The last weeks of this year’s presidential campaign featured the age old debate about whether to grow the total amount of wealth, or to redistribute the wealth that exists more equitably.
One of the implicit notions in the discussion is the idea that one can measure whatever it is that ought to be maximized in an economy in terms of dollars and cents. We understand, vaguely, that when our dollar becomes $1.05 after a year, and inflation is 6 percent, that we haven’t gotten anywhere, even though the number of cents we have has increased. So wealth is judged, instead, on an inflation adjusted basis.
That’s still a kind of silly way to look at wealth.
If most of your disposable income goes into buying computers and software, then you are probably much better off than you were eight years ago, and you almost certainly will be better off in eight years than you are now. Your “wealth,” at it were, is best measured in bytes and pixels per second and the like, and you are much wealthier.
If you drive an SUV to work 60 miles and back every day, you are much worse off now than you were eight years ago, but ironically, despite the recession, you may be better of now than you were two months ago. Your disposable income is determined by how much you have left over after you pay for gas, and your wealth is best measured in gallons.
If you needed heart surgery, you are better off now than you were 20 years ago; in fact, you may be alive now where you would have been dead, thanks to the advances we have made in cardiology. If you needed insurance in order to have that surgery, you might soon be dead now, whereas 20 years ago you would have been able to afford a decent level of treatment.
But, if the GDP is up, you might die with more toys. For all the good that does you.
But let’s pretend that wealth could be measured in dollars, for a moment. It doesn’t really matter how much you grow the economy as a whole, if all the wealth is with the top 1%, and the next 99% can’t afford to eat, we’d be worse off. At some point, and we can argue where that point is, wealth can be distributed so badly that it’s no good, where, essentially, we can do amazing things for people’s hearts but no one can afford it. So at some level, distributing that wealth is helpful, even if it causes a loss in the total amount of wealth.
While wealth concentration is very helpful when investing wealth to make more wealth, when that wealth is used for consumption (buying things) it is used far more efficiently the less people have. The rich and the poor both buy plates, but the rich pay 10 times as much and do not get a plate that performs the function of holding food 10 times as well. Caviar may be better than a peanut butter and jelly sandwich (although I’d debate that) but it isn’t worth as many times more as the cost would indicate. Each dollar owned and consumed by a poor person is worth more than each dollar owned and consumed by a rich person. When we want to consume for value (and that’s the end purpose to having an economic system) we want that money to be distributed evenly. When we want to invest efficiently, we want it concentrated. We’re best served, of course, by doing a little of both, keeping a balance. But the Free Market, in and of itself, doesn’t create that balance – it maximizes the return on investment, which means that it favors concentration of wealth. That is why government is needed to provide a counterweight, because years of an unregulated free market produce waste due to sub-optimal wealth distribution. The earlier in the process, and the more consistently this restraint is applied, the less forcefully it needs to be applied. Extreme Capitalism, like doctrinaire Socialism, turns out to be its own worst enemy.
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2 comments:
Paul Graham had an interesting take on wealth and how it is created. Imagine that you can buy $10,000 worth of stuff to take on one trading trip back in time, to exchange for, say, gold. How much would you get in various time periods?
A $100 iPod could probably be exchanged for $200 worth of gold two years ago. A cheap transistor radio could net you hundreds or thousands of 2008 dollars if sold in 1930. A laptop (and generator) could be sold for a king's ransom in the 1800s, and eventually you'd reach a point where you could probably get a house in exchange for a few discarded plastic bottles.
I'm not sure what the point of bringing this up is, unless it's to say that creating wealth is not the same thing as concentrating money: inventing and manufacturing useful things creates wealth. Bringing products closer to the people who'll buy them creates wealth (which is how traders make a living). But making money by playing the market or inheriting it from one's parents is merely the accumulation of money, with little or no associated creation of wealth.
Now I feel justified in arguing that capital gains and inheritances should be taxed at a higher rate than more productive activities.
it is used far more efficiently the less people have.
Thanks for this. I've been mulling lately over why I'm bothered by the idea of a flat tax, and I think this is the missing insight that had been eluding me. I owe you a beverage of choice. (Wait, did I just say that thoughts have value?)
Good points about how not all ways of getting money are equal. It's very hard, in law, anyway, to distinguish between prudent playing the market (I buy stocks, I sell them later at a profit) and the sort of entrepreneurial investment that leads to invention and manufacturing, which may also take the form of buying stock and selling them later for a profit. I think day trading can be cordoned off and taxed differently, but the rest is harder. Even a savings account allows a bank to write a loan that may lead to just the kind of invention and manufacturing that you talk about, and that process usually involves concentrating some money.
100% agreed with you about inheritances.
I recently read a blog that talked about a guy running a small business who was going to quit if his tax rate was raised (on his over $250K a year) and he had to pay for health insurance for his employees (which he could only think of in terms of the number of people he was going to fire to make up the cost, because he sure wasn't going to bear any of it.) I think he was a plumber or an electrician or something. I didn't see how him quitting was going to change the number of people actually doing things (plumbers) or the number of people who needed the plumbing done, or why I should mourn that someone a little more benevolent would be employing the people he employed.
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