The Concentration of Economic Power

Yeah yeah, and then go and figure out the combined power of just 3 rating agencies to direct the flows of capital around the world.

Well it's official. Obama will win the Presidency. We can look forward to the following in the first 90 days:

* no renewal of Bush's tax cuts

* renewal of the offshore oil drilling ban


* precipitous withdrawal from Iraq


* new taxes on "the rich and corporations"


* huge new health care plan


* throws Israel under the Islamic bus


* enforces the "fairness act" and shuts down right wing radio

but, but, but, "THE PEOPLE" control the government with their votes.

I have a bridge to sell you.

Another point i want to make is that Obama didn't win it - the MSM did. This is a coup. America is a banana republic as of Nov 4th.

Good point, professor.

The concentration of wealth is a Marxist worry. He predicted capitalism's fall as capitalists competed each other into poverty. He predicted that wealth would be concentrated in the hands of the very few while everyone else lived in poverty - until the communist revolution that was obviously going to follow. Nearly 200 years later, it is Marxism that is impoverished. Yet, I still hear the same prediction - often from people who have no idea where the original idea came from.

In a capitalist system, the only way to become wealthy is to please your fellow man. Wherever that behaviour has been disincentivized (Russia, France, China, North Korea, Egypt, etc.) humanity has been the poorer for it. in a system of massive state power, the gap between the most wealthy (the Nomenklatura) and the least wealthy (everyone else) would make Bill Gates blush. As you pointed out. Government has the monopoly on violent force and can cow the entire population. A rich man's only weapon is the ability to offer a price high enough to entice another to sell to him willingly.

Crusader: Now that you have listed all of the positives of an Obama administration, could you please list the negatives (if any)?

Thanks.

Wealthy Americans may only have 1/15th the power of the average congressmen but they have the freedom to choose how they spend money. A billionaire like Bill Gates is free to, e.g. save Africa, on his own; a congresswoman must convince 535/2 other big ego hotshots to join her. I would much rather have $1000 than a 1/535 share of 15x$535,000.

I suspect but can't prove that economies run better when folks aspire to the next ladder rung and compete to reach it. I'd like to see the foreman making money such that most line workers want to be him. If the foreman is only making a bit more than workers and the only successful folks are in a distant capital city it discourages the greed that fuels competition and growth.

When Everyone is equal

I, Government

I am government-the institution known the world over to all who pay taxes, get subsidies, and face regulation.

Coercion is both my vocation and my avocation; it is in my very nature to compel others to do that which they otherwise would not do.

My nature should then be of great concern to you as I impinge on your liberty. My nature affects your life profoundly. Indeed, there is little in your life that escapes my grasp.

I am also a mystery to many. Some see me as benevolent, Some see me as omniscient, Some see me as an absolute necessity, though people have lived in societies without me.

These naïve convictions grant me an unwarranted place in society. These misconceptions have imposed great hardships on ordinary people, though they have served an elite of rulers well.

I, government, inspire wonder and awe in many. Some persist in this admiration even when confronted with my worst atrocities.

It is in my interest that you never truly understand me, for if you did, you would see that, at the very best, I am merely the defender of your personal and property rights and, at worst, the most efficient violator of these rights.

In fact, if all did come to know my true nature, they would view me with distrust rather than with wonder. If you all knew what I have done throughout history, you would look on me with contempt rather than with awe....

http://www.fee.org/Publications/the-Freeman/article.asp?aid=4427

With the Congress not in session, the stock market made a big comeback today. See, that's the key to saving the economy. Send these idiots home so they can't screw up anymore. Exactly. We need more holidays. That's the problem. More holidays, Jewish, Christian, Buddhist, get them all in there.

— Jay Leno, The Tonight Show

Good points. When I look at the Forbe's list I notice a couple of things. One that the turnover on the list. It seems about 12% drop off the list each year, and only a small number die off. The second is how few are on the list because of inherited wealth or become they are executives making a huge salary. The wealthiest tend to be wealthy because they have created a product or service needed by the masses -- and employed hundreds of thousands, if not millions of people doing so.

@Crusader, don't worry about your precious Israel. Obama is an AIPAC sellout, so we won't have to worry about what to do with those millions we would have if we stopped subsidizing their military power through foreign policy and our perpetual military presence in the Middle East.

A Senate populated almost exclusively by millionaires may soon hand hundreds of billions of dollars of taxpayer obligation to a former CEO of Goldman Sachs worth hundreds of millions of dollars to buy notes of questionable value from similarly wealthy CEOs of other financial institutions with the blessing of Warren Buffet, while politicians raise the conforming loan limit for FNMA securities to a quarter of a million dollars and pass a $7500 tax credit for home buyers, presumably targeted at mobile homes in trailer parks.

And it's all a lot hand of wringing about the 'inequality' of wealth from folks jealous of successful producers.

Thanks for the economics lesson. I never would have figured that out.

Anyone who believes that politics is not thoroughly dominated by uncommonly wealthy people pursuing their political interests is completely out of touch with reality.

So I estimate that the 535 members of the US Congress enjoy over 15 times the financial power of the 535 richest Americans.

Lawson is absolutely right about that, because these Congressmen are wealthy people, just as members of the Central Committee of the Communist Party of the Soviet Union were wealthy people. And they probably labeled their exercise of their authority "production" too.

Attributing "productivity" to a machine (or an organization of various factors of production) makes a lot more sense to me than attributing it to man whose name appears on a piece of paper also naming the machine. Titles to property are still entitlements, regardless of endless, politically motivated, rhetorical drift.

Imagine a thousand people with a thousand dollars apiece "investing" as follows. Each year, each investor earns a yield. The yield is written on a piece of paper drawn at random from a hat. Each investor draws his yield from the same hat and then replaces it, so each investor chooses randomly from the same distribution of yields.

This simple model of a capital market is called the random walk model. Each investor's wealth is an independent stochastic process. Mathematicians call the process Geometric Brownian Motion. No investor has any advantage over another. They investors are completely indistinguishable.

After a number of years, we measure the proportion of total wealth held by the least wealthy half of the investors. Obviously, this value is less than 0.5. After a few more years, we measure again and observe a smaller value. After many more years, the value is smaller still. Ultimately, the value approaches zero. This outcome is inevitable. The model is very simple to program. Just try it yourself.

The point of this demonstration is not that real capital markets are so simple. Obviously, they aren't. The point is that no more complexity, or investors making more informed decisions, is required to concentrate wealth. Wealth becomes increasingly concentrated even with complete information symmetry, in a market in which no investor is any better informed than any other (or no investor has any information about the value his investments).

The random walk model generates a Lognormal distribution of wealth, and this distribution approaches a Pareto distribution (a power law) over time (except in the tail). Pareto (the Italian economist) chose the distribution named for him to model wealth concentration, because it fit the observed distribution empirically.

Without information symmetry, wealth presumably becomes concentrated only more quickly. Only a highly restrictive market, deliberately designed not to generate this outcome, could avoid it.

Do want such a highly restrictive market? No. I'd even repeal insider trading laws myself.

Do free markets concentration wealth? Almost surely.

What if anything the architects of forcible propriety should do about it is debatable. That free markets behave this way is not.

... a $7500 tax credit for home buyers, presumably targeted at mobile homes in trailer parks.

"ostensibly targeted" better expresses my intention.

It's been a while since I've posted here, but having been a long time DoLer (Dr. Stephenson was one of my college professors), I feel the need to brag on them a bit. Dr. Lawson often makes brilliant points like this.

What concerns me most about the current political scene is that people seem to think that the market is "broken" and needs to be "fixed". Markets don't break. The current state of affairs is simply the natural consequence of what happens when third-party busy-bodies (Congress)decide it's their job to make choices for others.

Prof Boudreaux,

You recently described the issue of redistribution as the "bottom line."

Feeling the same way about it, I tried to elicit a discussion of it at the Austrian Economists blog, and was simply banned for my efforts.

How about a full-scale discussion of it here, and specifically this question:

Does taking from the rich to give to the poor reduce or increase income inequality?

DG Lesvic

the bad boy of economcs

I suppose we can increase income equality by taking from the rich to give to the poor. The question is: what then happens to the total amount of real income? Generating income requires continual reinvestment of capital yields. Taking these yields from the decentralized lords of capital inhibits the reinvestment, particularly if the apparent beneficiaries of this redistribution consume rather than reinvest them.

Even if the nominal beneficiaries of income redistribution seek to reinvest as readily as current recipients of the income, the current recipients presumably are better informed of the currently most profitable investment opportunities. Simply redistributing monetary income doesn't redistribute this information, and it doesn't lower the risk aversion of the less wealthy recipients or their greater propensity to consume rather than invest.

On the other hand, higher income beyond a certain level might not signal greater awareness of profitable investment opportunity. After all, states already redistribute massively. Saddam Hussein effectively "earned" income sufficient to build himself grand castles with gold toilet fixtures, yet economic growth in Iraq was not then enviable.

If someone is simply entitled to the interest payable on a billion dollars worth of Treasury bills, this person receives much more income than I, but this income signals no awareness of profitable investment opportunity. On the contrary, holding so much cash suggests the opposite.

A progressive consumption tax seems a more enlightened approach to inequality. Distribution of entitlement to consume is what we mean by "distribution of income" typically. We can limit the entitlement of wealthy lords to consume without limiting their entitlement to reinvest the yield of capital they govern. The difference between a golden toilet seat and a silver seat little diminishes a persons's propensity to seek profit, particularly if his competitors for marginal consumption are similar limited. I suppose Adam Smith was right to advocate this sort of tax.

dg lesvic,

"Does taking from the rich to give to the poor reduce or increase income inequality?"

My belief is that it does neither, because the money given to the poor doesn't really come from the rich. It comes from the economy as a whole because the powerful have the power to adjust. Or to say it another way, the powerful don't pay taxes, they collect taxes (or rent, if you prefer). The net result of income distribution action initiated by the political class is that the political class survives and thrives and the productive class carries on with a bit heavier burden.

The idea of income inequality is inherently flawed because it is based on dividing society in accordance with the motivations and propaganda of the political class. Dividing society into productive and non-productive (political) reveals a much different reality.

Randy's critique of rent seeking is even more radical than mine, and mine is pretty freakin' radical; however, I agree with Randy's sentiments. Statist redistribution benefits the rich, not the poor, overwhelmingly.

The whole idea of "taking from the rich to give to the poor" is laughably incredible, like that's what most of the redistribution is all about. Who believes this incredible stuff?

I noticed some time ago that the Pope's castle seems the largest.

Martin,

I've been following many of your posts (well, the shorter ones anyway), and find myself in agreement with much of what you say. We disagree on a couple of details;

1. Parent care. I don't think the state has any business in this at all, because I believe in freedom to fail.

2. Castles. I am concerned only with those that aren't earned. Thus Bill Gates' castle doesn't bother me at all, while the two bedroom DC condo of a member of the political class bothers me considerably.

Randy - the only way to stop the rich from passing along a tax increase through price increases is to overthrow the system entirely, with a Communist regime.

I wonder if Martin harbors fantasies of peasants with pitchforks coming to Bill Gate's castle to string him up.

I suspect that "the poor" are worse off because of redistribution because it has corralled many of them into an 'income class'.

Redistribution is irrelevant to consumption parity. The only reason redistribution sells is because of the promise of greater ability to consume.

The problem is that the size of the pie available to the poor will not grow. Their increased consumption raises prices and the relief from the necessity to work means they are contributing as much to the pie as they otherwise might.

There is also a psychological toll taken. The focus of beneficiaries of redistribution is narrowed to their stipend and how they are going to spend it. This is deadening to any creativity with regard to producing wealth.

There is also a negative effect from the high end.

The idea of redistribution springs from the mercantilist concept that wealth exists and can only be taken. A manager government is mercantilist by nature.

I am reminded again of a documentary on Swedish socialism; Promise of Spring. One of the things that sticks in my memory is that the documentary crew kept finding youth hanging around drinking to alleviate their boredom. The crew kept asking them "Why do you do this?"

The constant reply was: "Nobody cares."

oops:

"they are NOT contributing as much to the pie as they otherwise might."

and

"The problem is that the size of the pie available to the poor will not grow as much as it might otherwise."

Crusader,

I have no problem with the powerful passing on the taxes. I would if I could. My problem is with those who assume that it is possible to tax the powerful. It is a basic tenant of progressivism - and it is wrong. Its a con.

I wonder if Martin harbors fantasies of peasants with pitchforks coming to Bill Gate's castle to string him up.

More like peasants expecting Social Security checks and finding only statutory claims to progressive income tax revenue.

I want to thank you all for your very courteous and positive response to the call for a discussion of redistribution.

Over at the Austrian Economists blog, they're still shocked and outraged at having been asked to discuss it.

Martin Brock here said:

"The whole idea of 'taking from the rich to give to the poor' is laughably incredible, like that's what most of the redistribution is all about. Who believes this incredible stuff?"

That was Rothbard's point, too.

The politicians wouldn't allow redistribution to proceed from rich to poor, but only from everyone to themselves.

But that's a political, not an economic theory, and a judgment, not a praxeological demonstration, and evades the question:

If redistribution did proceed from rich to poor, which is not impossible, what effect would it have?

It seems that most of you see it as Mises did:

While redistribution reduces society's total net income, it increases the poors' proportional share of it, leaving them with a larger proportional share of a smaller total. The question, then, would they be better off with the smaller share of the larger cake or larger share of the smaller cake?

To Mises this was a question of quantitative cognition, and, as such, beyond economics.

But I submit that his premise was wrong, that the issue is not quantitative but qualitative, that redistribution leaves the poor not with a larger but a smaller proportional share of the smaller cake.

Here is just a hint of why that is so:

Taking from the rich to give to the poor doesn't just draw money but manpower downward upon the hierarchy of production, and the manpower faster than the money. For manpower doesn't merely follow money but anticipates it. And, with manpower and therefore competition among the poor increasing faster than the redistributed money, they'll be poorer than they would have been without it.

1. Parent care. I don't think the state has any business in this at all, because I believe in freedom to fail.

I believe in mutual obligation, but if freedom to fail is all that, I'm happy for you to fail to collect rents my children owe you, including your Social Security benefits and any interest due on your Treasury notes. I don't expect this failure, but I'll happily accept it.

Here's my proposal. Everyone returns their checks from taxpayers to the g'ment, and the g'ment returns this loot to children, so the children may support aging parents who supported them rather than purchasing Treasury notes. We won't compel them to support their parents. We'll just stop compelling them to support everyone else.

And when everyone else dreams of new rents to label "proper", children won't pay those either, including license fees on software patents that didn't exist at all when they were born. How's that?

2. Castles. I am concerned only with those that aren't earned. Thus Bill Gates' castle doesn't bother me at all, while the two bedroom DC condo of a member of the political class bothers me considerably.

Define "earned". You imagine that Bill Gates is not a member of the political class. It's laughable.

Define "political class".

I expect you include Bill Gates in the political class because Microsoft enjoys patent and copyright protections enforced by the government, hence all his millions came his way due to legal protections.

But it is also true that many voluntarily paid the price for MS products, mostly through the cost of their systems including the OS.

The difficult question is: How rich would BG be sans patent and copyright protection?

Another question:

Who is not a member of the political class?

Martin,

"Re; Define earned."

Defining it isn't really the problem. From our earliest years we know the difference between agreement and theft. But nonetheless, theft exists, and is in fact institutionalized and often promoted. So the problem, given the environment, is to separate the earned from the unearned. Few transactions occur entirely within the realm of agreement, and some government services may actually have value. Nonetheless, we have judgement. My judgement is that a very large percentage of Bill's castle was purchased from earnings. And my judgement is that a very large percentage of our politician's condo was purchased from the proceeds of theft.

That was Rothbard's point, too.

I like Rothbard. I just don't think he understands money.

But I submit that his premise was wrong, that the issue is not quantitative but qualitative, that redistribution leaves the poor not with a larger but a smaller proportional share of the smaller cake.

The result depends on how much redistribution we're discussing and precisely what is distributed from whom to whom.

And, with manpower and therefore competition among the poor increasing faster than the redistributed money, they'll be poorer than they would have been without it.

I understand Charles Murray's proposal to end the welfare state with a minimum income, akin to Friedman's negative income tax, and the idea is appealing on some level, but I also understand your objection to it.

People are poor for many reasons. Some people really are poor because they're deaf, dumb and blind. Regardless of inspirational exceptions like Helen Keller, these disabilities really do hamper one's productivity.

Compelling contributions to these people doesn't encourage people to gouge out their own eyes, and if the contributions are drawn from marginal consumption, I don't see how they harm useful economic organization.

Will political "champions" of the disabled skim this stream of entitlement? Sure they will. If the stream were strictly voluntary, similar people would still skim it.

Sam Grove,

Re; Define political class

Those who practice the art of theft.

Re; Who is not a member of the political class.

The productive class. Those who earn.

I expect you include Bill Gates in the political class because Microsoft enjoys patent and copyright protections enforced by the government, hence all his millions came his way due to legal protections.

And for countless other reasons. I don't have a serious problem with it. I just insist on expressing the fact. Why deny reality? Bill Gates is not about to appear and shower me with gifts for kissing his ass.

Gates did not produce Microsoft Windows. The idea is absurd on its face, and he would be first to say so. Gates is entitled to organize the Microsoft corporation or other resources on a similar scale, but he didn't earn this entitlement by producing Windows or Office or Visual Studio or SQL Server.

Gates did produce Microsoft's first product, long before Windows Vista existed, and I think that's great. In fact, he probably had a lot more to do with Windows 3.1 than he had to do with Vista, and I sometimes wonder if we'd all be better off going back to 3.1.

Gates' daughters didn't produce Windows Vista either, and his grand children won't be the producers of whatever Microsoft is producing a generation or two from now, regardless of how much Microsoft stock they inherit. The whole idea is just laughably ridiculous.

Martin Brock wrote"

"The result depends on how much redistribution we're discussing and precisely what is distributed from whom to whom."

From whom to whom?

From the the rich to the poor.

How much?

Any amount.

What is distributed?

Anything of value.

For the principle, that taking from the rich to give to the poor does not reduce but increases income inequality, is the same, regardless of the details.

Martin,

To be honest, I have no idea what Bill did or did not do. What I do know is that someone agreed to pay him. I think its safe to assume that the someone got something of value in return - or they would have stopped paying.

For the principle ... is the same, regardless of the details.

I wouldn't believe this even if Einstein said it, and he wouldn't say it.

What I do know is that someone agreed to pay him.

I've owned and used lots of Microsoft software, and I've never even seen Bill Gates.

I agreed to pay someone at Best Buy for a laptop computer. Someone at Best Buy agreed to pay someone at a wholesaler for the laptop. Someone at the wholesaler agreed to pay someone at the laptop manufacturer. Someone at the laptop manufacture agreed to pay someone at Microsoft who agreed to hand the money to a financial officer who agreed with Gates and other governors of the corporation to hand it to software developers and documentation writers and marketers and packagers and countless other people including but certainly not limited to Bill Gates.

I'm definitely leaving lots of people out here.

And a mind boggling variety of forcible proprieties constrained all of these agreements.

If we're going to summarize all of these people with a single label, "Bill Gates" seems a largely arbitrary choice to me.

We might as well talk about "Clinton's economy", and of course, we routinely do.

Defining it isn't really the problem. From our earliest years we know the difference between agreement and theft.

Actually, countless law abiding people receiving tax money from you would be utterly shocked to hear you call them "thieves", and I'm not even discussing the recipients of license fees for economically dubious patents.

So defining these terms is important.

Martin,

So it was complicated. Do you have any evidence that anyone was forced to turn over any money? Not saying it isn't possible, and Sam certainly has a point about copyrights, etc., but again, while there are always elements of theft, we still have judgement. The element of agreement seems to me to carry the most weight in my dealings with Microsoft, while the element of theft certainly carries the most weight in my dealings with the government.

Martin,

"...countless law abiding people receiving tax money from you would be utterly shocked to hear you call them "thieves"..."

I'm sure they would be shocked. But they did use guns, didn't they. Talk to them, they don't deny it. They say quite plainly that they know that if they didn't use the guns that I wouldn't turn over the loot. They usually proceed to babble on about social contracts or other such nonsense, but they still use the guns. So they can use whatever words they like. The word theft is still accurate.

So it was complicated. Do you have any evidence that anyone was forced to turn over any money?

That's not the point. People didn't simply turn their money over to Bill Gates as a matter of fact. They turned it over to corporate collective of which Gates is (or was) the Chief Executive Officer.

Martin,

So was anyone forced to join this corporate collective?

Don't get me wrong here, Martin. Not trying to defend all actions of all corporations. Was it GM that just got a $25 Billion dollar bailout while no one was looking? Its just that Bill seems to me to be cleaner of political activity (i.e., theft) than most.

Countless forcible proprieties influence the decisions people make. The issue we were discussing involves the role Gates plays in producing Windows and other Microsoft products and whether it makes any sense to confuse him with a Lockean "property" holder, as compared with the Lord of an feudal estate for example, except insofar as we're discussing Microsoft's first Visual Basic compiler and other products in which he played a more direct role.

Gates' Microsoft didn't even write the first PC OS from scratch. They bought it. I have no problem calling Gates an officer of the corporation producing Windows but saying that he earns his living "producing Windows" is a collectivist fiction and an affront to hundreds of people more directly responsible for the product.

Furthermore, I think Gates himself would agree with me.

I think we're seeing the opening shot in a very long battle for bailouts of every description. Microsoft presumably doesn't need one at this point, but just wait.

Opening salvo is more like it. The new bailout is full of goodies handed out in many directions.

Re; Who is not a member of the political class.

The productive class. Those who earn.

Ah, but how to tell them apart, how to tell them apart.