Monday 20 April 2009
Inequality is one of the left's pet obsessions. Every election time some half-witted or just plain cynical politician starts screaming about making the rich pay their fair share. They do this without actually defining the rich. This approach allows even plutocratic class-war Democrats (One only has to think of John Kerry, Warren Buffett, George Soros, Herbert and Marion Sandler, Pelosi, Peter Lewis and Teddy Kennedy) to rhetorically hammer those whose assets are vastly smaller than their own.
But what is this obsession with inequality, the intensity of which is becoming pathological under Obama? Nearly every journalist I have ever met seems to think there is something unjust about the 'distribution' of wealth and income. Younger journalists are positively outraged at the 'social injustice' of it all. Invariably these journalists received their so-called ideas about the inequality of incomes from their university lecturers. The exceptions are usually the offspring of left-wing middle class intellectuals (most of whom are paid out of taxes) whose real objection to wealth and high incomes, i.e. any income greater than theirs, is that they flow to the wrong people.
This is not to say that everyone who subscribes to what is euphemistically called redistribution is driven by base instincts. Some distributionists are motivated by what they think is a sense of 'social justice'. To these folk there is something genuinely unjust about some people earning vastly more than others or even, perhaps, inheriting huge fortunes. The striking thing about distributionists is that there is absolutely no intellectual substance to their beliefs. Every distributionist should, as a matter of course, be asked three questions:
1. What is unjust about the present pattern of earnings and wealth?
2. What is a just distribution of incomes?
3. By what manner of reasoning did you reach your conclusions?
I have never been given an answer to any of these questions. It should be obvious, even to a left-wing intellectual, that in a free market most incomes are earned, including income from interest. Brookes has always insisted on stressing the point that there is a tendency for labour to receive the full value of its marginal product. The implication being that income and production are the obverse of each other. This leads to the logical conclusion that there is no distribution of incomes in a free market in the sense that it is used by left-wingers — there is only production.
Surely this cannot apply to profits, our distributionists assert, and they would be right for a change — but for the wrong reasons. Profits are not earnings or rewards of any kind. Profits (and losses) are the product of maladjustments between supply and demand. Entrepreneurs act to eliminate the maladjustments by reaping profits, attracting other entrepreneurs whose actions compete away the profits. Attacking profits, usually through various taxes, in the cause of social justice and equality lowers entrepreneurial incomes — it also lowers general incomes by distorting production. This is something that ideologically-driven distributionists choose to ignore. In their eyes it is a price the poor should be prepared to pay if they are to have social justice.
Firms sometimes bring in a specialist to improve performance at enormous fees, sometime in the millions. No person is worth a million dollars, assert distributionists — unless it is Jane Fonda, Barbra Streisland, Bruce Springsteen, George Clooney, etc. They are quite wrong. Some years ago when Gucci was going to the wall, along with its suppliers and employees, it brought in Domenico De Sole. He turned the company round and raised its annual sales to $780 million. As expected he was handsomely rewarded. But what did De Sole sell Gucci? The answer is superior decision-making ability. This ability saved the company and a lot of jobs. The cost of his services were greatly outweighed by their value to Gucci and it employees.
But what about the huge bonuses that the Wall Street houses and the banks paid, surely they cannot be the result of decision-making ability? What can I say, other than the critics are probably right about most of these payments. But what is overlooked is virtually all of them occurred in the financial sector. One rarely, if ever, hears of such payments in manufacturing or retailing. In fact, it's worth noting that as these payments were being made manufacturing was undergoing — and still is — a severe squeeze. So how did this situation come about? Simon Johnson noted:
From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. (Someone tell Obama: Americans did not cause the financial crisis, the world's central banks did)
The period under question is one marked by rapid monetary expansion. In other words, monetary mismanagement created enormous financial imbalances one of the symptoms of which is bloated bonuses and salaries in the financial sector. This phenomenon becomes particularly pronounced during an specially rapid monetary growth because it is then that asset values become greatly inflated along with profits.
It should be noted, but rarely is, that exchange in a free market is based on voluntary transactions. If the so-called distribution of incomes is unjust then the exchanges that brought about the distribution must also be unjust. But how can this be so if these exchanges were voluntarily entered into? This question is, unfortunately, rarely asked. I have asked it more times than I care to recall and I have yet to receive an intelligible answer.
Given free market conditions it is meaningless to ask anyone to exercise income restraint. If a company is prepared to offer me $1000,000 a year I am at loss to understand why I should refuse because some unionists cannot earn, let us say, more than $600 a week. Yet this is what union leaders and their media supporters argue. To the narrow-minded such a "situation is totally inequitable".
Union leaders and lefty politicians contend that if workers are asked to exercise restraint so should executives. But this is a fallacious argument. It is not workers that politicians plead with to exercise restraint but union apparatchiks. In other words, they are not saying that workers should not command as high a wage as the market will pay, but that unioncrats should not use union muscle to price people out of work by raising labour costs above their market clearing values. When I hear left-wing ideologues prattle on about equality, social justice and the rest of the left's ideological baggage, I recall what Keynes wrote on the matter. (In fact, one of the few things he wrote that I agree with):
There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. [Italics added]. It is better that a man should tyrannise over his bank balance than over his fellow-citizens. (John Maynard Keynes, The General Theory of Employment Interest and Money, Macmillan-St. Martin’s Press, p. 374).
Nevertheless there is just one small problem with Keynes' opinion. What happens when a man with all the instincts of a dictator reaches the point where his bank balance is so large that it can tyrannise over itself? The likes of Lewis. Soros and the Sandlers. for instance, spring to mind.
On a final note, one needs to focus on the fact that the Obamas of this world direct their attacks against incomes but not wealth. If Obama were serious he would propose a very hefty wealth tax accompanied by a maximum amount of wealth than an individual should be allowed to accumulate. But if he were to do this how many of his billionaire mates do you think would still hang around?
Is it pure coincidence that these plutocrats (and I use the term plutocrat in the most unflattering way) support higher income taxes because these would in fact amount to a tax on accumulating capital, without which one cannot get wealthy? Filthy rich Democrats have got their pile — which they have safely secured — and now they are going to do their damnedest to make sure their fellow Americans will not be able to do likewise. And Obama and the rest of Congressional Democrats are going to do everything they can to accommodate them.
Gerard Jackson is Brookesnews' economics editor