A common condemnation of a free economic system is the insistence that without periodic redistribution of wealth by a central authority (the government), wealth would come to be concentrated increasingly in the hands of a select few who would, via such concentration, deprive everyone else in society through their hoarding and thereby impoverish the great mass of the people. Even more horribly, over time, the economic wealth of a society comes to be vested in the hands of the do-nothing descendants of the original wealthy, meaning that not only is wealth controlled by a few but now those few didn’t even do anything (good or bad) to acquire the wealth save to be born into privilege.
Aside from the obvious and upfront nefarious implication of this belief (namely, that it’d be a social “good” for any private person to randomly steal from such a wealth accumulator, as such redistribution would be a form of dissipation of accumulated wealth which is itself a bad, making the theft a good), this fear rests on a multitude of fallacies and ultimately leads to several absurd conclusions.
None of these make any sense. Each will be examined in turn. But first, let us start with an exposition of the actual operation of an unencumbered (intervention/violent redistribution-free) economic system.
In a free market, capital is always in the most capable hands
According to the common criticism of free economic systems, the normal functioning of voluntary exchange amongst willing individuals will inevitably result in accumulation of real wealth by a select few and de-accumulation of real wealth by most others.
The insinuation is that exploitation is involved– the only way someone could come by “more than their fair share” is if they steal from or defraud others.
While this is certainly a true observation with regards to the operation of a band of thieves, or an agency of government (aka, an official crime syndicate), this makes no sense in the context of a market consisting of voluntary exchanges amongst willing individuals.
In a free economic system, wealth is defined subjectively according to individual preferences and values. Similarly and importantly, wealth is exchanged on a voluntary and subjective basis. The existence of an exchange implies that each party believes he is getting more than he is giving up. If this were not true, a voluntary exchange would not occur.
What people are exchanging is that which is produced. To be able to make more exchanges, one must therefore be more productive (defined as being more able in terms of producing things people want in quantity, or things people strongly desire above other things they might exchange for).
It follows, then, that wealth in a free economic system tends to concentrate in the hands of the “most able”, where “most able” is a synonym for “most productive” and where most productive is defined in terms of having strong ability to produce for others the things that they desire.
In short, in a free economic system, capital finds its way over time into the hands of those who are its most able owners, for the benefit of everyone in society.
The benefits of naturally occurring wealth concentration in able hands, even across generations
Why is this wealth concentration a benefit for all of society and not just those few who come to own it?
Because that wealth is only valuable insofar as it is used to produce goods and services for others.
This idea is dependent upon the fact of an economic technology known as “the division of labor”. The division of labor adds value to society through operation of what is known as “comparative advantage”, namely, that everyone is relatively more skilled in some forms of production and relatively less skilled in other forms of production and that individuals can increase their own productivity by specializing in those tasks which they are relatively best suited for and leaving those tasks which they are relatively unsuited for to others in society (the division of labor) who are relatively best suited for them and then exchanging part of their production for the product of others in these areas in which they chose not to specialize.
Further, it is by the concentration of wealth (the accumulation of savings, or capital) that allows for the supercharging of the division of labor. Capital supercharges the division of labor in two primary ways:
- through the mechanism of time-saving
- through the creation of certain technologies which enable production methods which can not be replicated by manual labor, no matter how vast
Capital provides a means of leveraging a productive process through time-saving (in essence, this is what capital is– labor-productivity stored across time for later use). It enhances the division of labor because the multiplier effect of saved time is akin to employing even more individuals in the division of labor and applying them to a specialized task. Similarly, capital allows for the creation of certain technologies which possess productive attributes that can not be matched by even an infinite number of skilled individuals (consider a nano-circuitry robot which is able to perform tasks on a circuit board at a scale no human can).
The only way to enjoy these benefits is through the accumulation of wealth. And the more wealth is accumulated by one individual, the more hyper-specialization through the leveraging of capital can occur with regards to a particular task or method of production.
And obviously, these effects persist across generations, so if X was accumulated in generation 1, the further accumulation of capital by a factor of Y in generation 2 means there is now X+Y capital available to enhance the division of labor in the current and subsequent generations.
The natural dissipation of wealth from unable hands
The fear of increasing concentration of wealth in unable hands across generations through the unencumbered operation of a free economic system is groundless.
As we have seen above, wealth only accumulates in the hands of the able– those who are more productive are more successful at accumulating wealth because other market participants are more eager to exchange for the value they produce.
The image of the lazy, idiotic wealthy heir to a fortune who comes by a greater fortune over time simply because he inherited much to begin with is a contradiction. Either such a person is unproductive and gradually manages to dissipate their accumulated, inherited wealth over time due to their inability, or else they have been mischaracterized for, as “lazy” and “idiotic” as they may be, if they as owners of their accumulated capital manage to grow it over time, they have demonstrated they are productive and to that extent they are able.
No one deserves condemnation for ableness in increasing their wealth simply because they were born with much to begin with– their ability to produce further wealth stands as a testament to their ability to produce and thereby “contribute to society”. And one does not need to be condemned for disability in this area, as the gradual diminishing of one’s accumulated wealth is punishment (and judgment) enough.
The subjectivity of ableness
Ableness with regards to wealth creation (productive ability) is at all times a subjective notion.
In terms of market exchanges, other individuals in the market place will only reward the production of wealth they find subjectively valuable.
Ableness is not constant nor is it objective. Ableness can grow and diminish within a person or organization over time. It is subject to dynamism, the constant changing whims and preferences of the market place. It is not permanent. One may be able at producing X but not Y and once the market favors Y, one is no longer able.
The contemporaneous nature of ablest hands
The caricature of “permanent wealth” is another fallacy, the idea of an indomitable tycoon who can’t help but grow his wealth ever larger and whose descendants only become wealthier still are phantasms.
Because ableness is a subjective consideration, it is also contemporaneous. A man who is a legend in creating wealth through horseshoes may be reduced to miserliness in an era of automobiles.
In a free economic system, concentrated wealth can only remain concentrated across time to the extent that the current owners of it respond to the popularity of certain goods and services through time. The aforementioned horseshoe-fortune can not perpetuate itself indefinitely following the advent of automobiles unless the heirs to the fortune re-allocate capital to this new technology (or some other profitable venture) and away from the now unprofitable technology of horseshoes.
In this way, the constant service of concentrated wealth is guaranteed toward the highest valued uses of society viewed as a whole. One can not create a fortune in horseshoes and then “hoard” this wealth in this useless industry as automobiles arrive on the scene and expect these riches to further accumulate over time.
How many John Rockefellers have begotten new John Rockefellers in the immediately subsequent generation?
Ableness is subjective. Few heirs can match their forefathers in ableness in the family industry and rarely does the value of the family industry to society at large persist for long periods of time (generation after generation).
The impossibility of wealth being “hoarded”
Only a very small fraction of a person’s fortune is being consumed by them at one time. If they suddenly consumed it all it’d be gone forever and they’d be impoverished.
True, wealth is accumulated by most people in order to be consumed. It is assumedly subjectively valued as wealth so that it can one day be consumed. But wealth can not be both possessed and consumed. One can not have their cake and enjoy its sweet, supple flavors at once. These ends are mutually exclusive, doing one makes impossible the other.
It makes no sense to accuse those who possess concentrated fortunes of “hoarding” wealth, of keeping it out of the hands of others.
Wealth can be:
- consumed
- invested
- loaned
If it is loaned, it is being made useful to others. If it is invested, it is being made useful to others and is engaged in the production of further goods and services demanded by individuals in society. If it is consumed, it is used up by the one who had produced or exchanged for it and so long as they didn’t do anything criminal to acquire it in the first place, this is their right. Consumption could come in the form of literally consuming or using something up, such as eating a foodstuff or utilizing a machine which can wear down, or it could come in the form of accumulating a stockpile whose sole purpose is to aid its owner in providing the comfort of knowing it is there. Such a stockpile could only be acquired by voluntary exchange in a free economic system so it would be within an individual’s right to “waste” it in such a manner.
A man may be worth $100M. But this does not mean he enjoys the ability to consume $100M worth of wealth at all times. In reality, he might own a few homes of a few million each, wear clothes worth thousands of dollars, eat food costing hundreds. The vast majority of his millions of accumulated wealth are not utilized for direct consumption, not now and likely not ever.
If he ever actually utilized this wealth all at once, consumed it (likely, made his worth liquid by exchanging his capital for cash, and then spending it on consumption goods and services) it would be gone. Assuming he was not employed by someone else and in possession of a current income as a result, the liquidation of his various equity positions would leave him not only penniless after this consumptive spree, but wealthless. He would have had his “last supper.”
He would go, in a matter of moments, from a wealthy man, to a pauper.
Wealth can not be “hoarded” and kept away from others. And if it is consumed, it is consumed for good. Consumption is not a renewable process, unlike production.
Wealth implies capital accumulation and preservation
The individuals in society who manage to amass great fortunes (accumulate large amounts of wealth or capital) in a free economic system have demonstrated a great ability not only to produce, but to restrict their own consumption, that is, to save.
Without borrowing, a person can consume only that which they produce. And a highly productive person also has the privilege of being a highly consumptive person. They can make many more exchanges with their additional product and consume an equivalent amount of goods and services they have exchanged for.
However, if instead of maintaining a net worth of zero, their net worth grows over time, they are exhibiting their discipline for restricting their own ability to consume. This means, rather than consuming all that they could because of all they produce, they actually reserve part of it and, through loans, investments and even voluntary acts of charity, allow other people to use this wealth to produce and consume themselves.
The caricature of the wealth accumulator is one of a cruel miser– somehow, by managing to gather into his arms a great fortune, he has denied many others their ability to consume.
But the reality is just the opposite! The only person whose consumptive desires have been denied are the wealth accumulator’s, while instead everyone else in society is allowed to make use of his additional capital in their own projects and consumptive desires.
The act of saving, the presence of accumulated wealth or capital, indicates a disciplined decision to underconsume relative to productive capacity. It implies a permanent restriction on total ability to consume insofar as this pile of wealth is maintained or even grows.
The encumbered market
None of the above applies to the context of a system of exchanges which are partially or primarily involuntary in nature. In other words, none of the above applies to wealth accumulated via means of plunder, whether they be public or private means.
Outside of this context, however, the accumulation of wealth is not a curse for society and, in many ways, it is a blessing. Further, it is not permanent nor is it arbitrary. The concentration of wealth in an unencumbered market always, over time, reflects the greatest ableness as defined by the greatest social uses and values of the time in question. No one who comes by wealth comes by it accidentally and those who were the special beneficiaries of luck or heritage must demonstrate their own ableness lest their wealth get away from them and into the hands of those who are more capable than themselves.
No individual can consume his wealth in its entirety and expect to remain wealthy. And those who restrict their consumption in order to preserve their wealth merely act to make their wealth available to others for their productive or consumptive use.
Those who have amassed great wealth by voluntary means should be cheered, applauded and thanked for the service they provide to everyone in society. Those who come by their wealth through plunder and malice should rightfully be derided, castigated and even violently prevented from further predations, if judgment calls for it.
A House Rises 