Stealing from the Rich?
Consider the following quote:
“Government cannot give anything to anybody that it doesn’t first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving.”
–Dr. Adrian Rogers, 3 time president of the Southern Baptist Convention
The economic conservative position is clear: Taking from one and giving to another, whether in the form of progressive taxation or welfare, amounts to theft: It is plainly immoral — the government has no right to steal from anyone.
This is a powerful argument. It hits us on a visceral level, appealing to our instinctive sense of fairness. How is taking from one and giving to another not stealing? On the face of it, redistribution seems difficult to defend.
How do progressives defend it? Traditionally, they employ one of two strategies: The first is just a straight-forward appeal to human sympathy, or what conservatives pejoratively refer to as the “bleeding heart” defense. This is often ineffective because conservatives are less likely to believe the needy are actual victims of anything but their own poor choices. They tend to believe private charities are more effective and resistant to fraud. And, lastly, they are more apt to believe that any sort of handout will promote a sense of dependency or learned helplessness and end up doing more harm than good in the long run.
The second method of defense is an appeal to the “good of the group.” This basically consists of citing numerous charts, graphs and studies to suggest that our economy and society is healthier if we curb the extravagant pleasures of the few in favor of the general well-being of the many. Again, conservatives are not so easily swayed. They are well equipped with their own charts, graphs and studies which “prove” just the opposite, that unfettered greed actually creates a “rising tide that raises all boats.” To buttress this argument they often look at redistribution in the extreme and point to the undeniable failure of communism. Consider the very next sentence of Dr. Rogers from the above quote:
“The worst thing that can happen to a nation is for half of the people to get the idea they don’t have to work because somebody else will work for them, and the other half to get the idea that it does no good to work because they don’t get to enjoy the fruits of their labor.”
— Dr Adrian Rogers, God’s Way to Health, Wealth and Wisdom
What are the chances Dr. Rogers will vote for a Democrat in his lifetime? Is there any argument that can sway him to see the world through the eyes of a progressive?
I believe there is, but to properly explain it we’re going to need to start at the beginning — the very beginnings of society, before money and organized religions even existed.
What is Money?
In the Beginning: The Evolution of our Moral Sense
You scratch my back and I’ll scratch yours.
Social scientists tell us this is how morality evolved. It’s called reciprocal altruism. Humans that possessed the genes fostering feelings of affection for one another were more likely to form friendships, and thus were more likely to survive than those who habitually created enemies. Why? Because friends grant favors. Friends cooperate. Some tasks require a helping hand, like building shelters and moving large objects. Other tasks benefit from a division of labor. “I’ll hunt the deer if you gather the firewood.” These win-win relationships provide a distinct advantage over those who live in isolation, and an even greater advantage over those who routinely form enemies. It’s the reason we evolved to be nice. But it is also one of the reasons we evolved to be mean, or at least, to get angry. When someone cheats us — when you scratch someone’s back and they refuse to scratch yours — we feel anger and we punish them, either verbally or physically (or both). This, in effect, trains others to behave justly, and when they won’t behave, our anger makes it more likely that we will avoid them altogether, increasing their isolation.
This all works very well in the small villages where we evolved. Here, favors elicit emotions of gratitude and are rewarded, cheating and defections elicit anger and are punished, and people develop reputations as either trustworthy or as cheats.
However, it does not work very well amongst strangers, as they can cheat each other with very little future consequence. Since we did not evolve to be pushovers, it should come as no surprise that our generosity and affection towards any individual is greatly correlated with the likelihood of reciprocation. In close relationships this blossoms into nearly unconditional love. We don’t think twice about helping friends and family move to a new house or to plant trees — we’ll even give them our kidneys. But evolution makes sure such wide-eyed affection dissipates the farther away we get from our inner circle of confidants. We are more wary when we deal with strangers.
But who is a stranger and who is a friend? The average person can recall the character and trustworthiness of around 200 individuals with excellent accuracy. It is thought that we evolved in tribes and villages of precisely this size or smaller, something called our environment of evolutionary adaptation (or EEA). Every social instinct we have — guilt, gratitude, shyness, empathy, anger, shame, pride and joy — evolved in groups that were typically smaller than 200 individuals.
In tribes of under 200 people, our ancestors could remember favors and indebtedness, so altruism was easily reciprocated — people built relationships, shared tasks and traded openly. But in modern cities of hundreds of thousands (or millions) of individuals, where anonymity reigns, we cannot hope to keep track of everyone. In large groups we struggle to keep score of indebtedness, lest we be taken advantage of. In fact, this innate desire to keep tabs on others is so strong that virtually every culture in the world has created some sort of physical currency, allowing us to keep score of favors owed and indebted. We use scrips of paper that act as IOUs for acts of reciprocal altruism, transferable from one relationship to the next.
We’re talking about money: Money is the currency of favors. Its transferable quality means we no longer need extract a favor directly from those we help; they can instead pay us with coupons redeemable anywhere. If we help a car company sell cars every day from 9-5, we can then use the wages they pay us to buy food from a grocery store. Money is the grease that turns the wheels of reciprocal altruism amongst strangers, and it makes us considerably more likely to help those we don’t know and will never see again.
The Beauty of the Free Market
If money did not exist, it is difficult to imagine a thousand engineers slaving away tirelessly to create the perfect iPhone, and another army of workers (paid considerably less), building and distributing millions of those gadgets in our Christmas stockings each year. But money does exist, and thousands of engineers and workers do exactly that. And we have to do favors for other people in order to acquire the funds to purchase those iPhones. It ends up being favors all around for everyone.
As we’re taught in economics class, the laws of supply and demand keep everything running smoothly. Sought-after goods and services thrive, while undesired products and behavior die out. It’s this tendency for markets to fulfill our desires perfectly that Adam Smith called the Invisible Hand:
“If each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.”
Throw a bunch of greedy humans together in a free market and they quickly start cooperating like they’re all on the same team, dividing up tasks — butcher, baker, candlestick maker — until everyone seems to have what they want and need.
It’s not just a beautiful theory; it also works beautifully in practice. The catastrophic failure of the Soviet Union, coupled with the stunning economic expansion of the West, has firmly established the superiority of the free market system over communism in the minds of virtually every serious economist and social philosopher in the world.
Barack Obama has described the free market as “the best invention to allocate resources and produce enormous prosperity for America or the world that’s ever been designed.”
In 2009, when Hillary Clinton was asked what values she’d like to promote to other countries during her tenure as Secretary of State, she replied with two: Democracy and free markets.
“There’s no doubt that we believe eventually free-market economies will prove to be the most effective means of both generating and distributing wealth.”
— Hillary Clinton
Money is the currency of favors; it allows strangers in large societies to cooperate in much the same way friends in small villages have cooperated for tens of thousands of years.
The Unnatural Qualities of Money
But the exchange of money is only an approximation of the way humans in small tribes exchange favors. As it turns out, our use of money varies from the way we perform favors for each other in 5 key ways:
1) Money is permanent, favors are ephemeral.
The “score card” of good deeds and indebtedness we keep in our minds isn’t etched in stone. Past transgressions are often water under the bridge. Money, on the other hand, lasts forever. What’s more, debts and earnings accumulate. Added together, this permanent accumulation is something that didn’t exist in the natural human environment of small villages, inserting a new inequality into human interactions. Indeed, this permanent accumulation of favors is so unnatural that every developed nation in the world has instilled some sort of “bankruptcy” law to allow one to escape overburdensome debt.
2) Money has absolute value, favors are proportional.
In the villages in which we evolved, we might work all day to build a suitable hut for an elderly lady, and she might repay us with a carefully-crafted home-cooked meal. In our minds, we unconsciously equate the value of these acts of good will — adjusting their actual value based upon each party’s capability. So a hard day’s work for us is repaid with a hard day’s work from her. But in the free market of money, there is no parity between these acts. The home is worth considerably more than the meal; there is no internal adjustment based upon the ability of the giver. In modern free markets, cash is cash, and the elderly lady will be deep in debt to us long after we’ve eaten.
3) Money can become concentrated in some portions of society and scarce in others. This creates a market for renting out money itself. This cannot be done with favors.
It often takes money to make money. This fact is so inescapable that people pay just to use money, shilling out 5, 10, even 20 percent on loans and credit in order to start businesses (or, with increasing frequency, just to provide food and shelter).
Who is the beneficiary of loans? Those with money (i.e., the wealthy and the bankers). For those of you who have never thought about it, banks act as middle men. They solicit investment from the wealthy by paying interest on their capital and then rent it back out to the poor and middle class for a larger fee. This way, the wealthy can leverage their wealth to work for them, without ever having to lift a finger.
Exploiting this particular difference between money and favors is so lucrative that the top hedge fund manager in 2014 made more money than all the teachers in America combined. And he did so without creating any tangible product of value.
4. Money is inheritable, Favors are not.
In hunter-gathering villages one’s good deeds might afford his or her children some special privileges, but the notion that one’s children could live off the goodwill their parents earned for the rest of their lives is absurd. And yet the existence of money makes such situations not only possible, but common. There exists, in this day and age, an entire class of aristocracy in America that will never have to work. And due to their ability to leverage their wealth without working, it actually grows at a faster rate than does the common citizen’s bank account while he/she is actively working.
5) Favors are often motivated by genuine altruism and affection. Exchanges of money are often motivated by genuine selfishness.
We perform favors to raise the well-being of our neighbors, but we perform services for pay to increase our own wealth. Granted, the entire power and utility of the free market system rests upon the idea that our interests and those of our neighbors often coincide — but this isn’t always the case. Consider a $1.99 hamburger: Often cited as a crowning achievement of the free market, they are indeed an unqualified economic success, serving both consumers’ desires and a fast food chain’s bottom line. Cheap hamburgers might be tasty and, at only a couple bucks, a great deal. But are they a moral success? Consider that these hamburgers are produced from cows raised in cages in brutal factory farms, often butchered by immigrants lacking social security, worker’s comp, and paid less than minimum wage while working in unsanitary conditions, which requires the meat to be sprayed with ammonia, then served on buns full of so much sugar they do not meet the FDA’s definition of “bread” and marketed to already obese children and served by part time minimum wage workers without health care. Many would consider this to be a gross ethical failure. Think of all the interests that go unfulfilled in this scenario. (And then think how common a scenario the cheap hamburger is, and how many other similar scenarios abound in the American economy.)
Progressives believe these differences between money and favors introduce artificial forces that give the wealthy an unnatural advantage. Furthermore, the wealthy often write laws specifically to exploit these unnatural advantages to allow the accumulation of wealth without work. These codified advantages would perhaps be slight in a tribe or village of 200 persons, but they become exponentially greater in a society of 200 million.
Large Societies
The advantages of the wealthy are increased exponentially by two facets of large societies: mass production and mass marketing.
1) Mass Production: The economies of scale allow large companies to produce products at far less cost than it would cost an individual (or a small company) to produce. In early villages if the blacksmith’s apprentice was upset with his treatment it’s likely, with a small investment of capital, he could leave and set up a competing smithy of his own. In today’s economy a disgruntled Wal-Mart employee could leave and work at Target, but she can not realistically leave and open a competitor to Wal-Mart next door. Her real options are significantly constricted from a natural economy.
2) National and International markets: The expansion of markets to entire nations, and even to the entire globe, gives considerable advantage to companies with well-developed name recognition. Humans evolved in small tribes with limited choices. While today’s society could easily produce a million cobblers, our minds are not equipped to decide between a million different brands of shoes. Name recognition is everything. This is why Nike paid Michael Jordan more money than they pay all their Malaysian factory workers combined.
Likewise, where we once had 10,000 book stores scattered around the nation, we now effectively have Amazon and Barnes and Noble. This may suit the consumer; however, it also puts 99.9% of booksellers out of business. The condensing of 10,000 bookstores into only two illustrates a phenomenon that lies at the core of progressive philosophy: Small populations create a large number of winners with moderate wealth; large populations create very few winners with extraordinary wealth.
Does Jeff Bezos deserve the tens of billions in his bank account? He certainly doesn’t work thousands of times harder than the average worker. (Indeed, it’s difficult to conceive how this would even be possible.) But conservatives are quick to point out that in creating Amazon, Bezos has provided thousands of times more value to society than the average worker provides. In fact, the amount of his wealth is precisely equal to the amount of value he provides. (This value is defined by how much of our hard-earned money we are willing to give in exchange for his goods.) This, they say, is the beauty of the free market. Progressives believe this view is short sighted.
Here is the fact it neglects: If Jeff Bezos were never born, another company would likely exist in Amazon’s place. If Bill Gates weren’t born, the computer revolution would have continued to unfold without him. If Henry Ford hadn’t started making cars in an assembly line format, someone else would have.
This is not to say these men have given us nothing. Each of them proved to be the best entrepreneur in their field at that time. But in a society of millions, infinitesimal advantages over the second best create exponential gains in wealth. If we were to chart the incomes of 10,000 booksellers in the year 1800, we’d see a smooth curve from best to worst. When we chart 10,000 booksellers today, we see two at the top absorbing all the wealth, while the other barely scrape by (or don’t exist at all). Large societies employing free markets are, by their nature, prone to egregious wealth inequality.
This is dangerous. Why? We need only look at the economic history of the world.
The American Economy
Economic History
We know fairly well what happens to free markets without regulation and correction, because no regulation or correction was the de facto economic policy for the vast majority of human history. Free markets tend to create rapid and robust growth as long as natural resources are inexhaustible and thus impossible to monopolize. However, once resources are monopolized (primarily land, in pre-industrial societies), most societies typically evolve into something like feudalism: an aristocrat/serf society. In fact, this is the default end game for all economies prior to economic policy. We saw this in historical Europe with the historical development of Dukes, Earls and Barons, in China with Gong, Hous and Zi, and in India with the five distinct classes of Brahmins, Kshetriyas, Vyshyasas, Shudras, and Dalits. Inevitably, in society after society, the wealth accumulates in the hands of the few.
The American Experiment
The discovery of America freed “serfs” from the feudal system. America presented a vast new land where resources were not yet monopolized, and once again the free market was allowed to thrive. The United States enjoyed this serendipity for hundreds of years as it expanded westward into free, arable land, discovering oil and gold along the way. Historian Fredrick Jackson Taylor noted in his “Frontier thesis” that this opportunity not only created a rugged individualism in the American spirit, but also presented a new-found egalitarianism not present in Old Europe, releasing the common man from the shackles of European monopolies.
But the luxury of limitless horizons began to dry up in the late 1800s. By 1890, the director of the U.S. Census Bureau suddenly announced that the “frontier was closed.” Shortly thereafter, resources became monopolized and money began to pool at the top. Malcolm Gladwell, in his bestselling book Outliers, notes that of the 75 richest people in history, “an astonishing 14 are Americans born within 9 years of each other in the mid 19th century.” The Rockefellers, Carnegies and Vanderbelts became the new American aristocracy, with political influence so profound they could easily be compared to the royalty of the old world. And they were poised to eclipse the new-found American egalitarianism.
The Industrial Revolution
The good news is that this monopolizing of wealth in the mid 19th century would not eclipse innovation. Few things illustrate the sheer power of the free market better than the Industrial Revolution. There is little doubt that freedom fosters innovation, and the industrial climate of the early 1900s proves this. This was a Libertarian utopia: low income taxes, weak or non-existent unions, no minimum wage laws, no child labor laws, very few pollution controls and almost no worker safety regulations. And this environment provided the last two pieces of the puzzle for the wealthy to solidify their dominance: mass production and mass consumerism.
Suddenly products were rolling off assembly lines, bank accounts were doubling, tripling, and even increasing by a hundredfold, soon the roaring twenties were upon us, the parties lavish, the cars were fast, and liquor was pouring until….. It all came crashing down, leading us to the Great Depression.
Why did this happen? Progressives believe the answer is clear. Contrary to conservative dogma then and now, the money amassed before the Depression did not trickle down to the common man and woman. The five unnatural qualities of money, made exponentially stronger by mass production and consumerism, pooled the money into the hands of the few.
Money Trickles Up
A strong economy requires a strong middle class composed of consumers and workers with money in their pockets, ready to spend. As they do spend, money trickles up through profits to business owners. Some of that money trickles back down in the form of wages, but what trickles down is always less than what trickles up, or the businesses would be operating at a loss. This simple logic is the bedrock of capitalism: the upward movement of money is the engine of the economy.
And as long as everyone has money in their pockets to spend, a free market can thrive indefinitely.
However, by the late 1920s, most of the money amassed at the beginning of the Industrial Age had trickled up into the hands of the new aristocracy — the Rockefeller’s and Vanderbilt’s and the like — leaving the masses with much emptier pockets. With no money to spend, demand soon dried up. And with no demand, production also slowed, and jobs had to be cut. The wheel of the economy ground to a halt, and the house of cards that investors had built was soon to come crumbling down.
Consider the words of Marriner S. Eccles, who served as FDR’s Chairman of the Federal Reserve from 1934 to 1948, as he describes what he believed caused the Great Depression:
As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery.
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
“That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers’ loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929. This then, was my reading of what brought on the depression.”
— Marriner S. Eccles, from his memoir Beckoning Frontiers
Getting out of the Great Depression
We’ve all heard the answer that World War II ended the Great Depression. But how does manufacturing thousands of goods, shipping them overseas and blowing them up rescue us from a Depression? It’s difficult to think of a more wasteful endeavor. Some Keynesian economists have suggested that increased spending stimulated demand further along down the supply chain. This is true, but it neglects one glaringly obvious question: Where does the money come from in the first place? There is a more nuanced and complete answer: The primary factor that rescued us from the Great Depression was the sudden influx of cash that flowed into the middle class. Not only were there suddenly millions of jobs to work as soldiers (with solid pay) but there were also countless jobs for women in factories. All around the country, no-income households were turning into two-income households. And where did the money come from to pay their wages? It came primarily from wealthy people: The top tax bracket soared to 94%. Add to this the fact that families spent very little during the war years as rationing tightened everyone’s belts. By the time the war ended, we had a massive middle class with money again in their pockets ready to burn. It was the largest redistribution of wealth the nation had ever seen.
By the late 1950s, money had flowed out of the pockets of the oil, car and railroad barons and into the hands of the common man. The tide had come in. The middle class was flush with money and ready to let it “trickle up” to the business owners again, who in turn, let some of it trickle back down.
Contrary to conservative dogma (then and now) minimum wage laws, welfare, social security and high taxes on the wealthy did not kill the economy, but created the largest economic boom in the history of the world. These policies also gave birth to the world’s first true “middle class,” all while keeping national debt under control.
How is this relevant today?
The similarities between today’s economy and the period just before the Great Depression are staggering. Over the last 30 years Reaganomics has shifted the power to the wealthy once again. The upper tax brackets are near historic lows, just as they were in 1929. Unions, once strong in the 50s and 60s, are now in serious decline. (STATS) CEOS are pulling in record salaries, but wages for the workers have been stagnant since 1980. In fact, the last time the concentration of wealth in the top one percent was as high as it is now was 1928. We now, once again, face a “perfect storm” for economic collapse.
Indeed, this is not just theory. It already happened. The economic collapse of 2008 was the largest since the Great Depression. It was quickly “patched up” with an $800 billion band-aid. But this band-aid will not last indefinitely. In order to truly stave off the inevitable pull into aristocracy, we must make more fundamental changes to our economy.
Three Ways Out of Aristocracy
As have been many societies before us, we are increasingly divided into something resembling aristocrats and serfs. This is the inevitable end game of a free market operating in a large society without adequate corrections. Once the resources become monopolized, the egalitarian days quickly come to an end, the wealth pools at the top, and society starts to fracture. History shows us three possible courses of action next.
1) Find New Resources. Capitalism is wildly successful as long as there are inexhaustible resources. This was the condition America found itself in for the first 300 years of settlement: Inexhaustible resources and land available for expansion made monopolies impossible. It was the perfect environment to showcase the power of the free market. Today, we might think of the Internet as a modern new frontier, and as long as net neutrality laws are in effect, it will be impossible to monopolize. But often resources are not unlimited, and so this choice has obvious risks.
2) Violent revolution. For years, this was the most common, and least desired, method for ending aristocracies. Beyond the obvious costs of loss of life and resources, violent revolution is also the least desired because it typically results in replacing the aristocracy with some sort of militaristic totalitarian or communist regime. This development occurred time and again throughout Eastern Europe and South America during the 19th and 20th centuries, where an aristocracy blind to economic and social egalitarianism is replaced by an authoritarian regime similarly myopic. So this choice is also one we should wish to avoid.
3) Measured redistribution and regulation. If inexhaustible resources are not available, we need a safeguard against violent revolution. Enter redistribution and regulation. In 1929, the gap between the rich and poor was larger than it had ever been in American history. Throughout the 1930s, the U.S. instituted draconian measures (a 94% tax bracket) to counteract the natural gravitational pull of money into the hands of the few. And this redistribution worked, creating a strong middle class to constantly feed the economy. Debt was very low, GDP was high, only one parent needed to work, and you could put yourself through school with a part time job. The “Leave it to Beaver” utopia of the 1950s that so many on the Right seem to pine for today was not the result of an unusually free market: On the contrary, it resulted from an unusually regulated market.
Meritocracy in Large Societies
Progressives, like economic conservatives, desire a true meritocracy — one in which talent and effort are highly correlated with wealth and reward. And, throughout the vast majority of human history, with humans living in tribes and villages of less than 200 individuals, we have every reason to believe that the free market created such a meritocracy. Indeed, the best evidence suggests that the free market works well in a system of trade and barter amongst those we know. No doubt, in such a system we’d see a natural and healthy distribution of wealth — those with sought-after skills and goods would prosper and those without would have less. Graphs of wealth and income would generally show natural distributive curves that reflected talent and effort.
It was also in these tribes and villages that our sense of morality and fairness evolved, and so it comes as no surprise that societal axioms appealing to the free market would ring true for us on a visceral, instinctual level. It isn’t a surprise that the free market would “feel” right.
But the environment we are in today is not natural. Instead of bartering, we now use money. And in place of villages of 200 or so, we now live in cities of 2 million or more. These new factors (the use of money and population explosions) first appeared around 4000-8000 years ago — a long time ago to an individual, but the blink of an eye in evolutionary terms. And in today’s unnatural environment, our instincts can lead us astray. In tribes of 200 that bartered, people typically earned their wealth via favors they performed, reflecting their natural talents and hard work. But today we see differences in income far beyond what we’d expect as a result from mere differences in talent and effort.
Consider the following. In America today, a handful of heirs to the Wal-Mart fortune own more wealth than the bottom 42% of the nation combined. The notion that this is an accurate reflection of people’s talents and efforts — a true meritocracy — is beyond absurd, and it calls for correction.
The two hallmarks of meritocracy are:
- Equal opportunity — America ought to be the land where anyone can make it through hard work.
- Work should be equated with reward — People should be rewarded for their hard work.
America fails on both these measures. In some respects, our economy could accurately be described as “more free” than most in the developed world; however, our equality of opportunity (that is, the ability for a low-income citizen to become a high-income citizen) is among the lowest in the developed world.
Likewise, the equating of work and reward breaks down in three key demographics:
- Those on welfare get money but perform no work. They are exploiting the government’s generosity. Progressives would do well to admit this.
- Those working for minimum wage work their fingers to the bone but get very little money in return. Corporations exploit their need by paying them very low wages. Conservatives would do well to admit this.
- The super-rich often do not work at all, but earn an exorbitant amount of money by exploiting the unnatural qualities of money operating in large societies highlighted above. Indeed, the entire system of finance was created precisely to exploit these unnatural qualities. And it is astoundingly lucrative. America’s top hedge fund managers can make well over a billion dollars a year, for services that seemingly add almost no real value to the economy.
Progressives believe all three of these problems can be solved with corrective measures and policies that reward work instead of wealth. These correctives can generally take three forms. The first is progressive taxation: taking in more from the rich than we do from the poor. The second is regulation: instituting policies that foster fair play. And the third is welfare reform: giving more to the poor than we do the rich in the form of subsidies.
Progressive Taxation
The argument behind progressive taxation is rather straightforward. It assumes that any close-knit society will require at least some amount of taxation. No one likes having money taken away in the form of taxes, so we want to design a system of taxation that has a minimal impact on our happiness — not only our aggregate happiness, but also each individual’s happiness. To design such a system, we consider the following phenomena.
1) The law of diminishing returns: Every dollar we earn contributes slightly less to our happiness than the previous dollar earned. For instance, $10 is worth more to a starving man than it is to someone deciding whether or not to buy a pair of $50 jeans. And it is worth even less to Bill Gates.
This is why we do not tax the first $6000 anyone earns and tax subsequent dollars earned at progressively higher rates. (Not even Bill Gates is taxed on the first $6000 he earns. The next $4,000 he earns are taxed at roughly 10 percent. And so on…)
2) The law of diminishing effort: Every dollar we earn is slightly easier to earn than the previous dollar. For instance, it is considerably more difficult for a homeless man to earn $10 than it is for a factory worker. And it’s considerably more difficult for a factory worker to earn $10 than it is for a hedge fund manager, who has likely earned hundreds of dollars in the time it took you to read this sentence.
Once again, this is why we tax the first dollars everyone earns at low rates (not even the hedge fund manager, or Bill Gates, pays taxes on his first $6,000 each year) and tax subsequent dollars earned at progressively higher rates.
This tax scheme clearly maximizes aggregate happiness. A tax code that is lenient on one’s initial earnings, and harder on one’s accumulated riches, gives an advantage to budding entrepreneurs (at the expense of those who can afford to subsidize new start-ups on behalf of the overall economy).
What is less clear is how it maximizes individual happiness. However, imagine that someone was unaware of his next year’s income. He’d likely agree to have more taken out of the later dollars he earns in exchange for very little being taken out of his first few dollars. That way he has something to build upon. This desirable bargain is equally applicable to an individual’s lifetime: Even Bill Gates can look back at his life and recall that a more favorable tax code when he was just starting out made it easier for him to build his empire, and if he had it to do all over again, he may well desire to live under the same tax code (especially considering how it did work out for him).
Chances are this all makes some sense, at a cognitive level, even to the most ardent conservative. This is why nearly all developed nations practice progressive taxation. But it introduces an entirely new problem, for when we compare any two people in a particular year, we can see they will be paying different total tax rates, since they invariably have a different proportion of money falling into different tax brackets. Chances are, for many, this inequality feels unfair – even to many ardent liberals. Liberals, however, tend to allow the cognitive argument to trump this uneasy feeling. Conservatives are of the opposite mind, giving more trust to an instinctive sense of fairness than to what may feel like a rationalization of illicit unfairness. For the conservative, the feeling of unfairness trumps any cognitive argument.
The Tragedy of the Commons
Why regulate a free market? Doesn’t the “Invisible Hand” know better than any government?
In 1968 Garrett Hardin offered what many consider to be the best answer to this question. He published a landmark article in the journal Science entitled “The Tragedy of the Commons.” The article describes a dilemma in which multiple individuals acting independently and in their own self-interest ultimately destroy a shared limited resource —even when it is clear that it is not in anyone’s long-term interest for this to happen.
Here’s an example of how this tragedy works. Suppose a fishing community is over-fishing a nearby lake: Studies suggest that if every individual fisherman continues catching fish at his current rate, the ecosystem will collapse and there won’t be any fish left in five years. On the other hand, if every fisherman simply reduces his take by 30 percent, then the fish population can replenish itself every year, and the population can thrive indefinitely.
Clearly, it does no good for any one fisherman to agree to this on his own. The other fisherman would just catch the share of fish he’s left alone. Instead, all the fishermen must work together: Saving the fish population requires a shared sacrifice. But the prospect of foregoing one’s share, agreeing not to catch as many fish as one would like, is made all the more difficult by the fact that once all of the fisherman agree to the restrictions, the fish population grows so large that any one fisherman — so long as he can get away with it —can then back out of the agreement and over-fish again without destroying the ecosystem. In other words, mere acquiescence to shared sacrifice creates a new advantage to cheating against the agreement.
What these fishermen need is some sort of protection against this temptation to cheat, a governing of his selfish desire — hence, the creation of government. In this case, the government must restrict individual freedoms in order to help everyone thrive. It’s a truth Libertarians like to ignore, but the capacity and tendency of humans to destroy shared resources has been shown to be true in society after society, since the dawn of recorded history.
Protecting the environment is similar, as this thought experiment shows. If Exxonmobil (an American company) is required to spend $100 billion to filter the smog from all of their refineries, they run the real risk of being unable to compete with Shell Oil (a Dutch company). They may well be run out of business. Capitalism is a cut-throat world, and every penny counts. No oil company can afford any significant extra costs, so they don’t filter the smog, and the environment gets dirtier and dirtier. This is why protection of the environment requires a central government to enforce equal pollution controls on every company, allowing each to operate on a level playing field with the rest, and giving the rest of us cleaner air.
The Libertarian might suggest that an “eco-friendly” oil company could install the pollution controls on their own accord, and then advertise the fact that they pollute less than their competitors, and if people value cleaner air, they will be willing to pay a premium for this company’s oil. However, the tragedy of the commons isn’t confined to resource producers, but takes place at the consumer level as well. Most consumers are living paycheck to paycheck: We don’t want to spend an extra $10 at the pump for Eco-Gas while our neighbor makes off like a bandit by filling up his tank with the cheap Exxon stuff. When people vote with the dollars in their wallets, they tend to eschew considerations of “the good of society” and instead look out for number one: their own short-term interests. We may know that gas company A pollutes the air, and we may not like it, but we also want cheap gas. Consumers are just as likely to fall victim to the tragedy of the commons as producers and resort to cheating on the well-established need to protect the environment by buying cleaner oil.
These illustrations are tragic, to be sure, but the most poignant tragedy of the commons is found in the exploitation of our greatest natural resource, our working class.
The American working class is an essential part of our nation and our economy. Not only are they the backbone of industry, but they are also the primary consumers of goods. Henry Ford famously illustrated this sentiment when he chose to pay his workers enough so that they could afford one of his cars (one of the very cars they were laboring to produce for him). Ford could see the larger picture. Just as a farmer tends to his mules — feeding, grooming and housing them — so too must a business owner tend to his workers, paying them decent wages, where they can be fed and housed without incurring massive, unreasonable debt. In some ways, we might say a wealthy person complaining about shouldering a higher proportion of the tax burden is similar to a farmer trying to run a farm by feeding his livestock the bare minimum to keep them alive.
Selfish minds are short-sighted. The mantra of business is to minimize costs and maximize profits. Wal-Mart can’t afford to pay its workers more than Target does: It would be wiped off the map. That’s how capitalism operates. A basic tenet of management is: Pay the worker the absolute minimum that will keep them coming back to work. In developing nations without economic safeguards, this amounts to the bare minimum that will keep a worker alive (a few dollars a day). And in reality, since most companies don’t offer healthcare, they don’t worry about keeping individual workers alive. They just need to offer enough for a new worker to replace a dead or sick worker as quickly as possible, keeping the business output humming along. This is not an exaggeration — and it is a testament to how humans commonly exploit each other. It’s happening right now all over the world, and it would be happening here too if the law allowed it. (Even here, most companies skirt the healthcare requirements for their unskilled workers by scheduling them for 30 hours a week, rather than full 40 hours, which would require a healthcare plan as part of the wage package).
But a healthy economy needs a strong middle class, and unless laws are created to protect it (just as we have laws to protect the environment), everyone will suffer in the long run (including the wealthy). The money will always pool at the top, and the working class will continue to default on their mortgage, left unable to make much-needed purchases. Less demand means less production. And the great wheel of the economy will gradually slow to a halt.
This is what happened in 1929, and again in 2008. To keep the wheel turning requires structural change.
Stone Age Minds
These progressive economic ideas are often met with resistance. Even if we intellectually realize that the heirs to the Wal-Mart fortune did nothing to earn their opulent wealth, our stone-age minds are not emotionally equipped to recognize it. Our instincts evolved in hunter-gatherer villages where people truly earned the things they owned. Our caveman brains have no “redistribution” module, but we do have an aversion to stealing. So this aversion to anything that looks like stealing (such as redistribution) trumps our intellectual unease with the lack of meritocracy. We rationally see the gaps in the system, but we emotionally feel the suspicion of theft. These are not just learned lessons. They are emotions built into our DNA.
There is no reason to blame Donald Trump, or the heirs to the Wal-Mart fortune, for any sort of unusual greed or malfeasance. Their wealth was not acquired by theft. Nor did they even break any laws. They are people no different from you and I. Their exorbitant wealth is simply the inevitable result of applying the rules of a free market, suited for villages, to a society of millions dealing in monetary currency. As noted, in such a society, mass-production and mass-marketing give unnatural advantages to the previously wealthy (people who had some money at the beginning of the game). Sam Walton’s gains were permanent (not ephemeral) and they were absolute (not proportional). They gained interest that could be reinvested, and most crucially, they were inherited by his children.
How did our instincts get it so wrong? While our emotions evolved in small hunter-gatherer villages, we now live in vast nation states, and this incongruity creates all sorts of errors in judgment. For instance, we have a visceral fear of spiders (our ancestors having spent much time in caves) but no visceral fear whatsoever of automobiles, despite the fact that the former kill less than 10 people every year and the latter kill 50,000. (Your chance of being killed in a car this year? 1 in 6,500 Killed by a spider? The odds are almost non-existent). Snakes make our skin crawl, our ancestors having spent a great deal of time outdoors in warmer climates, but we have no such reaction to electrical outlets, which kill twenty times more Americans every year. Simply put, no ancestor of ours ever faced an electrical outlet. There is an incongruity between our Stone Age emotions and our modern world. Consider our temperament, which evolved in a world of one-on-one fist fights. It is so inadequately prepared for today’s technology that we’ve already created enough weaponry to blow up the entire world. (Yet that hasn’t decreased our anger.)
Thus. It should be no surprise that our instincts fail us when it comes to intuitions about money and large societies: two features of modern life that, despite their seeming commonplace to us now, developed only in the last 4000 years — a blink of the eye in evolutionary terms.
So, despite widespread data that free markets in large societies with limited resources will not resemble meritocracies, humans can’t stop believing that they do.
Throughout history, there has persisted the steadfast belief that members of any particular class deserved their fate. The wealthy were thought to have come from “good stock,” and the poor were seen as inherently lazy, incapable or lacking moral virtue. For thousands of years marriage between classes was scandalous, as the wealthy often believed it would pollute their blood with undesirable character traits. In India, where they were concerned with more than just polluting blood, the lowest class was so disgusting that they were literally referred to as “untouchables.”
Why would humans so readily accept such an appalling lack of fairness? For the vast majority of human history, when tribes lived by hunting and gathering, work was correlated with reward. Thus, if one had great wealth, it was thought to be an indication of intelligence and hard work. If one were poor and destitute, it was considered a solid indication of laziness or lack of capability. Our emotions did not evolve in an environment with money and monopolies that inevitably reward the few and leave the masses with little. Thus, when feudalism evolved, wealthy lords and ladies commanded the emotional respect and reverence that would have been due them in hunter-gatherer villages — never mind the fact that they inherited their wealth and had never worked an honest day’s labor in their lives, it still felt as though they were kind, smart and industrious, deserving of great wealth and favor, because this is the emotional response we evolved to have towards those in power. Likewise, it didn’t matter that the poor toiled for twelve hours a day; it still felt as though they were lazy and incapable, because poverty was highly correlated with sloth and lack of talent in our environment of evolutionary adaptation.
There is little evidence that can change our minds on such matters. Those in the East were so certain a particular class deserved their fortune, that a wealthy man who never lifted a finger, or produced a single good idea, was assumed to have done his good and worthy deeds in a past life. Similarly, kind and hard-working laborers who toiled twelve hours a day in the sun were thought to be paying off ill deeds in past lives. Our emotions trump our intellects, time and again.
So, this is the liberal/progressive position: The free market is the most powerful creator of wealth in the world; however, the unnatural qualities of money, as well as the unnaturally large societies in which we live today, introduce artificial forces that favor the wealthy, and if we wish to maintain a true meritocracy, we must apply corrections. As I have tried to show, that thesis is bolstered by considerations of evolutionary psychology.
No matter how much it feels like a free market creates a meritocracy, the data overwhelmingly show that it does nothing of the sort; in order to create a true meritocracy, the free market requires correction to make money behave more like favors.