Monday, October 23, 2006

Thursday's Thought More Thoroughly Examined

Thursday I posted a thought that (to my surprise) garnered some responses that were interesting.

If you took all of the wealth and redistributed it equally so that everyone had equal wealth, it would only be a matter of time before the same people that have it now, would get it all back.

Now, we all know that this not going to happen. This is just a hypothetical question that cannot be proven or disproven with verifiable quantitative data. We'll never see this, but it can be debated and it often is, in some context or another.

Human beings are, by nature, greedy. And like any other human trait, there are varying degrees of greed. Some people are certainly more greedy than others. (However, it must be pointed out that not all greed is money-based.)

Capitalism is a system that flourishes with greed, as its foundation. In many ways, it is a necessary evil that ultimately ensures an economy will be sound. Without greed, what incentive would there be to produce anything of any real value. Since the beginning of time, there have been people that channeled that greed into successful ventures that have created wealth. Entrepeneurs.

Entrepeneurs are innovators that take ideas and turn them into wealth. They get an idea, they develop that idea into a workable venture, and then they sell that idea. When others buy into the idea, it produces wealth. That wealth is then used to create jobs, which in turn generates revenue for the company and the state, through taxes. To turn an idea into a successful venture, the innovators must be willing to assume risks. (Risk capital is part of any growing company's budget. If it isn't, it won't grow for very long.)

Since not all people are risk takers, there must be a group known as, non-risk takers. These are they that (for whatever reason) do not assume risks. These people usually sell their time to the risk takers to make the things that the risk takers want to make and sell.

I know that most of my readers already know this, especially if they have had any kind of economics course. My purpose is not to insult anyone's intelligence here, but to set this up for the reasoning behind my theory.

If we were to take all of the wealth in the world (or even the country) and reallocate it evenly to all citizens, on the surface that would seem to level the playing field and give all an opportunity, for a new way of life. But how many would use their new-found wealth to take risks? How many would hold on to it? How many would blow it on things that would not create more wealth, for themselves?

My theory is based on the premise that the risk takers would still prevail because they would keep coming up with ideas to create more wealth for themselves. The non-risk takers would mostly spend that money and the money would all end up back into the hands of the entrepeneurs.

In essence, this is the old capitalism vs. socialism debate.

Those that want rewards based on risk-taking, hard work and subscribe to the above mentioned principles are capitalists. They want individuals to control the means of production. They want the people that put up their hard-earned money and take their chances on the open market, to reap the bulk of the benefits.

To me, this is fair. If I invest the money, I should get the lion's share of the profits, should there be any. In turn, I must absorb the losses if that turns out to be the case. (Therein lies the risk.)

Labor assumes a much smaller risk. They only sell their time to the owners. They want the workers or the state to control the means of production. Sure, they assume some risk but not like the innovators. They take a risk on which company they work for. If they elect to work for a company that goes belly up, they lose their jobs. By the same token, they benefit when they choose to work for a company that does well. They get to keep their jobs. But overall, their chances of financial ruin are far greater than the ones that take the chances with their money.

Socialism in its purest form, dictates that the people should all be equal. The community is preferred over the individual and therefore, it advocates for workers to share in the bulk of the rewards, despite the fact that they did not take the bulk of the risks required to make the company successful. This is called "sweat equity".

Now, there is no pure form of either capitalism or socialism. There are elements of both found in any successful economy. How successful an economy is, depends on which way and how far that economy leans. Too much capitalism, pretty much creates an opportunity for the risk takers to exploit the non-risk takers. Too much the other way, will kill opportunities and will ultimately discourage risk taking.

So, there needs to be a balance, but it needs to be balanced more towards those that produce wealth. If the climate is hostile (towards business) enough, why would I not put my risk capital into a savings account and let it draw interest. It would be my right, but how many jobs would I create doing that? How many hungry children would be fed if people could not find employment, because I didn't want to risk losing what I had?

To understand where I am coming from, I would recommend reading the story of New Harmony, Indiana.

A noble experiment at the outset, the whole thing collapsed mainly because of the lack of incentives. Each member had jobs to do, all were to be treated equally. But when it became apparent that those that worked harder got no more than those that didn't, and when those that worked less got the same as those that worked more, it fell apart. Why should I do my job well, when the next guy that goofed off much more than me, got what I got?

So, the same reasons that doomed this small community would doom a larger group of people, if this model were to be adopted. Taking wealth away from those that worked hard for it and redistributing it among those that didn't want to work so hard for it, would be utterly disastrous. No matter how much you help some people, there are those that are not going to appreciate the help. They will only want more, and will want to exert less energy to get it. That in turn, will discourage those that have a good work ethic from trying.

So to briefly summarize, if you did a one time unconditonal wealth re-distribution and let the chips fall where they may from there, the same people that lose it, will (for the most part) get it all back, by continuing to work hard and take risks to get it back. Those that do not want to work hard and take very few risks, will (for the most part) give it all back, one way or another.

I am reminded of the quote by John Locke:

All wealth is the product of labor.

Anywhere there is wealth, someone had to work for it.

Yes, some inherited it. But someone before them worked for it, before they passed it on.

Yes, I know some steal it and get it by other forms of illegal activities. But in some bizarre way, you could make the case that stealing and organized crime is certainly hard work, if you want to avoid arrest.

And sure, I know that there are many people that receive it for doing nothing, when they could definitely get out and work for it. They aren't producing wealth at all. Someone (usually the government) is merely re-allocating it, by taking it from the person(s) that produce it and giving to those that produce nothing.

So as we can see, obtaining wealth and producing wealth are two entirely different things. Those that would obtain the wealth will willfully surrender it to those that produce it. Those that produce it, will get it back. Until someone changes who and what they are, the same old patterns will play out.


Mark said...


not exactly your theory though, LA...


LASunsett said...

I meant the part about the wealthy getting all of theirs back after the wealth re-distribution. The rest isn't really theory.