Saturday, January 28, 2012

Redistribution is required

Remember playing monopoly- how the rich get richer, and then the game ends?

Remember Monopoly? How one person with either luck or foresight bought all the railroads, milked the other players, and, towards the end, extended loans or gifts to keep their fun going a few more rounds? The end, however, was always the same- the game died because its mini economic system could not keep going if one person has all the money.

This seems an apt portrayal of our current economic seizure. An economy depends on the continual flow of money around, from one person's pocket to another's, and around again. The last two decades of rising income and wealth inequality meant that the mass of people have less money to spend, (and much of that money illusory, being debt), and the wealthy more. Since the wealthy tend to save their money, particularly as future prospects dim, we have the basic conditions for an economic heart attack- reduced circulation of money, and an even greater entrenching of the wealth divide.

Left to its own devices, and as we have seen over the last couple of decades, laissez-faire concentrates wealth upwards. A zealous and amoral focus on the rights of property and the fruits of economic success, however gained (think Bain) lead to a winner-take all system. Coupled with a political system beholden to money, it generates a spiral of entrenched interests and corruption. Only very rare crises of labor shortage (historically due to plagues) have historically reversed this flow within laissez-faire rules. The ultimate example is Rome, where the Senatorial class had massive land holdings, armies of slaves, and eventually exempted itself from any public duties, starving Rome of resources. It was a system that, for all its glories, was far less prosperous than our own, prone to revolt and ultimately, to rot.

What does laissez-faire accomplish by its concentration of wealth? For one, it forms the basic motivation to work..  whether to become wealthy or to keep body and soul together. For another, it is thought to put money into the hands of those best able to invest it productively (the vaunted "job creators" of GOP parlance).

Are those who have made a mint in our economic system the best investors for our common future prosperity? I think that logic has a few holes in it. Firstly, many of the wealthy are inheritors of wealth, and have no more economic accumen than a squirrel. I have proposed making the inheritance tax 100% to address this problem. Second, much wealth has been gained in the most amoral and unethical venues, (cf. Wall Street, board rooms elsewhere, and again Bain), full of self-dealing and cronyism. This hardly creates the forward-thinking, entrepreneurial venture creation and especially technical innovation we need to encourage.

And what are the harms of this concentration? Economically, as alluded to above, the wealthy may just sit on their hands and not invest their money, in which case the whole system grinds to a halt. On the other end, are the poor enlightened by their poverty, or have their character improved? Does this Darwinian system make them less likely to reproduce, in deference to their more successful betters? No, and no again. The immiseration of the mass of people serves no purpose beyond motivating them to engage in work- a point which we are obviously far, far, beyond. And of course keeping people persistently unemployed- the fruit we are currently harvesting from financial instability and unequality- is the exact opposite of what the whole mechanism was supposed to accomplish, which is employing everyone's talents to the best effect and for the general prosperity.

Politically, economic concentration leads to the very opposite of public good, as entrenched interests, (exemplified currently by the fossil fuel and financial industries, among many others), turn their wealth into corruption, buying legislators, elections, indeed burrowing into our very minds via the corporatized media.

So a modern economy needs some mechanism to counteract the natural course of laissez-faire. As a result, we engage in all the mechanisms of taxation, regulation, and redistrubution that now exist, from income taxes to welfare, Social Security, the military-industrial complex, and unemployment benefits. While the GOP harp about how evil these programs are and how they need to be "privatized", i.e. terminated, the last decades of rising inequality and, finally, economic breakdown, clearly show that stronger methods of redistribution are needed.

History provides countless mechanisms of economic redistribution, from the systematic to the catastrophic:
  • Extended families
  • Public works
  • Philanthropy
  • Circuses, staple food distribution
  • Educational programs
  • Dissollute gambling by the rich
  • Taxation
  • Old age pensions
  • Inheritance taxes, divided estates
  • Inflation, devaluation
  • Begging, alms, charities
  • Church donations, tithes
  • Markets and trade
  • Debt cancellation
  • Corruption, patronage
  • Land reform
  • Expropriation
  • Robbery, crime
  • War, plunder
  • Revolution

So the idea that "redistribution" is somehow inherently wrong couldn't be more misguided. It is why we have a society and culture in the first place. Better to arrange it systematically and productively than anarchically, but somehow, some way, a society's resources need to be and will be distributed to all members in some degree, by some method. The problem is really how to make flows of money through the economy optimally stable and equitable, while maintaining incentives that generate the original productivity.

The goals should be fairness, uniformity, legitimacy, and effectiveness. Markets have many of these characteristics, especially broad effectiveness, though we shouldn't kid ourselves that any market is truly "free". All are afflicted with unequal information, power, and other problems requiring ongoing regulation by entities superior to the market.

These desired attributes are present with a great deal more justice and redistributive power in a well-run democratic government and its universal programs of taxation, pensions, education, etc. These are far more fair and effective than relying on charity, gambling, crime, luxury spending, philanthropy, or other such miscellaneous methods of redistribution. They are also more macroeconomically useful, i.e. adjustable on a very large scale. When it comes to problems of common action, which describes this issue of regulating and counterbalancing the laissez-faire system, government is not only not the problem, it is the only solution, though dependent on its institutional quality.

Thus our moment of economic crisis, while temporarily strengthening the very forces that caused it, demands a conscious, long-term, and organized corrective response. Responses like taxation that is actually progressive in practice, not just in principle, strong estate taxation, increased outlays for education, a sustainable energy future, and a job guarantee for everyone willing to work.

Image of Andrew Jackson, the first president to do serious battle with the emerging corporate monster, here in the form of the specially chartered Second Bank of the United States, which he destroyed. "Biddle, thou monster, Avaunt!"

  • Martin Wolf on the critical and rising importance of public goods.
  • Martin Wolf gives his succinct economic prescriptions.
  • On the foolishness of low capital gains taxes.
  • More on the shady money behind Bain.
  • The status of the "corporations are people" movement.
  • Speaking of fights against the evil empire, an endlessly funny / loving homage to Star Wars.
  • Apple uses on quasi-slave labor in China.
  • At the same time, it doesn't care very much about its investors, either.
  • Leakers get screwed. Killers and torturers, not so much.
  • Warren Buffet as an object lesson in MMT economics.
  • Economic quote of the week, by Winston Churchill, via Bill Mitchell
"I should like to see the State embark on various novel and adventurous experiments … I am of opinion that the State should increasingly assume the position of the reserve employer of labour. I am very sorry we have not got the railways of this country in our hands."


  1. You didn't mention demurrage:

    This was common in the middle ages:

  2. Thanks, Oyvind, that is a fascinating topic. I really don't get the drift of "abundance-based" money rather than scarcity-based.. all the forms bandied about here are scarcity-based in practice. But the community basis is very positive indeed- like a private Craigslist with only good people, more or less.

  3. Another reason that redistribution is important is that "stuff" is getting cheaper and cheaper to produce/replicate, which also concentrates wealth (fewer workers are needed to make stuff). Digital replication is the extreme example, but robotics and AI advances extend the "employees are optional" crisis into physical production as well.

  4. Hi, JD-

    That is a great post. Not everything we need and do is market-based. So you could see automation and digitalization as removing a need from the rivalrous private market model to some other model like a public utility or public good. Or an external condition, like the air we breathe. This type of evolution is something we need to be more conscious of.

    For instance, if we companies like microsoft turn into effective monopolies through natural (or unnatual) network effects, then we may want to logically turn them into regulated public utilities.

    Classical economics holds that human desires are effectively limitless, but the distribution of the means to pay for those desires is scarce and unequal. So as you say, if large swaths of what used to be income-producing (redistributive) activities are lost, we need a solution, like either waiting for the rich to come up with some other need they are willing to lay down their money for, (pet pedicures?). Or instituting some more rational mechanism to turn those resources into something useful, like public goods. The Wolf essay was especially good on what is needed.

    Also, the fact that some activities are taken entirely out of market models is not all bad. Far too much of our lives have been sucked into the vortex of the "free" market, like child care, old age care, gardening, house cleaning, legal costs, corruption, lobbying, etc. GDP keeps going up, not all for good reasons.

  5. Agreed! I would add incarceration to your list of things that have been sucked into the free market, but shouldn't be there. Great article in the current New Yorker on this topic: