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Revisiting De Jouvenel’s Ethics of Redistribution: Seventy Years On

The debate over redistribution frequently hinges on arguments about efficiency; its opponents highlight the success of market processes, and the failures of command-driven systems.  By contrast, those in favour of the redistributive state usually advance arguments first and foremost about morality.

Seventy years ago, Bertrand De Jouvenel’s case against state-centric redistributionism, delivered in two 1949 lectures at Cambridge University, and republished by Liberty Fund in 1990 as The Ethics of Redistribution, made the moral case against redistribution. De Jouvenel maintains a focus on ethics and human flourishing, and suggests that while economics reveals truths of human existence, it always remains subservient to man’s moral life.

De Jouvenel invokes a relevant position on the morality around market processes themselves. He was one of the 36 scholars at the first meeting of the Mont Pelerin Society organized by F.A. Hayek, though his work has received less attention than many others in subsequent years as moral views were supplanted by utilitarian arguments for contemporary capitalism.

In making a moral case for open economies, The Ethics of Redistribution is no less relevant than it was in 1949.

By placing human flourishing at the center of the economy, De Jouvenel affirms a society in which both liberty and virtue are foundational. Compromises with economic liberty require that the state usurp the role of the family and the mediating institutions of civil society.

Redistribution and the State

De Jouvenel defines redistribution as state-led, for the sake of a definition in his book. He argues unequivocally that “relief (of the poor) is an unquestionable social obligation,” and he views the provision of a basic social safety net by the state as absolutely vital. De Jouvenel held that such a safety net should not be thought of as state-centric redistribution, but rather a basic function of government (partly as the author argues, because the modern welfare state has eroded the non-state welfare which preceded it).

De Jouvenel’s abiding concern midway through the 20th century was the growth of redistributionist views within non-socialist, self-ascribed market economies like France and the United Kingdom. Were he around today, neither Cuba nor Venezuela’s socialists would have been the target of his writing. Instead he focuses his attention on those places where individuals privately own the “means of production” and create wealth but are heavily taxed in the name of fairness or social justice. Recent moral arguments in the West in favor of taxing the very wealthy on moral grounds make his work particularly pertinent.  

The fundamental challenge of redistribution by the state—in pursuit of an equalization of incomes—is the erosion of human flourishing, and in particular, by undercutting the potential for a growing middle class: “The urge to redistribute is closely attended by a sense of scandal,” a common notion today when observing the existence of dire poverty in a world where the wealthy enjoy great riches. Against the notion that it only “removes the surpluses of the rich,” De Jouvenel contends that redistribution cannot avoid cutting deeply into lower-middle class incomes. His use of equations to demonstrate the economics of this is notable for a political philosophy text, as is his avoidance of the sorts of Rawlsian abstractions to which conservatives have been particularly critical.

Redistributive Taxation Favors Corporations Over Families

Comparing the treatment of corporate bodies to families, De Jouvenel touches on an enduring issue in taxation which remains today and which redistributionism would presumably exaggerate: “The profit-seeking enterprise has a treble advantage over the family, which is taxed at progressive rates and is not allowed to provide for depreciation of its assets or to deduct its operating expenses.” It is worth noting that these “upper modes of life” on display in popular culture—opulent events, yachts and private jet travel—are usually channeled via business entities as deductions.

While “the firm produces the goods,” the family “produces the people,” albeit with the latter unable to take advantage of the many tax avoidance options open to the wealthy or those well-connected to corporations. “It is puzzling that the needs of the former should be so well understood by the law-makers and the needs of the latter so disregarded,” laments De Jouvenel. “The upper modes of life seem to us wasteful of riches which could cover far more legitimate needs,” he adds, quoting the redistributionists. In an ironic twist this opulence comes about as a result of redistribution’s perverse incentives, not because of it.

Most Profits Are Redistributed Through Markets Into Reinvestment

Most profit is reinvested in vital business operations supporting billions of people’s livelihoods and jobs—undertaken by people who prefer gainful employment and thus avoid welfare altogether.

De Jouvenel adds: “It is a commonplace that things which are now produced inexpensively to the many, say spices or the newspaper, were originally luxuries which could be offered only because some few were willing and able to buy them at high prices.”  Take away profits and the ability to reinvest, and what follows is suppression of creativity through the social cooperation markets make possible.

Ultimately, retaining one’s own wealth, sans capital reinvestment, matters beyond these aforementioned economic realities in the process of creating wealth—because spending too is an expression of our values. The author affirms the distribution of welfare by non-state associations, over the abstract welfare state.

For De Jouvenel, non-state welfare has been achieved before, though the book does not focus in detail on societies where this has occurred. He explains, “Between the old customs and the age of the welfare state stretch the ‘hard times,’ when the individual was left hopeless and in need.” In his book From Mutual Aid to the Welfare State, David Beito details the workings of American welfare and social assistance outside the purview of the state, during these hard times. Many have disappeared in the face of social change, but not all, and they offer a clue to the way back to robust non-state welfare.

Redistribution: Efficient or Not, an Affront to Dignity  

For De Jouvenel, even if inefficiency in redistribution was entirely avoided—including the tax avoidance that demonstrably occurs—the approach itself remains immoral. People develop an appreciation for their own worth and inherent dignity through work; they cultivate virtues that sustain culture in this. Redistributionism fosters a world without personal responsibility. This is vital because for De Jouvenel, responsibility within economic freedom is other-centric, fostering virtues of cooperation.

The redistributionist state aims at changing patterns of consumption alone. As a result, redistribution hollows out civil society and actual communities in the name of an abstract, “the people,” by removing the dignity of personal responsibility, duty to others and the mutual cooperation required of us in markets. Disdaining the “somewhat mythical concepts” of utilitarianism embraced by numerous economists (including some free marketeers), De Jouvenel further opposes an “arithmetic of happiness.” He also viewed as “dubious” the idea that a market equilibrium can exist. Happiness for a start cannot be measured because measurability rests in the material alone. “The notion is a slippery slope, when determining the maximum and minimum incomes desired.”

Once the state embarks on a role as the arbiter of the economy, it becomes empowered to control a wide array of fields through its power of the purse. Because the state removes incomes deemed excessive, private foundations find it harder to compete with the state in the setting of artistic and cultural life. The negative effect includes the realm of critical inquiry when funding for the arts is channeled primarily by the state, not the free giving or exchange of individuals supporting it: “There being no private buyers left for books or paintings or other creative work, the State must support literature and the arts either as buyers or as provider of beneficia to the producers, or in both capacities”.

Given the state manages forms of speech through its arbitration of what is funded and what is not, under redistributionism, the author warns that in fact “what is redistributed is not wealth from the rich to the poor, but power from the people to the state”.

De Jouvenel’s anthropology is clear, his arguments are based on a human-centric perspective (informed by some economic calculus), rather than the abstract modeling that undermines human agency in favor of the belief that the state alone can deliver its economic promises.

Employ redistribution on “surplus” or “profits” and in turn, the private cultivation of social norms and virtues that transcend mere economics is suppressed, as private giving is eroded. The problem is that freely giving to those who require it is vital to a healthy society of free people—one in which we are able to act in solidarity with each other in pursuit of the common good, coming to the aid of fellow human beings in need. Real charity ceases and is in fact replaced by a commercialized arm of an ever more powerful state. Rather than consumerism being inherent in free economies as critics contend, it is “a paradoxical outcome the socialist policies that those services which were rendered without thought of reward should be on their way to disappearance,” as the author points out.

Contemporary Relevance

The Ethics of Redistribution distinguishes redistributionism from agrarianism: “Agrarianism does not advocate the equalization of the produce, but of natural resources”. For De Jouvenel, his contention is the redistribution of outcomes, not the inputs. Therefore, he is sympathetic to granting land (an input resource) to the landless, in order that they may create wealth to which they are the private owners. The argument is consistent with privatizing public land through allocation to private citizens to build capital; in the case of first nations in parts of the world such as North America or the black majority in South Africa.

Accepting government’s social safety net for the most vulnerable, when all else fails, as well as measures conducive to title deeds for the landless, De Jouvenel’s keen interest is always to ensure open access to the market, an institution that engenders virtue—without exalting it above human flourishing. This permits a significant role for government in addressing destitution and need where it arises, but keeps the state from doing damage to both society and the economy.

The text leaves it open to readers to define those exact limits of government before veering into the very redistributionism he critiques. Nevertheless, the critique itself is clear.  

Reader Discussion

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on April 04, 2019 at 11:09:12 am

“[R]elief (of the poor) is an unquestionable social obligation,” and he views the provision of a basic social safety net by the state as absolutely vital. De Jouvenel held that such a safety net should not be thought of as state-centric redistribution, but rather a basic function of government (partly as the author argues, because the modern welfare state has eroded the non-state welfare which preceded it).

Why, exactly, do we in the US trance Social Security and Medicare to the 1930s? Oh, that’s right—NON-STATE WELFARE SYSTEMS UTTERLY COLLAPSED DURING THE DEPRESSION. In short, private solutions are clearly superior in every way--until they aren't. Then we institute public ones. What else is new?

“[U]pper modes of life” on display in popular culture—opulent events, yachts and private jet travel—are usually channeled via business entities as deductions.

An excellent argument for restoring corporate taxes: Much of business spending is, in fact, consumption. Why are corporate offices so opulent? Is the opulence required for production? Or is the opulence a form of compensation/consumption by corporate officers?

“It is a commonplace that things which are now produced inexpensively to the many, say spices or the newspaper, were originally luxuries which could be offered only because some few were willing and able to buy them at high prices.” Take away profits and the ability to reinvest, and what follows is suppression of creativity through the social cooperation markets make possible.

More excellent points.

First, in a capitalist/free enterprise system, we must always be mindful of enabling people to raise capital for new initiatives. Today we have a range of options, from capital markets (stocks, bonds), angel investors, down to GoFundMe campaigns. Interest rates have scarcely ever been lower. Indeed, arguably our various financial crashes of late have resulted from the fact that the world has grown SO DAMN RICH that investors must look for ever crazier places to park their money, because government bonds provide paltry—or even negative—returns. In short, whatever concerns may have justified De Jouvenel’s views in 1949 scarcely apply to today’s economy.

The limits on a firm’s ability to attract capital come not from constrained capital markets, but from the first sentence quoted above: A firm’s ability to attract paying customers. Firms need to be able to forecast sufficient customer demand before investors will invest. Yet today domestic workers compete with immigrants, foreign workers, and automation, and where labor unions are in full retreat—more factors that De Jouvenel probably did not incorporate into an analysis in 1949. Thus households are uncertain of their incomes, and reduce their consumption. To remedy this, we don’t need to bolster the power of corporations to buy back their own stocks and house their earnings in the Cayman Islands. Rather, we need to bolster the power of the lower and middle classes to CONSUME. That’s the goal of redistribution.

Thus we dispatch with the “take away the ability to invest” argument. Now consider the “take away profits” argument: When have firms ever reported greater profits than today? I agree, we should be mindful of maintaining the power of producers to spend, too. That means focusing on after-tax income. And for the capitalist class, after-tax income HAS NEVER BEEN HIGHER. In short, the suggestion that income redistribution is incompatible with capitalists retaining financial incentives is absurd—unless you’d conclude that for most of history no one had adequate financial incentives because, for most of history, no one had the kinds of incomes that the elites enjoy today.

Thought experiment: Has there EVER been an era in which capitalists received enough incentive to be productive? Pick an era—say, during the Reagan Era. Now, let’s compare the after-tax earnings of the top 1% back then to the after-tax earnings of the top 1% today (adjusted for inflation). The idea that people need that much money or they’ll lack incentive to be productive is absurd, and would make their uber-rich parents blush.

1949 was a bizzare era in the economy: There was pent-up consumer demand accruing since before the Depression, yet much of the world’s capital assets lay in ruins, its human assets lay in graveyards, and automation, telecommunications, and shipping had not yet emerged as a potent substitute for the domestic labor supply. In this environment, labor unions wielded maximum power, and thus economic distribution among households was about as even as it has ever been. Anyone making forecasts from such a vantage point might very well draw false concussions—especially about the future of wealth distribution, which would undergo a radical change in the 1980s.

Ultimately, retaining one’s own wealth, sans capital reinvestment, matters beyond these aforementioned economic realities in the process of creating wealth—because spending too is an expression of our values.

Indeed. But spending by the poor and middle-class is an expression of values just much as by the rich, so I don’t see how this proposition militates either in favor of or against redistribution.

People develop an appreciation for their own worth and inherent dignity through work.

I have sympathy for this point of view—although I question how culture-bound it may be. Karl Polanyi argued that the supposed “universal propensity to truck and trade” is often hard to find in the archeological records around the world, where feudal-type economic systems seem more common. The ancient Greeks, who basically invented our current concept of a market place, also looked askance at people who earned a living in ways other than farming or land-owning.

More importantly, while may Protestant Work Ethic prompts me to favor a “dignity of work” concept, I have concerns about a future with a diminishing demand for labor. In such a world, the constructive value of a Protestant Work Ethic will become a poison, because it will leave plenty of people feeling valueless. Even today, people who are left unemployed when the mine closes have not altered their basic essence—but our Protestant Work Ethic society now tells them that they are worthless. No surprise, then, that we observe growing suicide rates among elderly men.

In short, the social utility of the Protestant Work Ethic and the “dignity of work” may have reached its end, and it may be time to shift the focus to the “innate dignity of man” or some such.

[H]e is sympathetic to granting land (an input resource) to the landless, in order that they may create wealth to which they are the private owners. The argument is consistent with privatizing public land through allocation to private citizens to build capital; in the case of first nations in parts of the world such as North America or the black majority in South Africa.

How would that work? The amount of land seems pretty much fixed, whereas the amount of money can continue to accrue over time. And each unit of land is fixed and unique, whereas units of money are fluid and fungible. Thus, I don’t see how to manage an ongoing social safety net program via land transfers.

Moreover, if such a system existed, I’d expect a market to spring up to permit recipients to immediately cash in their land grants. The buyers would then be able to aggregate small land grants into usable, contiguous plots. Any other result would seem ridiculously inefficient. But in the end, the system would look a lot like governments giving out cash. So why not cut out the middle steps and just give cash directly?

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nobody.really
on April 04, 2019 at 12:15:49 pm

"So why not cut out the middle steps and just give cash directly?"

As always, the devil is in the details and for those details to be implemented will lead inexorable to state DOMINATION of every aspect of our economic (if not social) lives. Consider your comment on "free land". You are correct in supposing that much of it would be sold off to investors. In fact since most poor are probably domiciled in urban areas, it is doubtful that they would know how to manage the land. Thus, given the likelihood that land will be sold, defeating the initial purpose of the distribution, then it would appear that the State would, of necessity, need to impose and MANAGE all the fine details of the program.
No Land for you unless.......

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gabe
on April 04, 2019 at 13:48:49 pm

Splendid essay about a splendid (and neglected book and its author).
Recall Cong Walter Judd, probably quoting a Chinese proverb, that any program (welfare or otherwise) needs to take care not to diminish a person's sense of dignity: once that is lost, nothing will work.
People, institutions, policies will always fall short in providing a full sense of dignity to fellow citizens, and how that is best done may shift, but that remains a key to human betterment, for the poor and the rich.
Helping the poor and otherwise unfortunate, whether by govt safety net, finding employment or otherwise, needs to be seen as very different than notions of "equality". Helping substantively is one thing; comparing one to others is relational and often based on envy and prone to its debilitating spread.
Finally, something more than a quibble: terms "mediating institutions" and "subsidiarity" make necessary and foundational institutions (family, church, schools) as derivative not fundamental.

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Robert Schadler
on April 05, 2019 at 08:51:49 am

Jonathan Edwards' answer to the redistributionist, no less than de Jouvenal: Charity and its fruit. The 'Protestant work ethic' doesn't work without it - something Weber missed. No part of any collectivist conclusion, much less the socialist 'fatal conceit'. FIAT LUX!

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gdp
on April 05, 2019 at 11:23:45 am

You make some really excellent points. Especially your observation about the phenomenon of too much money seeking too few high-return investment opportunities.

However, anything that you want to redistribute, whether food, housing or wealth, first must be produced. And we're talking, of necessity, liquid wealth. You appear to assume that just as much liquid wealth will continue to be produced by the elite "private equity model" of current world capitalism even if we appropriate a significant part of it for redistribution to persons down the class ladder who are expected to consume it (not save it). But I think that this would set off a chain reaction that would result in many non-elites being made worse off and thus exacerbate the problem. Because with fewer dollars bidding for stocks and bonds, their prices would fall, which would greatly (or perhaps not, no way to know for certain until it's too late) reduce the values of the mutual funds on which a significant number even of non-elites are counting for retirement. So suddenly you have impoverished or made financially less secure a great many more people than you thought you would, and those not the super-rich elites. Which means they now have to save more and consume less, thus lowering their standard of living and thereby requiring still more redistribution to them so that they can consume.

Moreover, if say there is currently one trillion dollars in excessive elite wealth right now and you believe you can take, say, $400 billion of that for redistribution, you assume that somehow that the remaining $600 billion will make up that loss next year so that you will once more be able to take $400 billion. But I don't think that is how it works, and not because of any incentive effect, or at least not only because of that. Most of this liquid wealth is in the form of securities and, as we saw in Q4 of 2018, billions can disappear in a very short time when prices fall. If you take $400 billion from $1 trillion, what you have left over is not $600 billion, because it is not a function of simple arithmetic. What you have done is taken $400 billion that you redistributed this year, but then next year there is only $300 billion of superfluous (however one measures these things) wealth, so you now only have $50 billion (say) for redistribution. You will have succeeded in making the super-rich less rich while not raising the long-term standard of living for the middle and lower classes one whit. Less inequality, certainly, just as there was less inequality in Carolingian France but the lower classes routinely died off in large numbers from starvation.

I am also unsure about your argument for consumption. The problem today is too much liquid wealth (capitalism is no longer mostly about sinking capital into a factory which is returned only slowly over a long period). Were you to redistribute a significant portion of it to middle and lower class consumers, expecting them to consume and not to save it, all that would happen is that prices would rise for the items that such persons want to consume (especially housing). Which is what happened in the 16th and 17th centuries when vast quantities of liquid wealth in the form of Spanish gold and silver from the New World flowed into Europe. So that their standards of living would not change. And even if you predict such a rise in prices to be offset by a fall in prices owing to the need of the non-elites to save more and spend less because their 401(k)s fall in value as described above, all that has happened is that net prices stay the same and everyone's relative position stays the same.

I know all this could have been said in just 2 short paragraphs but I don;t have the time to be concise right now.

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QET
on April 05, 2019 at 12:23:56 pm

1. There are some interesting arguments about taxing wealth. I’m generally sympathetic to, for example, property taxes. But mostly I’ve been discussing taxing and distributing INCOME.

2. What does redistribution do to economic efficiency and people’s willingness to produce? Well, it depends upon the amount. But here are some considerations:

2A. First, consider price theory and monopoly rents. Price serves two functions: It tells producers what things to produce. And it allocates goods/services among consumers. But sometimes people receive economic rents – that is, compensation above what is required to signal production; compensation that is derives solely from the need to allocate goods/services. The Lakers pay LeBron James $63 million/yr plus bonuses. This is the result of the bidding war for his services. But how much of that compensation could be taxed away before LeBron would say, “Screw it; I’m going to pursue my second-choice career as a [taxi driver? fashion model? Whatever.]”? I’d guess we could tax quite a bit before he’s quit basketball. Most of his salary is economic rent.

2B. Now add to this the theory of backward-bending labor curves. As people get richer, they tend to consume more of every (superior) good – including leisure. At some point, LeBron will say, “I’m a multi-millionaire; why am I still busting my butt on this court?” and hang up his shoes. But if we taxed away LeBron’s wealth, it might induce him to play a few more seasons, because he’d still be hungry.

2C. The labor market operates most efficiently when workers feel mobile—willing to change locations and jobs as opportunities arise, thereby facilitating an optimal fit of skills and opportunities, supply and demand. But today, labor mobility is curiously low, and workers often feel locked into their current jobs out of fear that they’ll lose health care, etc. A stronger safety net might help lubricate the labor market, giving people the confidence to pursue other opportunities—which should tend to increase social wealth in the long run.

3. What would happen to stock prices in the event of greater redistribution? Well, if this involves higher corporate taxes, we might expect some reduction in stock price—especially for the stock of firms that cater to the rich. But firms that cater to the poor and middle class would expect to see a surge in business as their clientele acquire more purchasing power. It’s unclear what the net effect would be.

What about the price of things poor and middle-class people consume? Yeah, there might be some increase in prices. But I also expect that there’d be an increase in the production of things that poor and middle-class people consume, and that would offset the effects in whole or part. Moreover, this increase in production would likely increase demand for labor, which would increase salaries/income for workers. In short, there would be many competing dynamics, and we’d need econ models to tell which effects would predominate.

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nobody.really
on April 05, 2019 at 13:41:55 pm

" But how much of that compensation could be taxed away before LeBron would say, “Screw it; I’m going to pursue my second-choice career as a [taxi driver?"

Well, I don't know about LeBron James BUT....
Consider what is happening in Illinois due to high taxation. In the past two years appeoximately 200,000 productive citizens have left for "greener" pastures. So too for California.
And then there is France. the French experienced a "millionaire drain" after imposing excessively high tax rates upon the rich. while this worked well for neighboring Belgium, not so much for the Frogs who were then compelled to further increase their value added tax. (When last in gay Paree, it cost ten dollars for a bottle of Peroni Lager AND I was informed that the following month the tax would go up another 20%.

The problem with your prescriptions is that they rely upon a static analysis and "willfully?) avoids consideration of the response of those affected by excessive taxation. At best, your analysis minimizes the effect of taxpayer avoidance. AND if implemented, once the avoidance problem becomes significant, we will observe a) higher tax rates upon ever more income quartiles, b) possible restrictions on the movement of *rent* capital and BRACE YOURSELF AS THIS HAS JUST BEEN PROPSED BY SEN WYDEN, DEM - OREGON, taxation of UNREALIZED CAPITAL GAINS.
Ha, says Wyden, let's see if you can escape with THOSE gains!!!

Again, the devil lurks in the details.

Also, you apparently forget the impacts of the "Luxury Tax" imposed some decades ago on high priced automobiles, boats, aircraft, etc. Recall what happened to those industries as the rich decided to avoid the ADDITIONAL 10% surtax.
Why would not a diminution of their capital ALSO result in lower consumption of luxury goods? What happens to all those employed in those industries?

As for products purchased by lower income people, recall that the overwhelming majority of these are goods that have long since been outsourced. Effectively, your latest supposition would result in increased employment in China, Taiwan and other hellholes.

Great Plan. Nobody really believes it will work.

another example of remarkable UN-observation!

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gabe
on April 05, 2019 at 14:46:24 pm

Now you sound more like a textbook. Contra your last sentence, which effects will predominate will be determined only by the event, not by any model, of which there will be a great many anyway, with great variations in predicted effects, so that whomever is in power may select whichever model serves his politics and pretend he has the full backing of reason and science.

Your LeBron example raises an interesting point. You are not actually ever going to tax LeBron's excessive income nor that of any other NBA player, nearly all of whom are black. Because that would undermine the ability of blacks as a group to close the wealth gap vis-a-vis whites, which is politically (if not morally) unacceptable (and when you tax Viacom's income, you are going to have to back out BET's contribution). Nor will you tax businesses owned by women or a not-insignificant part of whose management are women, for the same reason. Ditto Hispanics. Asians. LTGWBSQs. (What, you are going to take from Apple, and make life difficult for Tim Cook, the first openly gay Fortune 500 CEO? Didn't think so). Remember, equality does not consist in treating everyone equally. .

So that, just as with the GND, your bandwagon of distributive justice will quickly be overwhelmed by jumpers-on of other justices, and the class of persons and entities whose income you may with justice expropriate and redistribute will narrow considerably (so you'd better hurry, as first CA, and now IL, and tomorrow all the rest, are passing laws to impose women and minorities on corporate boards). I'd be surprised if any economist whose model accounted for this could get published in any respectable academic journal.

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QET
on April 05, 2019 at 14:49:36 pm

and its author

I am currently reading On Power and think it is magnificent.

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QET
on April 05, 2019 at 15:38:13 pm

"Now you sound more like a textbook"

Absotively! And the text book is titled "Lessons to be Learned from Homo economicus" authored by, well, nobody actually but quite popular with a certain mindset.

*WE* predict and then we *adjust* history to reflect our predictions.
Regurgitative theory of necessity must be scrubbed of all unpleasant elements once it is produced.

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gabe
on April 05, 2019 at 15:47:32 pm

I assume that there are systematic ways to think about this. Some time ago I ran across a video of Ben Shapiro responding to questions by a professed socialist. The discussion involved a hypothetical pencil factory, and the socialist asserted that the workers should distribute the profits and "own the benefits of their labor." Shapiro responded that they get the benefits of their labor in the form of wages. The socialist countered that there was a disparity in bargaining power, then made the crucial claim that "without labor, all you have is a factory full of wood, graphite, yellow paint and aluminum."

This last point is very illuminating. It apparently did not occur to the socialist to ask the question "where did the materials to make pencils come from? Why are they in the factory in the first place?" Nor did he seem aware of the possibility of the workers opening their own pencil factory and becoming owners themselves. This helps illustrate several key points regarding capital, risk, property, government, compensation and what nobody.really refers to a "rents."

1.) There was risk involved in starting the pencil factory. Whoever undertook to procure a factory, buy the raw materials and hire a work force took risks: that he might not be able to obtain the raw materials at a reasonable price; that someone would open a competing pencil factory across the street; that the demand for pencils might decrease; that his business might be regulated out of profitability, etc. The owner took these risks for the possibility of economic return. He put capital at risk, and if no one were willing to do so, there would be no need for the labor of the factory's employees. Pension funds, venture capitalists, small business owners seek to profit from the same principle: there is value in reasonable risk-taking, without which there would be essentially no progress. Since progress is concerned with future conditions and the future is unavoidably uncertain, progress involves risk; no risk, no progress. Do not allow people to profit from assuming risk; no progress.

2.) The government plays a role in risk. It can provide incentives for incurring risk, such as allowing deductions for investment losses, or it can coerce people into taking risk, by for example taxing capital that is not invested. The government also plays a role in exacerbating risk (e.g. regime uncertainty) and mitigating it (e.g. protecting property rights.)

3.) The concept of property gives a good illustration of the interaction between capital, investment risk and government. Farmland can either be cultivated or left in its natural state. In order to make farmland productive, resources, including labor, must be expended on it with a degree of uncertainty that such resources will be lost. There will be uncertainty regarding weather, losses due to pests and disease, collapse in market prices, etc. One remote risk is that after the land has been fertilized, planted, irrigated, weeded etc. some one will move onto the land and harvest the crops for his own benefit. We are not usually concerned about this risk because the government protects property rights. The essence of property is the right to exclude others from it. If there were no such concept of property, the person who undertakes to cultivate, plant and tend the land would have considerably less incentive to do so; the concept of private property mitigates certain risks and therefore, as above tends to promote progress. Land owners, secure in their property interest have incentives to advance the capacity of their land to produce, and therefore to develop improved processes, the very essence of progress. The government by protecting property rights mitigates certain risks. The same applies to enforcement of contracts.

4.) Markets are effective mechanisms for matching risk taking with results of such risk taking. Individual market participants are much more efficient at matching economic opportunities with risk tolerances than are government functionaries.

5.) People may be compensated both for their labor, and for their adoption of risk. The notion that risk is an economic entity is illustrated by the existence of insurance, in which people are willing to pay to lessen their risk of particular perils. Appropriating the property of someone who acquires it through accepting risk has no greater legitimacy than appropriating the property of laborers. However, there is in fact wealth that is derived in excess of the risks incurred or labor expended. This might be reasonably thought of as the "rents" referred to by nobody. really. If the government agreed to make good the losses of a hedge fund, guaranteeing them risk-free investments, but that hedge fund was allowed to keep any profits it made, it might be reasonably argued that something was off-kilter. This is the classic unfairness of socializing risks and privatizing profits. A similar concept seems to affect people's views of inheritance and windfall taxes, although in the case of the former, there is a philosophical issue regarding the right of decedents to provide for their heirs. In the abstract, at least, it seems to be non-controversial to "distribute" rents, i.e. that wealth that devolves upon a person with little or no labor, exchange for value, effort or risk. (Lebron can plausibly argue that, since he is willing to play and people are willing to pay him to watch, he is exchanging his labor for fair value.)

But as Gabe says. the devil is in the details.

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z9z99
on April 05, 2019 at 16:21:45 pm

This kind of analysis is helpless in the face of sentiment that risk is being compensated "excessively." No model can model "excessive." I once lived under a rent-control regime where landlords were permitted to increase the rent for certain expenditures made to improve the property and receive a rate of return on their investment that was fixed by the rent-control regulators at a "fair" level. Needless to say, few properties were ever even maintained, let alone improved.

And your mention of pension funds is apt. The entire pension system, public and (what remains of) private, depends on the high returns that enrich the financial capitalists progressives want to expropriate. The beneficiaries of the pensions are the same people the progressives want to aid by taking from the funds. Those high returns are made possible in part by low corporate tax rates (which increases the profitability and therefore the value of their portfolio companies). Expropriate and redistribute just to satisfy a strong political sentiment, and you will set off a chain reaction that will become a vicious circle. Like the apple for Tantalus, the promised fruits of redistribution will always remain just out of reach of the intended needy (and you'll create more needy in the process).

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QET
on April 05, 2019 at 17:21:36 pm

"If there were no such concept of property, the person who undertakes to cultivate, plant and tend the land would have considerably less incentive to do so; the concept of private property mitigates certain risks and therefore, as above tends to promote progress"

and there in a nutshell is, as numerous writers have asserted, is the reason why so many poor nations NEVER escape the grip of unrelenting poverty. Look to Mexico and its lack of clear tltle, I should say, its' unwillingness to provide a legal system supportive of clear title; look also to the African sub-continent and you will observe the same problems.

So too, the unwillingness to provide surety to the risk taker that the benefits "possibly" realized as a consequence of risk taking reduces the frequency and the effectiveness of such actions.

And now, we are to punish risk taking even BEFORE any profits are ACTUALLY REALIZED as is proposed by Senator Wyden of Oregon.

"Hey, it says on paper that your stock portfolio shows a profit. Well, let me take it before you have a chance to redeem it or before its value goes down."

Modern DEMOCRAT economic policy.

Funny thing, last night i watched "Highwaymen", a decent film about Bonnie and Clyde and the former Texas Rangers that hunted them down. (A good watch, BTW)

It strikes me that the people who today seek to take from the rich are motivated by the same envy that motivated the tens of thousands of Depression Era citizens who viewed this murderous duo as heroes SIMPLY because they claimed to be stealing from the rich, i.e. banks.
The details reveal something else - dead [policemen, dead gas station attendants, dead bystanders.
And what will we find in the details of Senators Wyden, Warren, Harris, etc policy prescriptions. surely, a willingness to feed the envy of their supporters but also we will find the destruction of an otherwise productive economy.

At some point in the life of an adult, one must recognize that it is unseemly to begrudge a man his own good fortune. We have apparently failed to instill that lesson in the citizenry.
Thank god, I keep my billions in my mattress!

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gabe
on April 05, 2019 at 17:40:14 pm

This kind of analysis is helpless in the face of sentiment that risk is being compensated “excessively.”

To the extent that the term "excessive" is limited to an emotional or ethical measure, I tend to agree. Your use of the word "sentiment" is appropriate, and this is the realm where the modern social justice warrior and neo-socialist are make-believe experts. There are however real-world concepts of "excessive" that are relevant to more than dorm room bull sessions and the self-esteem of unaccomplished "activists."

"Excessive" can also be considered a more objective concept that is essential to the notion of stability. Stability does not depend on good intentions or social justice fashions. The classic example is a Ponzi scheme. The appeal is the prospect of high returns with perceived limited risk. There is a mis-match between the perceived risk and the return, to the extent that the return is objectively "excessive." It is excessive because it makes the system unstable, to the extent that it will inevitably collapse. The same principle could been seen in the Savings and Loan crisis of the '80s, the housing bubble, and so on.

The real-world has a way of compensating for returns that are out of proportion to the risks. In the case of Ponzi schemes it is the obscured risk that the scheme will collapse. In the case of landlords that you mentioned it is that conduct will conform to what are perceived as acceptable risks.

These concepts do not change whether viewed from a progressive or conservative perspective, and they apply to compensation for labor as well as compensation for risk. In the matter of minimum wages, for example, if the minimum wage exceeds the value of the labor to the employer, the result is the loss of opportunity. If, in other words, the minimum wage is "excessive," the real world will produce responses that tend to limit the effect of the derangement. The world will eventually make things right, although often at a very high price. If "malefactors of great wealth" in Theodore Roosevelt's phrase amass "excessive" fortunes, corruption will inevitably result, and likely already has. The corruption will leave a decaying society in which that wealth has diminishing use.

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z9z99

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