Redistribution

In Ludwig von Mises' book, Human Action, the author makes the case for a purer form of capitalism. He points out that socialism is completely unworkable as a system for organizing production and makes a case against several forms of interventionism including credit expansion, price floors and ceilings, and redistribution. His argument is that all of these have long-term effects that go against their intended results. I found the case of re-distribution to be the most striking. It would seem that if the case against the idea that redistribution of income helps the poor holds, then no form of redistribution would be likely to help the intended beneficiaries.

A quick summary of the case is that redistribution takes money away from the investing class and gives it to workers. This much it's proponents would agree on. However, we need to consider the macro-economic effect that this will have. If we take money from investors, then they will have less to invest. Thus redistribution will have a negative impact on capital formation. That is, by taking money away from investors we make it so that the total amount that is invested will be reduced.

With less money invested, it will be more difficult for businesses to obtain the goods that they need in order to produce, or capital. The more scarce capital goods are, the more expensive they will be. The free market value of labor depends on the relative abundance of capital and labor. When capital is scarce, wages will be lower. When capital is plentiful, wages will be higher. Thus the long-term impact of redistribution will be to reduce the economic well-being of the poor by depressing wages.

I want to explore the ethical implications of this. This argument is commonly used to justify the libertarian political position. However, it actually goes beyond this. Notice that the argument would apply to every form of redistribution, including voluntary redistribution. If investors gave money to the poor instead of investing it, it would still have this depressing impact on their wages. If this argument is valid, it would be better for the poor for the rich to invest their money than for them to give it away.

This argument is counter-intuitive. It would definitely be the case that by taking money from one rich person to a particular poor person we would improve the economic well-being of that one poor person. However to apply this as a general principle would be a fallacy of composition. It does not follow that if we take from the rich and give to the poor that we help the latter. It could be that our instincts haven't evolved to deal with the impact of redistribution in large populations, such as the ones we are likely to experience in modern times.

I suspect that this might be what is behind much of the opposition to the libertarian point of view. People are naturally attached to the idea that charity makes one a better person. The idea that we show that we are good people by giving to the poor can be quite persistent. It is likely that people who are exposed to this contrary argument are likely to see it as an evasion of the responsibility that the rich have to the poor. However, we cannot allow a perceived duty to the poor to make them materially worse off. If this argument is valid, then we will have to find some other way to show that we are good people.

There are other forms of charity. It is possible for people to provide what economists call "public goods". Public goods are ones for which the cost of provision doesn't depend on the number of people receiving the good. However, in a democracy this category can be expanded to include anything that might help a politician get re-elected. Just about anything that a sizable number of constituents would want can fall under this category. If something truly is a public good, then there will be an incentive for private donors to provide it as a way of enhancing their own standing in the community. The problem here is that if we regard public goods as being legitimate justification for government expenditure, then we will make it far too difficult to morally evaluate those who hold office in order to determine whether their performance merits re-election.

Some expenditures on the poor could indeed be justified as public goods. We might help the poor to do things that benefit others, such as providing ways for them to shower and wash their clothing. I should point out that rigid enforcement of property rights would make it unacceptable to interfere if churches or any other property owners want to allow the homeless to live on their property, pitch tents or live inside any building that the property owner approves of for that purpose. They should be allowed to do this for either charity or profit.

Even if something is not helpful, this is no justification for blaming people for doing it. We should confine our action to withholding praise.