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Apr 10, 2023 05:44 pm

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Economic Myths #14 - Share the Wealth

Clement Attlee is, with little doubt, one of the more notable of Britain’s former Prime Ministers. Apart from the long lasting effects of his legacy he was, in 2004, voted the “Greatest British Prime Minister of the Twentieth Century” in a poll of 139 academics.

Needless to say, with such a high ranking in academic circles, almost every “accomplishment” of the post-war government that he led (with the possible exception of decolonisation) is likely to be an anathema to libertarians. Not only did he nationalise key industries such as the railways, canals, road haulage, coal mining, gas, electricity, telephones and steel manufacturing, he practically created the “cradle-to-grave” welfare state, the jewel in the crown of which was the now untouchable sacred cow, the National Health Service. Furthermore, he successfully entrenched the “Keynesian consensus” – the idea that full employment would be maintained by Keynesian fiscal policy – that was to unite all parties of any stripe for the three decades ending with the election of Margaret Thatcher’s government.

With such profound and fundamental changes to British society, many of which are still felt today, it is important to have an insight into Attlee’s motivations towards the legislation that his government passed.

Attlee’s own background, (not unlike that of most left wing intellectuals) was decidedly non-working class. The son of a solicitor, he was raised in Putney, an area of London populated by the professions. He was educated at an independent school and later read Modern History at University College, Oxford. He was not exactly born with a silver spoon in his mouth but neither was he consigned to a life of working in factories or down the coal pits.

According to Wikipedia, Attlee’s original political leanings were conservative. It was only after he spent three years managing a charitable institution for working class boys in Stepney, East London, that he “came to the view that private charity would never be sufficient to alleviate poverty and that only direct action and income redistribution by the state would have any serious effect”. Thereafter, he became a “full-fledged supporter of socialism”.

With such self-assuredness, can we expect Attlee’s post-war government to have come close to (as the infamous Beveridge Report that influenced his government’s policies put it) “abolishing want”? Unfortunately, the facts speak otherwise:

Coal production in 1947 fell seven million tons below the output of privately owned mines ten years earlier, resulting in a three week industrial power cut in London and the Midlands;
The government constructed 134,000 fewer homes per year at a higher cost per unit than were built in either of the two years preceding the war;
Wages were frozen to wartime levels while the cost of groceries soared as their supply declined;
When US and IMF loans dried up, the costs had to be borne by the British working man, leading to the “taxation and tears” budget of 1949.[1]

And summing up the welfare state:

The [Beveridge] plan merely furnished a thin cushion against total disaster for the most impoverished third of the population. True, every citizen (whether or not he needed it) was entitled to prenatal care, a birth subsidy, hospitalization and medical care of sorts, unemployment insurance, an old-age pension, funeral costs, and an allowance for his widow and dependent orphans. The subsidies and allowances were tiny, and, with mounting inflation, barely sufficed for the poorest – sixteen dollars at birth and eighty dollars for a pauper burial. Medical services were spread so thin that even at the price of nationalizing the existing medical profession, it was impossible to guarantee first-rate care. With food rations hovering near the starvation level, sickness became more frequent and national; production fell still lower. So poverty was not eliminated but increased to plague proportions, and life was a nightmare for everyone but the most dedicated bureaucrats. A man might have “social security,” yet he could not go out and buy a dozen eggs. After four years of Socialist government, he was only entitled to an egg and a half per week, as decreed by Marxist No.1, John Strachey, Fabian Minister of Food and Supply.[2]

The origin of Attlee’s political views betrays his belief in a common economic error, a belief that can clearly have disastrous consequences if its holder happens to one day become the leader of his country.

The view that either private charity or forced redistribution is the solution to poverty is based on the flawed notion that there is a fixed pool of wealth for everyone – that when one person possesses wealth it necessarily results in another person being without it. From this false premise it follows that the alleviation of the poverty of one person requires wealth to be disgorged from another.

The solution to poverty, however, is that wealth is created and not simply redistributed – the pie gets bigger and not just chopped up in a different way. Capitalism and the free market, far from creating haves and have-nots, involves the progressive accumulation of capital that produces more products at cheaper prices that everyone can buy. More factories, more machines, and more tools that produce a greater supply of goods for less and less effort serve to alleviate material poverty. All of us become better off as a result.

If, on the other hand, wealth is to be confiscated from some and redistributed to others, it retards this very process of wealth creation. While a specific redistribution may allow the beneficiaries to afford to purchase a bit more in the short term, in the long run there will be less work, less saving, and less capital investment and accumulation. The number of products produced will fail to increase and thus their prices will remain high and out of the reach of the poor. Redistribution is, therefore, a temporary solution at best. At worst, it traps the people permanently in the stagnant poverty that you are trying to get rid of.

Let us imagine ourselves, for one minute, as employees of the charitable institution of which Attlee was manager. How do we interpret that which we may see every day? From some kind of absolute standard, the poverty and destitution of the slums in the East End of London may have been “terrible” or “bad”. No one would ever seek to deny this.

However, it is important to realise that poverty, fundamentally, is not caused by humans but by nature. The Earth is not, and never has been, the Garden of Eden, full of delicious goodies that are ripe for our picking. The first person who trod the virgin soil of the Earth was in a position of absolute, crippling poverty by our modern standards. All he had was himself and his bare hands – no shelter, no food, no clothes, no tools, absolutely nothing. (Indeed, we might ask, how on Earth would “redistribution” have helped him when there was nothing to distribute!). But from the moment he dug the soil with his hands, from the second he picked up the first plank of wood to build into a shelter, from the day he fashioned a tool from basic materials such as a rock and a stick, so began the long, slow process of capital accumulation and wealth creation, a process that only really began to accelerate in the early 1800s.

Humans, in other words, have to work to overcome the natural state of poverty in order to build up a civilisation as prosperous as the one we have today. To view a snapshot of this process at any one moment in history and to declare, self-righteously, that “those people over there are in poverty!” is to judge this march of progress against an ideal – as if the earth should be the Garden of Eden. The appropriate standard against which to make a judgement, however, is the best that can be done given the eternal condition of scarcity.

If, therefore, one was to cry “something must be done” upon witnessing an “appalling” condition, one ignores the possibility that something is already being done and has currently reached its best possible stage before moving forward to bring greater things. Wealth creation and capital accumulation takes time – we did not get refrigerators and cars the very moment the first person on earth decided to get off his backside and start working. But this process has caused the percentage of people living on one dollar a day to fall from 85% to 20% in two hundred years – and that achievement has been accomplished while the population has multiplied five or six times.

The only way, then, by which we can judge that there is “too much poverty” at any one time is to ask a single question – is there anything that is slowing down or causing an artificially imposed constraint upon the process of wealth creation?

The answer can only be what Franz Oppenheimer referred to as the “political means” for an individual to gain wealth – that, rather than work oneself to use unowned resources, or to trade goods voluntarily with others, one confiscates them violently from people who already own them.

Although we can see that Attlee’s solution – redistribution through the welfare state – is a major part of the “political means”, so too is any restrictive and regulatory encroachment upon private property. In Attlee’s day, we can point to the fact that the decade of his birth, according to historian David Cannadine, marked the peak of aristocratic power and influence in British society. Today, it is the power of the privileged financial barons of Wall Street that benefit from cheap, freshly printed money, robbing the poor of the their purchasing power and ploughing it into fake assets, causing bubbles, malinvestments, booms, busts, unemployment and misery.

If we really want to solve poverty, we should be removing these barriers to wealth creation that favour the privileged elites rather than compounding the entire sorry state of affairs with further economic evils.

Next week’s myth: Unemployment

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Notes

[1] Rose L Martin, Fabian Freeway – Highroad to Socialism in the USA 1884-1966, Western Islands Publishers (1966), Ch. 7.

[2] Ibid., 76.

Wealth Redistribution Charity Poverty Socialism Welfare

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Life and Liberty

Apr 03, 2023 03:32 pm

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Economic Myths #13 - Wealth Inequality and "The 1%"

[First published on Free Life]

The inequality of wealth and income is a frequent bone of contention in the mainstream media. According to The Guardian, 1% of the world’s population will own two-thirds of its wealth by the year 2030. A typical response to this kind of revelation is the following utterance from the Executive Director of Oxfam in 2015:

An explosion of inequality [is] holding back the fight against poverty. Do we really want to live in a world where 1% own more than the rest of us combined?

The mainstream debate over this issue fails to understand the true nature of the problem (although, interestingly, The Guardian article referred to above is unusually far sighted in recognising some of the causes of inequality).

The pro-free market side is wont to point out that such inequality “doesn’t matter” and that governments should not do anything to interfere with the progress of business. The likely call from the opposite side, however, is for increased taxation and redistribution and, indeed, Oxfam itself stressed the need for a greater crackdown on tax avoidance by large, multinational corporations. However, the reality is much more nuanced than the false dichotomy between “pro-business” and “pro-government/anti-poverty”.

On the one hand, we can agree that wealth inequality does not, on its own, create any problems for the generation of wealth and the reduction of poverty. The common attitude towards the rich appears to assume that someone like Warren Buffett or Bill Gates has tens of billions of dollars lying around in a bank account for them to spend and enjoy.

The reality is that these figures represent the value of capital goods – machines, tools, factories and so on – that are invested in producing goods and services that everyone wants to buy. If these resources are in the hands of just a few people – say, “the 1%” – who most accurately devote them to the most urgently desired needs of consumers, then there is nothing economically deleterious with wealth inequality. Indeed, wealth inequality, in this scenario, is exceedingly good as any attempt to reduce it would divert resources into the hands of those less capable of directing them to the ends that people desire, or into the hands of those who would consume them. It is capital investment – more capital invested in more production processes to churn out more products that people need – not taxes and redistribution that solves the plight of poverty.

However, this scenario is conditional upon the crucial aspect that resources must be in the hands of those who are best suited to serving the needs of consumers. In other words, those who are rich must have become so by meeting those needs. Unfortunately, it is patently obvious that the current ownership structure does not reflect the voluntary choices of consumers. Rather, it is the product of crony capitalism, of cheap printed money that is ploughed into malinvestments, and of taxpayer funded bail outs when it all collapses. The growth in wealth inequality is due not to the fact that consumers are voluntarily choosing to place that wealth in the hands of a few select people; it is because the government is throwing cheap money at this tiny elite so they can steal all of the world’s assets.

What, then, is the solution to this problem? Taxation and redistribution would clearly compound the economic evils rather than solve them. And, in any case, in spite of the hullaballoo about tax avoidance, the rich will always be able to influence tax policy to their benefit and to arrange their affairs so as to avoid it as much as possible.

Instead, what is needed is a wholesale withdrawal of the state from either supporting or hindering anyone in the pursuit of gaining wealth. All wealth should be obtained through the voluntary nexus of serving the needs of consumers and everyone should gain their riches through their abilities and not through their political connections.

One interesting question is what might such a world look like? Would it encourage wealth inequality or would such inequality be unlikely?

On the one hand, it is arguable that wealth would still be highly concentrated. Genuine entrepreneurship is a rare talent and is likely to always remain so. On the other hand, however, if that is the case it is also likely that those particular individuals who own the world’s resources will rotate relatively quickly, with the top dogs remaining on the pedestal for only a short time. Indeed one aspect of the current wealth divide that is ignored is whether the same people remain stuck within their wealth/income group or whether there is relatively fluid movement between the different groups.

Successful entrepreneurs make their biggest successes when they are small, nimble and contrarian. Once they have achieved their wealth, however, and their enterprises have morphed into large, multinational companies, they become large, unwieldy, inefficient and complacent. A former rebel becomes a part of the establishment who then becomes vulnerable to the insights of later entrepreneurs.

This can perhaps be illustrated with the technology industry where no, single player has managed to dominate each successive era. Microsoft put a PC into everyone’s home in the 1980s-90s; Google was the number one in internet search; Facebook was on top with social networking; and we are now, seemingly, in a fourth phase where Apple dominates smartphone technology and other hand-held devices. No single outfit has been able to carry through its dominance from one era to the next. Corporate dynasties and everlasting companies controlling everything will certainly not be a feature of a genuinely free market.

Even a stock investor such as Warren Buffett, who has profited from a great many businesses in numerous decades, would be unlikely to achieve the wealth that he has done. Buffett’s mantra of value investing relies upon the price of a stock to fall below the underlying value of the business, and for the price to then reach parity with, or exceed, that value. But the large distortions in stock prices – both up and down – have occurred precisely because of central banks flooding the markets with cheap, freshly printed money that results in excessive booms and busts. It is unlikely that Buffett, in a genuine free market, would have been able to buy and sell at such favourable prices as he was able to do in recent decades.

The same phenomenon also accounts for the wealth of Amazon CEO Jeff Bezos, who currently [2018] occupies the top spot on the list of the world’s richest individuals. As successful as Amazon has been, Bezos is unlikely to have achieved his level of wealth without Amazon having been one of the seemingly over-hyped and over-privileged “FAANG” (Facebook, Amazon, Apple, Netflix, Google) stocks, which have been the main beneficiaries of the artificial, stock market gains since 2008.

Moreover, it is also possible that a free market would serve to make capital ownership more diffuse. As wealth creation ensues and the standard of living rises, ordinary people will find themselves with increasing amounts of disposable income that they may decide to divert into saving rather than increased consumption. Such funds, through savings accounts and the bond market, may form the backbone of investment funds that are ploughed into productive use. Thus, ownership of the claims on the proceeds of production may be more diverse than it is at present.

Either way, however, we can be sure that the resulting structure of production and ownership will be one that best serves the desires of consumers, changing and adapting as the tastes of consumers change. Ultimately, it will always be the everyday folk, through their purchasing habits, who decide on the level of wealth inequality – not the state and central banks handing out favours to their political cronies.

Next week’s myth: Share the Wealth

Inequality Wealth Taxes Redistribution Billionaires

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Life and Liberty

Jan 16, 2023 05:49 pm

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Economic Myths #2: Consumption Boosts Growth

[First published on Free Life]

The belief that economic progress is boosted by consumption is based upon the kind of misunderstanding that could be made only by intellectuals – the product of theorising that is completely detached from the common sense that everyone else possesses.

The misunderstanding is based on a conflation of the desire to consume on the one hand with the act of consumption on the other – or, in other words, it confuses motive with cause.

All economic progress is motivated by the desire to achieve consumption – in other words, to satisfy as many of our ends as possible. Without any desire to consume or to satisfy any ends there would never be any economic activity whatsoever. Thus, the bigger our desire for consumption then the greater will be our efforts to speed up economic progress.

However, economic progress is not caused, or brought into being, by the act of consumption. Rather, the act of consumption is the result of economic progress (i.e. of increased production). Actually consuming is what we to do in order to reward ourselves once we have produced something – it is not what we do in order to start production in the first place. Indeed, as is so often the case with realities that are hidden by myths, this truth is intuitive – you cannot consume a good unless it has first been brought into existence by production.

At any one moment in time there is an array of produced goods available to us. Each of us faces a basic choice as to what to do with these goods – consume them now, or turn them into productive capital goods that will yield a greater output of consumption goods in the future. The latter is the path to economic progress. If, however, we choose the first path – consumption – all we do is reduce the number of goods available to us and we are left with less. We may have achieved immediate satisfaction but we now have fewer resources left with which to produce more in the future.

For example, if I burn a log of wood to keep warm I cannot then use that log to build a fishing boat later on. Rather that log is gone forever and I will now have to labour in order to search for fresh building materials if I am to make good this loss. A farmer who decides to eat the seeds for crops in the spring will then have nothing to sow come harvest time, and will be left with barren and empty fields rather than lush acres full of wheat. Beyond the point of providing nourishment and sustenance to the human body the act of consuming of these goods will not provide any economic progress.

Consumption, for the most part, is the destruction of what we have. Economic progress is the transformation of what we have into something that will produce more for us in the future. If we choose the second option – that of turning our goods into productive resources – rather than destroying the resources available to us we will invest them in productive enterprises that raises the yield of consumer goods in the future.

The key to promoting economic progress, therefore, is not to encourage the act of consumption, which equates with an act of destruction. Rather it is to encourage production and a direction of a greater proportion of our resources available today towards saving and investment so that we may consume more in the future.

This is particularly important following a bust that results from a boom or bubble inflated by credit expansion. With so many malinvestments left starved of resources the best thing we can do to minimise the pain is to increase the proportion of saving and investing so that at least some of the doomed projects may realise a degree of viability. Instead our economic lords and masters misdiagnose the problem as a “lack of demand” and encourage us to borrow, spend and consume which only exacerbates the losses experienced by those projects that were started in the boom.

Nothing that has been said here should be taken as a condemnation of consumption or an exaltation of saving and investment. We all have to consume in order to live and it is ultimately up to the individual how much he desires to consume and how much he desires to save. However, once one has made the choice to achieve more wealth then this must begin with production, saving, and sound investment which is rewarded by greater consumption later on. Consumption will never lead to growth, and it is important for Austro-libertarians to point out this grave fallacy.

Next week’s myth: “We Need More Jobs!”

Consumption Spending Economicgrowth Wealth Investment Saving

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Economic Myths #14 - Share the Wealth

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