Distribution and Use of Wealth in U.S. Capitalism

Claim checks on wealth.        Image Credit: Freeimages.com/Jon Syverson

This is  the third part of a series of posts on the effects of Capitalism on the culture of a society. In the first of these posts, The Cultural Desirability of Capitalism, I set up the discussion as one that concerned the feedback effects of human behavior on a capitalist economy, and vice versa. I observed that every real economy in existence is a “mixed economy”, which is a mixture of the polar opposite platonic ideals of Capitalism and Socialism. As a shorthand we will refer to mixed economies that are predominantly Capitalist as ‘capitalism’ with an initial lower case ‘c’, and those that are predominantly Socialist as ‘socialism’ with an initial lower case ‘s’. The platonic ideals will be referenced with names having an initial upper-case letter, as befits a proper name.

Most of the rest of the first post was devoted to how materialistic tendencies could feed back through a capitalist economy to do damage to society. I concluded that injurious materialistic feedback to the economy should be controlled by regulatory law, not by changes to economic institutions. Because the reasons for these regulations are generally non-economic in nature, changes in the mechanics of the economy would not directly affect the problem. Using regulatory law would be much more efficient.

In the second part of the series in the post The Cultural Desirability of Capitalism – 2, I debunked the idea that Capitalism is actually based on materialism. I also addressed the notion that our society is rich enough that we could set up an environmentally friendly, just, steady-state economy by becoming more socialist and transferring wealth from the very wealthy to those with the least wealth. My reaction to that suggestion was that that would be a very foolish path to take, because that path would create a huge hole in necessary investments.

The justification for this last judgement is the point at which we re-enter the discussion. In the process a capitalist economy will be justified, both morally and economically.

How Much Investment Is Needed?

To determine how much wealth needs to be concentrated in the upper economic classes and what exactly the distribution should be, we need to have some way of knowing how much total investment is required. The moral justification usually given for such a concentration is those who do the most to produce wealth should receive the largest shares. However, the economic justification is that those with the most wealth are on average those who have made the wisest economic decisions in the past to produce new wealth.

As I argued in The Morality of Wealth, the richest of the rich, the fabled one-per-centers, consume only a very tiny fraction of their income and wealth. It is literally physically impossible to consume more than a few millions of dollars worth of the current year’s economic output. They might be able to spend some tens of millions on the accumulated output of many years stored in the form of objects like mansions and artwork, but these objects are generally not totally consumed and will be left to others when their current owners die. What the very rich consume from this year’s national economic output is actually a very small fraction of their net worth. So what do they do with the vast majority of their annual income and accumulated wealth? As I wrote in  The Morality of Wealth,

Some contribute to charities and charitable foundations. Some contribute to private family foundations, sometimes for purely charitable reasons and sometimes partially for the support of their progeny. Many take their excess assets and invest them in the economy. If they are wise investors and make profits, then they have contributed to a, at least for some time, self-sustaining increase in the country’s GDP. If they are not wise investors and lose money, the money they lose is redistributed to others who have done better in their use of society’s precious and scarce economic assets. The Christian parable of the faithful steward seems particularly apt here. All of these activities from the charitable contributions to the investments in the economy are for the benefit and well-being of society.

What would happen then if a huge amount of this surplus (i.e. unconsumed) wealth is taxed away, the way either Bernie Sanders or Hillary Clinton would like? If the very rich do not change their consumption one iota, every dollar taken from the very rich would be a dollar taken from charity donations or from investments in the economy. The richer the individual being taxed, the more likely it would be that the reduction would be to investments. The practical effect would be to redirect assets from investments by rich individuals to either government consumption or government investments. The nature of representative government being what it is, government’s disbursement  of the new tax revenue would most likely be for consumption. However, even if government invests the revenue, it is very well known that politicians and government bureaucrats make very bad investors. See here and here and here for verification. A loss of jobs for ordinary people due to less effective investments could be expected.

We can confidently conclude the more government taxes the top 1%, 2%, 10 %, or 20% – or whatever top percent – the less total investment will be made and the smaller the future productive capacity of the U.S. economy will be. But then we already knew that from The Rahn Curve, Hauser’s Law, the Laffer Curve and Flat Taxes.

So how much total investment is really required? What procedure should be followed to determine that amount? If we truly value the freedom of the individual to determine how his own life will proceed, and if we really do believe in the efficacy of democracy for finding  a consensus on controversial questions, we would find an economic procedure to obtain a consensus on economic controversies that takes account of everyone’s preferences. This procedure should determine the goods and services produced by the economy, as well as detecting if the economy approaches a state in which almost everyone is satisfied with the kinds and amounts of goods and services they are receiving. However, in the time before we find that blissful steady-state condition of the economy, the system should have mechanisms for insuring maximal economic growth.

An Economic System for the Democratic Determination of What is Produced and How the Produce Is Distributed

I would suggest we already know of an economic system that satisfies all these conditions. It is called free-market Capitalism. Every citizen with money in his or her possession can vote on which and how many goods will be produced: one vote per dollar. The reason why we want people possessing more dollars to have more votes is they are precisely the people (on average) who have made the wisest past decisions to maximize economic growth. If some of these members of the highest economic strata make unwise economic decisions, the market will take dollars away from them and award those dollars to people who make wiser decisions. Then by allowing prices to seek their market prices according to the Law of Supply and Demand and the Law of Marginal Utility, the economic demands of people will be optimally satisfied under current economic conditions. Not only will they be optimally satisfied, but they will be most efficiently satisfied with the least waste of resources, and with maximal economic growth over time.

How would the economy detect the approach of a desirable steady-state condition? By definition, a steady-state economy is one where everyone’s economic needs and desires are more or less satisfied to the level allowed by the constraints of physical reality, so that further economic growth is not needed. As that condition is approached, investors would discover their investments return less and less profit because consumers would require the additional production progressively less. Undoubtedly, you can detect the workings of the law of marginal utility here.  Consequently investors would invest progressively less with time. Notice that a steady-state economy is exactly the same as the secular stagnation that Keynesians dread, albeit under much more desirable conditions. On reaching a point of steady-state, the only investments made would be the replacement investments required to maintain the current economic productive capacity. At that point natural market and social forces would begin to slowly equilibrate the distribution of wealth.

We can be sure of this last assertion from what we know about the fluidity by which individuals move in and out of economic classes. I will discuss this fact, along with the actual distribution of wealth in the United States in my next post. In addition, I will take a crack at speculating how U.S capitalism might be modified to aid society’s democratic evolution toward a more satisfying state.

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