Thoughts on Forced Redistribution of Wealth

This article was co-written by Matthew Sabey, an economics major, and Brian Sabey.

An important part of our political dialogue is about distributive justice—that is, the justice or injustice of redistributing wealth and other resources in various ways. I’m not just talking about tax brackets and welfare programs; I’m also talking about more subtle means of wealth redistribution such as requiring hospitals to treat people who can’t pay (under EMTALA), thereby shifting the cost to those who can—or requiring everyone to buy insurance and subsidizing those who can’t afford it, with a similar effect. To what degree should the law imitate the great outlaw Robin Hood, taking from the rich and giving to the poor?  

Should the government take however much is necessary to ensure that everyone can go to college and enjoy adequate housing and health care? Should it redistribute much more, so that everyone shares equally in the fruits of everyone else’s labor as communist ideologies suggest? Or should the government intervene in the economy enough to pressure everyone to “play by the rules”—and no more? The two extremes of this debate correspond roughly with two competing ideals of equality: equality  of outcome versus equality of opportunity. Neither, of course, is remotely possible to achieve. But, if it were possible, we believe equality of opportunity would be vastly more desirable than merely dividing all the dollars into equal portions.

We think the debate can be framed thus: since real equality of opportunity is impossible, what is to be done? To what degree does it serve us well as a society to artificially balance the outcomes?

We don’t aim to answer this question. Instead, we aim to accomplish two goals. First,  to lay out some of the arguments on both sides that appear forceful to us so as to convince our readers that the question is difficult and the other side should not be casually dismissed. Second, to point out that however much we ultimately decide to redistribute wealth, there are potentially both good and bad effects–and for the most part we can all agree about which ones are which, and what causes them. We conclude that while there is no ironclad answer regarding how much redistribution is ideal, we might realistically hope to work together productively on the problem of how to go about it.

One of the crucial facts around which the debate organizes itself is the principle that economists call “decreasing marginal returns.” That is, to a rich person, one dollar is worth less than it is to a poor person. It might buy the rich person a slightly nicer meal; but without that dollar the poor person might not eat at all. Thus, the “return” (or value) for having a “margin” of one additional dollar “decreases” in proportion as one’s wealth accumulates; the dollar’s is worth vastly less to the rich person than to the poor person. Intuitively, it seems unfeeling or inhumane to allow someone for whom the benefit of the dollar is literally negligible—someone who would not even notice its absence—to retain that dollar when, to some other person, having it  means that the person has food to eat that day. And this theoretical case is far from fanciful: a dollar is literally negligible to many people, and to many others it could very easily make the difference between survival and starvation in the immediate future. Therefore calls for wealth redistribution have a legitimate and rational basis.

One can hardly emphasize too much the fact of decreasing marginal returns. The rest of the debate is concerned mostly with the consequences of this principle. When a dollar is a matter of no concern to me while it means survival for one more day to you, how is it possible—how could it even be argued—that the dollar should not be taken from me by the only entity with authority to take my money—the government— and given to you? But if we admit this much (and for our part, we do), there is no longer a question about whether it is permissible for the government to engage in forced redistribution of wealth. The only question is the appropriate manner and degree of redistribution.

And why not a radical redistribution? Why not follow the principle of decreasing marginal returns to its logical conclusion and maximize utility by equalizing wealth?

One possible answer might be found in Locke’s social contract theory and the basic notion of property. For Locke, even in a state of nature, in the absence of any law or stable society (imagine a caveman-like existence), the idea of property still makes sense. I have mingled my labor with the house I build, the tools I fashion, the food I hunt or harvest. I have made them mine; I have “bought them with a price,” and I thereby obtain a natural right to use and defend my property. Yet, though I have the right, I may not always have the power. Someone stronger than me may take my property by force. For Locke, this is the main reason we form governments—to protect our natural right to that which we, as individuals and families, have obtained by our labor. We sacrifice some of the freedom we have in a state of nature in order to render our other natural rights more secure. Therefore, if the government were to take my property away from me, it would violate its whole purpose for existing.

The idea that natural property rights must be respected is, in some degree, sound. Such rights exist: Locke was right that we, by nature, lay claim to what we have built—to the place where we dwell and the fruits of our labors. The communist regimes that, in their most extreme moments, attempted a system of radical communalism—ownership of all assets by the commune—failed wretchedly to overcome the natural tendency in people to claim ownership over what they, by nature, perceive as theirs, and to seek to increase the number of things over which they can claim ownership. Chinese and Russian communism have largely fallen back to Locke’s natural system of property—and most Chinese and Russians (and others) consider this a good thing. For better or worse, capitalism à la China is now among the most fiercely cut-throat of all capitalisms. So props to Locke.

However, Locke’s theory about the relationship between property rights and the state has issues. In particular, we question his premise that government is best viewed as simply the result of an agreement made by a set of individuals to protect their respective rights. That (or something like it) is part of what government is, of course; but a government is also the most important artefact of a society. It is something we as a collective produce—a collective that is more than the sum of its individual parts—and this artefact helps define our mutual belonging—what makes us a People. To the degree that we are responsible to each other and to the society as a whole, we are something different from, and (we would argue) better than, a set of individuals intent on protecting their rights. We have an identity as a group, and privileges and responsibilities that arise from that collective belonging. One of the privileges is, in some sense or other, to be supported by the rest, and one of the responsibilities is to support the others.

In that spirit of mutual support, it makes sense to promote wealth redistribution. And the government arguably plays an indispensable role in the process. For without some governmental intermeddling, certain dynamics play out, at least in the short run, that tend towards ever-greater concentration of wealth. In the long run, the historical growth of the middle class suggests that wealth deconcentrates with time. But there is at least a short term tendency towards concentration in the absence of intervention. It can be seen most clearly in the corporate world. The people at the top, in order to keep their company more profitable, don’t pay the base level employees even close to as much as the value that they produce for the company. Admittedly not getting paid as much as the value one produces is necessary for the survival of any company, but the degree of discrepancy between value and pay is often astonishing. The less the bottom tier is paid, and the greater the value they produce, the more profit the company makes. The profit a company makes is important for stockholders for competition with other companies, and, of course, for the income of those at the top. As they get richer, they get more power to suppress wages, thus increasing the income gap. And if the poor attempt to stand up for more wages, generally their jobs can easily be outsourced, and they will then be unemployed and even poorer than before. Therefore the bottom tier needs another powerful entity to fight for them. For now, that entity is the government (or government-protected unions).

So far we have largely focused on the justifications for wealth redistribution by the government. The Lockean notion of property we think deserves respect but must be qualified and balanced with a certain degree of communalism. But even from a communalistic and utilitarian standpoint, there are powerful arguments in favor of non-interference. It is possible that government meddling ends up injuring the very people it was designed to help. It may not be as common as some conservatives think, but we are fully convinced that this does occur. For one thing, it may provide the “have-nots” with a safety buffer, decreasing their motivation to seek better situations.

In a Chinese fable, there is a master and a student. The student wants to know how to lift his town out of poverty. The master said you must first get to know the people. So they went and stayed for a month with the poorest of the poor, sleeping on dirt, cuddled with the family because they couldn’t afford blankets. This family had just one child, and one cow. The cow was thin, but it produced enough milk to trade for two cups of rice—their daily rations. After trading the milk for the rice, they then had to take the cow out to where it could graze for free, and bring it back home. After a while the student came to love the family and understood how the cow was vital to their survival, the master called the student over and said “Let me show you how to lift this family out of poverty,” he then took the cow behind the house and slit its throat. The student was horrified: the family was doomed. He didn’t dare go back and look the family in the eyes, for he had been the one that brought his master there. So, ashamed, he returned home. The thought of the family’s suffering racked his emotions for three months.  Finally he found the motivation to attempt to make things right. When he got to the house, he was dismayed to find the house abandoned. He frantically asked around, and found out that they had moved to a new address. When he got there, to his great surprise, the house had multiple rooms and even new flooring.

This fable deals with the fact that people are good at getting stuck in a routine, a comfort zone, and not making the necessary changes to improve their lives. But when their crutch is taken away, and they hit rock bottom, people are also good at picking themselves up and adapting. For example, consider some startling facts found out about U.S. trade.  In a study by Matt Sabey, he  gathered data on imports, exports, GDP, and the unemployment rate, and wanted to find out if increased international trade is as bad for the US employment as the manufacturing sector believes. He found three months after imports increase, and exports decrease (indicating that manufacturing jobs are being lost in the U.S.), there is a large drop in the unemployment rate.  This indicates that many of the people who lost their jobs were able find new jobs, but  also the increased trade created jobs for others. So it is possible that without government interference “preserving” the bottom tier, those who reside there would be better off because they would be forced to make more drastic changes. Initially, it would hurt them; but in the long run it might dramatically increase their wages.

So the questions remain: how much wealth redistribution is proper and/or desirable? How do we navigate the tension between natural property rights and our responsibility of mutual support? And between the benefits and dangers of the free market on the one hand and of government intervention on the other?

The best way toward an answer, in our view, is through practical inquiry, rather than theoretical debate. Indeed, among the most notable contributions of pure economic theory to the debate is a proof that pure economic theory cannot answer the question. Arrow’s impossibility theorem shows that it is impossible to maximize a social utility curve, even if people have clear preferences. Therefore, it is impossible for economic theory to tell us how much we should redistribute wealth to maximize social welfare.

Let us restate that: whatever your opinion on the subject, it is not provable with economic theory. The numbers don’t back you up. They don’t back anyone up.

Without the ability to answer with graphs and numbers, we are faced with a difficult inquiry: what degree and what manner of forced wealth redistribution best fosters human thriving in fact? And the answer is not easy to discern.

In practice, forced wealth redistribution has both positive and negative effects, beginning with the fact that it must be by the government. One definition of “government” is a “monopoly of the legitimate use of physical force.”  Deriving from this monopoly is the exclusive ability to tax and spend public money. It is fitting, on the one hand, that it is the government that collects and spends taxes, because the government is a central expression of our mutual belonging—and, potentially, of our mutual benevolence as a People. But on the other hand, the government, precisely as a monopoly, lacks incentive to maximize efficiency—and forced wealth redistribution can just as easily express the greed and jealousy as the kindness and benevolence of the People.

On the one hand, wealth redistribution has the potential to relieve the indignity and despair of poverty, to help struggling people stay afloat or get back on their feet, and to restore people to a state where they can contribute to society. On the other hand, it also has the potential to reduce good incentives on both sides of the equation. For those on the receiving end, it reduces the incentive to work hard and pull their own weight. And for those on the giving end, it reduces the incentive to work hard when the fruits of their labor are spread out across the whole society. Thus, laziness and selfishness on both sides of the equation impede the economic efficiency of redistribution.

It might foster a sense of mutual belonging and identity. But it might also foster a sense of individual entitlement for the receiving party and resentment for the party from whom wealth is taken. But then again, if we are to guard against dangerous resentments, those of the starving poor for the idle rich are potentially much more volatile than those of the unwilling giver of tax money.

It may elicit more money than people would willingly give—more power to save from poverty and restore to productivity. Yet it may also stifle the impulse to give freely, and reduce the sense of gratitude in recipients when they receive by the processes of law instead of the impulses of human sympathy.

It potentially teaches the rich (truthfully, in our opinion), that they are wealthy by the grace of their society and their forebears as much as by their own efforts, and even if that were not so, it would still be their duty to share. But it potentially teaches the poor (falsely, in our opinion), that they deserve better, and are right to resent those whom fortune has treated more kindly than she has treated them. The insolent hoarding of the selfish among the rich may be rebuked, but the insolent clamoring of the selfish among the poor is flattered. Ideally, there would be some way to help everyone see truly and enjoy the blessings of gratitude, brotherliness, and generosity of spirit. Forced redistribution of wealth does not unproblematically promote this goal.

On the one hand, it may go some distance towards leveling the field with doctors and lawyers on the one side and social workers and teachers on the other. But on the other hand, there are powerful arguments in favor of allowing the free market to have its way with the incomes of the various professions. All of our college friends who intended to become teachers were aware that they would not be paid well. Why did they still choose to be teachers? Presumably, they anticipated that they would get more utility out of molding and helping students and having a steady job than out of the higher paying, less obviously meaningful jobs of those who work in high-powered, high-stress institutions like law firms and fortune 500 companies. Self-filtering as people choose careers is at least somewhat reliable in maximizing utility. People chose what they want. To redistribute wealth after that self-filtering occurs can legitimately be seen as a windfall to those who freely chose the lower-paying jobs and as a bad break to those who freely chose the burdens and risks of the higher paying jobs.

For our part, we are neither wise nor experienced enough to weigh the pros and cons of redistribution and say how much is best. Yet the problem must be answered one way or another.

But perhaps the question of “How much?” is the wrong starting place. However much We the People decide to redistribute wealth by governmental force, we should devote our best efforts to magnifying the good effects of wealth redistribution and minimizing the bad—i.e., of finding a good “How” for our however much. And perhaps the question of “How” is actually the appropriate starting place. That, it seems to us, is where the common ground lies. We can agree that it is good to minimize the inherent inefficiencies of government operations—to maintain strong incentives to work hard for the givers and the receivers alike—to maximize the benevolence and gratitude and minimize the resentment and entitlement on both sides of the equation—to increase belonging and diminish tensions across economic classes. Most of us, at least, can agree on these points. So shouldn’t we feel that we are on the same team in figuring out how to do it?