www.ErikSvane.com

The bilingual weblog that dares to go
beyond "ideas" and "opinions"
to see what lies hidden underneath

"Income Is Determined Not by Society
Distributing, But by Individuals Earning"

I have never been comfortable with the resentment that accompanies the mention of "the rich" on one hand or "the United States" on another. Whether on an individual basis (rich people and poor) or on an international basis (developed countries and third-world ones), the idea of (re)distributing wealth seems to suggest that income is determined by an interstellar spaceship flying down every month or so to hand out arbitrarily predetermined wads of cash. But either because the aliens (or whoever) are too devious or else because they are too stupid, they decide to hand a bundle of money to a Mr Wilson and a Mr Dupont, say, but only a pittance to a Mr Johnson and a Mr Durand.

On the international level, they would hand out untold billions of dollars to the United States, a bit less to much less to such countries as France and Denmark, and only a sorry handful of coins to countries such as Yemen and Burundi. (Anybody with an email account has probably received the statistics message: There is so many percentage points of the world's wealth in the United States, it states in purely statistical form, and only so little of the world's population, and the email goes on with examples of the same type before ending with a comment of the type: "Do you think that this is fair?")

This underscores the world's belief in what the Washington Post's Michael Kinsley calls "the central committee of the universe". It would appear that somewhere (if not inside the above-mentioned spaceship, then somewhere else), there is a relatively small group of people pulling the strings of the entire planet. And either because they are too stupid or too short-sighted or else because they are too devious or too greedy, they are not intelligent enough, and generous enough, and fraternal enough, and visionary enough to see what is (or should be) obvious to everybody else: that this is a monstrously unfair situation, one that could be corrected relatively easily, with just a bit of good will.

The only problem with this is that, whether in relation to individuals or to nations, there is no central committee of the universe, none has ever existed, and none ever will. The truth is that some individuals, like some nations, choose to be more productive than others. But belief in this fairy tale has led innumerable individuals, groups, and nations throughout the history of the world to take action which have led to disasters, tragedy, and grief, not only for the persons or people believed responsible but also for themselves and their loved ones. Throughout history, belief in this fairy tale has led to statements such as "They deserve to (fill in your choice of catastrophic punishment here)" and (when a tragedy had befallen a certain group) "They deserved it". This grass-is-greener-on-the-other-side-of-the-hill belief goes on with sentences such as: "if only they had done such-and-such (or if only they were to do so-and-so or if only they didn't do such-and-such or if only they understood), the whole situation would clear up, and the community/the country/the region/the entire world could live in peace." Also: "…and if only those idiots would be smart enough to learn from visionary beings like myself, or if only if people as smart as the members of the group to which I belong were in power, all the problems would start getting resolved."

I could go on like this, except the point of this article in the Guest Authors section is a book which I came upon in 2003, which is one of the biggest literary discoveries (philosophically speaking) in my life. Apart from the fact that it uses an image of a truck instead of that of a spaceship, a chapter in The Joy of Freedom says much the same I did in the first paragraph here, except it does so much better than I do. Although its subject is the "dismal science" — economics (its subtitle is "An Economist's Odyssey") — David R Henderson's book is a breath of fresh air. Directly or indirectly, it gives in-depth insight about subjects such as racism, segregation, unions, war, communism, fascism, anti-Americanism, education, ecology, and even the fourth movement of Beethoven's Ninth Symphony. (The chapter on South Africa's apartheid era is especially eye-opening.)

(This doesn't mean I agree with all the Ph.D. in Economics says. Sometimes he can tend to go overboard, I notably don't agree with what he has to say in his website articles on the Iraq conflict, for instance, and I certainly think that a number of the authors on one of the websites that has published his articles are loony, to say the least. What's more, I have never felt entirely comfortable around people close to the libertarian creed, probably because I tend to equate them with the most extreme nutcases. That said, Henderson seems to be far removed from such people, and this book is a jewel.)

But don't take my word for it; make up your own mind. Most of what follows comes from Chapter 9: "Whose Income? Who's Distributing?"

The Joy of Freedom

David R Henderson

We speak as if "the rich" had somehow obtained their income dishonestly, or, at least, dishonorably. In fact, the vast majority of income in a relatively free society is earned. It's true that a small number of wealthy people did get their money by fraud or dishonesty. More common, especially in societies with lots of government controls, were people who get wealthy by using political pull. But I started to see that the typical high-income person in a relatively free society gets his or her income the old-fashioned way — by earning it.…

[A] former communist told us of his intense resentment of the fact that he was smart and had nothing, while the rich were dumb and had a lot. "That," he said "was how I became a Marxist. I hated the rich." We were shocked. We had thought that virtually all intellectuals came to their views via their intellect, not via their resentments … His route to Marxism was a very common one. "The number of people who become Marxists by reading Marx," I still remember him saying, "can be counted on the fingers of one hand." …

The language of economics sets people up to feel envious. Pick up any basic economics textbook and you'll probably find a section on the distribution of income. The distribution of income is simply a statistical measure of how many people earn or receive various amounts of income. However, people, including many economists, often mistakenly talk as if society is "distributing" income and people are passively receiving it. When I think of someone distributing income, I imagine a truck backing up to a crowd of people, the tailgate coming down, and someone on the truck throwing out wads of dollar bills. If you think someone is just handing out money, then the most natural thing in the world is to think that everyone should get the same amount and that it's unfair if they don't.

I have news for people who think that society is distributing income: No one is distributing. In a free society, we earn our income. Society didn't wake up one morning and decide that Michael Jordan deserved $10 million for playing basketball and $30 million for advertising consumer products. Michael Jordan woke up every morning for more than 15 years with a fierce determination to stay in tremendous physical shape, to practice for hours a day, often with weights on his arms and legs, and to be the awesome athlete that he was. And millions of basketball fans and buyers didn't "distribute" to Mr Jordan. Instead they decided, one by one, to spend a little more time watching Jordan on TV, or to spend a few pennies or dollars more for products that he advertised. That's how his income was determined: not by society distributing, but by Jordan earning.

So, whenever you hear that the top 20% receive 45% of all income or that the top 5% receive 20% of all income, remember what that really means. It means that the top 20% produced 45% of all output and that the top 5% produced 20% of all output … Also, the connection between the number of family members producing and the income they generate is a major factor in the inequality of family income. An average household in the top fifth has about 2.5 times as many workers as in the bottom fifth. The bottom fifth includes many single mothers, a lot of them on welfare. The top fifth includes a high number of two-earner married couples along with, presumably, some teenagers or young adults.

You might think I exaggerate when I say the word "distribution" misleads people into thinking that someone is distributing. But if people aren't misled, then why, when we talk about government taking from some and giving to others, do we use the word redistribution? If no one is distributing in the first place, then such government measures should simply be called distribution. Where does the "re" in redistribution come from? It must come from the mistaken assumption that someone distributed wealth in the first place. Of course, the idea that someone is distributing is ludicrous. But our language makes many of us think that way, with highly destructive consequences.

The End-State View Versus the Process View of Fairness

Philosophers have two main ways of judging whether something is fair. One is the end-state view of fairness: The outcome is fair based only on the outcome and not how we got there. The other is the process view of fairness: The outcome's fairness can't be judged independently of the process used to get there … Typically, about 80 or 90 % of the rules are process-based. Take, for example, the rule "don't steal." According to this rule, it doesn't matter how much the person you steal from has and how little you have; stealing is wrong. In other words, you don't even look at the outcome. …

To consider the two types of rules, consider two people, each with one million dollars. One made the million by working hard on a product that he sold to customers, and he never lied or cheated any customer or employee. The other designed a clever piece of computer software that stole one dollar from each of 1 million people's bank accounts. Which of the two got his money justly? Virtually all of us would answer that it was the guy who made the money honestly. In other words, how the person made the money matters a lot. Yet a straight end-state view would say that how the money was made doesn't matter at all. What this shows is that virtually all of us hold a process view of justice. Incidentally, so do all the major religions that I know of. …

Which view — process or end-state — do the vast majority of economists talk about when they talk about a just distribution of income? Here's a hint. They tend to judge how just or "equitable" an income distribution is by how equal it is; they don't ask how people got what they got. In short, the vast majority of economists have a purely end-state view of justice. …

Does Government Intervention Correct the "Injustices" of Capitalism?
And Are Market Economies So Lacking in Virtuousness in the First Place?

People often judge a society more virtuous if the government has set up programs to transfer resources from high-income people to low-income people. But what makes each person virtuous? The only things that count, the only things that can count, are each person's voluntary actions. I am not a moral person because I live in a society whose other members are virtuous. Nor am I a moral person because I live in a society where the government uses force to take from me and give to others. My morality is a function of my own actions, not of other people's, and especially not of actions I am forced to carry out.

Moreover, a clear impact of government transfers has been to make us less virtuous. People give too little to charity because they can rely on the giving of others … "I free-ride on your efforts" … you don't get to feel part of the solution. You don't get to feel the pleasure and deep satisfaction from knowing you made a difference in people's lives. In short, you miss out on a very important part of being human. [What you get is the] feeling of being cheated for not being given the chance to help others.

Although you do get the benefit of seeing other people helped even if you don't contribute yourself, what you miss is the pleasure of helping them and the feeling of being involved. To get this pleasure, most people will help others. That's why communities do so well at solving problems, whether getting together to clean up a beach or park or raising tens of thousands of dollars so that a neighborhood kid can have an expensive surgery. The importance of community is recognized in the African expression [that Hillary Clinton used for a book title but failed to understand, and] that translates, "It takes a village to raise a child". …

Isn't it interesting that [people] in the United States, where the welfare state is less extensive than in Europe, are more generous with others than people in Europe are. … Why does the United States exhibit more feeling of community and more generosity than other wealthy nations do? One of the main reasons is that governments in the United States take less responsability for people's lives than governments in most other countries. This leaves room for communities to develop and support their members. When governments take over, people who would help often feel that their own help is redundant and futile.

Economists have found that government aid "crowds out" private charity, … Communities happen. One of the main virtues of Americans, which Tocqueville noted as early as the 1830s, is their tremendous proclivity for forming voluntary organizations to solve various problems. No government policy is needed for communities to form. They just happen. All government needs to do is get out of the way so we can build and nurture our communities. …

Markets teach or encourage at least three virtues: tolerance, honesty, and compassion
Not only do markets breed tolerance, but government interference also breeds intolerance. … The reason for the difference in accountability has to do with the profit motive in private business versus very little motive in government-run business. … Governments have little or no incentive to spend money carefully because it's not their money … Markets breed accountability and governments do not. …