A large number of people are convinced that rising inequality between the rich and poor is the primary driver of the ills that plague our society. The #Occupy movement that arose after the housing bubble popped, and the fervent support for the self-proclaimed socialist Bernie Sanders are both proof of this.
This opinion is backed by supposed logic and apparent economic law that can be articulated in ways that are quite convincing. I recently came across an article that attempts to prove the thesis that capitalism generates inequality, and which offers a policy proposal that will alleviate it. The author does so in a way that will be perceived as fair, reasoned, and possibly even correct to the lay reader. Such an article must be refuted.
The author begins,
“At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality. Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.”
He begins well enough, continuing,
“Using data from twenty-three developed countries and from the separate states of the United States, they observed negative correlations between inequality, on the one hand, and physical health, mental health, education, child well-being, social mobility, trust and community life, on the other hand. They also found positive correlations between inequality and drug abuse, imprisonment, obesity, violence, and teenage pregnancies.”
It is possible that there is a correlation to be observed which indicates that increasing wealth inequality leads to a rise in negative effects that are allegedly associated with that inequality. But correlation does not imply causation. It is equally possible that there is a correlation between increasing artificial economic intervention and a rise in the same negative effects.
Therefore, causal mechanisms must be presented to prove the allegations brought forth by these observed correlations. The author describes one such mechanism as such:
“Much of the inequality of wealth found within capitalist societies results from inequalities of inheritance. The process is cumulative: inequalities of wealth often lead to differences in education, economic power, and further inequalities in income.”
Accepting (for now) the causal argument associated with inheritance, let’s instead look at the next statement where he describes the consequences of the resulting inequality. That “inequalities of wealth often lead to differences in education, economic power, and further inequalities in income.”
Looking at the condition of access to education, it is clear that any differences in education are negligible at best. A person at the bottom of the economic inequality spectrum has, through the internet, access to virtually ALL information – free of charge. That person, therefore; has equal access to education as a person at the top.
If this point is rebutted by saying, “Yes, all people have equal access to education, but there is unequal access to university degrees and accreditations,” it will need to be pointed out that this is a VERY different argument. That while there may be some truth to the rebuttal, there are numerous state economic interventions that could be pointed to for having caused this particular inequality.
Then comes the argument that differences in economic power is a negative consequence of inequalities of inheritance. Only a fool would argue that the latter will not tend to produce the former. It is also indisputable that those individuals who are the beneficiaries of substantial inheritances are better off than those who do not. But neither of these facts prove that differences in economic power are bad, nor that they are insurmountable.
The author correctly admits,
“Some inequality results from individual differences in talent or skill.”
Then states as fact that,
“this cannot explain the huge gaps between rich and poor in many capitalist countries.”
But why should this be so? If huge gaps of talent and skill exist between individuals, then why shouldn’t huge gaps in wealth follow? Certainly, it cannot be argued that talents and skills should be appropriated and redistributed.
If this premise is accepted, the rebuttal may be that receivers of inheritance have not justly earned their economic advantage. That the resulting “unjust” economic power must be appropriated and redistributed. But what is so unjust about receiving an inheritance?
Being born to a rich family is the same things as being born to a poor family – blind luck. Being born rich is the same as being born with above average intelligence or ability. Certainly there is no reason to punish a person born with above average ability, so what reason is there to punish a person who begins their life with an existing sum of wealth? Aren’t both equally a product of happenstance?
The author then proceeds to attempt to further identify exactly what aspect of capitalism leads to inequality. He first examines markets, offers a satisfactory portrayal of their function, and concludes that markets are not the aspect which should be blamed.
Having found markets not guilty, he proceeds to identify the difference between capital and labor as where blame should lie for economic inequality. He says,
“Capital is money, or the realizable money-value of collateralizable property. Unlike labour, capital can be used as collateral and the loan obtained can help generate further wealth.”
Here, he is making the claim that capital owners have access to credit (loans) that is unavailable to workers. That with this access to credit, the inequality between capital owners and workers will tend to grow exponentially.
The problem is that this assumes the people who are capital owners, and the people who are workers comprise an unchanging static environment. But there is no reason for this to be so. Capital owners often make bad decisions, go bankrupt, and join the realm of workers. Similarly, workers can save, invest in collateralizable property, and then have similar access to credit.
“Because workers are free to change jobs, employers have diminished incentives to invest in the skills of their workforce.”
This is another fallacious argument put forward in the author’s attempt to prove his thesis. His point is that if a worker cannot improve his skillset, then he will be unable to bridge the inequality gap. On the surface, the author’s claim appears plausible. The counterintuitive truth, though; is that despite the risks of losing employees to competing firms, employers routinely invest in training, certification, and educational programs. Further, even if a firm was to make no investment in workforce skills, doesn’t the worker have an incentive to improve his own skills?
Continuing in his attempt to prove the thesis, the author states,
“Another source of inequality results from the inseparability of the worker from the work itself. By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. This puts workers at a disadvantage.”
While superficially plausible, this point misses some important facts. Capital investment in technological improvements have caused vast increases in worker productivity over the last several centuries. As workers are able to produce more with their labor, the results will be to put downward pressure on prices of goods and services. The worker (who is also a consumer) sees his standard of living rise as his wages increase vis-a-vis consumer prices. The worker is increasingly presented with the opportunity to work less and have more time to invest in growing his skills, and/or to save more and to invest those savings in collateralizable property.
As shown, the author has unsatisfactorily defended his thesis that capitalism generates inequality. Nevertheless, he continues undeterred in proposing specific economic policies for the state to adopt and enforce. This proposal includes:
“…a large cash grant to all citizens when they reach the age of majority, around the benchmark cost of taking a bachelor’s degree at private university in the United States. This grant would be repaid into the national treasury at death.”
“…an annual wealth tax of two percent on a person’s net worth above a threshold of $80,000.”
The first part of his proposal needs some unpacking. He essentially says that every person, on their 18th birthday, should be given a grant of $48,000. Upon death, every individual would pay back that grant.
Besides the complete arbitrariness of the proposal, there is no effort to look for possible negatives that would come from its implementation. First, there is no way of knowing what an 18 year old would do if handed a free $48,000. While some will surely use it wisely and invest in their futures, others are just as likely to blow it while binging on cocaine and hookers.
And what’s to guarantee that every individual pays back the grant? Certainly there will be at least some people who die with something less than $48,000 worth of accumulated wealth. The author doesn’t address this objection, but perhaps his answer will be that any accumulated wealth up to $48,000 will be “repaid to the national treasury” (a.k.a. appropriated by the state). But this creates negative incentives which would lead to ever more numbers of people “repaying” $0. As the number of people who “repay” nothing grows, this program would quickly move toward fiscal insolvency. Imagine a person nearing the end of their life. Every incentive would exist to liquidate whatever wealth they have and distribute it to their family and loved ones before they die.
And what of the wealth tax?
Imagine a middle class family that owns a $300,000 house, and two cars valued at $20,000 each. Technically, this family has a “wealth” of $340,000. This means that every year, they will owe a $6,800 wealth tax (on top of the numerous income, property, sales, and other taxes that the author would no doubt see continued). What happens when the annual wealth tax comes around and this family does not have $6,800 available with which to pay? They will be forced to sell a car, at least – and let’s assume that the car was necessary to travel to and from work. Now the job is lost, as well, and this family is suddenly on a downward spiral caused solely by artificial economic intervention, as proposed by this author.
Let’s go one step more and look at an individual further down the economic ladder. Imagine a man who has only earned meager wages over the course of his life. Despite his economic disadvantage, he has been frugal and saved his earnings for years. Eventually, he has saved enough to purchase a modest house. The house is worth $85,000. All of a sudden, this man – who is still only earning meager wages – owes an annual $1,700 because he has been thrifty in his own personal finances. He is no longer able to save any where near what he had been saving before, and his upward mobility stagnates. The result of this type of policy is to grease the economic ladder and make it more difficult to climb.
Just the arbitrariness of the proposals is enough to give concern. A person worth $79,000 is nearly the economic equal of a person worth $81,000. But, for some reason, the latter person is forced to hand over some of his wealth in the name of alleviating inequality while the former is free from such force.
And what is the logic behind punishing wealth accumulation?
In the market, exchanges occur voluntarily when the parties involved benefit. Business owners and entrepreneurs find success only through effectively serving their fellow man and meeting their consumer demands. When a business owner or entrepreneur becomes very wealthy, this is not because he has taken advantage of others. Rather, success and wealth – in the market – come from having found a way to best satisfy the needs of others. Success and wealth are the rewards to be reaped either when one has found a way to provide a good or a service better and/or cheaper than it was provided in the past, or when one has developed a new product that meets needs of consumers which had not before been met.
There is only one common link between all individuals with regards to economics: everyone is a consumer. Therefore, when an entrepreneurial individual achieves success, improving the lives of the consumers they serve, that person should be lauded, not envied. The author shows at least a partial understanding of this point when he says:
“Markets involve voluntary exchange, where both parties to an exchange expect benefits.”
One would not enter into an exchange if they did not feel they were going to benefit. Voluntary exchange, therefore, is virtually always a net benefit to all individuals involved, and yields an improved standard of living. People who achieve success have rightfully earned it because they have improved the lives of the people they’ve served.
Granted, in some exchanges, the expected benefits may be unrealized by a particular party. The beauty of voluntary market exchange is the key word voluntary. In the instance where a party to an exchange is afterwards unsatisfied, they never again have to engage in it. Knowledge accumulates over time, and the benefits of exchange increase accordingly.
There is only one case in which wealth accumulation by an individual should be considered unjust. These individuals can best be differentiated from market entrepreneurs by labeling them political entrepreneurs. Herein lies the only example of true, unjust inequality.
The rigors of market competition can be too much for some ambitious people. The state provides these people with an opportunity to purchase political power and use that power to protect their profits. Today, this practice is known as lobbying and campaign funding. In the past, the same practice was known as bribery. Political entrepreneurs guarantee themselves a certain level of income by gaining state contracts. They free themselves from the dangers of competition by ensuring that the state creates artificial barriers to enter within their sector of the market. They do not have to satisfy the demands of consumers in the same way that their market-based counterparts do, because their revenue comes from an institution that has an unlimited supply of money through their power to tax and inflate the money supply.
While the author would argue that the state is necessary in order to curb the power of successful and wealthy market entrepreneurs, the proper argument would be that the necessary course of action would be to scale back and eliminate the power of the state.
For intervention, appropriation, and redistribution to be claimed as the proper course of action, one must prove that the results are preferable to the alternative of free markets and free will. The author fails at this. As interventionists are wont to do, the objections I have raised will be dismissed, and the legitimate concerns will be addressed through more laws and more regulations. The result is a cycle which leads only in the direction of tyranny.