Equal Rights or Equal Outcomes?

Some of the wisest and most beautiful words ever put to parchment are these:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.” (Declaration of Independence)

Not far behind are these words:

“No one shall be deprived of life, liberty, or property without due process of law.” (Fourteenth Amendment)

At its core, the Declaration of Independence was a statement rejecting the king of England’s governance of the American people and explaining the reasons for that rejection. The concept, “all men are created equal,” is the idea that government should treat each person equally and that everyone is entitled to equal protection and rights under the law. (This concept was also embodied by rights set forth in the U.S. Constitution and its amendments.) Of course, it took years of infighting and a civil war to end some of the worst violations of these rights, but the Declaration of Independence and the Constitution planted the seeds that would eventually lead this country to recognize these rights more fully than any other nation ever. They propelled it to become the richest and most powerful nation ever as well.

It’s important to note that the rights and privileges protected by the Constitution offer no guarantee anyone will achieve wealth or happiness. Apart from individuals’ inalienable rights, they have varying endowments that affect the extent to which they obtain life, liberty, and happiness. Governments are particularly unsuited to change citizens’ aptitudes, attitudes, desires, determination, perseverance, and trustworthiness, all of which are useful characteristics are to obtain property and happiness. Consequently, a constitution could not—and the U.S. Constitution does not—try to equalize outcomes. Instead, it attempts to ensure a fair game for citizens, and it’s up to society and individual players to determine what constitutes winning as well as who wins.

Some governments are founded to ensure the “right to an adequate standard of living” for everyone, or they have some other lofty result-oriented goals. Leftists in general, and especially Franklin D. Roosevelt (who espoused the “right to an adequate standard of living” as a worthy role for government), have tried to change the American government to reflect these ideals. Specifically, they have advocated for government to better ensure equal outcomes rather than equal rights. The propaganda in support of these ideas usually includes the assertion income inequality is a bad thing. (The reason most politicians advance this theory will be the subject of future blogs, though a hint is in this footnote*.) To a large degree, however, ensuring equal outcomes is antithetical to ensuring equal rights.

“Collectivism” is a general name for the theory that government’s role is to ensure equal outcomes. In the theory, everyone contributes to the wealth of a group, such as a family, tribe, state, or nation, and all the wealth of the group belongs equally to everyone in the group. Of course, the extent to which collectivism is implemented varies across governments. Results also vary among collectivist groups. Things which vary little, all other things being equal, are: 1) governments designed to enforce equal rights achieve better results for their citizens than governments designed to enforce equal outcomes, and 2) government officials of collectivist governments fare far better than those they govern.

The founders looked to history to assess whether collectivism would be an effective way of governing the United States. For example, they evaluated the history of one of the first European colonies in America, Plymouth Colony. The colony was started in 1620 with a collectivist form of governance. While Karl Marx coined the phrase, “From each according to his abilities, to each according to his needs” centuries later, that was the general idea the religious people who founded the colony believed would be the best way to do things. As such, everyone was entitled to take an equal share of the commonwealth produced by all the people in the colony. The colony owned the land and the colonists worked the land. As is always the case, some people worked harder to add to the community’s common wealth than others, while others did next to nothing, or nothing at all. As is typical, less and less was added to the commonwealth as the productive people realized that they were exploited suckers. Competition to be the most exploited and most suckered has never been a game people are motivated to play to the fullest. Before long their governor, William Bradford, saw the colony failing, and decided to grant property rights to individuals and to allow the colonist to own what they produced. And they lived happily ever after (or at least as happy as humans could be in those days).

After considering past government structures as well as the recently minted theories of The Enlightenment, the founders rejected a government that would have enforced equal outcomes in favor of one that enforced equal rights.

Though collectivist ideals fly in the face of our founding principles, they are not wrong solely for this reason. If leftist (or progressive, “Liberal,” and socialist**) ideals would make the world or country a better place, they should be adopted. But do collectivist ideals make for better governance than the ideals set forth by America’s founders?

The history of collectivist societies is long, and the many attempts to make them work have varied. In general, however, when countries have tried to equalize standards of living, the majority of their citizens have become poorer, they have contributed less to innovation and development that benefits everyone, but their governors have fared far better than the governed (up to the point the economy and government collapses – which they inevitably do – at which point the heads of leaders generally roll). Collectivist countries have repeatedly failed the test of history, and it may even be impossible to disprove the saying, “Socialism fails every time it’s tried.”  As deftly described by Hayek in The Road To Serfdom, collectivist societies also typically lead to tyranny. Recent examples of this truth are Venezuela, China, the U.S.S.R, Cuba, Greece, and Sweden, (yes, Sweden!) among others. (Sweden, however, is also a heartening example that a country on the road to serfdom need not stay on that road. Such examples, however, are rare. Why it is so hard to get off that road is illustrated daily in news of the objections, marches and riots which accompany efforts to take a less collectivist path in the U.S.)

Leftists in America have tried and have largely succeeded in tilting the playing field to benefit certain groups over others. As a consequence, the government’s role has shifted from what it was founded to be. That intended role was similar to a league organizer/rule maker whose goal was to ensure equal rights and which provided unbiased referees to watch over the game. Government now has become a combination league organizer/rule maker, player, and provider of referees whose bias is to produce equal outcomes. (Everyone gets a trophy too.) To enable this new role, the public has had to cede power to government which was denied government in the founding documents. The founding documents, approved by We the People, did not grant to the federal government the power to take wealth from some people so that it can be given to the needy. Granting such power to the federal government inevitably leads to the need to cede even more power to government.

No form of government can deliver universal happiness to the governed. As discussed in my blog on Wealth, no matter the form of government, or the absolute standard of living of the poor, the poor will be among us, i.e., no government can eliminate poverty – no matter how hard a war on poverty is fought. Collectivist governments, however, promise to deliver on that impossible dream. People who do not know better are fine with government taking a little fat away from the rich to provide lean to the poor. Following every additional grant of power to government needed to slice an addition layer from the rich, the presence of the poor persists. The power needed to redistribute increases as the government slicing approaches the meat of the rich. All the while, the motivation to produce wealth falls as the rich gradually feel the effect of being the exploited suckers of society. (Those motivational effects are present whether or not a taxed person realizes such effects.) To satisfy the poor’s ever growing desire for more, government must cut even deeper. Consequently, no matter how much wealth is redistributed from the rich to the poor, the poor does not go away until everyone is equally poor. Hence the title of the book, The Road To Serfdom.

As if the presence of tyrannical rulers were not bad enough, governments whose goal is to achieve equal outcomes have devastating impacts on the people it purports to help. Of course, providing food to people who are starving helps them in the short term. But humans have not figured out a way to have government provide immediate relief to people without simultaneously trapping many of them in situations with terrible schools, broken families, danger, disgruntlement, hopelessness, drugs, and self-destructive attitudes. I recognize that I may be wrong and that the following ideas do not apply to everyone on welfare, but I think that able-bodied, sane people*** have a deep seated understanding that they should “do their part.” Everyone understand the clear logic of “I’ll bring home the game and you will cook it.” Everyone also understands it is wrong for a 19 year old sitting around the house all day playing video games while other members of the household earn the money to pay the bills, go to the grocery store, prepare the meals, etc. Worse, the inner voice of the able-bodied, sane person who does not do her part to provide for herself tells her she needs to either get to work or find an excuse for her freeloading – lest she live a life of guilt for not being a decent human being. This human trait is a major driver of the adoption of self-destructive attitudes and beliefs.

To salve their conscious, people whom are given things they have not earned glom onto all kinds of theories to justify (at least in their own minds) why it is okay that other people must work to support and feed them. In short, since it is okay to receive from others that which you deserve, it becomes the job of welfare recipients to dream up theories or accept the theories of others as to why they deserve money from the government.

For example, a welfare recipient might view herself as entitled to welfare because her ancestors were treated terribly. (The underlying theory is something like: Justice is served if descendants of evildoers pay the price for what their ancestors did.) A variation on that theme would be a welfare recipient who views herself as merely collecting on a debt owed to her ancestors, i.e., the debt accrued because the labor of her ancestors was exploited by the ancestors of taxpayers alive today. (A typically unattended detail of this theory is how a tax system could be designed to exclude taxation of current taxpayers whose ancestors came to America after slavery was abolished, and tax only that portion of a taxpayer’s heritage that came from slaveholders.)

A popular theory is that because other people are luckier than I am, the lucky ones should share their luck with me. I have never seen a logical argument as to how this theory carries any water, but it is clear that the general principle makes no sense, and is not a justification for first-world welfare recipients to draw from the supposed pool of universal luck. For example, by the luck having been born in the U.S., most U.S. welfare recipients are wealthier than the average human on planet Earth. So, if luck is something which should be shared equally by all, U.S. welfare recipients would have to pay into such the pool of universal luck in order to equalize luck. Neither does it properly take into account that people often make their own luck. It would be tremendous luck to someone if a cushy, high-paying computer programing job opened up in my town. It would not be lucky for me because I did not study and train to be eligible to take advantage of that luck. Exactly what would that person owe me because of the luck of having landed that job?

Another popular theory goes something like this: “If the government can spend $X billion on X, e.g., fighting unnecessary wars, then it can afford to give people Y, e.g., welfare.” The logic as to why spending money on one thing justifies spending money on anther escapes me – spending money on one bad thing has no bearing on whether spending on another thing is good. More important, the fact that government has spent $X billion on (you name it) necessarily means it has $X billion less to spend on anything else, i.e., it is less able to afford to pay for other stuff.

A favorite, go-to theory to justify freeloading is that the people who provide the manna are demons, i.e., they deserve to be punished for their evil ways. That is why it is not sufficient to just soak the rich. On the contrary, CEOs, trust fund babies, everyone on or in Wall Street, Big Oil, Walmart, or simply “The Rich” must be demonized to boot. Otherwise the soaking cannot be justified. Given the importance of justifying the taking, any ol’ presumption of evil will do, e.g., see my blog on Greed. The rationales as to why the revenue from the extra taxes should go to the poor rather than some other objective (e.g., education or the environment) are usually weak or non-existent (this is not to suggest they are not plentiful).

While there is some logic in some of the theories used to justify “you work, I eat,” they are not a justification for people who could add to the community’s wealth (if only to work for their sustenance) but choose to let others do the work for them. Embracing these theories leads to greater disgruntlement, not greater happiness. Counting ones misgivings is self-destructive. Subcultures that adopt these theories tend to eschew life-enriching habits such as applying oneself to becoming educated. Rather than encourage the uplifting pursuit of education, these subcultures instill the belief that pursuing education is selling out the subculture by putting a lie to the theories upon which they rely to freeload. In short, pursuits of equal outcomes are not a recipe for human flourishing. On the contrary, pursuits of equal outcomes are recipes for ever greater unhealthy grievances. To the extent redistributing income rewards envy, such redistribution is increasing evil to boot.

Government programs intended to help the poor also hurt the poor in other ways. The Great Society programs of the 1960s are a good case in point. Before those initiatives to help black people, the percentage of two-parent households was greater for black individuals than for white individuals, and black Americans were making great strides in climbing the ladder of success. The Great Society initiatives stopped that progress for more than ten years**** and rapidly began tearing families apart, which had a disparate impact on black families because a higher percentage of black people were recipients of this “help” than were other people. According to this report, non-Hispanic white single-parent households made up 25 percent of all families with children under 18 in 2015, while 66 percent of single-parent households with children under the age of 18 were made up of black individuals. The Great Society programs’ devastation of so many black families is both heartbreaking and hurtful to the people the programs were intended to help.

People often claim that the government is simply not giving enough to the poor. This may be true, but I’ve never seen evidence that more government handouts can feed empty stomachs without also feeding grievances. Moreover, more money is not always the right answer. It makes no difference how much money is pumped into schools in disadvantaged neighborhoods if doing so increases the need to foster the sentiment that applying oneself is a betrayal of one’s subculture. In short, to a large degree feeding more money into the flawed welfare system makes matters worse for society and the participants in that system.

Finally, consider what affirmative action has done to the credentials of its recipients. America is blessed with colleges that are suitable for the most intelligent and prepared students in the world, colleges suitable for the least intelligent and prepared students, and colleges for everyone in between. As Malcolm Gladwell so astutely observed in David and Goliath, students who are fully capable of excelling in a school appropriate for their gifts and preparation could live a happy and productive life in the discipline about which they are passionate, but they will flunk out or give up on their passion if they go to a college where they are outmatched. The biggest cost of affirmative action is that it propels disadvantaged students into colleges where their peers are better prepared and suited for the coursework. As a result, disadvantaged students are often disheartened, and they drop out to take on less challenging disciplines, i.e., the ones about which they are less passionate. Additionally, employers are often more skeptical about the credentials of individuals who have been excelled by affirmative action, as they assume professors were more lenient in their grading of minority students. This fact is certainly unfair to the students who earned their credentials (of which there are many), but there is no way for an employer to determine which applicants deserved their grades or promotions on the basis of scholastic merit. No law can undo this unavoidable downside of affirmative action.

I could present many more examples of ways redistribution does more harm than good. Hopefully, however, this blog has already led you to reconsider any beliefs that go against the ideals established by the Declaration of Independence and the Constitution.

Additionally, there is the fact that income inequality is not just a bug of the system, it is also an essential feature of the system. But that is the subject of a future blog.

VIDEO RESOURCES

Free Or Equal

Free To Choose

The War On Work

ADDITIONAL RESOURCES:

The Progress of American Blacks

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*The politicians elected in such collectivist societies are those who are most skilled at convincing poorer factions of the electorate (and voters who are sympathetic to their plight) that they will take from and control the rich for the benefit of that particular faction. All the while, most of those politicians are primarily serving themselves and doing favors for the people who can help them the most. The favors sought by those who pay politicians (e.g., by contributing to their campaign fund) usually implement policies which will hurt the people who elected the favor selling politicians.

**When it comes to issues that have direct economic effects, “liberal” ideals are almost the opposite of the liberal ideals of the Enlightenment, i.e., the ideals that propelled the modern world.

***This discussion of “able-bodied, sane people” obviously does not apply to people who do not fit this description. Everyone, able and disabled alike, understands that people who are physically or mentally incapacitated are exempt from doing what is expected of a decent person who is not incapacitated.

**** ““The poverty rate among black families fell from 87 percent in 1940 to 47 percent in 1960, during an era of virtually no major civil rights legislation or anti-poverty programs. It dropped another 17 percentage points during the decade of the 1960s and one percentage point during the 1970s. . .” Thomas Sowell.

Greed

Dictionary.com says greed is “excessive or rapacious desire, especially for wealth or possessions.” Gordon Gekko says, “greed is good.” Many other people say greed is bad. Commenters on Facebook and elsewhere, for example, often say greed is the reason companies do not sufficiently pay their employees. In fact, they blame greed for many of the country’s societal and economic ills. Sometimes they are right, but usually, they are wrong. Let’s see if we can sort this out.

First, let’s focus on greed as the “excessive” desire for wealth or possessions. (I’m willing to stipulate that ““rapacious” desires for wealth or possessions are unalloyed evil.) In particular, let’s focus on the word “excessive” in the context of greed. Because I explored how things appear differently depending on an observer’s economic status in my blog on “Wealth,” I will not belabor the point here that a person in the bottom billion could perceive a person on welfare in the United States as greedy if he or she desired more wealth or possessions. It is worth noting, however, that the additional amount of wealth one must desire for it to be considered “excessive” varies significantly depending on whether one has $20, $20,000, or $20 billion in savings.

I doubt that greed has ever been the sole motivation for a person to create and pursue wealth. And even if a person who was only motivated by greed existed, how could anyone but that person tell? Outward appearances would be the same whether the motivation was greed or something else, such as the desire for fame or the interest in inventing, developing, and selling something which is valued or useful to her fellow man. Motivation could also come from the desire to discover, create, work, or lead, to make jobs available for people in need, or to build up a nest egg for family security or charity. People can become wealthy because billions of people love their products (think Steve Jobs) or because they win lotteries, but there is no indication that reason to believe that greed was necessarily the motivation.

Despite this, many people believe greed is the cause of much human suffering. Not only is that belief based on little or no evidence, but it also makes no sense economically because for greed to be a material motivation for wealth creation.

Before I proceed, please know I believe greed is very bad. (It’s a sin for God’s sake!) I also think, however, that 1) people falsely assume greed causes already-wealthy people to seek more money and that 2) people see others with great excesses of wealth while there are still poor people in need. From this evidence alone they conclude that greed must be keeping wealthy people from sharing more with the poor, but they are wrong to jump to this conclusion.

Do you consider middle-income Americans wealthy? In a very real and relevant sense, they are. According to Wikipedia, John D. Rockefeller is the richest person in modern history. Rockefeller lived the first 74 of his 98 years before 1914, the year the first air conditioner was installed in a home. If he ever flew in a plane, it was very late in life; he did not go far, and the plane was relatively uncomfortable, dangerous, and unreliable. He never took his kids or grandkids to anything like Disneyland. His doctor and dentist had a tiny fraction of the knowledge, tools, procedures, pain relievers, and drugs available to middle-income people today. And he had fewer options for entertainment, as opportunities just weren’t the same back then. Was Rockefeller rich? You bet! Could he enjoy a lifestyle as good as a middle-income American today? In most respects, no. My guess is that very few, if any, middle-income people in America today would want to switch places with the richest man in modern history.[i]

Despite being rich in this sense, many middle-income people do not consider themselves rich. This is mostly because they see people who are vastly richer than them when they look around, and this makes them feel poorer than they are in terms of their absolute wealth. (They are rich compared to 99% of all humans who have ever lived. Yes, all Americans are in the top 1% by this standard.) Today people on welfare, people with middle incomes, and people with executive salaries perceive themselves as poor relative to others they see on a regular basis and on TV. They feel poor because feeling rich is not a function of absolute wealth. While individuals with larger incomes may have more security, people are going to see others with more money than them until they get to the wealth level of Bill Gates. It is normal to feel poor by comparison no matter where one falls on the income distribution curve. And it’s important to realize that the 540th billionaire in the U.S. sees most of the other 539 billionaires as having many multiples of his or her wealth (rightfully so). That person cannot be happy when his or her foundation cannot do nearly the amount of good works as the Gates Foundation because billionaire number 540 is a pauper by comparison.

The upshot is that essentially no individuals on the income curve consider themselves to be greedy because they want more than what they already have. There is no inherent correlation between absolute levels of wealth and greediness, so it is just as unfair for a poor American to call a wealthier American greedy as it is for a poor Pakistani to call a poor American greedy for wanting more. Some poor and rich Americans may be greedy, but their income levels have nothing to do with it.

The poorest U.S. billionaire, or the 540th person who wants to move up to the 539th spot, is not necessarily greedier than the middle manager who wants to be an executive manager or the mail clerk who wants to be a middle manager. Some people are greedy, and some people are not, irrespective of their income or status.

Having set the stage, let’s get back to a discussion of greed itself. Pretend you are a middle-income person in America. You post an ad to sell your car, which is worth $10,000. A person much poorer than you comes to your door and says she wants to buy the car, but she can only afford to pay $3,000 for it. Are you greedy if you say, “Thanks, but no thanks,” for the offer? What if she then gives you a truly heart-wrenching and believable story about how financially desperate she and her family are and how with your car she could start an Uber business to make ends meet? If you turn down her offer again, would it be fair to consider you even greedier because you’ve heard her tale of woe?

The answer to the above questions is “no.” You are not greedy or greedier based on the above facts alone. (You may actually be greedy for some other reason, but turning down the offer is not evidence of greed.) The existence of financially desperate people is a real and important societal problem, especially for those who have had unfair disadvantages or bad luck. Each of us has societal obligations to do our part in addressing these problems, such as paying a fair share of taxes. Choosing to help the people who happen to knock on your door would be kind and good, but with few exceptions, you are not morally obligated to help everyone in need before you. One reason for this is that it would be an astounding coincidence if the need of the person standing before you happens to be the most worthy candidate for the money you could spare for charity. Chances are, you would accomplish less total good by giving money to the person knocking on your door than to someone else, e.g., someone in even greater need.

Let’s take this to the next level. Say you are the owner of a janitorial service company. Your company makes enough profit for you to draw a salary of about $52,000 per year (the U.S. median income in 2016). The company’s janitorial jobs require relatively low skills, and although you only pay janitors the minimum wage, you routinely have three or more applicants for every job opening you have. What if an applicant for a janitorial job tells you a tragic story about why she needs a job and a wage of $2 per hour more than the minimum wage?

You would realize that the extra money would come out of your own pocket. If only one employee received an extra $2 per hour, that might not be so bad. But if word got out that someone was getting a higher wage (and it is hard to keep this kind of secret), you would have to deal with a bunch of angry employees demanding the same raise. Giving more employees a higher pay could put you out of business. Think about all the factors in this situation: 1) the local property, school, state, and federal income tax you pay, 2) the jobs you have created and how bad it would be for your employees if those jobs went away, 3) the charitable contributions you would not be able to make if the business went down, 4) the legality of paying minimum wage, and 5) your employees’ ability to improve their skills and establish a good work record and earning the good feeling of not being dependent on welfare.  You might conclude that you are doing more than many other people to address societal problems. You might also say to yourself, “I had nothing to do with the applicant not having the skills to justify the wage she desires.” Could anyone fairly call you greedy if you decided to hire the next person in line? I, for one, cannot see how paying the minimum wage or hiring the next person in line could fairly be described as an “excessive . . . desire . . . for wealth or possessions.”

When it comes to employee pay in larger companies, the number of dollars and people involved are greater. Usually, there is a smaller percentage of employees who earn minimum wage, but everyone in the company wants to be paid more. In short, the same dynamics and issues confronting the janitorial service company are at play in large companies as well. The factors considered when it comes to employee pay in all companies rarely has anything to do with greed.

The Golden State Warriors basketball team pays its star player, Kevin Durant, $65 million a year. Do you think the team owners would not prefer to pay him $64 million or $32 million (or minimum wage)? Do you think the McDonald’s franchise owners want to pay their store managers more than the minimum wage? Do you think the board of directors (who usually own stock in the company) of any company wants to pay the CEO a penny more than it must to hire and keep him or her?  If you do, please think again. It is not an overstatement to say that all employers pay their employees more than they would prefer.
Obviously, owners would make more money if they paid their employees less. This is true of both greedy employers and employers who are not greedy. The reason employers do not pay less is that in a free market employers cannot pay much less than the value of the products of an employee’s labor. If an employer were to attempt to pay much less than that amount, an employee would likely find another employer willing to pay the value of his or her labor—i.e., the employee on whom the employer makes too much money will soon be working at another company. This is because an underpaid employee in one company is an opportunity for profit for another company. If an employer pays its employees more than their labor is worth, the company must charge more for the products it sells to earn enough profit to stay in business. So if companies pay employees substantially more than the value of their labor, their prices will be higher than their competitors’ prices for the same products. (Surely you know how that story ends.)

When the Warriors hired Durant, the owners must have believed that the value of him being on the team was worth more than his pay (otherwise they wouldn’t have offered to pay that much). If Durant was worth $66 million a year to the team, but the owners thought no other team would offer to pay him more than $64.9 million, it would have made sense for the owners to offer him $65 million. (That owners desire to make a profit on a $65 million investment should not be a surprise or something to be alarmed about. If owners do not expect to make money on an investment, they will not make the investment.) If Durant believed $65 million a year was the best offer he could get, he would agree to be exploited to the tune of $1 million per year (his other choice being to accept a $64.9 million offer from another team). Note that this describes a voluntary transaction in which both parties believe they will be better off after the deal—a win-win situation.

(Here is also a quick side note on whether Durant is greedy: The team charges prices for tickets, TV concessions, and everything else it sells at a price that maximizes team revenue. Both the team owners and Durant believe the team revenue would be greater if Durant was a part of it. The team revenue (what the public would pay) would be the same whether Durant was paid $1 or $65 million. How could Durant be greedy for wanting a cut of the value he would bring rather than letting the team owners keep all the money?)

The main point is this: If one team does not offer Durant a salary near the value he would bring, some other team will. The same is true for franchise managers and every other job in the company. It should be obvious that the greediness of the employer is irrelevant to how much an employer pays its employees.

People often say employers exploit their employees by paying them too little. As noted above, employers do try to make a little money off of every employee because the whole point of a business is to make a profit, and a business that does not make a profit will not be in business for long. Also, as mentioned above, an unreasonably high profit on an employee creates a profit opportunity for other companies, i.e., other employers can hire that employee at a higher wage and make a reasonable profit on that employee. In this sense, in my example above Durant was exploited by $1 million per year.

Many of you may think that using the word “exploit” as I did above is crazy. Perhaps it is, but people talk about employers exploiting employees all the time. The only employee exploitation that can exist is the kind I described, and it is small (less than 2% of a salary in the Durant example). Paying people the market value of their labor should not be called exploitation. In a free and robust market, no other kind of employee exploitation can survive the incessant competition for valuable employees. (There are some exceptions, such as in tiny towns with few businesses, but the hue and cry about employee exploitation usually relate to large companies, such as Walmart, McDonald’s and the like, which are mostly in highly-populated areas.)

To many, exploitation is afoot anytime an employee is not paid “a living wage” or some other amount they consider to be fair. These people do not consider that their preferred wage may be far above the value of the employee’s labor. Ignoring the labor value when discussing the price for the labor is preposterous. If the value of an employee’s work is $0 (e.g., she dig holes and then buries them all day), then the entire amount paid by the employer to the employee is a gift from the employer to the employee. Any law that forces employers to pay more for something than that something is worth is an exploitation of the purchaser, not the seller. So when people demand purchasers of labor (employers) pay sellers of labor (employees) more than the value of their labor, they are mistaken even if they think they are calling for the elimination of greed and exploitation. In fact, they are calling for the creation of or an increase in the exploitation of employers for the benefit of employees.

A person who is disproportionately suffering from societal ills may deserve to receive more money than the value of what he or she can produce. In those cases, it may be the responsibility of society to fund appropriate supplemental payments, but it certainly should not be the responsibility of the employer. The employer has given the employee a source of income and job training that may not have otherwise been available. Exploiting employers of low-skilled workers by forcing them to pay to redress problems caused by society—problems that are already ameliorated by the employer—is fundamentally unfair. To label an employer greedy for not wanting to be singled out and exploited in this fashion is akin to something out of the pages of Alice in Wonderland.

So while there is some truth in Gordon Gekko’s take on greed, it is not the whole story. More important, greed plays a much smaller role than people think it does in economic deals, especially with respect to wages.
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i [Edit 05/08/17: I just realized I did not give credit to my inspiration for the Rockefeller discussion. HERE it is. George Will was even more inspired than I. See George F. Will: You’re richer than Rockefeller.

See also THIS comment on Will’s commentary.]

See also: “Most Americans today are richer than John D. Rockefeller was a century ago.

Investment Income and Universal Basic Income Are Not “Basically The Same”

I recently engaged in a Facebook conversation about a cartoon with the caption “So you understand how the consumer will end up paying for a tariff, but fail to realize how the consumer pays for a minimum wage increase?” Though the question posed by the cartoon was great, people did not talk much about it in the comments. Rather, the conversation gravitated to how great it would be if CEO wages were capped at no more than five times a company’s lowest paid employee’s wages and to why the U.S. should implement a Universal Basic Income (UBI) plan in response to the effects of automation and artificial intelligence on jobs. There were some decent conversations, but then came this comment:

“. . . a lot of money is made via capital gains, which requires no actual labor and is basically the same as UBI. Except only rich people get it because it requires having money in the first place.”

UBI is a plan for the government to replace all welfare programs with a direct payment of unrestricted cash to certain people. There is little consensus on who would receive UBI (Michael Munger, a respected economist, proposes UBI go to every American), how it would work, and whether it is a good idea. (People who think they know how to run other people’s lives hate the idea of UBI.)

I was stunned that so much misunderstanding could be crammed into such a short statement (and that so much miseducation could be revealed in one sentence). There is approximately zero similarity between UBI and capital gains.

Sorting out misunderstandings about capital gains is important because if too many voters believe capital gains are free money that goes to rich slackers, then voters will support policies that reduce the number of new jobs created—jobs that will be needed as machines replace workers at an accelerating pace.

Let’s be clear on what capital gains are. Capital gains happen when someone sells a capital asset at a price higher than what he or she paid for it. Capital assets are investment properties, stocks and bonds, and similar things. Capital gains taxes are imposed on such gains. Properties that are intended to be sold in the regular course of a business’s operation are not capital assets. If a non-capital asset is sold for more than it costs, the resulting gain is called ordinary income and is taxed as such.

A typical capital gain happens when a person scrapes together savings, mortgages his or her house, and gets a loan to start a business. The person works hard over many years to make the business successful for family members, employees, and customers. The person draws just enough salary to “put food on the table” because drawing more would reduce the business’s chance of success. If the business fails, the mortgage company will take the house, and the person will have a damaged reputation, a disappointed family, and no savings. If after many years of hard work, risk, and struggle, a company comes along and buys the business for more than the person invested in it, he or she will make a capital gain and pay capital gains taxes on it. (Hopefully none of this sounds anything like UBI.)

Investments are good for everyone because they enable companies to get started and grow. If there are more investments, there are more companies, and if there are bigger companies, there are more jobs and more taxes paid (though more jobs lessen the need for taxes). Fewer investments mean fewer attempts to start businesses, which leads to fewer successful businesses. Successful businesses create wealth that can be used to launch even more businesses, to generate more tax revenue (adding to the government can afford), and to create more jobs for people who might otherwise be on welfare (welfare payments subtract from what government can afford). Therefore, creating more businesses is a winning strategy.

There is another important “win” from people investing money in businesses rather than spending it on bigger and better yachts or other items. An essential feature of investments is enabling people to be more productive. If workers are more productive, they are more likely to be competitive in the workforce and to have good and secure jobs with higher wages and to be more successful in competing with everyone else in the world. Investments in both education and innovative tools and methods enable people to be more productive and competitive. An investment in education is in human capital, and an investment in innovation is in physical capital, which leverages human capital. U.S. employees are paid more than people in other countries largely because Americans are more productive and have better tools that can only be obtained through investment.

As great as those things are, many people would value another aspect of investment-enabled job creation more than the combination of all the above if they were aware of it. To see this beneficial aspect, one must first understand why people are paid what they are paid. For people who make more than the minimum wage, their salaries are dictated by supply and demand. As a general rule, the longer the queue of qualified people competing for a particular job (the greater the supply of workers), the lower the wages will be for the job. The shorter the queue, the higher the wages. This explains why highly skilled teachers often earn less than other workers whose jobs require fewer and less challenging skills. The queues for teachers’ jobs are long because of the many non-monetary rewards obtained through teaching. The queues are short for many other jobs because there are fewer or no rewards other than pay.*

As newly created good jobs are filled, there are fewer people looking for those jobs, and the supply of workers relative to the number of job openings falls. As the supply of workers looking for jobs shrinks, the amount paid to workers will go up. Think of how wages for middle and low income people have stagnated over the last nine years. Much of this stems from slow job growth and too many applicants for too few jobs. More investments would have addressed this problem.

If we want to continue to enjoy the benefits of an economy that enables quality jobs to exist and grow in number, we must facilitate heavy investment in our people, tools, and methods. If we reduce expected gains from investments (by taxing more or otherwise), there will be less investment, poorer results, fewer jobs, a diminished ability to compete with other countries, and continued stagnating wages.

The big picture is that people have accumulated wealth because they have sold something to people who valued that product more than they valued the money that bought it, i.e., the buyers gained from the purchases. And the seller gained too. Since such exchanges are voluntarily, they would not have happened if the results were not mutually advantageous. Both parties to the transaction may have wished it was more advantageous, but if wishes were horses, beggars would ride.

People mostly have three choices when it comes to surplus wealth: put it under a mattress, lend it, or invest it. Money under a mattress does no good. Loans pose a relatively small risk, but they result in a relatively low income compared to possible gains from equity investments. Loans are also less rewarding because their interest is taxed as ordinary income, but they still enable people to grow their companies and create jobs.

Businesses cannot borrow much without sufficient collateral. Collateral comes from equity, and equity comes from investments in companies. Without investment there would not be companies. People who invest in companies bear the substantial risk of losing some or all of their investments. Unlike UBI, the gain from investing money is not a free ride.

These facts reveal the biggest difference between UBI and investments. To receive UBI you are not required to have done anything (e.g., availed yourself of education or work opportunities), and UBI recipients never need to take financial or reputational risks. With a few exceptions, one must have first worked hard and provided a great deal of value to other humans to accumulate investment capital. More important, one must risk losing capital to make money from investments. The more one invests, the more one has at risk. Stock market and individual company crashes have caused many a millionaire to go bankrupt. By comparison, a worker suffers the relatively minor inconvenience of having to find another job, and a UBI couch potato need not trouble himself at all.

To cap it off, capital gains are taxed, and UBI would not be taxed.

UBI may be part of America’s future. It cannot, however, be justified with the theory that the rich get free money.

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*This is also why talented CEOs and other top executives get paid so much. Rarely are there queues for these people. Top executives already have top jobs with great pay, benefits, and perquisites. To lure them away from their current jobs and uproot their families to solve company problems will cost a great deal. If they are good as expected, they will make a company much more than they cost. When top executives can make yacht loads of wealth for a company (which, of course, is what is left over after the CEOs are paid), they are worth their salaries.

Wealth Creation – It’s For The Children, and their children, and their children. . . .

This is the second of a two-part response to a friend’s reply on Facebook about my Wealth blog post. Each of the two questions is so good that I’ll address each in a separate blog. Here is the Facebook comment:

I agree with much of the sentiment [expressed in the Wealth blog post]. Let us apply some devil’s advocate to it anyways. If wealth does not necessarily create happiness, why endorse it so strongly? I mean, you say it increases standards of living, which is definitely true. But if people on average are not any happier despite a higher standard of living, then it seems to be a debatable good. Create enough wealth and the people become fat and lazy, which is why historically, every civilization that has risen has eventually fallen as well.

Question 2: [My paraphrase.] Given that wealth causes people to become fat and lazy, and nations of fat and lazy people fail, why want wealth creation?

Yes, on account of Rome’s growing wealth Romans eventually got fat and lazy and abandoned the beliefs and virtues which enabled Rome to become wealthy. In so doing they became weak and got overthrown by the Goths, Visigoths and the like. Other powers have suffered similar fates for similar reasons. It very much appears the US is following a similar path. It just might be an unavoidable human thing.

We do not know how long it will take for us to get fat and lazy enough to plunge the world into another dark age. Despite the fact that humans tend not to appreciate how good they have it, life with what wealth makes available to people is better than life without those things. Humans wanting a better life for their progeny and their fellow man (whether or not they will appreciate it) is a very human, and very worthy sentiment. It may be a very long time before we slide into the next dark age. However long between now and then, it will be better for our children and grandchildren to have lives with more abundance and knowledge than would be the case absent robust wealth creation.

On the other hand, it is possible that enough people discover the lessons of the failures of the fat and lazy lost empires and avoid their fate. More wealth will facilitate more research into how to avoid those fates and the implementation of solutions.

Moreover, we are better off because of what the thinkers and doers of Rome and other eventually failed empires did. The US founders would have formed a much less perfect union had they not learned much from the thinkers and political experiments of other empires – especially the Greek and Roman. Even if we fail to turn back from the things that are leading us to another dark age, we having tested higher limits of wealth creation will be quite useful to the societies which flower after the next dark age.

Wealth Creation. No Happiness, Why Bother?

This is the first of a two-part response to a friend’s Facebook comment on my “Wealth” blog. The questions raised by my friend are so interesting that I’ll address each in a separate blog. Here is the Facebook comment:

I agree with much of the sentiment (expressed in the Wealth blog). Let us apply some devil’s advocate to it anyways. If wealth does not necessarily create happiness, why endorse it so strongly? I mean, you say it increases standards of living, which is definitely true. But if people on average are not any happier despite a higher standard of living, then it seems to be a debatable good. Create enough wealth, and the people become fat and lazy, which is why historically, every civilization that has risen has eventually fallen as well.

Question One (Paraphrased): If wealth creation does not make people happy, why is it important, or why do you make a big deal of it? I have many answers, but to avoid another book-length blog I’ll mention only a couple.

Happiness is the means, not the end.

Our republic has proven (to the extent anything in the social sciences can be proven) that a national government fares better if it is constitutionally prevented from infringing on any of its law-abiding citizens’ inalienable right to pursue happiness. Allowing individuals to pursue their own happiness in a state with a reasonable level of property rights and rule of law has proven to be remarkably conducive to improvements over time in both quality of life and human relations.

Compare the lives and attitudes of people in 1789 and 2017. In 1789 there was a ubiquitous presence of human and animal excrement that was lightly treated, if at all. Even the rich had to maneuver around the horse poop in the streets. There was also nearly universal child labor, fear of famine, a lack of effective pain killers and cures, sparse to no understanding of microbes and toxins in drinking water, high infant and maternal mortality, and short life expectancy. There was much more depravity, but you get the picture.

Many authors have chronicled the downsides of industrialization and its attendant wealth creation, and some make good points. I think, however, that human life and culture is enhanced by wealth and that the sooner wealth is created, the better.

On the human relations front, the percentage of the population that was racist, sexist, anti-gay, xenophobic, and religiously intolerant was much larger in 1789 than now. Nevertheless, people then like people today had some happy days and times. They probably rarely counted their blessings as to how much better off they were than the people who experienced the Black Death a few centuries earlier—just like people now rarely think about how much better things are today than they were in 1789. Humans in all times tend not to focus on the good things in life. Instead, they seek out and dwell on the things that make them unhappy.

It is not the government’s role to pursue the impossible, i.e., to make people happy. It is the government’s role to let citizens pursue their own happiness and to create an environment where people can reasonably hope things will get better. Hope is a big motivation for people to make things better, but it dwindles when things are stagnant. Hope and feelings of self-worth and contentment are fostered when people produce goods and services that are useful to and valued by their fellow humans. Idle hands give people extra time to count their misgivings and dwell on the negatives. Without hope, people not only flourish less, but they also dream up excuses about why they are not participating in good things like others in society, and this usually involves demonizing other people. Calling out people who are doing harm is fine, but demonizing people who are not doing harm or are doing is good is bad for everyone.

In general, the more rapidly wealth is created, the fewer people are forced into the unhappiness of idleness. If there is hope that better times are around the corner, more people will participate in the human enterprise of trying to make life better for others (something that every job does), and they will feel better about themselves. Will they be constantly happy? No. Will they be happy more often? Probably, but happiness is far less important than feeling that one is doing something positive for others. It is the pursuit of happiness, not obtaining it, that does the trick.

Wealth

One would be hard-pressed to name a topic that stirs up as many intense feelings and beliefs and is as often misunderstood as wealth. Thus, sorting out the subject could be useful.

According to the Webster Dictionary, wealth is the “abundance of valuable material possessions or resources.” A practical alternative for wealth is “having a lot of money.” The most common thing people believe about wealth is that they do not have enough of it. This suggests that most people believe wealth is a good thing. On the other hand, many individuals believe 1) that an abundance of wealth is a bad thing, 2) that having an abundance of wealth is a sign of having done bad things, and/or 3) that most wealthy people do not deserve their wealth. I’ve even heard people say things, such as “I did not deserve to be paid the amount my company paid me.”

Before we get into the meat of the subject, let’s discuss something odd and confounding about wealth. Anyone who has valuable material possessions or resources at his or her disposal that are not needed for survival has some wealth. There are places on Earth where someone who has one tenth the material resources of the average welfare recipients in the U.S. would be seen as having “an abundance of valuable material possessions or resources.” In this case, the welfare recipient would be considered by everyone around to be wealthy. On the other hand, the person on welfare in the U.S. (with ten times as many resources at her disposal) would be considered the opposite of wealthy by Americans. Similarly, most people in America would say a person who earns $200,000 a year is wealthy—and for good reason—but the lifestyles of people who make that much bear no resemblance to the lifestyle of Warren Buffett. If a space alien were to land in Buffett’s backyard and learn he is the richest person on the planet, a decent alien would keep to herself the thought, “Is this all you got?”

To navigate this topic despite the morass just described, I must simplify. When I use the term “the wealthy” in this blog, I am referring to people whose abundance of wealth is several standard deviations above the mean wherever they live.

Money can’t buy love nor many valuable things. By no means is the amount of wealth one accumulates a measure of the character or value of a person. Truly fulfilling and meritorious lives can be lived without accumulating wealth, and it may even be true that a starving artist can produce valuable art a satiated person cannot.

Creating wealth also has moral implications. A moral person will, if physically and mentally capable, produce more than he or she consumes. A moral family will, if physically and mentally capable, produce more than the family consumes. There are at least two parts to this moral obligation. First, not producing enough for oneself or one’s family imposes a burden on others to produce the things that a person or family consumes. (Choosing to be a burden is a bad choice.) Second, when one caps production at the bare minimum, he or she is shirking a responsibility to help provide for the physically or mentally disabled.

So, if able, anyone who consumes resources should create resources, i.e., people are obliged to create or facilitate the creation of wealth. People can do their part in wealth creation in many and varied ways. For example, stay-at-home parents not only create human capital when they raise healthy and capable children (and human capital is the ultimate resource), they facilitate the production of wealth by the parent who works outside the home. The wealth I have created is in large part attributable to the tremendous job my wife did in this role on both counts.

Another moral aspect of wealth creation is that it very often, if not always, has positive and negative consequences. Even before carbon dioxide emissions were considered a negative externality, coal mining resulted in people living off the modern equivalent of $1 a day while wracked by untreatable pain, polluted skies, black lung disease, back-breaking and dangerous labor, and the depletion of natural resources. The industrial revolution which was made possible by coal production periodically relieved humanity from famines and plagues, massive infant mortality and short life expectancy, and enabled the modern technological wonders humans now enjoy.

Many people would add to the above list of externalities. For example, the use of coal fostered factory labor. Factory labor was dehumanizing, sometimes led to child labor, and caused many to leave their “idyllic” farm lives. Despite these negative results, people took factory jobs because they could live a better life than would have been possible with their alternatives. One should realize that having young children working on farms was already necessary for survival. At first, there was nothing unnatural about children working as they had always done. Child labor only became dispensable after the factory machines (made possible and available by capitalism) improved the productivity of ordinary workers so they could produce enough to provide for their families. Even then, there was not enough productivity to dispense with all child labor. The first child labor laws restricted the employment of children younger than 9 years old, and the next wave of laws only required employers to provide a certain amount of education to young workers. It took more than 100 years for capitalism to produce sufficient productivity per worker so the legal age of an adult could be set at 18.

While I’m not a big fan of Thomas Hobbs, he got some things right. When speaking of the effects of war in Leviathan (1651), Hobbs wrote this:

“Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”

Hobbs was describing the difference between states of war and states of peace. Note, however, how aptly this description applies to the difference between having economic prosperity and not having it. The economic well-being and connectedness of a common person today is far better than the economic well-being and connectedness experienced by the common person of the 17th century. It is so much better, in fact, that it would be fair to consider the lives of common people during good times in the 17th century as “solitary, poor, nasty, brutish, and short.”

With all its faults and narrowness of focus, the wealth brought about by capitalism has lessened human suffering, solved problems, allowed humans to flourish, and enabled billions of more people to partake in the joys of life.

Wealth cannot solve all human problems—not by a long shot. It would be hard, however, to find a cause or a pursuit of knowledge that would not benefit from more money behind it.

Having wealth does not necessarily lead to happiness. I’m not referring here to the rich person who is miserable because he is not as rich as someone else; that is a first world problem of little importance. I’m referring to a more universal problem with wealth. It ties into Jesus’s observation that the poor will always be among us. The main reason this observation is still true in a much more prosperous world than the one in which Jesus walked is that once a society has achieved a certain standard of living for the average person, absolute wealth is relatively unimportant. When considering air conditioning, cell phones, access to advanced medicines, the absence of a fear of famine, high quality news and entertainment available for a pittance, and willing and able wealthier people who want to help, etc., it appears that many poor people in wealthy nations today have a higher standard of living (they consume more and higher quality resources) than the richest people one hundred years ago. John Rockefeller, the founder of the Standard Oil Company (which almost single-handedly put an end to the whaling industry), may have had scores of servants whose work was equivalent to a massive amount of power. But having the ability to flip a switch to turn on the lights, heat, air conditioning, or an entertainment system wields far more power. Still, poor people are justifiably unhappy, and giving money to poor people to try and solve the problem usually makes the problem worse. (The reason for this is a subject for a different blog.)

Despite its externalities, the creation of wealth benefits humans over time, and the faster the wealth creation, the better. The wealthier a nation is, the more wealth it can and will devote to the search for knowledge and the improvement of the environment and citizen safety. The same is true for scientific inquiry. Included in those inquiries will be the search for ways to improve society and encourage human flourishing. No amount of research or innovation will solve all human problems, as achieving paradise is beyond humanity’s grasp. But with enough wealth creation, the standard of living enjoyed by our descendants (whether or not they have the sense to recognize it) will be so much higher than it is today that it will be comparative to the difference between the 17th century and now.

Because all innovators and scientists stand on the shoulders of the innovators and scientists who came before them, standards of living will improve exponentially more rapidly the sooner people innovate and make new scientific discoveries. Thus, we should support and revere the people and things that generate wealth now, but many of the demands people have for their politicians would result in precisely the opposite (but this is again for the subject of many future blogs).

UPDATE: April 9, 2018. A short video version of much of what was said above was just published. “As the Rich Get Richer, the Poor Get Richer