The Fallacy of Wealth Redistribution

In these times of bailouts and corporate corruption and growing inequality of wealth we hear a lot from the left about wealth redistribution, laws to set ratios between the salaries of workers and CEOs and other ideas to try to force an economic egalitarianism on the free market as the expression of a socialistic ideal of economic class warfare.

It is assumed on the left that the welfare of the people as a whole is threatened by growing wealth inequality, that the rich increase their wealth at the expense of the rest of society, and that our current unstable economic times have created opportunities for unscrupulous businessmen to enrich themselves while driving down the economy for everyone else. This is the fallacy of inelastic wealth, which mistakenly assumes that increase of wealth in one sector comes from the other sectors of the economy rather than primarily from that part of the economy which is growing.

This theory is fundamentally untrue, but it is the basis for what Edmund Burke described as the desire to “cut the throats of the rich” for the benefit of society. Just as there was more than 200 years ago, there is an element of the political left today which is absolutely convinced that if you just took away the earnings of the wealthy class and redistributed them, you’d be able to make everyone equal and solve all the problems of poverty.

Burke summed up this economic dynamic, which the equalizers don’t understand, succinctly when he wrote to Prime Minister Pitt advising against such a policy:

“The laboring people are only poor because they are numerous. Numbers in their nature imply poverty. In a fair distribution among a vast multitude none can have much. That class of dependent pensioners called the rich is so extremely small, that, if all their throats were cut, and a distribution made of all they consume in a year, it would not give a bit of bread and cheese for one night’s supper to those who labor, and who in reality feed both the pensioners and themselves.”

That basic criticism of the flawed mathematical reasoning behind wealth redistribution remains as true today as it was in 1795 and today we have hard statistics with which to illustrate the point.

Consider what would happen if H. Lee Scott, the CEO of WalMart, were to give up his salary of $1.24 million a year and divide it a…mong the 180,000 WalMart employees. It would raise the salary of each of those workers by the grand total of 68 cents a year. If he were to give up his entire compensation package including stock options, which totals $10.46 million a year, it would raise the average salary of WalMart workers by a sumptuous $5.81 per year.

Don’t think that WalMart is an exception. The same mathematical relationship applies throughout the economy. If you took away the salaries of the CEOs of the top Five Hundred corporations in the US and divided all $5.4 billion in compensation between the oppressed workers of America, each of them would gain a staggering $18 a year. That’s barely an hour’s wages for the average worker — enough to take the family out for a meal at MacDonalds.

So the grand victory of the proletariat in cutting the throats of the capital class and bleeding out their ill-gotten wealth would be utterly meaningless in bettering the lives of the working class or anyone else.

I realize that ideas like wealth redistribution appeal to the moral conscience of many well intentioned people who have a genuine desire to help the disadvantaged, but as is so often the case, this is an argument based solely on emotion and totally unsupported by mathematical reality. At best it is pure ignorance and at worst it is conscious demagoguery and class warfare for no legitimate purpose. It is socialistic buffoonery and if you run into someone who thinks it makes sense, wake them up with some facts.

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About Dave 536 Articles
Dave Nalle has worked as a magazine editor, a freelance writer, a capitol hill staffer, a game designer and taught college history for many years. He now designs fonts for a living and lives with his family in a small town just outside Austin where he is ex-president of the local Lions Club. He is on the board of the Republican Liberty Caucus and Politics Editor of Blogcritics Magazine. You can find his writings about fonts, art and graphic design at The Scriptorium. He also runs a conspiracy debunking site at IdiotWars.com.

28 Comments

  1. The long-standing corruption of our governing processes by the power elites, as well as the consequences thereof are so front and center of our debilitating socio-economic condition that to talk of the pros and cons of redistribution of wealth in classical economic terms is meaningless.

    Much of the wealth, particularly in the area of banking and financial markets, has been accumulated by unconstitutional means. True, the redistribution of wealth would not make the situation of the poor any better, and in the long run it would certainly make it worse. However, a by far more important and honest conversation for us to have on the tremendous disparity in wealth is about ending the massive racket that has brought it about. Honest capitalism is a virtue, but that is not what we have had in America for decades, and for that we must blame equally our power elites, our phony “Left,” our phony “Right,” and our unvigilant selves.

  2. A valid economic argument, which overlooks two philosophical points at the heart of the argument for ‘social justice’.

    “… cutting the throats of the capital class and bleeding out their ill-gotten wealth would be utterly meaningless …”

    First, there really is ill-gotten wealth among the upper classes, primarily because of their ability to influence government preferences. Corporatism is not a fantasy, it is a modern reality in bureaucratized America.

    Second, the premise of redistributivist (ugly word) rhetoric is that social equality is both desireable and possible. Although reality is rarely ‘just’, the vast majority of people *earn* what they acquire. The objective of ‘social justice’ is to disconnect rewards from merit … eliminating any motive for production. The outcome is necessarily universal poverty.

  3. Companies, their boards and shareholders want the best CEOs, the superstars who excel, who make profits. These aren’t plentiful, aren’t cheap and didn’t get where they are without effort. Take away the incentives? Goodbye leadership, goodbye profits, goodbye job security for everyone else.

  4. sure, ceo’s aren’t plentiful, and getting paid for doing a good job is understandable. but the truth is, they get paid millions, regardless of how the company is doing. this just tells me there is more to the story.

  5. Dave Nalle confuses many things in this piece. It is a straw man argument to suggest that serious socialist ever advocated total equality in wealth or income. What serious socialist advocate is equality before the law including the mediation of natural resources (land, human beings, etc.). Such equality before the law leads automatically to much less disparate distributions of income, wealth, and political power. But the goal is not exact equality in outcome of distribution: only in equality before the law (equality in terms of government).

    Second, the quote from Burke confuses consumption with income. A far less disparate distribution of wealth and income, where we no longer allowed rent-taking and exploitation to redistribute incomes from those who work to those who do not work, would not necessarily reduce the consumption of the richest among us. However, it would eliminate the incomes not consumed that have necessitated enormous increases in government debt and personal debt.

    Right now we have created wealth in fictitious property assets contrived to redistribute income from those who work to those who do not work. The worst of these can be categorized in three areas: 1) private ownership of government chartered enterprises (shares of corporations, etc); 2) private ownership of natural resources; 3) structural debt that arises due to the prior to fictitious property assets.

    Together this fictitious property, daily, redistributes income from those who work to those who do not work. Even the poor become more destitute because their labor is worth less because of the unbelievably extreme concentration of wealth from these fictitious assets (and the accompanying claims on the fruits of others’ work).

    So redistributing wealth with the aim of forever ending private ownership of natural resources and private ownership of government chartered entities, while also one-time eliminating of all of our structural debt, would actually increase our productivity. Such a redistribution would increase the rewards to hard work and ingenuity and eliminate the rewards for hoarding and rent-seeking (though we can make exceptions for retirees, the disabled, and others unable to work). So it is precisely because redistribution is NOT a zero-sum game that make it worthwhile to pursue.

    I plot a path for such reforms at Path to Prosperity for US All (http://path2prosperity4all.us/). The benefits from such an approach are quite substantial. No longer do left and right need to squabble over the best way to cope with this crushing weight of the unprecedented concentration of wealth. We in the 99% can simply demand an end to it.

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