What If the One Percent Shrugs?

(Inspired by George Reisman.)

You have certainly heard the claim from the Occupy Wall Street movement that 1% of the population owns or controls most of the wealth in the economy, and that this wealth should be taken from this 1% and re-distributed to the remaining 99%.

Those protesters need a lesson in economics.

What they fail to realize is that the wealth of the one percent provides the standard of living of the ninety-nine percent. (Read the essay I link to, and read it carefully.)

The protesters live in a highly industrialized society, but their thinking is that of the Stone Age, or at best, the age before the Industrial Revolution. They do not realize that wealth in a modern capitalistic economy plays an entirely different role than it did in the pre-capitalist world. George Reisman explains:

In such a [pre-capitalist] world, if one sees a farmer’s field, or his barn, or plow, or draft animals, and asks who do these means of production serve, the answer is the farmer and his family, and no one else. In such a world, apart from the receipt of occasional charity from the owners, those who are not owners of means of production cannot benefit from means of production unless and until they themselves somehow become owners of means of production. They cannot benefit from other people’s means of production except by inheriting them or by seizing them.

Ludwig von Mises makes a similar point:

Destitution is in a feudal society the corollary of income inequality, but not in a capitalist society. The fact that there is “big business” does not impair, but improve[s] the conditions of the rest of the people. [Quoted in a blog post by Ari Armstrong at The Objective Standard’s blog.]

In the feudal society, and back through history to the Stone Age and the Neanderthals, some men’s wealth was at the expense of other men’s destitution; and if you did not inherit wealth, there was no other solution than to forcibly seize it and redistribute it. But this is precisely what has been radically changed by capitalism and the Industrial Revolution.

In today’s world, virtually everyone benefits from the wealth of the “one percent”, even if you yourself own none of that wealth. Some examples (taken from Reisman’s essay): When you drive a car, you benefit from the wealth of the automobile industry and the oil industry; when you use a computer or a cell phone, you benefit from the wealth of Microsoft and/or Apple; and so on. Radio and television sets, refrigerators and washing machines are other examples; and you can multiply the examples on your own.

Those things – cars, computers, etc. – did not even exist in pre-capitalist days. Today, they not only exist; they get both better and cheaper over time. This is the result of the fierce completion between members of the “one percent” club. One example given by Reisman is that when Henry Ford introduced the T-Ford, the price of cars went from about $10 000 at the beginning of the 20th Century to $300 in the mid 1920s. And nobody can have failed to notice that computers and cell phones have improved vastly over the decades and have also become cheaper.

One example from my own experience: Some twenty years ago, I bought a second-hand computer for about 10 000 SEK or about $1500. This computer used Windows 3.11 as its operative system, had 4 kilobytes RAM, and the size of its hard drive – well, I don’t remember exactly, but it was measured in kilobytes or perhaps a couple of megabytes. The computer I work on now I bought last year for about the same price. It has Windows 7, the hard drive is 465 gigabytes (of which 433 are still unused), and what the RAM is, I don’t know, but is certainly more than 4 kilobytes.

And this is not all. I bought my first computer second-hand. The price the former owner had originally paid for is was 40 000 SEK or $6000!

This is the result of Bill Gates, Steve Jobs and other computer entrepreneurs vying with one another to produce both better and cheaper computers.

In the pre-capitalist age, there were no feudal lords vying with one another to produce better ploughs for the farmers. They were vying with one another to produce better weapons, better war-fare techniques, and better ways of making the farmers’ lives miserable. There was no struggle to produce more wealth; there was only struggle to seize as much as possible of the little wealth that existed.

In George Reisman’s words, the OSW protesters “see the world through an intellectual lens that is inappropriate to life under capitalism and its market economy”. They have to believe that the fortunes earned by Henry Ford, or by Bill Gates and Steve Jobs, or by any great entrepreneur, is actually stolen from them, or from the rest of us. However perverse this view is, it has to be their implicit basic premise.

What would happen if those protestors actually got their way and all the wealth of the 1% were seized and redistributed to the 99%? The question is what would vanish first: the cell phones they use to communicate; the web sites, blogs and Facebook pages they use to spread their message; or the cars or even bikes they use to travel to the places where they hold their demonstrations; or the washing machines and other household appliances that give them the free time in which to protest.

That may be as it may: the end result will be starvation. Civilization would simply end, and we would be back to pre-industrial days. That would serve them right; but they probably only comprise 1% of the population; so what about the remaining 99% who do not deserve such a fate?

And what if the “one percent” were to shrug and leave the rest of us alone? Well, I do not have to tell you, because there is a novel that shows what will happen. So I will end with quoting from it:

When you live in a rational society, where men are free to trade, you receive an incalculable bonus: the material value of your work is determined not only by your effort, but by the effort of the best productive minds who exist in the world around you.

When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making, for the work of the scientist who discovered the laws that went into the making of that product, for the work of the philosopher who taught men how to think and whom you spend your time denouncing.

The machine, the frozen form of living intelligence, is the power that expands the potential of your life by raising the productivity of your time. If you worked as a blacksmith in the mystics’ Middle Ages, the whole of your earning capacity would consist of an iron bar produced by your hands in days and days of effort. How many tons of rail do you produce per day if you work for Hank Rearden? Would you dare to claim that the size of your pay check was created solely by your physical labor and that those rails were the product of your muscles? The standard of living of that blacksmith is all that your muscles are worth; the rest is a gift from Hank Rearden.

This is the speech the OSW protestors should listen to. But then: When will they ever learn?

Paul Krugman’s Dishonesty

One should not expect honesty from Paul Krugman, but this blog post takes the price.

Krugman starts out by trying to be funny:

One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.

And then goes on:

First of all, bank regulation is important even in the absence of bailouts. Don’t trust me, trust Adam Smith. Scotland invented modern banking; it also invented modern banking crises; and Smith, having witnessed such a crisis, favored bank regulations.

And then quotes Smith as follows:

Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

Krugman doesn’t supply a page reference for this quote, and with good reason. If people read this quote in its context, they would quickly see through Krugman. (If anyone wants to look it up, it is on p. 308 of the Cannan edition of Wealth of Nations.)

If one bothers to read the whole chapter, or at least the surrounding paragraphs, one would know what kind of restrictions Smith has in mind: they are all about restraining the issue of paper money! What view of paper money could be farther away from Krugman’s views on this subject?

So what does Smith say? This is the very next paragraph in Wealth of Nations:

A paper money consisting in bank notes, issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented, is, in every respect, equal in value to gold and silver money; since gold and silver money can at any time be had for it. Whatever is either bought or sold for such paper, must necessarily be bought as cheap as it could have been for gold and silver.

In simpler words: Bank notes with 100% gold or silver backing are as good as gold or silver. What about notes with less than 100% backing? One paragraph later:

It would be otherwise, indeed, with a paper money consisting in promissory notes, of which the immediate payment depended, in any respect, either upon the good will of those who issued them; or upon a condition which the holder of the notes might not always have it in his power to fulfil; or of which the payment was not exigible till after a certain number of years, and which in the mean time bore no interest. Such a paper money would, no doubt, fall more or less below the value of gold and silver, according as the difficulty or uncertainty of obtaining immediate payment was supposed to be greater or less; or according to the greater or less distance of time at which payment was exigible. [“Exigible” is an old word which, according to my dictionary, means “able to be exacted; demandable; requirable”.]

Again in simpler words: Bank notes with less than 100% backing (or where the gold/silver backing for some reason is uncertain) are not as good as gold or silver.

So how can modern Keynesians – who dismiss gold as a “barbarous relic” – invoke Adam Smith and pretend he was on their side? Krugman is simply counting on his readers’ ignorance.

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It is a fashionable game among “social liberals” to quote Adam Smith out of context in order to insinuate that he was in favor of interventionist measures. Here is another example, which I routinely encounter in Sweden. They take the following quote (from p. 128 in the Cannan edition):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

This sentence is taken to mean that Adam Smith was well aware of “market failures” and would approve of such interventions as price controls and anti-trust laws. But in this case, they do not even bother to ignore some earlier or later paragraphs in Smith’s text; they ignore the very next sentences in the same paragraph:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though they cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. [Emphasis added.]

Smith then goes on to describe in some details how such assemblies are rendered necessary. But the main point here is that Smith advocates less government intervention, not more.

(Scandinavian readers may read this essay of mine on this subject from 1982.)

Late update (April 6, 2012): Stuart Hayashi blogged on this subject on the same date this was published with a link to this post. I didn’t see this until today.