The Ill Gotten Gains Problem

           One thing that statists (opponents of the free-market, supporters of relatively extensive government intervention) typically are eager to deny is that rich people have earned/deserve their money. This is because libertarian defences of the right of rich people to collect and keep their fortunes assumes that the riches in question were earned by serving society’s consumers (everyone, for all intents and purposes). The more effective one has served the consumers, the more money one makes. A problem that arises when examining the fortunes of current rich people in the real world where a pure free-market order is not in operation is that a lesser or greater part of many of these fortunes were acquired through political privileges, not purely on consumer-serving ability.

            

           Most libertarians do not deny this fact; some even emphasize it in order to show how government interventions in the free-market order allow certain politically well-connected businessmen to gain at the expense of less well-connected businessmen and consumers. Many statists seize on this fact too though, and try to use it to make an argument that goes something like this: ‘Rich people have only acquired their fortunes through graft, political privileges, and other sorts of villainy. Also, even if they seem honest now, the only reason why they were able to amass their fortune was through the nefarious deeds of their ancestors, who robbed the land and possessions of poor people in the past. As such, when we propose that the rich pay a higher percentage of their income as tax, we only intend for society to take back what these rich scoundrels and their ancestors have taken out of society to begin with. Thus, our taxation policy is in accordance with justice.”

            

           There are several serious problems with this argument, which the majority of this post will be focused on exposing. First, while some fortunes have been acquired primarily through political privileges and other anti-social means, to assert that this is so for all fortunes is extravagant and inaccurate. The best way to think about this is to abstract away from the real world and its complications for a moment and think in terms of ideal-types. This is what the libertarian writer Ayn Rand does in her famous, controversial novel/philosophical dialogue, Atlas Shrugged. In it, the two main protagonists are Dagny Taggart, an efficient, competent, and energetic female rail-road executive, and Hank Rearden, a man who started small and rose to own the most successful steel company in the world and even invented a new, superior kind of industrial metal alloy. Both of them are intent upon accumulating money, but they are intent on earning it through making their respective products the best they possibly can be, and then selling them on the open market to willing buyers. Both of them despise political gamesmanship, do not seek any political privileges for their businesses, and despise those who receive such privileges. On the other hand, two of the antagonists in the novel are James Taggart, Dagny’s Brother, and Orren Boyle, Hank’s competitor in the steel industry. They are not very efficient or competent businessmen, but they have good connections in Washington, which allows them to get special privileges for their respective businesses. They despise Dagny and Hank for being selfish, materialistic, and overly competitive.

           

           With these ideal-types in place, Rand can then comment, without contradiction, on the respective value systems and societal worth of the protagonists and the antagonists. According to Rand, Dagny and Hank deserve their money and their success because they achieved it by making a product which advanced the well-being of their customers, while James and Orren do not because they achieved it through mulcting the consumers and their more efficient competitors. When libertarians and free-market advocates praise rich people as having contributed a lot to society, they are referring to those like Dagny and Hank, not those like James and Orren who would not have made any money in a truly free-market order, they only made it through subverting that order for their own narrow, short-term benefits. When examining the income of current rich people in the real world, more often than not it represents a combination of the tactics of the ‘good’ businessmen, mixed with the tactics of the ‘bad’ businessmen. While this will affect most libertarians’ evaluation of individual businessmen, isolating the two methods of making money shows that it is possible that, with the right institutional conditions, the people receiving high incomes will have earned those high incomes by serving the consumers of society.

Empirically, there is a significant qualitative difference between how the rich in the pre-industrial era made their money and how the rich in the industrial era did. The populace was rarely benefited,  and often hurt by, the activities of rich medieval noblemen, who acquired their wealth largely through political privileges and violence. On the other hand, the consumers of an industrial society certainly receive important benefits from at least a significant chunk of the activities of the rich owners of corporations who cater to the needs of the masses, corporations such as Subway, Wall Mart, The Gap, and many more. While income gained through political privileges and violence still exists, and grows the more important government intervention becomes in an economic order, certainly a significantly greater proportion of the income accruing to rich people at present was gained through serving the consumers efficiently than was the case before the industrial era. Ignoring the distinction between the two methods of earning money and just calling all of the rich ‘scoundrels’ and their income ‘unearned’ is overly-simplistic and represents an inability to think abstractly and mentally isolate the various different phenomena that are all operating in the real world and which must, for clarity’s sake, be considered separately.

               

           Even if we were to unrealistically assume that a large proportion of most fortunes today were solely due to political privileges rather than due to serving the consumers efficiently, the conclusion to tax the wealthy more still does not follow. What is the point of having the government give the politically privileged rich subsidies with one hand and take away the same amount in additional taxes with the other? Even if we could do the impossible, and determine the exact amount of extra dollars that the political privilege allowed certain rich people to make, and then tax them the exact same amount extra, there is still no point. In reality, these determinations are not attempted, with ‘rich’ people above a certain income level all paying the same extra taxes, no matter how relevant political privileges were in the making of their income.

            

           Having dealt with the current income of rich people, let us now look at the foundation of their wealth: land and capital holdings accumulated and passed down by ancestors. It is true that, if we look at the history of most parcels of land in the world, we will find that at some point or other, probably multiple times, they were taken from what should have been their rightful owner by an expropriator, who claimed it as his own by force. Does this mean that we should consider the current private ownership of every parcel of land and natural resource as we do a recently stolen car, that is, as illegitimate? The answer should be a resounding ‘No’. Anglo-Saxon Common Law has a statute of limitations for such claims to ‘stolen’ property or broken contracts for a very good reason. A private property society cannot function if people’s rights to own certain pieces of property are constantly called into question by the almost inevitable discovery that acts of expropriation had occurred with regards to that property, somewhere in the mists of history. Just as people won’t be as incentivized to improve their property and accumulate capital if they fear being expropriated by a government, they also won’t be as incentivized to improve their property and accumulate capital if they fear their property being taken by the heir of some obscure medieval peasant family who finally found evidence to prove that that land had once rightfully belonged to his family.

           

           Besides this, in a rapidly progressing commercial/industrial economy with free-market institutions, wealth and property are constantly changing hands, tending to go towards those best able to serve the consumers. Someone who acquires or inherits money must invest it in those lines and businesses which he expects will best be able to serve the consumers in order to make an income and avoid slowly dissipating his capital through consumption. Someone who acquires or inherits land must maintain the site and make sure that it is used in the ways which will best serve the consumers if he hopes to get a money-income from that land and not just use it for self-sufficient production. Those that fail in these tasks will dissipate their capital and may have to sell their land for cash. A good example of these phenomena occurred in England. In the Medieval and Early Modern periods, most of the land in England was 'owned' by noble families, who had acquired it through violence or as a political privilege. With the rise of a commercial/industrial society in England though, if the nobles wanted to enjoy a high standard of living for the time period, they had two options: they could continue despising business and just dissipate their capital and sell their lands in order to continue consuming at a high level, or they could adopt the ways of capitalistic business and try to keep a steady income flowing from their money capital and land holdings. One can find examples of both strategies in English history. In either case though, over the course of the nineteenth century especially, the importance of the large noble landowner as a privileged economic caste diminished significantly. Without any major governmental policies of land reform/redistribution, capital and land naturally flowed to those better able to use it to serve the consumers and do well in the new industrial market economy. All this is to say that in a free-market, industrial economy, the economic significance of a past act of expropriation gradually, and sometimes quickly, loses its importance, as the expropriator or descendants of the expropriator must learn to serve the consumers in a free-market order if they wish to maintain their standard of living and level of wealth.

            

           These points should be enough to dispose of the statist argument presented at the beginning of this post. There remains the question though: after what period of time do we let bygones be bygones, and under what circumstances should property be returned to its former owner who was expropriated? It should go without saying that, as with any legal charge in a civilized legal system, any person accused of illegitimately holding stolen property should be assumed to be innocent unless proven guilty. The burden of proof would be on the plaintiff to produce documents proving that the property in question had been stolen in the past. It should also go without saying that ‘evidence’ based on ‘historical traditions passed down orally’ should not be accepted in a court of law, no matter what the most esteemed courts in Canada dealing with aboriginal issues claim.

            

           That said, if it can be sufficiently proven that the property in question was stolen in the past, the response should depend upon the nature of the property and what was done with it in the period since it was stolen, and on the length of time that has elapsed since it was stolen. For instance, a situation in which the land should probably be returned to its rightful owner is in cases of remnants of feudal land relations that can still be found in places such as Southeast Asia and Latin America. A feudal land relation is when a 'landlord' claims to own a vast swath of territory through the use and threat of force, but allows his ‘tenants’ to work the land and carry on their business, as long as they give the lord a cut. Rectifying the issue of the illegitimate land ownership of the feudal lord is relatively simple: just give the land to the people who are currently living on it/using it for their economic activities, and take the feudal lord out of the picture. I should emphasize that the foregoing is not an indictment of every landlord who rents his land to tenants, far from it. It is only the case of feudalism where the landlord clearly obtained title through expropriation or by purchasing it from an expropriator and is not really contributing anything positive to the lives of his tenants. If history were changed and feudal lords had never appeared on the scenes, the peasants and townsmen just would have owned the plots of land they were using themselves and little else would have changed. This is not the case, for instance, in an urban apartment building where a landlord owns the building and charges the tenants rent to live in the rooms. If a landlord or the person he purchased it from had not built the apartment, there would not have been an apartment for the tenants to live in.

Besides the feudal situation, most historical grievances related to land ownership should probably be forgotten about, unless the expropriation was fairly recent. This is because any inheritors of the expropriator’s land or people that he had sold the land to would not have been the ones to commit the crime themselves and would have assumed, probably quite reasonably, that the land was theirs to own legitimately and that they should go about improving the land. To grab back the land, at that point, and give the improved land to the descendants of the person who had been expropriated in the past does not seem fair, and as mentioned earlier, it would undermine the security of property rights necessary for a prosperous private property society to function and progress economically by diminishing incentives to improve land.

            

           That being said, there should be some measures, for land and for movable goods, to ensure that criminals don’t benefit from their crime. If a car thief steals a car and immediately sells it to an unknowing car dealership, the car should still be returned to the victim and it should be up to the car dealership to try to ensure that the thief pays them back somehow, and hopefully in the future be more careful about what property they buy. Similarly, if a bandit gang drives the rightful owners off a piece of land and then sells it to a corporation, as long as the suit is brought relatively quickly before the corporation invests tons of capital into the land, the land should be returned to its rightful owners.

            

           Thus, such is the ill gotten gains problem and such is what it does and does not imply, and what should and should not be done about it. It is an issue that should not be ignored, but nor should it be blown out of all proportions and used to justify expropriating wealthy people, leading the way to a system where ill gotten gains become more and more important along with the influence of politics in the economic sphere, that is: socialism and interventionism. Rather, we should seek to institute a set of institutional arrangements where ill gotten gains gradually become less and less important, that is, free-market capitalism.