In the
mainstream media, much ado is often made of the fact that the world’s/a country’s
wealth (the sum of the capitalized market values of all economic assets in the
world/the country) is very unequally ‘distributed’ amongst the world’s/the
country’s population. The first misleading statement featured in my previous
post (http://thinkingabouthumansociety.blogspot.ca/2013/04/misleading-statement-hunter-round-1.html)
is an example of this, and there are many others. Based on this fact of unequal
wealth distribution, calls are often made for a redistribution of such wealth
from richer to poorer members of society. What these redistributionists do not
tend to realize is the fact that, in a market society characterized by a great
degree of exchange and division of labour, most of the wealth owned by others
is used to serve us, in our capacities as the world’s consumers.
The failure
to realize this is, I think, usually based on an incomplete understanding of
the concept of private property. In a legal system where private property
rights are respected, people, technically, indeed do have the right to do
whatever they want with their private property, provided that they do not
aggress against the person or property of others explicitly (through violence
or trespass) or implicitly (through fraud). From this, the redistributionists
usually proceed to claim or imply that owners of private property are just
irresponsible autocrats when it comes to their property, and thus relieving
particularly rich property owners of some of this power would have only
beneficial consequences. When it comes to private ownership of wealth though,
the deeper and more interesting questions to ask are: 1. what will happen to
their wealth if its owners use it irresponsibly? 2. Given this, is it likely
that owners of great wealth will use it irresponsibly?
The answer
to the first question is simple: in a free-market society, if people use their
wealth irresponsibly, they will very soon lose this wealth. A contemporary
illustration of this is provided by the economic fortunes of successful hip-hop
artist M.C. Hammer. Especially with the release of his 1990 album which
featured the very popular ‘U Can’t Touch This’, Hammer was making lots of
money. However, rather than investing this money in ways that would serve the
consumers and that would thus assure him a steady income in addition to the
maintenance of his wealth, Hammer indulged in luxurious consumption. In 1996,
Hammer had amassed a lot of debt and was forced to declare bankruptcy. In
short, because Hammer used most of his money for his own personal consumption
instead of investing it in businesses that would serve others, his wealth
dissipated and he was forced to declare bankruptcy.
The answer
to the second question follows from the first: if, in a free-market society,
wealthy people seek to remain wealthy, they must use their wealth responsibly
by investing it skillfully in ways that will contribute to serving the
consumers. In a free-market society, it will tend to be the relatively thrifty
and business-savvy people that will be able to amass a great fortune in the
first place. It is thus likely that, having worked so hard to amass it, these
people won’t suddenly reverse their character traits and start squandering all
their wealth through luxurious personal consumption, but will rather continue
investing it in order to serve the consumers.
The most
common analogy used to describe the division of wealth in a society is the
division of a pie into slices. Wealthy people have a much bigger slice of the
economic pie than less wealthy people. Given what we have discussed above
though, this analogy is misleading. A pie is a quintessential consumption good:
it is a good that, once it satisfies the relevant human wants and needs that it
was created for (the need for nourishment and the desire for something tasty),
it is gone. The analogy implies that the sole difference between wealthy people
and less wealthy people is that the wealthy people have access to more
luxurious consumption goods, such as yachts, personal helicopters, mansions,
lobster dinners, caviar, etc… while the less wealthy people do not. While very
wealthy people do have access to these goods, and often make use of it, the
vast majority by no means use all, or even a substantial fraction of, their
wealth for their own personal consumption. This is because if they do, as M.C.
Hammer did, they will very soon lose their status as wealthy individuals.
What does it
mean, in a free-market society, to have wealth invested profitably? In order
for resources to be invested, they must first be saved. In order to be invested
profitably, the resources must be used to produce inputs for other businesses
and to sell these inputs to them, or used to produce consumer goods for the
general consuming public and to sell these goods to them. In both cases,
ultimately, the desires of consumers must be predicted and they must be met in
a cost-effective and high quality manner, in order for the investment to be
profitable in a free-market society. Factory owners do not typically use their
wealth to buy factories for the purpose of quietly contemplating the machines,
but in order to ultimately produce for the consumers and sell it to them at
profitable prices, in the face of the competition of other factory owners
seeking to do the same. The same applies to most forms of investment.
What would
be the economic consequences if the redistributionists had their way and a
significant portion of the accumulated wealth of richer individuals was
coercively transferred to poorer individuals? A lot of people with little to no
business or investment experience would suddenly become responsible for the
maintenance and profitable investment of the economic assets transferred to
them. A lot of the responsibility for investing wealth would be transferred
from the careful hands of individuals who have proven themselves to be thrifty,
business-savvy, visionaries into the hands of individuals who have proven no
such thing. In addition to a likely decline in average investment skill behind
the funds invested, it is likely that many of the new owners of the
redistributed wealth will seek to sell their assets and use the proceeds for
consumption purposes. The result would be that the prices of
producers/investment goods would fall relative to the prices of consumers good,
which would then force businesses, if they sought to remain profitable, to
adopt a shorter-term outlook and orient their productive activities more towards
consumption in the present rather than towards investing so that production can
be increased in the future. The result would be a slowing down of capital
accumulation or even capital consumption, something which is in no one’s long-run
interest as it means the economic system as a whole will be able to produce
less. See tip #27 for a discussion of the importance of capital here: http://thinkingabouthumansociety.blogspot.ca/2013/03/how-to-think-about-human-society-tips.html
Thus, next
time that you are inclined to think that the current level of wealth inequality
is appalling and that a redistribution of wealth would be a good idea, remember
that most wealth does not consist of piles of foods sitting in the stashes of fat
cats or of luxurious consumption goods. Rather, most consists of productive
business assets, invested in order to best serve you, in your capacity as a
member of the general consuming public to which all successful businessmen must
ultimately cater, in a free-market society, if they wish to retain their status
as wealthy individuals. The envy that you might feel because wealthy people are
able to enjoy yachts, mansions, and caviar, is a small price to pay to
incentivize these people (if they wish to maintain their luxurious lifestyles)
to invest their wealth in a responsible, consumer-serving manner, which
ultimately makes us all better off.
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