Wealth Redistribution in Capitalism

One of the things that bothers people is Other People who have More Stuff than they do. (See Tenth Commandment: envy is human nature.) So various persons who have less than they’d like to have make up various political arrangements in which, essentially, a big mob gets together with torches and pitchforks and loots the rich family’s house. This looting is then called a “progressive tax rate.”

However, unlike in crony “capitalism” (which is our current economic system), free market capitalism does in fact have its own mechanisms by which wealth is shuffled about the system: and the difference between capitalism and looting the rich by force is that when wealth moves around in a free market, it reproduces itself rather than being used up.

Consider venture capitalism: people with great ideas! pitch their business plans to the rich folks, and try to get the rich folks to put their wealth to work realizing the new business. When that happens, the wealth, instead of sitting in somebody’s bank account, flows out of the hands of the wealthy investors and into the hands of the new business, paying, among other things, for the salaries of new jobs. Thus wealth flows downward. Now, of course, the investor expects a return on his investment, but most new ventures fail – the wealth that moved from the rich guy’s pocket doesn’t come back to its original holder; it stays farther down the ladder and circulates down there. The employees of the failed company still got richer, even though the company didn’t survive, and the rich guy got poorer. All without a looting mob going around taking things.

What happens in crony capitalism? The wealth of the rich guy stays in his bank account – and he makes “his” “investments” in a venture using government grants and loans. But the government isn’t any better at picking successful businesses than anybody else – see Solyndra’s bankruptcy – which wouldn’t be a problem if it were a private investor. But when the government moves wealth, the wealth that moves isn’t the rich guy’s wealth. It is money taken from the relatively poorer through taxes, or money that will be taken from the relatively poorer when the government’s loans come due and taxes rise. The rich guy’s wealth is still sitting in a Swiss bank account being economically useless. That’s why the government categorically should not be in the business of loaning money to businesses. That money isn’t coming from the rich people’s bank accounts: it’s taken from the working class, who wouldn’t get any dividends back from the investment even if the business were successful!

Now, when it’s working properly, free market capitalism encourages wealth to flow from the top of the ladder downward through investments; and occasionally those investments will pay off! The product is popular, people want the service – the business makes money. Additional wealth has been created. The economy grows. Some of that money goes back up the ladder, but now there’s actually more wealth than there was at first, both at the bottom of the ladder (where employees are paid and customers receive value) and at the top, where the investors receive dividends.

But that means the rich guy got richer! Well, yes, this particular rich guy in this particular investment did (he might have lost money in a different one, remember). But the poorer guys got richer, too, in aggregate; compare the average “poor” household today to the average poor household in 1900. The poor of today are insanely wealthier than their percentage counterparts in 1900. Comparisons of “inequality” in wealth don’t mean anything other than that wealth exists in the community – there is a floor to poverty (no one can have less than nothing) but there’s not actually any physical cap to wealth, and thus no upper bound to wealth inequality. For reasons beyond the scope of economics, it’s impossible to raise the floor – someone is always going to have nothing, or next to nothing; some folks even choose to live that way rather than being forced by poor choices or bad circumstances into indigence. What’s truly a concern is stagnant socioeconomic class: how easy is it for someone to start from nothing and climb the ladder of wealth? Are the people who start out in poverty trapped there?

So what happens when crony capitalism takes over? The rich get to keep all their wealth – they don’t pay the price when the venture fails, the government does. So if more ventures fail than succeed (which is usual), and the rich guy isn’t losing the money, who is? The taxpayer. All those poorer folks whose taxes went to the grants and the loans from the government eat the loss. They don’t see any benefit; their wealth is destroyed. The government doesn’t really care; after all, there always seems to be more money on the tax tree! In this case, the rich really do get richer, and the “poor” get poorer, because the money that was lost came from their pocket, while any benefit goes to the pocket of the politically well-connected rich guy. This destruction of wealth in crony capitalism can happen even when the venture is a “success,” thanks to government requiring purchase of the product.

Take the Naked-O-Vision TSA scanners as a particularly insidious example: those machines are paid for by You, Oh Taxpayer. But who’s benefiting? Certainly not you. And the TSA, besides being a completely useless unConstitutional infringement on American citizens’ rights and filled with incompetents, cowards, petty tyrants, and sexual abusers, actually destroys wealth. Time is money, and it costs a lot of time to get through airport security theater – for no actual benefit at all. No value is created by the TSA. They don’t even provide safety; they’ve never caught a terrorist – whenever one crops up on a plane, it’s the passengers who’ve dealt with the problem. The TSA is a wealth-destroying program for the taxpayer – and a wealth-increasing program for the rich. But its activities are shrinking the economic pie, not expanding it – this one really is a zero-sum game, where every dollar given to the TSA is exploited from the working class. Brought to you by government cronyism!

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About pancakeloach

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