Tuesday, January 29, 2013


Adam Smith defined Economics as the process of wealth creation, but by the early 20th century the economists of the time stated a different purpose for Economics. Economics became the process of redistributing wealth. Redistribution is one of the cornerstones of Keynesian economic policy. The idea begins with the assumption that money is unfairly distributed. This is based on the observation that the amount of money possessed by some people does not seem to be based on fairness. This was definitely the case when Kings and Sultans possessed most of the wealth in their countries. This unequal distribution resulted from their control over the manufacturing of money. For hundreds of years money was simply a product of the monarchy. The common man earned money by doing things for the monarch. This traditional way of distributing money is still advocated by many economists as a solution to the disruptions of money flows during a financial crisis. Their logic is that the state creates the money, let the state decide who gets a share. These economists believe the state is much wiser at determining who gets what than the market system. Or that the market system is imperfect and can be improved by strategic monetary infusions by the state. This modified monetary structure is justified, because it is the right thing to do. The poor need care. The weaker members of the flock need shelter and food, and only the state can do so with the proper level of concern.
The origins of these traditions trace back to the concept of compassion. Compassion is a key virtue promoted by all major religions in the world. It is a quality that all religious people should seek to integrate into their actions. Therefore, the fact compassion permeates our economic traditions is no surprise. Likewise, it is no surprise that the competing secular philosophy of the market system is characterized as evil or godless. Such criticism is simply a protective religious response to a system that does not on first glance appear to have compassion at its heart.
Money must be distributed throughout a community for there to be a vigorous and robust economy. If money is left in the local bank or buried in the backyard, most people will not earn enough money to feed their family or pay their bills. Money needs to circulate and expand. Circulation or distribution can occur in two ways. A strong political leader can control all money through taxation or by managing the printing presses. Then it is a simple matter of determining who gets what. Most monarchies tried this method with greater or lesser degrees of success through the 19th century. Louis XIV used the construction of Versailles to distribute money in his society through the craftspeople and suppliers working on the project. Napoleon used his soldiers to spend money into the French economy. In other countries he used his soldiers to rob or plunder for survival. In the twentieth century Central Banks allowed private banks to make loans to emerging businesses to encourage economic expansion of the economy. The amount of wealth created in the twentieth century is greater than all the previous centuries combined. Clearly, no other system worked as well as the system employed in the 20th century when it came to the amount of wealth created. So what does history teach us? Based on the results obtained in the twentieth century versus the wealth creation in all previous centuries, it is clear the market system creates more wealth and quicker than any other system of wealth accumulation.
Redistribution is not a system of wealth accumulation. It is really a system of reengineering the last stage of the wealth accumulation process to redirect the final destination of the money accumulated. Redistribution ends up being a mirage even for those people who benefit from the redistribution. Why, because the government’s tax piece will be quickly replaced by higher prices and greater profits by the people who run businesses. This is why it costs more to live in New York or San Francisco (two of the most highly taxed communities in the country).
So, if I have convinced you redistribution is not a wealth accumulation process than what is the wealth accumulation process for the followers of the redistribution mantra? The wealth creation process for the business sector is capitalism. The wealth accumulation process for the government sector is the taxation process. One can argue that this is not really a wealth accumulation process since all the money is created by the market economy of the private sector.
The conclusion economists must draw from this process is that redistribution is not an effective wealth creation process. Redistribution just moves money from one side of the table to the other. It is a redistribution process like poker is a redistribution process without the fun. Just like a casino, government takes a fee for setting up the game.
Redistribution is not an economic concept. Redistribution is a justice concept. It is based on fairness and judgments about what is "right." This type of legal right does not belong in an economic discussion, because economics is not morally based. Redistribution is used as a justification for government to intervene in the market economy and correct the errors. This makes redistribution a government technique, not an economic principle. Redistribution may be the right thing to do, but that is only because the citizenry agreed it was.

To return to Adam Smith, redistribution is not a wealth creation process so it does not fit the definition of an economic process. Redistribution is a social process. As such redistribution should not be a consideration during optimization of the economic system. Many economists claim Economics is about a "fair" distribution of income, but it is not. Economics is about creating wealth.

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