Capitalism Is A System Of Wealth Redistribution

One of the things that I find most interesting about the economic policy rhetoric that you hear coming out of the Occupy movement (and out of the White House for that matter) is the notion that a rich person’s earnings must be taxed in order to be redistributed. To hear them tell it, a rich person’s wealth sits in cash under a mattress…unless Washington taxes it away.

You can make an argument for low taxation based on moral principle (a rich person deserves to enjoy the benefits of their har…

  1. Casey Way

    Excellent post. There is economic “friction” in terms of government redistribution because it is a closed system. The lack of competition prevents self-promoted efficiency where then some of the revenue is lost “as heat.”

    Antipodius: I am reminded of Bastiat’s comments about “what is seen” and what is “unseen”. The effects of the rich person’s money are not seen and so often not factored into the thinking of the leftist/occupy argument.

    Just started reading some of his works myself. Incredible how the same arguments cyclically repeat themselves throughout history.

  2. Flapjack

    Excellent post.  If I might humbly add, when one of the rich does lose his money on a bad investment, bad luck, bad whatever, the effects are limited.  When one government loses its (read: our) money, it effects far more people.  The former is much easier for a society to handle, even if it happens numerous times, than the latter (which seems to be happening numerous times).

  3. Daniel Perez
    Untaxed wealth becomes available to the rest of the society. The spoils of the 1% are spent every day by new businesses, home buyers, non-profits, and charitable organizations. When we redistribute money through government, rather than the capitalist system, that’s when it tends to disappear.     ยท

    Great stuff. The analogy a leftist would generally make is to compare “wealth” to a pillar of salt, something limited and finite where each would have to take his or hers own limited (and carefully measured) share.

  4. Grendel

    Oh no you don’t.  You can’t get away with changing the meaning of my words.  The so-called capitalist “redistribution” you refer to is the productive deployment of resources–including capital (wealth)–to produce more wealth. 

    When I talk about redistributing wealth, I mean You have it and I want some of it.  And I don’t see how politicians, government contractors, social and regulatory bureaucrats, and social workers are any less deserving than investment bankers, fund managers, VC managers and traders?

  5. Mel Foil

    If people are standing in line to transfer their hard-earned money to the owners of Apple, then maybe something else, besides money, is the measure of happiness for the people in line. Wealth is unevenly distributed also because ambition, perseverance, and just plain desire for life’s luxuries is unevenly distributed.

  6. Ignatius J. Reilly

     The choice is NEVER between Regulation & No Regulation.

    The choice is between the market regulation of profit/loss vs. government imposition.

    The choice is NEVER between Undistributed Wealth vs. Redistributed Wealth.

    The choice is:  Who gets to distribute the wealth?  Billions of freely transacting consumers/producers vs.  government bureaucrats, lobbyist and politicians.

    Free markets are the greatest force for empowering individuals, no matter your income/wealth.

  7. liberal jim

    Good post, but I would need to stipulate that free market capitalism is what you are talking about.  Currently neither party favors FMC.  Both parties have fostered the growth and power of government and as this has occurred the problem of income distribution has become more acute.   Republicans talk limited government while growing government, Democrats are a bit more honest in that they talk big government while promoting big government. Both operate for their own self interest. The primary problem in DC is corruption not ideology.  It is difficult to imagine that a group of intelligent well meaning people could create the financial and social mess we have.  It is not difficult to imagine that a bunch of self promoting scoundrels would do it.

  8. Aodhan

    I see your point. It’s well taken.

    However, there is danger in using the term “redistribution”. Capitalism is not about distributing (much less redistributing) existing resources fairly, but about directing their use efficiently. It is about generating wealth, not distributing it–about growing the collective pie, not dividing it.

    Capitalism shouldn’t be judged on the basis of how well it distributes wealth at all, but on the basis of how well it generates it. Sometimes capitalism provides just deserts (e.g., for hard work); other times it does not (e.g., for unearned talent). That is, the “distribution” is sometimes more moral, sometimes less. I don’t know whether the distribution is more moral overall, relative to socialism. How much does anyone deserve anyhow?

    Ultimately, it’s better that people have more absolutely rather than as much as others do relatively. That is, it’s an issue of wealth, irrespective of what others have or don’t have. Socialism just impoverishes, and that’s why it’s bad. Prosperity trumps equality as long as no one is made worse off, and even then, it depends on how rich or poor they are to begin with.

  9. Jeff

    The crucial element in this is freedom. In a free market, we need not rely on the benevolence of other people. A free exchange makes both parties better off; otherwise, at least one party would have refused the trade. Under coercion, like government regulation, the trade is not necessarily free. In practice, one or both parties are often worse off after a coerced trade. That’s why free markets make for prosperity and regulation invariably stifles.

    The main argument for capitalism is that freedom promotes prosperity, even without benevolent parties. Redistributionist systems rely on benevolence of the regulators, but that is a notoriously unreliable assumption.

    The appeal of redistributionist systems is in the understanding. It’s easy to understand market coercion, especially in the form of regulation. (Of course, this ignores the inevitable rise of black-markets under market coercion.) It’s impossible to understand free markets.

    Some people can’t accept that prosperous, free social structures are created by human beings but not designed by human beings. “Someone has to manage things!”, they shout. This is a psychological problem, not an intellectual one. Demonstrations won’t persuade these people, neither logical nor ostentive.

  10. BlueAnt
    Grendel: Oh no you don’t.  You can’t get away with changing the meaning of my words.  The so-called capitalist “redistribution” you refer to is the productive deployment of resources–including capital (wealth)–to produce more wealth. 

    I was going to make a similar point.  Let’s put it this way:  Capitalism is inherently a system of efficient capital redistribution.  Wealth redistribution happens too; wealth, in the form of profits, is distributed to workers, investors, and entrepreneurs who are more correct in their economic choices than their fellows.

    This is why various Austrian economists use the term confiscatory redistribution to refer to taxation and socialism.  Profits (and wealth) are never permanent, and they never stay at rest; in a well-functioning economy, they are regularly redistributed without intentional human intervention, to the benefit of all involved.

    Now the illiberal leftist argument may be that wealth redistribution along the lines of “correctness” is morally inferior to redistribution along the lines of fairness or equality.  Any such moral case is spurious, I think; at the least, history shows that political-economic orders based on such ideas lead to misery, authoritarianism, and the repression of ingenuity.

  11. Rodin

    Well said. I can only conclude that the anti-capitalists are either closet fascists seeking to secure their own status and deny potential for economic mobility by others, people who have never had a savings account, or complete airheads.

  12. Antipodius

    Those are excellent points. I am reminded of Bastiat’s comments about “what is seen” and what is “unseen”. The effects of the rich person’s money are not seen and so often not factored into the thinking of the leftist/occupy argument. This is merely another facet of the “stage one thinking” Thomas Sowell talks about.

    Good post mate.

  13. No Caesar

    Good point, but redistribution, used in this context, tends to connote no net increase in the size of the pie, just a change in who has how many slices. Free market capitalism is a system of wealth generation. As has been amply demonstrated, Private capital tends to have a >1.0 effect on wealth, government spending (even before subtracting the pure costs of regulations, etc.) has a <&nbsp;1.0 effect on wealth.

  14. Johnny Dubya

    The&nbsp;proper way to “soak the rich” is to&nbsp;lower tax rates and therefore&nbsp;reduce tax-avoidance behavior so that the rich&nbsp;put their money to work benefiting the economy.&nbsp; Even Paul Krugman recently wrote that taxes cause “a diversion of resources away from productive activities into tax avoidance and evasion”!&nbsp; For the most part, though, liberals do not see the superiority and efficiency of this type of “rich-soaking” over the cruder, less-efficient form–consuming funds through tax collecting, and then excreting government programs.

  15. WI Con

    Great post indeed. It always bugged me in my college econ. classes that when discussing Keynesian spending, the ‘multiplier effect’ was always included in the analysis. I never recall that multiplier spoken of or taken into consideration when/if&nbsp;&nbsp;the topic&nbsp;of regulations, tax cuts, capital gains taxes, inheritance taxes&nbsp;were considered.

    It really seems to be a glass half full/half empty way of looking at things where, when that ‘excess income’ is invested in a myriad of ways – the economic pie gets bigger. When viewed as something that isn’t ‘needed or excessive’ and&nbsp;it is something to be confiscated/redistributed -&nbsp; that pie gets smaller.

  16. Paul Norman

    There are so many good comments here, I don’t know where to begin. Ricochet is a wonderful forum, not only because folks can explore their own ideas, but also because they learn so much from the feedback of other members.

    Some take issue with my term “redistribution” when referring to capital investment in the free market. It’s true that “redistribution” suggests a “redistributor”, and of course in the free market there is none. But the terminology is intentional.&nbsp;

    Capital is just income that has been saved and invested. Taxed income is spent, so it doesn’t become capital. In my post, I wanted to point out that every dollar you tax is a tradeoff between income and capital. When you tax income of high earners to be redistributed to lower earners, you reduce the amount that can be “redistributed” to (read invested in) productive enterprises.&nbsp;

    The nature of pro-growth economic policy (tax and spend vs. save and invest) is subject to a time honored debate. I don’t mean to re-argue the supply-side principles, I just mean to point out that the rhetoric of President Obama, Elizabeth Warren, etc. does not even acknowledge the tradeoff.

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