Desperate to leave a legacy—of having turned the United States more sharply toward socialism—President Obama is grasping for various schemes. In his latest State of The Union address, he again brought up solving the “problem” of income and wealth inequality by the means of state intervention as part of his desired legacy. He envisions taxing the rich more and providing government-subsidized child care and education to all, among other things.

President Obama’s and other Leftists’ obsession with inequality is fueled by studies such as the recent one by Oxfam. Based on the data from Credit Suisse Group, the Oxfam study concluded that by 2016 more than 50 per cent of the world’s wealth will be owned by the wealthiest one percent of the population. In 2014, they owned just 48 per cent. The study attracted wide media attention to the increasing wealth gap. But is the gap in income and wealth alarming? Is it a problem?

I argue no. Differences in income and wealth reflect differences in productivity: those who produce more material values, earn more and accumulate more wealth, given no government interference. The production of more or better material values is good for us; they help us survive and enjoy life more. More of cheaper, more reliable energy is good for us. So are more effective medicines, more nutritious food, and better housing, or any other material values. We should encourage and reward, not blame and punish, those who produce them.

Yet, punishment of production is the effect of the statist schemes to reduce the inequality of income and wealth, whether highly progressive income taxes, corporate taxes, special taxes to the rich, or any other means of “re-distribution.” When you penalize producers, they move to other, less punishing regimes. Recall French President Hollande’s “millionaire tax” that a few years ago caused an exodus of the wealthy from France, or American corporations’ tax inversions (moving their legal headquarters elsewhere to avoid the relatively high U.S. corporate income taxes).

What the producers (those who invest capital in the production of goods and services) need the most is not government’s “re-distribution” of their wealth but freedom. Freedom to produce and trade whatever and with whomever you wish and to decide how to use the proceeds is an important incentive for wealth creators. The development of Hong Kong from a fishing village with no natural resources to the thriving center of business and trade is a positive example. For a negative one, consider the collapse of Argentina from one of the world’s wealthiest countries a mere century ago to the economic basket case today. Their fundamental difference: the freedom of producers in Hong Kong and the gradual curtailing of freedom by government force in Argentina.

Those advocating narrowing the income and wealth gap, from the Occupy movement activists to media commentators, fail to grasp (or evade) the primacy of production over consumption and the crucial value of production to human survival and well-being. One academic commentator recently argued that forced income equalization by government is in the self-interest of the wealthy (the producers): if income was more evenly distributed, more people could afford and would buy the producers’ output. That kind of argument, of course, begs the question: what enables the production of goods and services in the first place? What the commentator ignored was the fact that the more you take away from the producers, the less they are able to produce and to invest in cost-saving technology and product improvements. Initiation of physical force is not conducive to production.

Another misconception fueling the arguments for equalizing income and wealth is the myth that the wealthy hoard their money, like Uncle Scrooge of the Donald Duck cartoons who keeps his money sitting in an enormous vault. Most of the wealthy do not hoard their wealth. They invest it in further production, which benefits not just them but the rest of us in the form of larger variety of better, cheaper goods and services, or as employment and investment opportunities. And whatever they don’t invest or save, they consume. But that consumption is enabled by their production and does not take anything away from anyone else. Quite the contrary, their consumption creates trading—and income—opportunities for others.

The obsession with inequality of wealth and income needs to be countered with stronger advocacy for freedom of production and trade (which means government performing its proper role—protecting individual rights—and not interfering with markets). Freedom is the only means to increase human well-being.

5 COMMENTS

  1. I think you are taking on a far too narrow view of the economics of the situation. Attributing the differences in income and wealth simply to “productivity” is, frankly, a naive perspective promulgated by the rightist side of the political spectrum.

    While the nostrum that “those who produce more material values, earn more and accumulate more wealth, given no government interference” is possibly true (we will never know because we have never seen a truly free market economy and are not likely ever to see one) but it is also, sadly, irrelevant in most capitalist economies. The various tax regimes and labour laws (or anti-labour laws in some places) have warped the concept of a true capitalist economic system into a fairly biased scheme of regulations and policies that advantage the wealthy – – or at least those who control great wealth. (Discussion of the inherited wealthy is outside the scope of this discussion.)

    Frankly, I agree that tax-the-rich schemes are not the answer and are generally doomed to failure because – as the recent taxation “scandals” around Apple and Google and the like demonstrate – governments at all levels are far too invested in competing to see who can buy the biggest and “best” companies into setting up shop in their jurisdiction to consider that they might possibly be their own worst enemy.

    Having said that, I also agree that governments should not be in the business of picking winners (how many times have goevernments anywhere actually backed an inteeligent choice?) but should perform their “proper role” – which is more than just protecting individual rights: societies are created for the mutual benefit of all members, not just those with wealth or political power/leverage. Governments are the agents of the members of the society and should act in the best interests of that society. WHat currently obtains in most governments (democratic or not) is the same agency problem that exists in large business organisations: the few with the ability to control/manage the “organisation” do so to further the interest of themselves and those to whom they are beholden. In Canada, at least, this influence has been somewhat muted through laws governing political contributions but in the USA we see the agency issue in full bloom.

    You ask “What enables the production of goods and services in the first place” and claim that it is wealth/capital allone: where is the labour in that evaluation? Unions can and do make a similar claim – without labout there would be no goods or services. In my experience that LAST place you want a CEO is behind the service counter on on the retail floor. I suggest that the provision of fair wages – at the very least living wages – for labour is a better way to ensure sustained/sustainable productivity and stable economic growth than jigging the business regulations or the tax laws. I have yet to hear a coherent argument as to why (in 2013 – the last year for data) the average CEO is worth 195 times what the average worker (and 237 times the average female worker) earns (https://www.policyalternatives.ca/ceo Jan 15/15). Such imbalance hinders motivation and productivity in an increasingly disenfranchised and alienated labour force.

    I also do not agree with the “more is always better” perspective in that it continues the capitalist mythos of unlimited growth. Economic activity takes place in a constrained context of finite resources and capacity for production (of any kind, not ust the primary industries), consumption, waste disposal and pollution. Yes, better medicines are desirable and valuable and so is cheaper more reliable energy. Arguably, these will not be achieved under a regime of unfettered freedom of production and trade: companies like Enron, Ford, Crispy Creme and Chemie Grünenthal (thalidomide) demonstate that this leads to increased narcissistic behaviours and a worsening of the agency problem. The self-relabelled “energy industry” shows us that rather than move forward to products that increase social good by relacing and surpassing established ineficient and wasteful products entrenched interests will spend outrageous amounts to defend the status quo. Indeed – I have seen some estimates that the oil sector could have spent much less on developing aternatives like solar power than they have spent on lawyers defending their established business model.

    Perhaps a more nuanced approach would be to encourage “enlightened self interest” in the senior management classes? A regimen of fair dealing that levels tha playing field for all economic participants might be a better path than to simply surrender total economic power to the entrenched interests of the few.

    Regards and a hello from a former student;
    Bob Willis

    • Thanks for your comments, Bob. You suggest that that attributing income and wealth differences to productivity, or production, is “too narrow view of the economics of the situation.” Narrow in what sense? Production is the fundamental of economics and wealth creation—a fact that is immediately observable. For a simple example, consider a small island with ten inhabitants, five of whom live in one part of the island, and the remaining five in the other. The first five people are productive: they decide to grow coconuts, work hard at cultivating the land, increasing their crop yield, and selling their products to habitants of nearby islands, generating income and gradually accumulating wealth by saving and investing in further production of coconuts, or perhaps diversifying their crops. The other five people on the island hunt and gather foods they can find for their own sustenance only. They don’t generate an income and therefore do not accumulate wealth.

      I am sorry to see that you reject conceptual knowledge: “we will never know [whether those who produce more material values accumulate more wealth under capitalism] because we have never seen a truly free market economy.” When we understand the nature of human beings—man is a rational animal (as per Aristotle’s definition)—we can deduce, through conceptual integration, what human survival and flourishing requires. First and foremost, it requires the use of reason, and therefore, a social system that protects a person’s right to think and act on his rational conclusions. Capitalism is the only social system that provides such protection, because it is based on the recognition of individual rights. The role of government under capitalism is to protect individual rights of its citizens against the initiation of physical force and fraud, whether by criminals and foreign invaders, and resolve contract disputes through a court system. The fact that we don’t have a capitalist social system today does not mean that we cannot logically infer how such a system functions and what its implications are.
      Capital (wealth) is the fundamental requirement in establishing and operating a business, not the only requirement. Capital enables an entrepreneur to trade with others for their input, whether suppliers of raw material or labor.

      I agree that “more is not always better,” but more material values are always better—if human life is the standard of value. When I say values I mean whatever is good for the survival of a rational human being. Producing disvalues, or junk, or consuming your seed grains today so that you have nothing to eat tomorrow, obviously is not consistent with the requirements of human survival and well-being. But by the standard of human life, producing better medicines, more nutritious food, labor-saving technology, more comfortable dwellings, etc., is good.

      You are advocating government ensuring “fairness”—but fairness by what standard? Who decides what is fair? Should the government enforce a gap on CEO pay? And if yes, at what level? You said that government shouldn’t “pick winners.” Do you trust it to determine what is fair? Or should we just democratically let the majority to determine that? Sometimes the majority can be right: the Swiss voted down in a referendum the proposed cap of 12 times the average employee’s salary. However, the majority violating the individual rights of a minority still constitutes initiation of physical force. The only way to ensure “fairness” is to have free markets where people can trade by mutual consent for mutual benefit. If a company pays its CEO too much, or its other employees too little, it cannot survive or be profitable. Free markets—capitalism—is a system of competition.

      There is no “nuanced” position between protecting individual rights (such as the right of corporations to pay their employees whatever they mutually negotiate) and initiation of physical force. Only the former facilitates human survival and flourishing—the latter, whether the initiator is the government attempting to ensure arbitrarily defined “fairness” or a common criminal, undermines them.

  2. Dear Dr. Willis,

    You are absolutely right about the existence of the “agency” problem in the government, when the rich few have a disproportionately high impact on public policy, getting special preferences that possibly lead to more inequality. But the “left-leaning” solutions are leading us in the wrong direction, towards more government intervention and less individual freedom. And individual freedom is the necessary precondition for the progress of humanity, in technological, economic or evolutionary sense.

    I think the argument for socialism (or welfare state, or communism – these are merely labels for slavery by state) as a viable alternative to free market economy is based on the wrong understanding of capitalism. Original economic thinkers (starting from Adam Smith) considered individual freedom a necessary precondition for a free market economy, understanding freedom as EQUALITY BEFORE THE LAW (see the discussion of the “freedom” concept in Hayek’s “The Constitution of Liberty”). In other words, the government should not impose the rules that provide preferential treatment – to either the rich ones (“e.g., let’s protect the national producer”), or poor ones (“let’s take away from the rich and give to the poor”). The problem of government serving the entrenched interests of the rich is not inherent in capitalism (and hence socialism is not a solution). IT IS THE PROBLEM OF THE WAY OUR POLITICAL SYSTEM IS ORGANIZED. The root cause of the problem is the representative democracy system, which is totally flawed. The first flaw is in democracy’s mechanisms of giving unlimited power to temporary majority of citizens (which are usually requiring unequal treatment for themselves at the expense of minorities). The second flaw is in the representation mechanism, with inherent agency problems (e.g., interests of governors diverge from the interests of citizens; the need to raise funds to get re-elected, leading to power of the rich donors, etc).

    We must realize that capitalism equals freedom, and freedom is equality before the law, rather than democracy. Non-democratic state can still be totally free, while a perfect democracy can in fact be a totalitarian state. Capitalism with its free markets remains the most efficient way of organizing production and allocating resources; despite Schumpeter’s theoretical argument for equality of socialism with its omniscient planners, the reality does not support these claims. The problem is in representative democracy. Why then the socialists attack capitalism (with ides about restrictions of economic activity and wealth redistribution) instead of democracy? Because democracy is the way for them to get to power, enslave the people (make them dependent on state for welfare and social security), and then control them through democratic mechanisms.

    Finally, I personally do not see a problem with “CEO is worth 195 times what the average worker”. This does reflect the difference in their impact on the firm performance. The global market for top CEOs is very competitive, and this supply-demand system drives their salaries up. Moreover, do not forget that the salaries in a free economy are set on the basis of free agreements, and nobody has the right to interfere with the freedom of contracting. This is why the unions are hurting economic growth by interfering with freedom of contracting (particularly for top performers, giving them the same salaries as for the mediocrity, or “average workers”). But I acknowledge that labor unions have a certain role for supporting the capitalism: the clever union leaders understand that bargaining with capitalists (who are vulnerable) is easier than with socialist government that has the full power; this understanding makes unions the latent supporters of capitalism.

    • Thanks, Olex, for your comment and reply to Bob Willis; well said.–The solution to the problem of unrestricted majority rule (i.e., democracy): a constitutional republic, where the constitution is based on the recognition of individual rights.

      Thank you also for following my blog. Hope all is well.

    • Well said, Dr. Oleks Osiyevskyy.

      The agency issue, in my opinion, is due to the fact that government already wields enough power to either hinder or enable certain activities, views and interest groups. Sometimes it can be very difficult to see the difference between cause and effect, and, in some ways, they do cause feedback in both directions.

      Regarding pay, this should be left as an internal organizational matter. The whole point of companies is to generate and increase its value for the shareholders by providing goods and services to customers want to purchase. Things get really, really wonky when this basic notion gets sidelined or made into some kind of pseudo charity. Keep in mind that a free market economy is dynamic: this means having to constantly monitor what is happening within the organization and around it to get it and keep it thriving. Technology, tastes, trends, materials change, not to mention their supply, availability and cost.

      I think it is harmful to artificially decree what is acceptable in terms of income and then make tax policies which turn this from raising revenue to enforcing certain “desirable” social outcome. Then we wonder why organizations and sometimes individuals are doing their utmost to minimize their tax and regulatory burdens. The entire outcry about inequality, in my opinion, misses the mark entirely. At the end of the day we all have difference interests and differing levels of ability. Saying and believing it ain’t so does not alter the reality on the ground.

Leave a Reply