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.

The Death of Castro

The death of Castro requires of me special comment as social media has been awash, over the last couple of days, with celebrations of the man who has presided over a country where doctors are paid $25 a month, teacher $15, and the best paid professions are taxi driver and prostitute. A nation where people need vouchers to buy food.

Some of his champions naively blame the U.S. embargo on Cuba for these conditions but, while the embargo is needless, immoral, and never should have been implemented, this simply belies their basic lack of understanding of economics. Conditions in Cuba are the obvious and necessary consequence of central planning and reflect those consequences of wherever else it has been tried. Cuba can trade with most of the world so it can't simply be the American embargo at fault. What Cuba cannot do is build up the wealth and capital necessary to take their people out of poverty.

But what can you say to someone who loves Big Brother?

My mother visited Cuba early in the year and stopped at a tobacco farm where she learned that those that labour there work like dogs year round, until harvest time when the government takes 70% of their crops, leaving them with the other 30. (How is this not exploitation of the working class to the left?)

This is why Cuba is poor. If you rob people of their efforts you rob them of their dignity and desire to work for those efforts. You can't grow an economy under those conditions, increasing peoples living standards depends on people having the incentive to produce more than they consume.

Other supporters point to Cuba's supposedly renowned healthcare system (which doesn't have the money to provide medicines) and education. On facebook, I quipped, "People celebrating Castro would rather everyone was poor but got free healthcare from the government, than everyone was rich enough to pay for their own healthcare."

In a land where people are not free to attain to their highest potential what little use to them can an education be?

My hopes remain with the Cuban people.

Actually, Darling, Elites Hate Free Markets. Everyone Knows That.

The realm of political action is awash with the view that free markets are the enemy, and that more government controls are the key to bringing about a more just society. Popular is the view that free markets only favour the elite and that only the elite favour free markets.

Never mind the government is already responsible for over 40% of spending, and that 19% of the population is employed in the public sector (in the UK). The state controls the money supply, sets the interest rates, and is responsible for regulating each and every facet of the economy from the provision of energy, to the conditions under which someone can employ another person. There is no part of the society left untouched by the machinations of the state. But it's free markets that the elite want. Free markets.

That is really quite an astonishing statement given the vast majority of the population have not even heard the term libertarianism and cannot distinguish between laissez faire and crony capitalism. Your average person has been given indoctrinated in the false dichotomy of left vs. right paradigm. Indeed for most of my life I believed that because I was against war and for civil liberties I must therefore be on the left and a socialist. The idea that you could be for free markets and for all that other good stuff was never presented to me, and when it was at first I thought it was a contradiction in terms.

If the elites want free markets why don't they just take them? Would the world be as it looks if they did?

Since the elites own the media you'd think they'd be pumping out libertarian propaganda in the news every day - whereas if you ever have actually watched the news you'll hear all the debates start with the premise that - whatever the problem - government should solve it by either doing A, or doing B (sometimes some maverick will suggest C.)

Given the elites control and created the education system you'd think everyone would be indoctrinated in the wonderful virtues of laissez faire, but no, most of the history taught consists of war (caused by government and a lack of free trade - but they won't tell you that) and myths about how the government stepped in to save us from every poor historical condition imaginable. They don't even teach that classic liberalism (the forerunner to libertarianism) was seen as the opposite of conservatism before the 20th century and it was only then that the major debates became between conservatives and fascists on one extreme and socialists and communists in the other extreme.
You'd think they'd want to teach that to everyone if the elites wanted free markets, wouldn't you?

Even economics students do not get taught free market economics but mostly Keynesian and Chicago school which are both statist compromises for the mixed economy. They do learn far-left theories as well though!

Our philosophy simply doesn't get taught. I have a client who recently got in touch and told me she had just looked up libertarianism and was shocked and appalled that despite doing a philosophy degree (which included political philosophy!!!!) she had never even heard of it!
Doesn't sound much like the elite is using their influence, if indeed they want libertarianism.

Almost everyone who does study at uni, regardless of department, will cover Marx and the influence of Marx, of course in some capacity or another. Not his contemporary Baukunin though since he was an anarchist socialist. They only teach pro-government philosophies.

Ludwig von Mises, despite being the greatest economic mind of his time could not find a university post. Everyone has heard of Karl Marx but very few of Carl Menger. Not to mention Bohm-Bawerk, Bastiat or Murray Rothbard.

Why is it that corporations lobby for regulation and to pass laws rather than to remove them?

Elites have and always will oppose free market because they force them to provide value for value like non-elites have to, prohibit them from receiving government contracts and preferential treatment, and because the poor - who have more to gain and less to lose - will always outcompete and undercut decadent elites with more overheads.

The trick is simple, you just convince people that what we have is capitalism and use any criticism of the present system to attack free markets on principle. Most people will not look hard enough to untangle the trail of cause and effect back to the precise government interventions which caused these conditions. But it can be done! That's the purpose of this blog, please stay tuned.


A. S. 27/11/2016

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Economics is Elegant! (not boring)

The Market for Elegance

There is a tendency for intellectuals to believe in big government because it gives their intellect a role in planning society. It’s hard for them to conceive that million of decisions taken by individual actors may outperform their own intelligence or the intelligence of mandated “experts” but in reality it has and always will, and for logical reasons.

Nobel Prize winning economist F. A. Hayek explained that no one has the information to centrally plan an economy – and even if they did, this information is constantly changing in real time. People’s behaviours, values, preferences, ideas, expectations and knowledge change constantly and in unpredictable ways (thankfully so lest we be reduced to a bunch of deterministic automatons!) The information required to plan an economy is distributed amongst us all – and it is expressed in every transaction we make or choose not to make. Every time we decide something is too expensive, every time we buy something that is on sale because we only find it worth the cost at the reduced price. What we choose to buy is about as accurate a representation of what we value as we are likely to devise (apart from perhaps the way we choose to spend our time and attention) because each buy is at the expense of everything and anything else we could choose to buy with the same limited resource. It’s a measure of what we value in our particular circumstances.

It’s the interplay of countless actors trying products and services, rating them, deciding whether or not they want to buy them again, recommending them, cautioning others against them, which enables producers to know – without even talking to the vast majority of their customers – what exactly is desired and what is not. We are constantly giving out signals to producers of what to produce, in what quantity, limiting waste through overproduction and preventing shortages. This leads to approximately the right goods being produced in approximately the right quantities approximately all of the time. It also limits waste as goods that no one wants will not be in production for long, those that have been produced already will fall in price ending up in the bargain bin until someone finds them a home. This accounts for why in planned economies there are always mass shortages of some goods and wasteful overproduction of others.

Of course there will always be some Maverick or hard-headed producers that completely ignore all these signals and just do what they want, (Henry Ford, “If I had asked people what they wanted, they would have said faster horses.”) but they will not be in production for long to waste resources unless they really do know better than their customers. 

This is just evidence that human knowledge is not perfect. Consumers don’t always make the best choices first time – how could they? But they are unlikely to make the same bad purchase a second time. When they do err, the consequences of bad decisions are usually limited to some small number of people. On the other hand, when government policy-makers or central planners step in to make decisions over the entire economy, a poor choice can affect millions.

It’s this idea of one-size-fits-all – the customary approach of government – which is exactly what we need to combat, because it relies on the assumption of perfect knowledge (a priori) on the part of a small qualified number, which can only be gained by the individual experience huge amounts of individuals (a posteriori). Occasionally an inferior product, a VHS, will outperform a superior one, a Betamax, but ultimately DVD will come along and outperform both. The market acts like a sieve for good ideas, leaving bad ones behind.

It’s a wonder that so many fail to grasp the beauty and elegance of this self-correcting system of interdependence.


A. S. 11/2016

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