Tuesday, 29 November 2016

Fallacies of the Redistributionists

One of the favourite arguments of the redistributionists is that if you tax the rich and give it to the poor then the poor will spend it in their local economy which will get the economy going, rather than what the rich will do, which is "just" invest it or buy luxury goods.

I call these economic half-truths because, as Frederic Bastiat explained in his introduction to Economic Sophisms, "We must confess that our adversaries have a marked advantage over us in the discussion. In very few words they can announce a half-truth; and in order to demonstrate that it is incomplete, we are obliged to have recourse to long and dry dissertations."

It is true that if you take money from the rich and give it to the poor the poor will go into the shops and spend it.  However, people who say that redistributing wealth stimulates the economy have not yet realised that saved money is also money that is being used and is being productive. It could be as an asset in a bank to base loans off of. Once those loans are made the money is no longer in the hands of rich people in the practical sense anyway. It's now in the hands of the business owner, the staff, the suppliers, and then it circulates because those people spend it in their local economy. Therefore all that is happening is a different group of people are now spending the money in their local economy.

The thing is that money is not being raised or created out of thin air. It is already circulating in the economy. It is in capital investments which do improve the regular man's living standard in a more nuanced way. When rich people invest in businesses it allows those businesses to create products and services which contribute to peoples well-being. If those businesses are successful that is a sign they have created something that people want, if they are not the money gets taken away from the investor, which creates a natural tendency for the money to collect with people who are good at investing in companies that create things that people actually want. If the resources are being used to create goods that people buy, how can those same resources be used to make machines and tools?

As a friend explained, many people get befuddled when money is introduced. We can use grain seeds as an analogy for money. You can either eat grain or save it for planting for next years harvest. The more seeds you save the larger your harvest will be the next year. The harvest is symbolic of the abundance of products that capital investments make. If there was very little grain after the harvest the price of that grain would be very high, however if there was much of it it would be sold very cheaply. In accordance with the laws of supply and demand, the more things are produced the cheaper those goods and services become and this, broadly speaking, is what raises living standards. Not so much rising wages, although they contribute, but the fall in the price of goods compared to wages.

Redistribution will not even solve the problem of inequality, despite the claims of the redistributionists to the contrary, because it doesn't address the cause of low incomes, which is that people have a lack of economically valuable skills. People who are highly skilled are often headhunted for jobs and can choose between positions as well as attracting higher salaries. Because their skills are sought after they never have to put up with poor treatment in the workplace if it bothers them. They are more likely to have friendly, supportive bosses, or even become their own boss.

When you redistribute wealth you the people you redistribute it to have not become any more economically productive. They do not have any new skills. Broadly speaking, they are just going to go out and spend the cash in the shops which means it will end up right back in the pockets of the people who have been taxed to redistribute! And not without any harmful effects! It'd be like if a store owner gives a kid $20 and the kid buys $20 worth of product from the store, how has the economy grown?

This is an exercise in taking money from the deep end of the pool and throwing it into the shallow end, while spilling it along the way on government, administrators, bureaucrats and tax collectors - not to mention the lawyers, accountants and lobbyists who have now made lucrative careers in trying to help the rich avoid paying the redistributive taxes. Those people could otherwise be doing more productive work serving the public. The cash is still going to go back where it came from.

The real solution to the problem of income inequality is not bribing those at the top down but bringing those at the bottom up. The best way to do this, sorry to redistributionists, is to make it easy as possible for people to start businesses and hire and fire people. When there are many jobs in the economy workers can easily move from one job into another, which means they are in charge. They can take a job, take advantage of on-the-job training and learn skills, then move on to another job and do the same thing again, until they are so highly skilled that they can get a supervisory position or a management position, or create their own job. That is real class mobility. Well-intention ed interventions in the free market such as minimum wages, occupational licensing, red tape and regulations, patents, labour laws, and countless others, actually make the condition of workers worse over the long term because they have less jobs to choose from - this means they may have to admit poor working conditions and bad management because they can't just walk into another job at any time. Everything the left thinks is good for workers is bad for workers. Even if many of the jobs are bad and poorly paid they still make it difficult for management to treat staff poorly and get away with it, and no one needs stay in those jobs for very long anyway, just to tide them over until they can get something better or until they have mastered the skills and someone else will take them on for more.


  1. One summary: You can give people money and they can buy things although this may have the effect of raising prices on those things. Or, the money can be invested (wisely) and products people want may go down in price meaning the money they already had will go further.