Inequality – Part 2

Prabhudesai, in a comment to the recent post on inequality, wrote that envy motivates the concern for inequality; otherwise, to demonstrate their commitment to equality, people would give away that portion of their wealth that exceeds the average wealth of the society (or the world at large, if they are really sincere.) I agree. 

People who are exercised about what they consider to be an “unfair distribution” of wealth insist that the wealth of the super-rich should be confiscated and distributed “fairly” to all. Bezos, Musk and other multi-billionaires come in for special censure. Why, the cry goes out, should they have billions when there are starving millions? They have more than they could possibly consume while there are people who are starving. It’s immoral and sinful. The government must do something about that.

I disagree for various reasons. First, I present a consequentialist argument why the wealth of the super-rich should not be redistributed by government edict. As I am not a utilitarian, I reject this argument for a much stronger claim.

The consequentialist argument is founded on the assumption that the wealth of the super-rich was justly acquired. This assumption does not necessarily hold in all cases but for argument’s sake, let’s grant it.

What does “justly acquired” wealth entail? That the wealth obtained is not through force, fraud or theft. Government officials (generally politicians, bureaucrats, judges, and police officers) acquire undue wealth through force, fraud or theft. They don’t create the wealth that they acquire; they just extract the wealth from the wealthy.

How is wealth justly acquired? First by creating new wealth, and only then taking a part of the wealth thus created. If a person creates wealth, and captures part of it (all the way up to 100 percent), there cannot be any moral objections to that taking. The wealth would not have existed at all but for that person. So it must be that society is no worse off than before if the person who created the wealth were to take all of the wealth he created. In most cases, the wealth creator captures only a tiny fraction of the wealth created.

Economists estimate that billionaires like Jobs and Gates capture only a few percent (of the order of billions) of the wealth that they created (of the order of trillions.) Most of the wealth they creat ends up as societal wealth.

The stress here is on the fact of wealth creation, not wealth extraction. When a judge, a bureaucrat, a politician or a policeman acquires wealth by accepting bribes, that wealth is not justly acquired because that’s just a transfer of wealth; no new wealth is created by the judge, the bureaucrat, the politician or the policeman.

The bare, basic, simple, inarguable, undeniable, incontrovertible, inescapable fact of the matter is that wealth does not exist in nature. Wealth is created by people. Nature provides the raw materials but without humans, there is no wealth because there’s no wealth creation. Only small children and stupid adults think that wealth exists in nature. Santa Claus is not a fact of nature. It’s pure fantasy. 

Human agency is involved in the creation of all wealth that we enjoy. Wealth is created by only some of us but it is enjoyed by all of us — regardless of whether we are rich or poor, whether we created wealth or not. Even the poorest among us are beneficiaries of the wealth that gets created by others. It may be hard to discern but no one (with the possible exception of hermits) is unaffected by the wealth that is created anywhere in the world, though with some temporal lag. The poor Indian pushcart vendor with a smartphone is benefitting from a technology developed by people who could not have cared less for his welfare. I didn’t create most of the wealth that I enjoy. And neither did you.

Steve Jobs created wealth by directing Apple Inc to produce iPhones that people eagerly paid money for. We economists glibly say that the market made him rich. But really that’s just compact way of saying, “A large number of people like you and me voluntarily parted with our money to get iPhones because we figured we gained in the bargain.” If Apple had produced things we did not value, Jobs would not have the billions he had. He created wealth and tens of millions of consumers benefited. Jobs gained a lot but the consumers benefited a great deal more.

Now we come to the consequentialist what if: what if we had a system that confiscates the wealth of billionaires like Jobs? Would Jobs (and his thousands of Apple employees) have put in the hard work that was required to produce the products? It’s unlikely. That’s human nature. If you know that you’d not be the beneficiary of the product of your effort, you will rationally decide not to invest the effort.

Just think about the disaster that resulted from the collectivization of farming (China, Russia, etc.)? Simple fact: if reward is delinked from effort, people rationally avoid exerting effort.

Wealth creation requires effort. Therefore, if effort is not rewarded, people would not exert the effort required to create wealth.

But we have to admit that not everyone exerts effort merely for material gain. Some people are motivated by the drive to understand the world, and they make scientific and technological advances that result in wealth creation, and yet they don’t capture any of the resulting wealth. Darwin, Newton, Einstein, Smith, et al — tremendous benefactors of mankind come to mind. They did what they did but they were not motivated by the desire to accumulate wealth, even though their work eventually was the foundation for great wealth.

So the consequentialist argument is simply this. If wealth (great or small) is confiscated by government whim, people would be less motivated to create the wealth that society depends on. Society will, consequently, be poorer than otherwise. Therefore it is OK for society to tolerate great wealth inequality.

The wealth inequality is a function of, and a consequence of, the unequal human inequality to invent and innovate. We are poorer than Gates or Jobs not because of some conspiracy against us that must be outlawed but because we are not as capable as they were in creating wealth. In moments of weakness I can envy Bezos and Musk their wealth but I cannot in good conscience object to their wealth because their wealth is not unearned. It’s not that they are rich because they stole wealth from people — they created the wealth in the first place and were able to capture only a small fraction of the wealth, the majority of which accrued to the rest of us.

But hold on. As I indicated before, this consequentialist argument does not appeal to me. Even if it is true that confiscating wealth from wealth creators did not lead to the diminution of aggregate social wealth, I would still oppose it.

I would oppose confiscation of justly acquired wealth even if it increased aggregate wealth.

Theft is immoral, even if the wealth stolen from the rich benefits the poor. The poor don’t have a claim on the riches of others — rich or poor. It’s doubly immoral if the justly acquired wealth of the rich is stolen from them for the benefit of the poor ends up further impoverishing the poor. 

I don’t deny the humanitarian obligation of the wealthy to help those in need but that has to be entirely voluntary and motivated by charity, not extracted through violence. All of us have the moral obligation to help our fellow human beings if we can — regardless of whether we are wealthy or not.

And charity, as the saying goes, begins at home. Let’s ask if we are willing to do without being coerced for the poor what we insist the super-rich do. We must first put our money where our mouth is. It’s wonderfully easy to demand in a comment to some random blog post that the super-rich should be forced to share their wealth; it’s not as easy to give away one’s own “extra” wealth to help the truly needy.

It is claimed by some that the demand for wealth distribution is motivated by a demand for “fairness and justice.” That does not make sense. Fairness and justice require that justly acquired wealth is not confiscated. One can appeal to the rich to share their justly acquired wealth but one cannot demand it at the point of a gun. One can ask for charity, not demand it.

One can decry a particular “distribution of wealth” but that does not make the existing distribution unjust. There isn’t some pile of wealth that pre-exists in nature that is “distributed” by some entity that we can then judge that particular distribution to be just or unjust. It’s not as if there’s a person (or a committee) who is handing out wealth from a pile of wealth that the heavens dropped unbidden for the benefit of all mankind, and thereafter we demand an equitable division of the unearned spoils. We talk about wealth (or income) distribution but there is no agency doing any distribution: it’s an impersonal process of distribution that emerges from the processes of wealth creation. No one’s in control of any distribution and therefore it’s silly to demand an “equitable” distribution.

Let me stress that. If there was a dictator who was distributing wealth to the population from a pre-existing pile of wealth, we could reasonably judge whether or not his distribution was fair or not. But that’s not the case. Wealth does not fall like manna from the heavens. It has to be created. And when people get to keep a part of the wealth they create, the consequence is that more wealth is created that would have been otherwise if wealth were confiscated for “social justice.” That consequentialist argument is not necessary for the stronger argument that people are entitled to just deserts — that they are entitled to the wealth they create.

Envy is at the root of the demand for wealth redistribution. My point is that you (billionaire or not) are entitled to all the wealth that you create, and if you take only a part of what you created, more power to you because I benefit from your wealth creation benefits humanity whether you intend it or not.

Finally, I care about the absolute levels of wealth, not relative. I don’t care that someone has a million or billion times my wealth. What I care about is whether I have a million dollars, regardless of others having trillion dollars. In a few years, the poorest person in the world would have millions of dollars but the richest could have trillions of dollars.

I would rather live in that world. Just a few hundred years ago, no one had trillions of dollars and the average person had a couple of hundred dollars of wealth. Now there are a few people with hundreds of billions and the poorest person has a few thousands. I would rather take my chances with a world with the extreme wealth disparity of the kind we have today rather than in a world with little disparity but with extreme poverty. I may envy the rich of today but I look forward to a world with no poverty if that means there are extremely wealthy people.

I don’t envy the rich and I pity those who do.

[You may wonder why I put that Buckminster Fuller quote at the head of this post. It’s to illustrate that even extremely smart people make foolish claims. Therefore it’s not at all surprising that ordinary people — who read blog posts and post comments — make astoundingly stupid claims.] 

Post Script: I wanted to write a bit about the distinction between a billionaire’s billions and the money in our savings account. Billionaires don’t have billions in their bank accounts; money is not what they have; they have the promise of money. Since this post is long enough, I will have to leave that bit for a later date.

Post post script: Lot’s of comments to this post (as of today, Nov 8th.) I wrote a follow up post on “What is Wealth” which is a response to some of the comments.