gun cocking) more of their income with the poor but confuse their capital with their consumption (about 10% of their capital). But this "sharing" is really only capital consumption and this is a disaster for the economy.

An additional error relates to the fact that the left seems to be comparing the rich with the poor in a sort of mental "one-to-one" comparison. Of course, in this artificial scenario it looks like every rich person could easily boost the incomes of every poor person. But the left is forgetting their own propaganda: the rich only comprise 1% (10%?) of society. How can the tiny fraction of income consumed by the rich be distributed to benefit the 99% in any significant way? The answer is that it can't.

Many on the left will attempt to counter points like these by pointing out that the Nordic countries have massive welfare states with (allegedly) no ill effects. However, the Nordic countries (apparently) do not consume their capital at the level of the e.g. U.S. In fact, taxes fall much more heavily on consumption. And this is reflected in the fact that the Nordic countries have lower levels of consumption than the U.S. Robbing Peter to pay Peter is no great feat. The capitalist engine powers the welfare state in the Nordic countries (and Europe).

It should also be pointed out that the Nordic countries have taken in far fewer immigrants than the U.S. Since its founding, the U.S. has literally rescued millions of immigrants from poverty in their native lands. Naturally, this makes the U.S. appear to be more unequal compared to the Nordic countries because many fresh immigrants, not surprisingly, do not start out as middle-class. But this is hardly a valid criticism of capitalism. The welfare states of the Nordic countries would likely collapse if they took in vast numbers of immigrants. So they don't. Should we really celebrate how well they take care of their own poor when they choose to leave millions of Third World people wallowing in poverty? Were it not for Godwin's Law that states that those who are the first to invoke Hitler automatically lose the argument, I might be tempted to make an invidious comparison here.

What is also forgotten by the left is that it is the capital (including increased profits) of the wealthy that is employed to create nearly all the goods and services available to the poor. Without entrepreneurs who save and then put their capital at risk there would be stark poverty. This is one reason libertarians see entrepreneurs as heroes to be celebrated -- as opposed to how the left sees them: cash cows. Of course, entrepreneurs are typically motivated by self-interest but this doesn't diminish the fact that most of us have escaped wretched poverty due to their efforts. As libertarian philosopher Jan Lester argues, "The failure to grasp that intentions do not matter is the pons asinorum of all social theory".

When I was a teenager I watched Norma Rae (1979), a movie based on a real-life union organizer (starring Sally Field). I haven't seen the movie in years but I do recall that the standard of living she enjoyed was far above the factory conditions documented by Karl Marx in Das Kapital. Nevertheless, is it fair, even in the face of a dramatic rise in real wages, that millions of workers "struggle to get by" while factory owners live lives of grand opulence? No, it's just plain ol' bad luck. Furthermore, there is no "exploitation" (or even bad luck) involved when someone who would have likely lived at the level of an 14th. Century farmer/field hand in the absence of capitalism is now living better than kings and queens of that era. Most of us living under capitalism today were born with stainless steel spoons in our mouths.

Unfortunately, even Austrian and other free-market economists have perpetuated the myth of "exploitation" by teaching that interest is "deducted" from workers' wages, i.e. the "discounted marginal productivity" doctrine -- the theory that wealthy savers receive interest as a "reward" for advancing workers their wages out of savings -- as if workers would be entitled to all profits from sales in the absence of an act of abstention by savers. Although it is true that time preference plays a part, the implication that interest is deducted from wages has been an intellectual disaster for free market ideology. (For a more complete explication and criticism of this view, see George Reisman's Capitalism, pp. 484ff. and pp.666ff., available free online.)

Wages are funded out of savings and these saving are derived from prior sales, or from wages earned by workers who later become entrepreneurs, which means that profits are analytically prior to wages. Profits would be "infinite" in the absence of costs (this strange outcome results from dividing the profit numerator by zero costs in the denominator). In other words, wages are deducted from profits, not the other way round. Therefore, the income of the capitalist is derived from consuming his capital in the form of mansions, Jaguars, caviar, etc., not from the workers' wages. Were it not for capitalists, there would be no significant division of labor and, therefore, no surplus value to squeeze out of the workers (as Marx alleged). Egalitarianism is really just a cry for the wealthy to provide more of what they have already made possible.

Of course, few if any capitalist undertakings could take place without the help of workers, but the capitalists are the ones who provide the capital, take the risks, and provide the labor of direction. They are workers too! Perhaps we could argue it is the workers who are "exploiting" the capitalists who, as a class, consume so little relative to the capital they contribute to the workers. And what about the externalities resulting from so many benefiting from so few? I demand justice for the 1%! Market failure indeed.

For the left, the existence of virtually any (even relative) poverty is an indictment of capitalism in and of itself, even though real wages have climbed dramatically over the last 100 years. But no free-market economist has ever argued that capitalism would cure all poverty overnight. It takes time. But there is no other solution. Socialism does not work unless you like the equality of poverty. Ironically, the redistributionist schemes of the left, because they involve massive capital consumption, have actually led to either a (relative) decline in real wages or, at the very least, drastically slowed economic progress.

As we can see, the left's worldview is rife with major intellectual errors.

  • Comments(3)

Posted by David McDonagh Thu, April 17, 2014 13:32:36

Lee, I like your blog piece here very much indeed. It succeeds at doing what I was going to revise my statistics course of the 1970s to sort out but, typically, failed to get round to, but you are utterly right that the statistics do not even matter! The basic fact that I, and others, have overlooked is that capital is bound to have a social use. It is bound to be concentrated so the opt cited statistics are a brutum fulmen! If nationalised then the state would have the same concentration of capital. Thanks for that. I gained quite a bit in exploiting your blog article!

I will follow up the citations in Reisman on marginalism and the other topics soon. Eventually, I aim to cover almost every page of his book here.

The Swedish history is excellent and very surprising.

Posted by Lee Waaks Thu, April 10, 2014 20:47:11

Thank you for your comment David.
My entry is primarily drawn from George Reisman's Capitalism, pp. 300ff. I think his argument is particularly acute because it is not based on incentives. I'm not sure its original, but it is powerful. (Also see pp.654ff. where he shows unions cannot gain higher wages from profits).
No, I did not see the history of Sweden but I will seek it out.

Posted by David McDonagh Thu, April 10, 2014 11:07:49

This is a welcome counter to the bosh that the ten or one per cent indicates something anti-social. The use of capital to serve the masses is hardly anti-social. The entrepreneur is rarely also a capitalist [saver] too, by the bye. He usually borrows from the bank.

Did you se that history of Sweden from a chap named Andrew [I think] that I sent to the LA list from Ray's Café a few weeks back? It was the story of a free market Sweden up to about 1950.