In unequal countries (and all countries are unequal), there is always an ongoing conversation around the problem of wealth distribution. On the one side, there are university students and ardent populist-socialists (the extreme left), who advocate it. On the other side, there are the wealth-owners and the successfully-entrepreneurial, who are against it.

The argument from the left is generally consistent: fairness, justice, equal opportunity, and all the related buzzwords.

The arguments against wealth distribution are (usually) less cohesive:

  1. “The wealth distribution is actually not that bad!” (for example, this article from moneyweb).
  2. “The problem is taxes and government intervention – free markets would take care of it!” (seems implausible).
  3. “We’re talking about flawed statistics!” (almost certainly true – but from experience, this particular argument doesn’t seem to persuade the other side).
  4. “The wealthy will just up and leave, and take their tax dollars with them!” (or the wealthy will just find ways of getting their tax dollars to leave).
The ideological debate

At its heart, this debate is really a conversation about human behaviour. At least, that’s the way it seems to me.

The Left:

“Where we are today is a bad place. We got here through a historic series of oppressions, persecutions, genocides and discriminations. If we would only just correct for that, then people would be able to lead better lives. If you just gave people wealth, then they would be able to play on a level playing field. And if they played on a level-playing field, then everyone’s skills and abilities would be given free reign. And with all the prosperity that would flow from that, the playing field would be henceforth and forever level, and we’d never end up in this bad place again.”

The Right:

“Where we are today is a bad place. We got here through a historic series of over-regulations, taxes, interfering socialist politicians and centralised institutions. If we would only correct that, then people would be able to lead better lives. If you just gave people freedom, then they would be able to play on a level playing field. And if they played on this level-playing field, then everyone’s skills and abilities would be given free reign. And over time, the playing field would find its own natural balance, and we’d never end up in this bad place again.”

That is, the level playing field either doesn’t exist and needs to be created, or it would exist if only we’d stop trying to force it.

The trouble is:

  1. The current playing field is definitely not level (I don’t think anyone disagrees with this);
  2. History has a lot to do with that (I’m with the liberals on this one); but
  3. It definitely won’t stay level forever (this seems deeply idealistic).

It’s this idealism that worries me. That somehow, if you re-distribute wealth today, then it will always be re-distributed.

That’s just not what happens historically. And ironically, the person that illustrated this best is the Left econo-darling, Thomas Piketty.

Re-interpreting Piketty

After Thomas Piketty wrote “Capital” and suddenly became a liberal economic rockstar, his line of argument went:

  1. Look at all my cleverly collected data history.
  2. The World Wars and the Great Depression effectively leveled the playing field (by destroying the wealth of the wealthy).
  3. Between the World Wars and the 1970s, we witnessed a lot of global growth, accompanied by gradual accumulation of capital in the hands of a new elite.
  4. But since then, “r>g“. Alternatively: the concentration of capital has reached a critical mass, where there is effectively a type of gravitational pull of wealth toward wealth, in the hands of the wealthy.
  5. This is bad.
  6. We must re-distribute this.

But we must be careful to distinguish between his data and his conclusion. The first was his real work – the second is only his opinion.

Let me re-write that line of argument with an alternative conclusion:

  1. Look at history.
  2. The World Wars and the Great Depression effectively leveled the playing field (by destroying the wealth of the wealthy).
  3. Between the World Wars and the 1970s, we witnessed a lot of global growth, accompanied by gradual accumulation of capital in the hands of a new elite.
  4. But since then, “r>g“. Alternatively: the concentration of capital has reached a critical mass, where there is effectively a type of gravitational pull of wealth toward wealth, in the hands of the wealthy.
  5. Doesn’t this mean that wealth inequality is actually the natural state of economic affairs?
  6. Even when the playing field is leveled with violence, ownership rights eventually coalesce in the hands of a new elite.
  7. Wealth re-distribution won’t work. We need to do something else.
Capitalism creates inequality

This is what capitalism does. If you allow people to follow their own way, then you get:

  1. People that are ambitious or frugal or entrepreneurial or connected, who then strike it lucky and make a lot of money;
  2. Some people that are all those things, but due to bad luck, or bad decisions, or some kind of societal prejudice, don’t make a lot of money; and
  3. Those that don’t (or can’t) prioritise their material well-being.

That is: wealth gets distributed. Unequally.

And this is only one generation. When this generation has children, their children’s opportunities are immediately not equal – because the children of the wealthy have more privilege than those that don’t. So with each successive generation, the unequal wealth distribution concentrates.

This is the key problem with wealth distribution plans

Let’s say that South Africa goes ahead and re-distributes the farm land to the rural poor. What will happen after that point of redistribution?

Well, now the authorities have a conundrum. If the title deeds are passed over in full, then the new owners are free to do with it what they will. And if they are free, then here are some options:

  1. The new landowners can sell the land, and invest the money;
  2. They can sell the land, and spend the money;
  3. If they’re entrepreneurial, the new landowners can mortgage the land, and use the money to finance some farming activities;
  4. They can keep the land and do very little with it.

Of those:

  1. Option 1 is the best chance of a long-term land redistribution success.
  2. Essentially, Option 2 is a one-time bonus from the government, and the land ends up back where it started.
  3. Option 3 can go either way:
    1. If the new farmers are successful, then that’s also long-term land redistribution success;
    2. If the new farmers are not, the banks will foreclose on the property, and we’re back to the outcome of Option 2.
  4. Option 4 is basically value destruction: because you take a working asset and turn it into a non-working asset, with no change in the living standard of the recipient.

And because people are people, and because we live in a mostly free and mostly capitalist world, the expected outcome is that the re-distributed land will eventually end up in the hands of:

  1. the new elite (being the successful new land-owners); and/or
  2. the old elite.
The Equality Myth

From all the evidence, it seems that wealth equality is not something that occurs naturally. It can only be forced on people. And if you want it in perpetuity, then it needs to be forced on people in perpetuity.

But perhaps we can simulate it?

If we take a step-back from our obsession with property ownership, and focus on the outcomes of property ownership, then we notice a few things:

  1. Asset-owning has rapidly diminishing marginal returns to the overall quality of daily life.
  2. If a billionaire loses $1,000 (or even $1,000,000), it probably won’t even be noticed. It will not affect his day-to-day-living. He’ll continue to eat what he eats, shop where he shops, and do what he likes. There is a point at which income is sufficient for daily living, and the excess gets poured into investments.
  3. But this means that, given a sufficient level of income, perhaps it’s possible to live well. Maybe not as well as a rich person – but enough that the difference in the standard of living is nowhere near what the disparity in wealth would suggest.
  4. And wouldn’t focusing on that be easier and cheaper than risking the value destruction that comes with these wealth distribution programs?

Which is the basic argument for a Universal Basic Income.

To be honest, it’s not quite where I expected to land up in this post.

But it does seem like a hopeful place to end it.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.