Friday, September 16, 2005


wealth redistribution

Wealth Distribution

The Premise

Going back to biblical times there have been protests about the
concentration of wealth. It thus seems that there must be some
underlying reasons why this remains a popular idea. Several
arguments can be made in favor of a more equitable distribution
of wealth.

Arguments For

  1. The moral argument:
    Many of the major religions condemn the accumulation
    of wealth. The most obvious example is found in the well-known
    sayings of Jesus. But many eastern religions expect their true
    followers to disdain wealth, or in some cases material
    possessions altogether.

  2. The fairness argument:
    As all people come into the world equally helpless
    they should ultimately reach at least approximate equality of
    condition when they mature. People have an innate sense of what
    is fair as many psychological experiments have demonstrated. The
    intrinsic sense of fairness requires basic economic

  3. The economic efficiency argument:
    Having a population with gross inequalities of wealth
    causes economic efficiencies. For example, if too many people are
    too poor there will be limited markets for the output of industry
    and agriculture. This will limit the growth potential of the
    economy. Some also argue that excessive wealth produces waste as
    the rich spend there money on items which are economically
    inefficient. Buying jewelery instead of investing in new

  4. The social stability argument:
    When societies get too out of balance social unrest
    increases. In the most extreme cases this leads to civil
    disturbance or revolution. This resentment against the wealthy
    may lead to their death or banishment and the forcible taking of
    their property. The most popularly cited example is the French
    revolution, but there are many other cases. Even where the
    rebellion doesn't succeed the damage to the society may be severe
    and long lasting.

Arguments Against

  1. Private property is sacred (or inviolable).
    Society is based upon a person's right to the product
    of their labors (or their ancestor's labor) and thus the state
    has no right to take it away.

  2. wealthy people create growth opportunities for society.
    Only those with a large amount of capital can startup
    or expand new businesses. If they didn't exist the economy would
    not grow as fast.

  3. wealthy people are the only ones who can support the arts.
    Throughout history it has been the wealthy who have
    commissioned fine art, musical compositions, museums and other
    monuments of civilization.

  4. Poor people are lazy (or inferior).
    This argument is a variant of the Calvinist belief
    that salvation is found through work. Thus those who become
    wealthy are "blessed" and deserve their rewards. Those who are
    poor are to blame in some fashion for their position in society
    and government intervention to alter the balance will only lead
    to even more lazy people and the eventual breakdown of

Redistributing Wealth

Let us assume, for the moment, that the arguments for
redistribution are more persuasive than those against. Then how
would redistribution be achieved? There seem to be only two
avenues. The first is through the appropriation of wealth. This
has been done several times in history. Henry VIII seized the
wealth of the Catholic church in England and kept part for the
treasury and redistributed part to his supporters. During the
French revolution much of the wealth of the aristocracy was
seized by local authorities or looted by the populace.

The results of such drastic actions are hard to foresee. It
may lead to a permanent realignment of power in society, as in
England or it may lead to anarchy and the rise of a dictator as
in France.

The second approach is via taxation. Once again there is a
historical example in Britain. During the 20th Century the
government decided that the hereditary landowners had too much
wealth. They established a plan whereby the wealth would be
transferred over many decades via death duties. As the lord of
the manor died off his heirs would have to pay a tax on the value
of the estate. This has had the effect of gradually transferring
the wealth of the aristocracy to the government. One difficulty
has been that, in many cases, the estates are worth so much that
the heirs cannot find buyers and they get transferred to the
"National Trust". This is the nub of all wealth transfer schemes.
In order to tax the wealthy at a rate that forces them to sell
part of their assets there must be buyers who can afford to
purchase the items. A painting appraised at one million dollars
is worth nothing if there are no buyers. Even assets like stocks
depend upon a pool of buyers for them to be convertible to

When the wealth of a society gets sufficiently unbalanced it
ceases to valuable since there are no people with the resources
to purchase it. During the French revolution most of the
furniture in the estates was looted and much of it was used for
firewood. It had no value in a peasant's home. It didn't fit,
wasn't practical, and the decorative detail was useless.

So any plan that is going to shift the balance of wealth has
to deal with issues of extracting real value from the
accumulations of the wealthy without causing a drop in the
marketability of the assets.

Can wealth redistribution take place in the US? The least
disruptive approach would be changing the tax code to be more
progressive. This could be modifications to the income tax, the
restructuring (not elimination) of the estate tax, and imposition
of either wealth taxes or consumption taxes. The wealthy can be
expected to object to all of these changes. In addition they have
the political and economic clout to promote their self interests.
A concerted effort by the people can succeed. Recent examples in
countries like the Phillipines and Poland show the power the
people can have when they join peacefully for a change in the
organization of society.


The Interest in Wealth Redistribution

In the US there is, currently, little interest in wealth
redistribution. The populist impulse that existed around 1900 has
not re-emerged around 2000. Many people attribute this to a
general satisfaction with their standard of living of the
majority of the middle class. In addition there is a wide spread
native optimism which makes people feel that they have a good
chance of moving up the economic ladder during their lifetime and
thus any increased taxation on the wealthy will impact them at
some point in the future. The fact that this is not borne out by
statistics does not alter people's perceptions. In Europe the
middle class is much more aware of the limited mobility within
classes and is much more attuned to keeping wealth imbalance
within limits.

The Arguments for Unfettered Wealth

  1. Libertarianism
    This has been discussed in numerous places. Most
    social critics feel that the arguments in favor of private
    property are just self serving. There is no natural law of
    private property. It only exists as long as there is a state
    structure with a robust police function which can maintain the
    property concept. Many societies do not recognized private
    property and function successfully. Even in developed countries
    most don't have as strong a Libertarian sentiment as is found in
    the US. Many feel that excessive wealth is

  2. Only the rich can create economic growth
    In the US this is contradicted by the history of our
    country. All the great industries of the 19th and 20th Centuries
    were created by individuals with no prior wealth. Andrew
    Carnegie, Henry Ford, Bill Gates, etc. started with essentially
    nothing and built huge enterprises. On the other hand the
    children of these entrepreneurs have not been especially noted
    for doing anything notable. Andrew Carnegie felt so strongly that
    each generation should make its own way that he left the bulk of
    his estate to charity. His children had to make their own way.
    The secret of a successful entrepreneur is his ability to raise
    capital to expand his enterprise. This is obtained from banks and
    selling stock and not generally from personal wealth. One doesn't
    need rich people to build a business. The capital of a bank can
    be $1000 from one hundred people or $100,000 from one person. The
    amount available to lend is the same. Wealth does not have to be
    concentrated to be available for investment. In the developed
    world much of the available capital comes from pension funds and
    is thus not provided by the wealthy.

  3. Arts Patronage
    In much of history the wealthy have created the
    permanent emblems of civilizations: castles and churches are most
    often cited. They have also been responsible for patronizing the
    arts and leaving us a legacy of fine art and music. But recently
    the biggest projects have not been paid for by patrons. The
    monuments of the 20th Century have increasingly been things like
    commercial buildings, sports stadiums and public works projects.
    Whether the movies or popular music of today will be held in the
    same veneration as the old masters and Beethoven future
    generations will have to decide. The point is, however, that the
    arts of today are democratized and not dependent on the wealthy.
    The only areas which continue the patronage model and are still
    the domain of the wealthy are opera, classical music and big fine
    art museums.

  4. Divine Justice
    This is a remnant of the Puritan origins of the US.
    By this time society should have evolved enough to realize that
    much of what happens in the world is beyond the control of the
    individual. Not only are inherited capabilities different, but
    many people are born into segments of society which handicap
    their progress up the economic ladder. Blaming the victim is just
    uncharitable and mean spirited.

Self interest

As is usual in discussions of public policy one can cut through a
lot of posturing if one asks the question "who's ox gets gored?"
In other words, are those objecting to change going to be
negatively affected by the changes. It is obvious that the
wealthy and their dependents (apologists, lackeys, and
beneficiaries) potentially stand to lose the most. One should
thus examine their arguments in this light. Those favoring
redistribution are usually the poor so it is clear that they will
support any position that potentially gives them more.


History has shown that when societies get too unequal bad things
happen. They either become economically inefficient or they
become subject to social unrest. In many cases both happen
simultaneously. The banana republics of South and Central America
are a good example. For hundreds of years a small ruling
oligarchy has run things. Things are even pretty good for these
people. However, the societies as a whole have not prospered.
They have been subject to continual poverty and revolution and
much of the development that has taken place is in the hands of
foreign investors. The wealth of the few has been maintained at a
high cost to the majority.

As new societies arise which are more equal and more
efficient, the oligarchical societies will fall ever further
behind. The peasant class that kept things going, inefficiently,
will no longer be enough. The capital needed for growth will not
be present and the expertise needed to deal with modern
technology will not be in place. We can see such failed societies
in parts of Africa.

We in the US need to decide if we are going to slip into an
inefficient oligarchy, risk civil unrest or redirect our
resources and wealth into more equitable avenues. No society is
perfectly egalitarian, but when we have reached a point where the
top one fifth in Manhattan makes $350,000 and the bottom fifth
makes $7,000 we are probably near an economic tipping point. How
we deal with the coming challenge is up to us.

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