16 June 2009

Maule On Wealth

Tax Prof James Edward Maule (and here) has an interesting pair of posts on his blog about wealth-creation v. wealth-grabbing. Some of the gist of the argument, which is in my view strikingly negative about what is involved in becoming and being wealthy is captured in these quotes from it. From the first post:

[A]lthough we don't know why some people are obsessed with accumulating wealth beyond what is required for life, we do know that the obsessive pursuit of wealth generates a variety of life difficulties, dysfunctions, propensity toward unwise and even illegal behavior, intensification of other addictions, and a variety of other ills. In the long run, an individual's pursuit of wealth harms society. In contrast, those who put other values ahead of wealth accumulation for its own sake or for the sake of acquiring disproportionate power end up benefitting society, whether through unpaid volunteer work, dedication to underpaid careers such as nursing and hospice care, or even, I suppose, through the creation of a great symphony or work of art. A world filled with hospital aides, Red Cross volunteers, inner city mural artists, and minimum-wage-earning services workers suggests a more peaceful, nurturing planet that one filled with greedy, money-obsessed, wealth-accumulating power addicts adept at shifting cost onto others. . . .

There is nothing wrong per se with someone trying to turn "making a killing" into his or her art. The problem is that doing so is guaranteed to harm society. Is it possible to make a killing without imposing huge costs on others? Is it possible to make a killing without excessively harming the environment? Is it possible to make a killing without unduly putting the economic well-being and the security of nations at risk? Is it possible to make a killing without engaging in monopolistic or oligopolistic behavior? Is it possible to make a killing without riding on the backs of others? Is it possible to make a killing without undue infringement of the rights of others?

When one examines the lives of the "captains of industry" who made killings in the late 19th century, or the biographies of those who reached billionaire status during the 20th century, one finds all sorts of social evils being generated and compounded by the practices that were put in place. How many track and yard workers died so that the railroad barons could live in a luxury that probably hastened their own deaths? How many Ford Pinto owners, drivers, and passengers died so that anonymous shareholders could maximize profits? How many retirement finances were destroyed so that the big-wigs of Enron and dozens of other enterprises, some known, some yet to be outed, could wallow in money? How many jobs were lost because speculators, gamblers, and money addicts wanted to squeeze non-existant profits out of derivatives? Perhaps they call it "making a killing" because it kills so many people, destroys so many jobs, and ruins so many lives?


From the second:

I did intend to suggest that "wealth-seekers" who succeed in accumulating amounts far in excess of their needs do end up, sometimes intentionally, sometimes unwittingly, and almost always remorselessly, imposing huge costs on others, excessively harming the environment, unduly putting the economic well-being and security of nations at risk, engaging in monopolistic or oligopolistic behavior, riding on the backs of others, and unduly infringing the rights of others. By definition, it is impossible to accumulate huge amounts of wealth without pushing others aside, a fact demonstrated by the repeated and unrelenting pursuit of monopolies and oligopolies by the wealth-seekers. In other words, it is possible to become a great artist without exploiting others or damaging the world. By definition, the "pursuers of great wealth" must exploit others and damage the world, for if they were not to do so, the world's resources would remain distributed among all people in rather even distribution, with variations of far less magnitude than exist today. Borrowing from Mr. Pappas, "to suggest otherwise flies in the face of human experience."

Mr. Pappas notes that "the pursuer of great wealth" benefits society by supporting his or her own family and extended family, creating jobs, contributing to charity, paying taxes, and meeting the demand for goods and services. I disagree. The people who are doing these things aren't pursuers of great wealth. They're pursuers of making a living through independent action. They're entrepreneurs. They probably do provide more for society than do symphony-creators if one accepts a measurement of worth that reflects dollars and that precludes psychic value. No matter, the point isn't whether entrepreneurs are more worthwhile than composers, but whether the power-hungry pursuer of great wealth is a benefit or burden to society. Unfortunately, some of the world's power-hungry wealth pursuers began as enterpreneurs and then ran amok, giving entrepreneurs a bad name. Entrepreneurs create wealth. Wealth seekers desire and take the wealth created by others.

It is important to understand the distinction between a wealth creator and a wealth seeker. The slaves on the Southern plantations created wealth. One problem was that they ended up with very little of it, just barely enough to survive. The same can be said of the track and yard workers employed by the railroad barons and the migrant farmworkers employed by huge agribusinesses. The argument that entrepreneurs create wealth is a truism that misses the point. Yes, entrepreneurs contribute to the creation of wealth by providing services in the management of workers, the organization of projects, the implementation of ideas. And most entrepreneurs generate some modest amount of return, compensating them for their efforts. Most entrepreneurs earn not much more than their employees. Most entrepreneurs don't try to stomp out their competition. Most entrepreneurs end up being destroyed by the monopolists and oligopolists. Most entrepreneurs are wealth-creators, but they, just like the workers, become the victims of the wealth-grabbers.

As the wealth-grabbers muscle their way into domination and control of a market, entrepreneurs face the choice of closing up shop, caving in and selling out, or becoming yet another money-grabber. Whether the product is illegal drugs or operating system software, black market alcohol or telecommunications, this is how the modern but damaged capitalist system plays out. Greed, and psychological addiction to money and power, infect the market place. Among the billionaire wealthy are those who claim they needed to do what they did in order to survive, while their employees scrape by on minimum wage. Survival for the latter means this evening's dinner, whereas survival for the former means keeping within striking distance of whoever currently tops the asset ownership list.

The problem isn't the entrepreneur who earns twice or three times, or even ten times, the average compensation of his or her employees. It's the CEO or conglomerate owner who pulls in pay and perks that are thousands and tens of thousands times the average salary of the rank-and-file. However one puts a value on what the wealth-seeker creates, it surely isn't tens of thousands times the value of what the minimum wage employee produces. Either those employees need hefty raises, or the CEO and conglomerate owner need pay cuts. For those who claim that CEO and similar pay is determined by "the market," keep in mind that few people enter that market, that it is a market frequented and controlled by a handful, and that the reciprocal and mutual treasure-dividing is out-of-bounds for most people, including the entrepreneurs who seem to think that criticism of the wealth-grabbers threatens the well-being of the wealth-creating entrepreneur.

Joe Kristan, of Tax Update Blog, commented on Mr. Pappas' post by adding "well-meanng meddlers who hobble honest wealth producers with high taxes and foolish regulation cause far more harm than dishonest wealth-seekers." Joe and I will need to agree to disagree on this one. If the wealth-grabbers didn't hobble the environment, would we not see reduced government spending on, and thus less need for taxation to fund, environmental remediation? Would we not see less need for environmental protection regulations? If the wealth-grabbers paid living wages instead of controlling markets so that a store manager was valued at 1/10,000th of the CEO, would we not see reduced government spending on, and thus less need for taxation to fund, social services? If the wealth-grabbers' companies funded the rank-and-file retirement plans as generously as they do those of the big-wigs, sould we not see reduced government spending on, and thus less need for taxation to fund, social security? Would we not see less need for deferred compensation regulation? If the greed merchants made full and fair disclosure and did not package junk into derivatives, would we not see reduced government spending on, and thus less need for taxation to fund, rescue of the afflicted? Would we not see less need for financial market regulation? The saddest part of the entire debate over wealth and taxes is that the very rich have persuaded the not-very-rich into arguing for the very arrangements that, if continued, will guarantee increasing centralization of wealth in a very few and continued destruction of the wealth-creating, make-a-living-not-a-killing entrepreneur. Increasing income tax rates, for example, on taxable incomes exceeding $1,000,000 and increasing them even more on taxable incomes exceeding $10,000,000 isn't going to hamstring the honest make-a-living entrepreneur, but it should provide some, hopefully enough, disincentive for the amassing of even larger accumulations of wealth and attendant incomes through the make-a-killing lifestyle. Given the choice between letting an elected government take the money and run things, or letting a self-appointed nobility, excuse me, oligopoly, take the money and run things, I'll vote for the former.

Mr. Pappas concludes by pointing out that "many great artists have been funded by rich patrons." Patrons, he notes, that are the "very same types he castigates as obsessive, greedy and dysfunctional." He claims that "[w]ithout a Lorenzo de Medici there would have been no Michelangelo." We don't know that. Absent a parallel universe, there's no proving nor disproving this claim. We do know there was a Michelangelo doing things before he connected with the de Medici. We do know that he eventually came to realize that repressiveness of the de Medici wasn't worth it. Surely an apologist for the de Medici might claim that THEY (not only Lorenzo but his son and others) created the art of Michelangelo. Hah. And even if it could be proven that Michelangelo would have accomplished less than he did, or nothing, it would not have justified the behaviors of the de Medici. A few centuries later, in the same European peninsula, someone discovered that making the trains run on time isn't enough to justify the greed. In the long run, wealth grabbing is a very poor idea.


I disagree with Maule on this one on multiple counts.

One disagreement harms like environmental damage and compromised worker safety associated with the conduct of business enterprises. I agree that business enterprises frequently engage in conduct that harms the environment and produces worker injuries. But, these harms would be present for the most part, whether the leadership of the businesses that cause them are fat and happy, or just getting by.

The vast majority of the revenues generated by the vast majority of businesses (at least in the "real economy") go towards producing goods and services which pay for often modest salaries for ordinary workers and often modest returns for investors some of whom are mere ordinary individuals saving for future middle class wants and needs. What we define as "profit" for either tax or accounting purposes is usually a minority of revenue, and senior executive compensation (let alone "excess senior executive compensation" by some sensible measure) is usually a small fraction of average profit and an even smaller fraction of business revenues.

In short, it is the very conduct of modern economic activity, and not its exploitative aspects, in particular, that led to the woes associated with an industrial and post-industrial era economy. Some of the most environmentally destructive businesses in the world, and often also the most hazardous to workers, are small, family owned farms, logging operations and mines owned by people who are just barely getting by as measured by their standard of living, or in relation to proxies for the ordinary working man, like the wages paid to the average factory worker.

Equally important, I think that Maule is mostly wrong about how wealth creation works. It would be nice if something like a labor theory of value (a Marxist economic theory based on the assumption that the value of a good was the sum of the labor inputs that went into make it) was supported by strong economic data. But, some of the most striking examples from the real world argue otherwise.

For example, in Zimbabwe, not in 21st century, rather than the 19th, most of the productive land in the country was owned and managed by a few thousand white plantation owners who were mostly descendants of the European colonial elites. Native Zimbawean farm workers did most of the raw labor, at modest wages. While the black majority government did not legally discriminate against its own citizens, and slavery proper was long ago abolished in name and deed in this part of Africa, the nature of the relationship between plantation owners and their workers looked a lot like the pre-Civil War American South. The government, understandably, was fed up with this situation and instituted land reform, in which land was seized from its post-colonial owners and given to farm workers by the government.

The trouble is that in Zimbabwe, the farm workers were not up to the task of managing the land. Farm production plummeted, the economy of Zimbabwe has collapsed, and the political system has dissolved into something just short of anarchy. As distasteful as the fact may be, the plantation owners knew how to run their farms, while their workers did not, and that made all the difference.

More generally, it simply is not true that "By definition, the "pursuers of great wealth" must exploit others and damage the world, for if they were not to do so, the world's resources would remain distributed among all people in rather even distribution, with variations of far less magnitude than exist today."

The most downtrodden in society both in our own domestic economy, and at a global level in the world economy, are most irrelevant to the economy than they are exploited by it. Those who don't participate in, or have a connection to, wealth creators in the economy are not given anything in our economic system, except due to charity or government intervention.

Exploitation implies that economic value is taken from some who create it to benefit others. The world certainly isn't free of exploitation. But, those who participate in creating wealth, even as "replaceable underlings" typically come out far ahead of those who aren't involved at all. For example, factory workers in early stage industrial economies and historically in places like the first Ford plant, face different risks from those who are in agricultural economies, but they often have more economic resources than their pre-industrial counterparts. Ford paid his workers more than he had to in order to get workers to fill his plants (and the automobile companies have continued that precedent for more or less their entire existence with the encouragement of industrial unions). The foreign plants to which manufacturing has been outsourced by American industrial giants have done the same, paying wages at the high end of the scale for their local economies. Proletarians have tended to be better off than peasants (this is starkly the case in modern pseudo-capitalist China and much of the rest of the Third World's sprawling megacities).

There is good reason to believe, in fact, that it is easier to restrain, regulate and redistribute earnings from the externalities created by large enterprises than it is to do the same with small enterprises. Big businesses are easier to regulate and have a harder time simply cheating on their taxes -- they manipulate and twist the tax rules, but, with rare exceptions, follow them.

It isn't that social equity isn't a proper role of government. It is one thing to say that wealthy individuals are a "but for" cause of great wealth, and quite another to say that this implies that those who have more have no obligation to share with those who have less, as a price for conducting business in an orderly society, like the United States, as opposed to one where government is ineffectual, like Somalia. But, I am no longer nearly so convinced that behind every great fortune is a great crime, as I was a couple decades ago.

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Carl said...
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