It really is funny (and tragic) how often lawmakers don’t think, “Now, if I owned a business and the government did this to me, what is the absolute first thing I’d try to do?”
People with money tend to be smart, and to be focused on making money… otherwise, they wouldn’t have any. Trying to forcibly take it from them necessarily results in them working against you… and cutting everyone’s hours down to 29.5 a week so they don’t have to pay benefits. For example.
I largely agree sir but at the same time, there have to be lines, and those lines have to be enforced. Otherwise what are we working toward, except some sort of Shadowrun-esque future? A highly simplified question I admit but one I think reasonable- especially since the thing you mentioned was already becoming commonplace, in the name of “focusing on making money, because that’s what they’re supposed to do!”
Hard lines, imposed by some authority or other, are easily dodged… and when they are not easy to dodge, they can force companies to take extreme measures that aren’t good for anyone. If you have not anticipated that sort of reaction when you draw the line, you’re trying to play a game where you’ve forgotten that your opponent gets to move, too.
Negative public perception is more difficult to avoid by being legalistic. People don’t care about your loopholes.
What I’m rooting for is a world in which companies make more fuel efficient cars because that’s what sells, where they pay their workers well because that’s what it takes to retain a highly motivated and skilled staff, and where pollution is held in check by the monetary advantage of advertising lower pollution to a world that cares.
One can argue how realistic that is, certainly. I personally have found, however, that being a jerk or a thief is simply bad strategy, and that having someone think well of me is worth far more than what I could have stolen from them, in the long run. It’s easy for me to scale that system up in my head, because I believe that’s how the world works.
The trouble is, it’s hard for companies to respond to that sort of subtle pressure if they’re worried about the government shutting them down (via penalties) for coloring outside the lines, and about where those lines are going to be next week, and about how they’re going to achieve some specific milestone to qualify for tax credits they can’t refuse because the other guy is getting them.
Imagine if a government didn’t outlaw theft. No hard line policy there. If you want something, you can just take it. No amount of concern for public image will make up for the fact that the richest people will immediately become the ones who can steal the most. Overall wealth will drop drastically, of course, as stuff is destroyed, industries collapse, etc, but that won’t stop anyone really good at stealing from getting ahead. You can hope that everyone recognizes that stealing is bad for society, but if nobody steals but one person, that person will get way ahead, and others will have to steal as well if they want to keep up. Of course, it’s difficult to keep stealing, to get around others’ security measures, to avoid having your stuff stolen right back, etc, but in general, the people who get better and better and stealing and getting away with it will become more and more powerful, more and more able to exert their influence to improve their ability to steal successfully, and everything else falls apart. In the long term, they too will suffer, as there’s just less total wealth around to steal, but they aren’t as bad off as the people who didn’t steal, so stealing was still the best choice for them personally. The only way to avoid this is to have a consensus rule that forbids stealing, then appoint a body to keep people from doing it as best they can. If nobody can steal, people have to make money through practices that produce additional value, thus increasing overall wealth instead of diminishing it, and power will get distributed a different way.
Ideally, most government economic intervention is of this nature on a different scale. If everybody pays their workers badly, the economy suffers because nobody can buy your products. If lots of people pay their workers well, but they don’t -have- to pay their workers well, one person can pay their workers less and get an advantage. Others have to pay their workers less to keep up, and it becomes a contest about who can pay their workers the least and get away with it. Yes, there are issues with getting enough workers still and similar considerations, just like there are issues with keeping all your stuff from getting stolen back in the prior example, etc. In general, though, you’ll get better and better at managing to pay your workers less and less, and so will everyone else, just like above with stealing. Those who are good at working the system can improve their own position at the detriment of society and use that power imbalance to widen the gap still further. This very example has happened over and over again throughout history, and it’s always ended with an outside intervention, such as feudalism’s collapse against the rise of mercantalism then capitalism, the creation of labor unions, government anti-trust laws, etc.
There are countless ways that a company or individual can work for their own interest at the expense of society as a whole. If everybody does them, society suffers. Governments function to enforce social contracts where we basically all agree not to do those things, so that society will be better off.
You are treating the arguments of the 18th century slave-owning landed class as self-evidently true. There is considerable controversy about the soundness of both their economic and political positions. It is not the case that deviations from capitalist and proto-capitalist property relations are necessarily economically destructive, but they are usually destructive to the power of the economic elite.
The constitution is not the triumph of objective good sense over idiocy; it is the triumph of one political-economic ideology over another. It is a matter of considerable historical, empirical and theoretical inquiry, not of “objective truth,” whether that triumph was good or bad.
But, since by definition the economic elite have great control over the economy, any action which is destructive to their power will be resisted by them and that resistance will take an economically destructive form. The only way that might not occur would be an economic elite who voluntarily surrenders their power for the good of the disadvantages, which is unlikely.
As to the question of good or bad, there is no way to determine that for any social action since, first, there is no common definition of good or bad; and second, repeatability does not exist in social experiments so alternative solutions to the same problem cannot be tried. One can, at best, determine if the state of affairs after taking an action is better or worse than before, and even that fails on the first point.
The only way that might not occur would be an economic elite who voluntarily surrenders their power for the good of the disadvantages, which is unlikely.
Mais oui, mon ami! Such is all human progress. Or should I say “progress”?
Yours is my favorite kind of comment, Larry. I hope it starts a good conversation!
I’ll respond briefly by saying these are things that actually happened. Whether they were wisely done or not, well… But is it really controversial to say that security of contract, the ability to expect that a deal will be enforced, is (along with other aspects of rule of law) a necessary criterion for development and prosperity?
And I wouldn’t read too much into my narrative here. Certainly not that the Constitution was the triumph of good sense over idiocy. In fact, as we’ll see in just a few- but hush, no spoilers!
But is it really controversial to say that security of contract, the ability to expect that a deal will be enforced, is (along with other aspects of rule of law) a necessary criterion for development and prosperity?
Well, I’m a Marxist (more-or-less), so I would say, yes, I would controvert the necessity, and, at the present stage of development, even the desirability of such criteria. See e.g. Lochner v. New York.
The problem is that “security of contract” etc. are extremely vague and broad terms. What sorts of contracts should or should not be secure? What kinds of deals should or should not be enforced? The devil is in the details. And a larger question is: should contracts have a central place in social relations?
My bigger point is that the nascent structures of capitalism that found expression in the transition from the American Revolution to the beginning of the industrial revolution were historically situated; these were not universal structures. I object less to your analysis (which is historically accurate) than to the presentation of them as true social universals.
I’ve read your comic from the beginning, and I know from viewing several of your long-scrolling legal flowcharts that you are afraid of neither complexity nor nuance. History deserves no less commitment to complexity than does law.
“should contracts have a central place in social relations?” I am a Robert Coase fan. So I would have to answer in the affirmative. Contracts, by contracts I mean mutually assented to reciprocal obligations, are the foundation of most human institutions. Marriage is a contract. The employer-employee relationship is a contract. So businesses, government, and families are all predicated on contracts. Without them, any kind of cooperative venture becomes extremely complicated and difficult, if not impossible, because there is no way to induce people to do things that are not in their own best interests without contracts. Sure if everyone was sufficiently altruistic everyone would just act according to everyone else’s wishes without the need or bribes, threats, or other inducements. But I do not think that that ever happens in real life.
“If men were angels, no government would be necessary”, nor contracts.
As an alternative approach to Marxism, I like the version of society postulated in “the Quantum Broach”. It presents a fictional world where even criminal law is seated on contract law.
Not that I think it’s work in the long run. Too dependent on social inertia for stability.
More directly, we cannot rely on contracts for everything for three reasons: 1. Sometimes contracts are too costly to negotiate. 2. Sometimes they are too costly to enforce. 3. Sometimes, everyone agrees that a contract should not be enforced for moral reasons, like a contract specifying the terms of purchasing a slave. In those cases, the state actually does need to step in and decide who has what rights without all parties needing to agree to it.
What sorts of contracts should or should not be secure? What kinds of deals should or should not be enforced?
When we get to Contracts law, I plan to go into this in some detail. A contract, by the usual definition, is an agreement that the law will enforce. There are any number of agreements that are unenforceable for a variety of reasons. Maybe the agreement is repugnant, as one involving slavery or other cruelty. Maybe one party had too much “bargaining” power, so it was more an act of duress or extortion than a fair deal. Maybe the parties had very different understandings of what they were agreeing to. There are tons of examples of deals that the law will not enforce as a contract. The law has a ways to go here, as well, in my opinion.
And a larger question is: should contracts have a central place in social relations?
Social relations? I say no. Others disagree. In fact, one source of frustration people have with the legal system in this country arises when you get both kinds of people in a dispute. It winds up looking like one person has used the courts and contracts to extract money and property from another who values other social relationships more highly. The one person thinks he’s merely doing the civilized thing and settling things with lawyers, the other thinks he’s being screwed over. Speaking as a big fan of doing the civilized thing, I still tend to side with the guy who feels screwed over.
But if we go to a level of abstraction higher than person-to-person? In such business relations, contracts are still key. In fact, I would go further and say that at the political level, the expectation that (enforceable) agreements will be enforced is a major component of the Rule of Law, and one of the things that distinguishes an impoverished corrupt country from a “successful” one. If one cannot safely predict that a deal will be carried out, one won’t enter into it. If someone can stymie my investment because they paid a bigger bribe, or because they can exert pressure on the government to look the other way, or because they’re powerful enough to just say “I changed my mind,” then I’m not going to invest. This was one of the big things that marked Europe’s shift from the feudal days where might was right to modern times where might ensures right (for the most part).
these were not universal structures.
To the extent of the preceding paragraph, I’m willing to argue that the connection between investment/growth and security/Rule of Law really is universal. Are there exceptions? You betcha. Can these lead to other injustices beyond what they avoid? Yup. Do we sometimes pay them lip service while continuing to do things the might-makes-right way? Absolutely. But I really do believe the connection exists and plays a significant role.
History deserves no less commitment to complexity than does law.
And might I add, no less commitment to accuracy over mythology. I remember one history course in undergrad where, as an exercise in using our brains while doing research, the professor had us find all the factual errors in a chapter from a commonly-used high school history textbook. It was astonishing. The lesson has not left me.
We have a strong tendency to use history as storytelling, to make a point. The danger there lies in choosing and amending the facts in service to the chosen narrative. I try really hard not to fall into this error, but I’m only human. And though I may curse at myself in the moment, I’m always grateful whenever someone points out where I’ve screwed up.
To second what Larry said, the US government has said “Nope, you can’t enforce that contract” many times before. Most notably, after the Civil War, the Thirteenth Amendment freed the slaves without compensation, invalidating pretty much the entire economic system of the South. And I don’t think anyone in America today sees freeing the slaves as unjust because it hurt the economic interests of plantation owners.
They also did it plenty near the end of the Gilded Age, when legislatures (and eventually the federal government) started banning certain kinds of unfair employment contracts. Again, I don’t think there are many people who think that it’s unjust to not allow people to work for pennies an hour.
From another angle, there are lots of things that it’s illegal to buy in the US, and so the government won’t enforce those contracts. If your drug dealer runs off with your money and doesn’t give you any drugs in return, you can’t exactly go to the police, can you? But somehow drugs do manage to get bought and sold even despite their illegality, so security of contract clearly isn’t strictly necessary for business to happen.
Also, the contract clause in article 1 section 10 was designed specifically to stop any state from nullifying debt. In the great depression, several states nullified mortgages, and the supreme court upheld the states’ actions. So the U.S. government will nullify contracts even when its constitution proscribes it from doing so.
On the first. Agree. Returning stolen property leaves, and has always left, the purchaser of the stolen property without his investment.
On the second. Partially agree. The problem with a Federal Minimum Wage is it runs off business. We buy clothes made in Vietnam and phones made in China precisely because it’s cheaper, largely due to labor costs, to manufacture them there. That’s jobs, poor jobs but jobs, that aren’t available in the US. And that’s money flowing out of the US to states that are less blindly altruistic, (or more blindly greedy, where long term harm results, such as in some toxic mining operations).
A perfect open market has a practically infinite number of buyers and sellers, of good and services. People who demand more for their work lower their rates or are forced out of the market. People who cannot afford to work for too little, raise their rates or leave the market. Employers/Buyers who pay too little, find their choices drying up while those who pay too much find they are uncompetitive on the other end.
Better ten cents an hour than no money at all.
On the third. I think you underestimate the value of probable violence in enforcing those contracts.
That, and a repeat customer is better than a one time grab, which is both why the street seller wouldn’t be inclined to do so, (ruin his reputation as a seller, costing him sales,) and why the store doesn’t pursue and prosecute most shoplifting incidences. (Today’s twenty dollar value thief may still be worth thousands of dollars over the span of his patronage to the same store that he just stole from.)
I think the last is probably because the pursuit and prosecution is far more expensive and arduous than the initial cost, not because shoplifters are prolific shoppers of the same store; not really a pattern I’ve seen.
Lets also remember that no one was actually keeping accurate or detailed records of economic data until the 1930s. So it is highly improbable that these sorts of questions will ever be answered definitively.
To be fair, the arguments presented here: That the state refusing to enforce loan contracts would make people unwilling to lend money, thereby reducing the supply of credit, and that raising the money supply would raise the price level, do seem to be in line with prevailing economic theory.
Right, BUT saying that cancelling debt or making debts difficult to collect are economically destructive assumes the persistence of a capitalist-oriented economy. Instead of printing money to replace the lack of loans, the government could have (if such techniques had been invented yet, which they hadn’t) imposed a progressive tax system to siphon off wealth from the wealthy that way, then issued publicly funded grants with that income. Thus they’d have a way for investment in farms and businesses, which would create the needed growth without continuing to pipe more and more money into the hands of the wealthy elite or putting the populace into debt. This would have the added advantage of letting those businessmen and farmers reinvest their profits right away, rather than having to pay off debts first, which could in turn provoke more growth than the loan system. The extra money in the hands of the middle-class would result in more spending than the concentrated wealth in the hands of the elite, which gives further growth incentive, etc, etc. That’s the theory, anyway.
Everybody wins in such a system except, as any early Marxist would readily point out, the wealthy. That’s why many early Marxists took the assumption that “They’ll never go along with this, even if it’s for the betterment of society, so we have no choice but to kill them and take their stuff.” This may not actually be necessary in practice, of course, as many increasingly socialist western nations would like to feel they demonstrate. The amount of excess wealth in the hands of the super rich may be great enough that one can get significant economic gains just taxing them enough to narrow the wealth gap slightly without too significantly impacting their lifestyles. To what degree the whole investment system can be replaced, of course, remains to be successfully demonstrated.
That makes sense. However, there is a reason that the 13 states didn’t have progressive income taxes. All income taxes, including progressive income taxes, are harder to collect than are import duties and excise taxes. If the general public refuses to accurately report their own incomes, the state has basically no way to know how much money they actually owe on income taxes. So income taxes are really only viable in countries with large classes of wage and salary earners whose employers can accurately report on their incomes. That is why income taxes tend to be more common in rich countries than they are in poor countries. The governments of impoverished countries cannot tell how much money their inhabitants are actually making. But they can tell what goods are passing through their borders and look up their current market value and levy and calculate an import tax based on that value. In post-independence America, the people who made the most money were independent merchants who no one else could precisely ascertain exactly how much money they made. So they would have been able to avert most income tax liability by doctoring their personal records to show them making less money than they actually earned. So its not just that no one had thought of a progressive income tax yet. It would have been really hard to implement.
Worse is the case of regulatory capture.
If two resources, popular to different demographics but otherwise equivalent, are taxed at different rates, you are effectively taxing those different demographics unequally.
It’s much the same as giving Heroin cases a proverbial “slap on the wrist”, while crack cocaine cases get long jail sentences.
In taxing two things unequally, you CAN tax the higher valued item higher as a form of luxury tax, such as taxing silk more than cotton, but if the people who are helping write the taxes are inclined to wearing silk, and the cotton growers aren’t all that popular and populous, you may well find cotton mysteriously taxed higher than silk, (because it brings in more revenue, of course, there being more of it to tax.)
As I understand it, still today utility vehicles are taxed higher than passenger cars because of some gripe we had with a foreign country that exported utility vehicles. So, those vehicles get shipped to the US as passenger vehicles, modified from passenger vehicles to utility vehicles, and sold.
My, admittedly shallow, reading on the Whiskey Rebellion was that it was, in part, because Whiskey was taxed and the alcoholic beverage of choice in cities like Boston, wasn’t, placing an unequal burden on the farmer over the city dweller.
Also, replacing loans with public grants would have problems even if you could fund it. It would create a perverse incentive to start ventures for which the opportunity cost of capital exceeds the benefits just to get the grant. To put it less pedantically, if the farmer and the merchant don’t have to pay the money back, then what stops them from spending it all on hookers and ice cream?
Why do the wealthy deserve discriminatory treatment as a class? Yes, some of them may have obtained their money by force or fraud, but others gained it by working harder and/or smarter than the rest. What one man receives without working for, another has worked for and not received.
As to the sanctity of contract, it should (but often is not) be based not on threat of violence or legal sanction, but on personal honor. If I borrow from someone and agree to terms of repayment, as an honorable person I MUST keep to those terms or I am less of a person.
Finally, as to the suggestion that a progressive income tax, reinvested in grants, would have been a superior system. First, that creates a layer of middle men between the holders of capital and the users, which lessens the efficiency of the system. Second, and in my opinion worse, it gives the government the decision making power as to which individuals a have access to growth capital and which do not. This leads to favoritism and corruption, as those who need the grants do whatever it takes to make sure they get them. Last, by not requiring repayment of startup capital, the moral hazard of bad business decisions is lessened, perhaps even eliminated.
The Marxist would say that all private property is acquired through force and fraud, and that your alternative is a myth meant to legitimize an unethical system.
“all private property is acquired through force and fraud.” That is very debatable. Could you develop that point?
Discriminatory treatment of the wealthy, or at least high-income persons, can be justified by neoclassical economics. If people are uniformly rational, then they will always buy the highest utility goods first and the lowest utility goods last. Assuming continuous utility functions, this gives rise to a declining marginal utility of money. So total utility can actually be raised by taxing the rich and giving the money to the poor unconditionally. But for all the reasons that you listed, I am in favor of doing this through a negative income tax rather than through grants to specific businesses. Without the need to pay back the money plus interest, there would be a perverse incentive to start businesses for which the opportunity cost of capital exceeds the benefits just to get the grant from the state. That is categorically bad.
The rich possess the inherent ability to earn more income relative to the amount of work they do, because they can invest their wealth and obtain a passive return without personally doing any work at all. Thus, if two people have exactly the same skills, and make exactly the same effort, but one of them starts with a bunch more money, the one who starts with more money will earn more income.
If everyone in the world started on equal footing and then gained or lost wealth as a result of their personal merits, then one could perhaps argue that those who succeed in acquiring wealth deserve that passive income as one of the fruits of their labor. However, even in this idealized scenario, only the first generation is fair: the second generation inherits the wealth of their forebears and therefore starts with unearned advantages or disadvantages. So even if things START OUT fair, they don’t stay that way.
We can’t realistically take away the passive income people get from investing capital. Furthermore, we don’t WANT to, because that investment increases the overall wealth of society as a whole, so we don’t want it to stop.
But that means we need to have SOME way to redistribute money from the rich to the poor, or else we just have a runaway snowball effect where the rich get richer and the poor get (relatively) poorer FOREVER. Which is both obviously unfair, and also obviously detrimental to long-term economic growth of the civilization as a whole.
And in fact, since the rich are naturally earning income faster than the poor, it’s possible to tax them higher and STILL leave them with an unfair advantage over the poor. (Which, arguably, is the situation we have right now.)
“Thus, if two people have exactly the same skills, and make exactly the same effort, but one of them starts with a bunch more money, the one who starts with more money will earn more income.”
But you are neglecting the effect of passive income, in so far as the persons who have it often do not exert the same effort. It is a very natural tendency, especially by the third generation of inherited wealth, to coast. That is the heart of the redistributive method of capitalism. Those on the bottom rungs of the ladder are hungrier, work harder and/or smarter, and take the wealth from those who do less and less. A prime example, before the progressive income tax, would be Andrew Carnegie; born in a one room weavers cottage in Scotland who became one of, if not the, richest man in the world. Bill Gates, while not starting as far down as Mr. Carnegie, is a modern example.
There is nothing, to my mind, obviously unfair about a system which rewards economically good behavior with increased wealth and punishes economically bad behavior with decreased wealth. If I had accumulated great wealth, there is nothing unfair with allowing me to utilize it in whatever legal way i see fit. I can spend it on myself, donate it to charity, leave it to my children, or leave it to the home for unwed cats if I want to. And as to the estate tax, I paid the tax on the income when I earned it, is it fair that the same money be taxed when I give it away after I die?
I am not saying it is unfair to reward good behavior with wealth and punish bad behavior with poverty. I am saying that there is more than one reward mechanism at work in our capitalist system.
Imagine this scenario: we have a system where those who work hard are paid $100, those who work moderately well are paid $10, and those who don’t work at all are paid nothing. Then, people who are friends of the king are paid $10,000 extra.
This system rewards those who work harder. Does that automatically make it fair?
Do you intend to argue that every single person in our nation at this moment possesses wealth exactly proportional to their personal merits, and not at all based on circumstances outside their control? If not, doesn’t that reality prove that there is room for our system to become more fair than it currently is?
No, of course I cannot argue that our system, or any system involving men and not angels, is as fair as it could be. What I will argue is that capitalism, with all its flaws, is more fair than any system which relies on confiscation of earned wealth for distribution to those who did not earn it.
To paraphrase Churchill, capitalism is the worst system of economics, except for all the other systems; or as he did say “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
So you’re not just against progressive taxes, you’re against all taxes whatsoever? Because it is unfair to redistribute “earned” wealth?
I’d like to observe, first, that this seems to be entirely a moral argument, not a practical one. Even if accepted, your argument does not imply that society as a whole will necessarily be better off under capitalism than some other system. You have argued only that capitalism is RIGHT, not that it is GOOD. I think we should be wary of any arguments saying that we should intentionally inflict suffering on our society for the sake of principles.
Second, I question your definition of “earn”. You seem to take it as a given that income from investments is “earned”. I seem to recall that the IRS describes it explicitly as “unearned”.
Your core idea seems to be that people inherently DESERVE to keep any money they can manage to make. I think that is a highly questionable premise. For example, does that imply that thieves are morally entitled to keep whatever they manage to steal? Why or why not?
(Remember, you can’t say “because it’s illegal”. We’re talking about what the law SHOULD be, not what it IS.)
You almost have my core idea correct – I believe that people inherently DESERVE to keep any money they can manage to make in a mutually consensual relationship. If you give me your money, not under duress but because I give you something of value in return, then I deserve to keep that money.
It is that consent that is one of the reasons I favor a consumption tax over an income or property tax. I consent to the taxation by deciding when and what I will purchase; if I do not wish to pay the tax I do not spend the money. To counter the usual argument about the fairness of it, I do favor exempting food to be consumed off premises, rent/mortgage on one’s primary residence, and clothing under $50 per item.
As to investments being earned, using the IRS definition as gospel is, as you pointed out later, a question of what the law SHOULD be, not what it IS. I most certainly do consider that as earned income, in order to obtain investment income I need to evaluate the quality of the investment, the honesty of the invested, and the extrinsic risks involved, A failure to adequately do so will result in my losing my investment. Having worked on production lines and invested, i claim that it is harder to make money on the latter; the former involves little more than showing up while the latter involves a great deal of thought.
Income from passive investments may have been free back when we had the gold standard. But now that we have persistent inflation, the only way to actually get a positive return without constantly supervising your investments is to take some measure of risk. So income from investment is really compensation for bearing risk. I work in securities analyses. So just trust me when I say that even finding a security that you will not lose money on is actually a lot of very hard work.
When the rich decide that it is no longer worth doing that work (or paying someone else to do that work) of finding good investments, then I will seriously consider the argument that your starting wealth does not affect your income.
Since the stock market has not shut down yet, I assume that the common belief among those with the ability to invest is that it still provides more average income than putting the same amount of personal work towards an ordinary job.
I never said that investing in the stock market does not raise your income. The career of Warren Buffet proves that it is extremely profitable at least in some cases. However, putting your money in the stock market, or any other securities market, is categorically more risky than putting your money in the bank, if only because your stock portfolio is not insured by the government. So investors in the stock market, and all other securities markets, are in part getting paid to take risk. People pay others to alleviate risk for them all the time by buying insurance from corporations. So I think that getting paid to take risks that others are unable or unwilling to take through the securities markets is legitimate.
I never said that using your pre-existing wealth to increase your income was illegitimate.
Nonetheless, people who start out richer are able to make more money from a given amount of effort and talent. There are very good practical reasons why that would be the case, and even why we would WANT that to be the case.
But if left unchecked, the natural outcome is for wealth to become more and more concentrated over time, regardless of individual merit. And I think it is very difficult to argue that that outcome is either equitable or beneficial.
Thus, I see the need for SOME kind of countervailing force that will tend to make wealth LESS concentrated.
The current most-popular option for that seems to be a progressive tax system. The historically most-popular option seems to be to have occasional revolutions. I am open to alternative proposals. (The concept of a universal basic income seems to be gaining some traction.)
I agree with you. I was just trying to point out that it really doesn’t matter if the affluent became affluent by investing pre-existing wealth or by working in more lucrative professions. It still wouldn’t change the fact that money has a declining marginal utility.
A two tier consumption tax would accomplish the same thing, and also encourage savings and investment, which in this country is at an all time low. Tax spending on non-prepared food, rent/mortgage on one’s primary residence, and articles of clothing under $50 per item at a very low rate, perhaps even no tax at all. These are the items which take up most of the budget of the poor. Tax all other spending at a rate sufficient to meet the budget needs of the government.
First, this tax would be simpler to enact and collect, as well as being understandable by all. The need for tax accountants and the IRS would go away. Second, savings and investment would be encouraged, as money not spent is not taxed. Third, it takes the government out of social engineering by tax code, making it more fair to those who live lifestyles not favored by those in power (i.e. renters, investors in non-favored industries, etc.)
Quite an interesting discussion.
I don’t have the space here for a thorough discussion of Marxian/socialist theory, but I do want to point out some controversial assumptions.
First, many of you seem to be operating under the assumption that wealth is objective (i.e. existing outside minds, like rocks and trees), and that capitalism (in its various forms) consists of ways of distributing objective wealth that we can evaluate objectively. I do not believe this assumption of objectivity is warranted. Wealth, at least as we know it today, is — in Marxian theory — a claim against the labor of others, which is a social construction, not an objective thing. I have nothing against social constructions per se, but I think our reasoning about social constructions should be substantively different from our reasoning about objective things.
Second, I want to reiterate a point I made earlier. While Marx certainly had very strong moral beliefs, he tried very hard to base his critique of capitalism not on his moral evaluation, but on capitalism’s own internal contradictions: i.e. he tried to critique capitalism not from the outside but from the inside. Although sadly forgotten by too many socialists, this approach is, in my not all all humble opinion, worth emulating. The point is that capitalism will fall not because it is in some sense “bad” (which it is), but that it will fall when and if its internal contradictions act as a fetter on human productivity and psychological and emotional fulfillment. Similarly, we can say that Roman slavery was “bad”, but the Roman slave system fell not because it was bad, but because of its internal contradictions, and contradictions between the social system and changes in economic technology.
Marx was very nearly right as to the timing (had the leaders of the socialist parties in Western Europe been just a bit more socialist, the First Imperialist War would have ushered in European socialism), but despite his theoretical simplifications, I have seen no evidence that he was substantively wrong about the underlying dynamics.
The point is not what the bourgeoisie or the proletariat “deserve”; the point is that the structure of capitalism entails certain material social forces (i.e. ideas, constraints, incentives in the minds and lives of living people) emerge in any political-economic system, beyond the power of individuals — even the ruling class — to substantially affect, and the struggle between these material forces impels the reconstruction of society in a new form.
From my very limited reading, I suspect that the beginning of the American republic is a fertile ground for exploring the dynamics of class struggle.
Those are all good points. But lets remember that there are serious criticisms of Marxian theory that we should probably address before we start using it as a lens with which to interpret history. For example, it is highly questionable whether or not the labor theory of value or the tendency of the rate of profit to fall are empirically accurate, or even logically compatible with each other. Wikipedia|Marxian Economics|Criticisms
To add to that, I’d like to point out that the farmers were vastly underutilizing their resources: using fractions of their land, and growing inefficient crops that were both less valuable and harder on the land. A more classical view of economics says that if the less effective farmers are allowed to go bankrupt, then they will eventually find jobs that are more useful to the country overall (for example, working for a farmer who uses all of his land for growing flax).
If you would like to discuss the merits of the LTV, I have written extensively on the subject: Labor Theory of Value.
Regardless, neither the LTV nor the falling rate of profit are at all relevant to Marx’s sociological framework of historical materialism and class struggle as at least an important (if not exclusive) mechanism of social change.
Furthermore, it is not necessary to dispute the actual economic efficiency of colonial-era agriculture. The point is not that it could (and probably should) have been transformed; the point is who gets to direct the transformation and, more importantly, who benefits from it; both of which are political issues, not necessarily economic issues.
Point granted. But there is a good reason that the populists were ultimately defeated. They had no plan to either socialize credit, or give private persons the incentive to provide credit. If they had decided to socialize credit, it would have been difficult, or impossible, to get the necessary cash for it, because the several states were cash poor at this time. Barring that, it is not clear how debt-relief is compatible with maintaining the incentive to provide loans. So it is really not clear how they and their ideology could have triumphed.
We may have a terminology issue.
As I use the term, wealth is NOT a social construct. MONEY is a social construct that represents a claim against the labor of others. WEALTH is the combined practical utility of our assets.
If I go into a workshop and build a chair, I now have an objectively real physical object that didn’t exist before, and that object increases my wealth to the extent that I can make practical use of it. It is not necessary that I interact with any other person in this process.
Although we often measure wealth in units of money, I don’t think that implies they are the same (just like we measure the brightness of light bulbs in candlepower, but that doesn’t imply that light bulbs are candles or that they can be turned into candles). If money was wealth, then we could become wealthier simply by printing more money–but we know that won’t work.
Money is actually a technology that we use to organize and track debt. Debt is older than money, and is itself a technology that we use to improve the efficiency of trade. Trade is a technique that aims to create wealth by redistributing assets in a way that increases their utility. (Remember, I said wealth is the utility of our assets, not the assets themselves; the same assets can equate to more or less wealth depending on how much utility we can get out of them.)
When I say that investment creates wealth, I don’t mean it creates money. Investment does NOT create money (it just moves it around), and if it DID create money that wouldn’t be a good thing. But it (hopefully) creates wealth by creating or improving useful assets.
Wealth is a generalization, and therefore it is an abstraction, but it is absolutely NOT a social construct; the individual things it generalizes are objectively real. If I have a hammer, I can do things that I couldn’t do without it. I don’t mean “society agrees that people with hammers should be allowed to take actions that society would otherwise forbid”, I mean that I can effect actual objective changes in my environment that I would be literally incapable of achieving without the hammer. The hammer gives me actual power to reshape my environment. That power does not come from society.
All wealth ultimately derives from similar powers that our assets give us to control our environments. It is a complicated and abstract concept, but it is definitely real, and in at least some cases it can be redistributed.
Which are the most boring types of issues. Substitute “money” for “wealth” if you please, and get on to the substantive issues.
The point is that the distribution of actual stuff is not the crucial issue; the crucial issue is the distribution of economic power. Power does not follow stuff; stuff follows power. You might as well try to understand an internal combustion engine by studying the transmission.
It seems to me that power does follow stuff a lot of the time. The person who controls the widget factory is going to be able to produce the most widgets, right?
Dunno. I’ve never seen an actual widget factory.
However, a common justification for capitalist privilege (since at least Nassau Senior) has been that capitalists consume less then they would otherwise be entitled to.
But most actual wealth in western capitalist societies is not in the form of actual stuff intended for consumption, or even of ownership of the physical means of production (factories, farms, trucks, etc.) but abstract claims against their future productivity.
abstract claims against their future productivity
I almost never see this point being raised, and it’s an important one. Equity investments are valued based on the perceived value of the corporation. Emphasis on “perceived.” (Supply and demand, yes yes, but that’s a function of the perceived value.) And to the extent it even remotely reflects the actual financial value of the corporation, it’s not based on its current assets and liabilities. (Unless the company isn’t really growing any more.) Instead, that “actual financial value” is the present value of the corporation’s expected future earnings. Emphasis on “expected.”
In other words, a company’s stock price isn’t the value of its stuff. It’s based on income that hasn’t even happened yet.
The market capitalization of all the publicly-traded companies in the U.S. is somewhere around 22 trillion dollars, I think. (10/12/2016) Its GDP, in contrast, is about 18 trillion. That’s an excellent indication that the stock market is overvalued, and by a significant amount. In other words, a lot of the wealth out there is based on forecasted values that are much more optimistic than they probably ought to be. And I’d argue it’s been overvalued since the dot-com bust way back in the dim and distant past.
That’s a lot of wealth, in other words, with nothing to back it up other than a fantasy of future productivity that probably won’t happen.
Of course, perception is everything, so as long as people keep thinking that, it’ll be true. Until they don’t.
(we seem to have reached this software’s nesting limit)
Nathan is talking about stock being valued higher than the real assets it represents. I’m not sure I believe his argument about market capitalization vs GDP (it seems plausible to me that an accurate valuation could have a market capitalization higher than GDP; an apple tree could have a value higher than its annual yield because it lives for multiple years). But let me set that aside a moment.
Larry says that most of our modern wealth is not in the form of real assets at all, but “abstract claims against their future productivity”. I’m not entirely sure what that means, and it’s not clear to me that it’s the same thing that Nathan is talking about.
I’d think that stocks represent a (partial) ownership of a collection of real assets–land, factories, warehouses, etc. (Incidentally, some of those assets might be real without being physical–e.g. the value of existing organizational structure and ongoing agreements, which are necessary to smooth running and costly to replace if they are lost.)
The things that you can do with real assets in the future IS the value of those assets, in the ordinary sense (an apple tree has no value at all unless you’re allowed to do things with it at some point). ALL economic value is based on stuff that hasn’t happened yet. That’s not a special category.
If the market capitalization of the stock is higher than the true value of the associated real assets, I would describe that situation by saying that the owners have made an inaccurate estimate of the wealth they control, not that they control wealth of some special abstract type related to future productivity.
The price of your stock isn’t wealth, it’s your expectation of the wealth you’ll be able to acquire in a hypothetical future scenario. If you gaze into your crystal ball and see riches in your future, and then the vision changes and you see poverty, no actual wealth has been created or destroyed; only your expectations have been altered.
If that’s what Larry is talking about, then I’m not sure it’s appropriate to look at your stock price as being any kind of wealth at all. And if he’s talking about something else, then I’m not sure what he’s referring to.
Indeed. I’m not a fan of threaded comments.
The underlying point I’m trying to make is that wealth is a social construct; hence wealth is not physical or objective, but fundamentally political and subjective. And the political depends partly on the perceived subjective legitimacy of the claims on future production and partly on the state’s actual exercise of force (and its own legitimacy) to secure those claims.
To try to turn the discussion back to my original point, the “economic” problems that the Constitution addressed were fundamentally political problems, not technical or “objective” problems. And without much specific deep specific historical information, I speculate on general Marxian principles (and Fed 10) that those political problems were in the form of a class struggle, the struggle between, as Madison says, those with and those without property.
So who exactly were the creditors who were refusing to lend money at this point? Where they mostly professional bankers? I ask because I thought that banks were few and far between in America in the 18th and 19th centuries because they required a charter from their state’s legislature to operate legally.
I believe it was mostly semi-local merchants, but banks (like the Massachusetts First National Bank) also contributed to lending money to farmers.
(Shays’ Rebellion: The making of an agrarian insurrection by David P Szatmary, p.1 – 15)
I’m not really an historian, but I would have presented the issue (relying heavily on Federalist 10, which anticipates themes later found in Lenin’s The State and Revolution) as that the confederated states were experiencing sharp class struggles, and these struggles had to at least be managed more consistently, lest the chaos and conflict allow the British reabsorb the states. And the authors of the Constitution did a creditable job, paving the way for the institutions necessary to manage the emergence of capitalism.
(Anyone who actually reads Marx knows that Marx not entirely ironically praises capitalism in its particular historical situation; Marx believed not that capitalism was intrinsically bad (well, he did, but he tried to keep that out of his published writing), but that capitalism was limited, just as previous forms of economic and political organization were limited, and that social forces would eventually impel us to transcend those limits.)
@Nathan The market capitalization of the stock market and the nation’s GDP are really not directly comparable. Market capitalization is a stock variable. GDP is a flow variable. Market capitalization must ultimately be justified by earnings which must ultimately come from some component of GDP. But the relationship between market capitalization and GDP depends on the discount rates of all the various actors in the stock market, which really cannot be measured with meaningful precision. A better comparison would be the amount of money that passes through the stock market every year V GDP.