Wealth Distribution

The Premise

Going back to biblical times there have been protests about the concentration of wealth. It thus seems that there must be some underlying reasons why this remains a popular idea. Several arguments can be made in favor of a more equitable distribution of wealth.

Arguments For

  1. The moral argument:
    Many of the major religions condemn the accumulation of wealth. The most obvious example is found in the well-known sayings of Jesus. But many eastern religions expect their true followers to disdain wealth, or in some cases material possessions altogether.
  2. The fairness argument:
    As all people come into the world equally helpless they should ultimately reach at least approximate equality of condition when they mature. People have an innate sense of what is fair as many psychological experiments have demonstrated. The intrinsic sense of fairness requires basic economic equality.
  3. The economic efficiency argument:
    Having a population with gross inequalities of wealth causes economic inefficiencies. For example, if too many people are too poor there will be limited markets for the output of industry and agriculture. This will limit the growth potential of the economy. Some also argue that excessive wealth produces waste as the rich spend there money on items which are economically inefficient. Buying jewelery instead of investing in new enterprises.
  4. The social stability argument:
    When societies get too out of balance social unrest increases. In the most extreme cases this leads to civil disturbance or revolution. This resentment against the wealthy may lead to their death or banishment and the forcible taking of their property. The most popularly cited example is the French revolution, but there are many other cases. Even where the rebellion doesn't succeed the damage to the society may be severe and long lasting.
  5. The democratic argument:
    The concentration of wealth in a small group allows for anti-democratic influence of social policy. The wealthy have the ability to create their own "think tanks" and astro-turf front organizations. These are then used to create the perception that the public is in support of their self-serving objectives. Recent studies have shown how these techniques were used in the repeal of the estate tax debate as well as in the rise of new factions opposing the liberal social policies of the Episcopal church. When such vast amounts of money are under the control of a tiny group the basic mechanisms of democracy are undermined.

Arguments Against

  1. Private property is sacred (or inviolable).
    Society is based upon a person's right to the product of their labors (or their ancestor's labor) and thus the state has no right to take it away.
  2. wealthy people create growth opportunities for society.
    Only those with a large amount of capital can startup or expand new businesses. If they didn't exist the economy would not grow as fast.
  3. wealthy people are the only ones who can support the arts.
    Throughout history it has been the wealthy who have commissioned fine art, musical compositions, museums and other monuments of civilization.
  4. Poor people are lazy (or inferior).
    This argument is a variant of the Calvinist belief that salvation is found through work. Thus those who become wealthy are "blessed" and deserve their rewards. Those who are poor are to blame in some fashion for their position in society and government intervention to alter the balance will only lead to even more lazy people and the eventual breakdown of society.

Redistributing Wealth

Let us assume, for the moment, that the arguments for redistribution are more persuasive than those against. Then how would redistribution be achieved? There seem to be only two avenues. The first is through the appropriation of wealth. This has been done several times in history. Henry VIII seized the wealth of the Catholic church in England and kept part for the treasury and redistributed part to his supporters. During the French revolution much of the wealth of the aristocracy was seized by local authorities or looted by the populace.

The results of such drastic actions are hard to foresee. It may lead to a permanent realignment of power in society, as in England or it may lead to anarchy and the rise of a dictator as in France.

The second approach is via taxation. Once again there is a historical example in Britain. During the 20th Century the government decided that the hereditary landowners had too much wealth. They established a plan whereby the wealth would be transferred over many decades via death duties. As the lord of the manor died off his heirs would have to pay a tax on the value of the estate. This has had the effect of gradually transferring the wealth of the aristocracy to the government. One difficulty has been that, in many cases, the estates are worth so much that the heirs cannot find buyers and they get transferred to the "National Trust". This is the nub of all wealth transfer schemes. In order to tax the wealthy at a rate that forces them to sell part of their assets there must be buyers who can afford to purchase the items. A painting appraised at one million dollars is worth nothing if there are no buyers. Even assets like stocks depend upon a pool of buyers for them to be convertible to cash.

When the wealth of a society gets sufficiently unbalanced it ceases to valuable since there are no people with the resources to purchase it. During the French revolution most of the furniture in the estates was looted and much of it was used for firewood. It had no value in a peasant's home. It didn't fit, wasn't practical, and the decorative detail was useless.

So any plan that is going to shift the balance of wealth has to deal with issues of extracting real value from the accumulations of the wealthy without causing a drop in the marketability of the assets.

Can wealth redistribution take place in the US? The least disruptive approach would be changing the tax code to be more progressive. This could be modifications to the income tax, the restructuring (not elimination) of the estate tax, and imposition of either wealth taxes or consumption taxes. The wealthy can be expected to object to all of these changes. In addition they have the political and economic clout to promote their self interests. A concerted effort by the people can succeed. Recent examples in countries like the Phillipines and Poland show the power the people can have when they join peacefully for a change in the organization of society.

Digressions

The Interest in Wealth Redistribution

In the US there is, currently, little interest in wealth redistribution. The populist impulse that existed around 1900 has not re-emerged around 2000. Many people attribute this to a general satisfaction with their standard of living of the majority of the middle class. In addition there is a wide spread native optimism which makes people feel that they have a good chance of moving up the economic ladder during their lifetime and thus any increased taxation on the wealthy will impact them at some point in the future. The fact that this is not borne out by statistics does not alter people's perceptions. In Europe the middle class is much more aware of the limited mobility within classes and is much more attuned to keeping wealth imbalance within limits.

The Arguments for Unfettered Wealth

  1. Libertarianism
    This has been discussed in numerous places. Most social critics feel that the arguments in favor of private property are just self serving. There is no natural law of private property. It only exists as long as there is a state structure with a robust police function which can maintain the property concept. Many societies do not recognized private property and function successfully. Even in developed countries most don't have as strong a Libertarian sentiment as is found in the US. Many feel that excessive wealth is unbecoming.
  2. Only the rich can create economic growth
    In the US this is contradicted by the history of our country. All the great industries of the 19th and 20th Centuries were created by individuals with no prior wealth. Andrew Carnegie, Henry Ford, Bill Gates, etc. started with essentially nothing and built huge enterprises. On the other hand the children of these entrepreneurs have not been especially noted for doing anything notable. Andrew Carnegie felt so strongly that each generation should make its own way that he left the bulk of his estate to charity. His children had to make their own way. The secret of a successful entrepreneur is his ability to raise capital to expand his enterprise. This is obtained from banks and selling stock and not generally from personal wealth. One doesn't need rich people to build a business. The capital of a bank can be $1000 from one hundred people or $100,000 from one person. The amount available to lend is the same. Wealth does not have to be concentrated to be available for investment. In the developed world much of the available capital comes from pension funds and is thus not provided by the wealthy.
  3. Arts Patronage
    In much of history the wealthy have created the permanent emblems of civilizations: castles and churches are most often cited. They have also been responsible for patronizing the arts and leaving us a legacy of fine art and music. But recently the biggest projects have not been paid for by patrons. The monuments of the 20th Century have increasingly been things like commercial buildings, sports stadiums and public works projects. Whether the movies or popular music of today will be held in the same veneration as the old masters and Beethoven future generations will have to decide. The point is, however, that the arts of today are democratized and not dependent on the wealthy. The only areas which continue the patronage model and are still the domain of the wealthy are opera, classical music and big fine art museums.
  4. Divine Justice
    This is a remnant of the Puritan origins of the US. By this time society should have evolved enough to realize that much of what happens in the world is beyond the control of the individual. Not only are inherited capabilities different, but many people are born into segments of society which handicap their progress up the economic ladder. Blaming the victim is just uncharitable and mean spirited.

Self interest

As is usual in discussions of public policy one can cut through a lot of posturing if one asks the question "who's ox gets gored?" In other words, are those objecting to change going to be negatively affected by the changes. It is obvious that the wealthy and their dependents (apologists, lackeys, and beneficiaries) potentially stand to lose the most. One should thus examine their arguments in this light. Those favoring redistribution are usually the poor so it is clear that they will support any position that potentially gives them more.

Conclusion

History has shown that when societies get too unequal bad things happen. They either become economically inefficient or they become subject to social unrest. In many cases both happen simultaneously. The banana republics of South and Central America are a good example. For hundreds of years a small ruling oligarchy has run things. Things are even pretty good for these people. However, the societies as a whole have not prospered. They have been subject to continual poverty and revolution and much of the development that has taken place is in the hands of foreign investors. The wealth of the few has been maintained at a high cost to the majority.

As new societies arise which are more equal and more efficient, the oligarchical societies will fall ever further behind. The peasant class that kept things going, inefficiently, will no longer be enough. The capital needed for growth will not be present and the expertise needed to deal with modern technology will not be in place. We can see such failed societies in parts of Africa.

We in the US need to decide if we are going to slip into an inefficient oligarchy, risk civil unrest or redirect our resources and wealth into more equitable avenues. No society is perfectly egalitarian, but when we have reached a point where the top one fifth in Manhattan makes $350,000 and the bottom fifth makes $7,000 we are probably near an economic tipping point. How we deal with the coming challenge is up to us.



Moral: A just society is an equitable society, an equitable society is a just society.

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Copyright © 2005-6 Robert D Feinman
Feel free to use the ideas, but the words are mine.