Should We Distribute Wealth Equally?

[Marat]

The operative impact of all money is a function of how large a ratio of one's total assets it is. We could make a street person deliriously happy by giving him just one of the rooms of Jerry Seinfeld's 200-room mansion in the Hamptons, while it would probably take Mr. Seinfeld a few months before he even noticed he had lost one of the rooms of his mansion. This effect of money extends throughout the whole spectrum of income distribution, so for a middle class family unable to afford to send their child to university, getting $100,000 from Bill Gates' $40 billion estate would be a life-changing event, while no one but Mr. Gates' accountant would notice his loss. Thus capitalism, by naturally tending to distribute money upwards and concentrate it among those who already have the most money, is profoundly wasteful of the net economic resources of society, since the way it distributes these maximally reduces their effectiveness in producing human happiness, which has to be the ultimate goal of money.

 

While this would seem to argue for a social system which provides everyone with the same amount of money so that its happiness-producing effect is maximized, there are two limits on this. First, there has to be some concentration of wealth in a few hands to allow it to be rationally directed to the large investment projects which help generate more wealth. Also, although there have been many societies which have produced great things without individual wealth incentives -- such as Ancient Egypt's ability to build the pyramids or the Soviet Union's ability to defeat Nazism, both without capitalist incentives -- in today's society some rewards of extra money seem necessary to inspire people to work harder at dangerous, difficult, or stressful jobs. However, in a society where the overall goal was to maximize happiness by distributing the money as evenly as possible within these two constraints, very small incentives, such as paying hard-working or brilliant people 10% more than other people, might seem sufficiently dramatic amidst the general equality of wealth that they would suffice to inspire the required extra effort.

[Mr Skeptic]

Even though we could maximize the worth of money by distributing it equally, that sounds like a recipe for disaster. It would mean there is no reward for working [harder] and some reward is needed for most work because it wouldn't be work otherwise. I think the ideal is to eliminate all "stealing", and reward people only with the wealth they themselves generate.

 

To give an example: someone has inherited a billion dollars. They hire a manager, who then does all the investing of that billion earning the owner a nice interest on his money, enough to cover inflation, the manager's wages, and plenty left over for the owner to live a nice life. But the owner has not earned any of that. Anyhow, he dies richer than before and his son inherits the money, does the same, only more so. This is self-perpetuating (if it can beat the inheritance tax) and about as bad as the case of money distributed equally. In this case, wealth is generated but clearly not by the owner -- it's almost like he "stole" it from his workers. However, I can't offer a good method to separate the effects of owning wealth vs generating wealth.

[tomgwyther]

One of the best forms of wealth distribution I've come across, is sort of 10% function of the lowest paid and highest paid employee of a company, that is:

If the lowest paid employee of a company earns say 10,000 PA,

then the highest paid employee - usually the CEO - could only earn a maximum of 100,000 PA.

This would (I believe) redistribute wealth whilst still leaving capitalist ideas somewhat intact.

The company would still have incentive to increase it market share, employee would still have incentive to work harder/better so as to be promoted to a higher paying job. Those at the top would still get more than those at the bottom. The directors and bosses could increase their salary if they wished, but would have to increase the salaries of all their employees.

If the company made a huge profit, the boss could increase his salary and get that yacht he's always wanted whilst the lower level employee would get a similar pay rise. Or the profit could be invested back into the company by hiring more people, investing in new infrastructure etc.

Edited September 8, 2010 by tomgwyther

[Marat]

That makes an interesting contrast to today's situation, in which CEOs are often making 400 times entry-level employees. Whether anyone can really perform work that is objectively worth that much more than someone else who is also working full-time seems doubtful, unless we are covertly operating with some covert notion that some people are inherently superior to others, which is rejected by most religions and democratic governments.

 

I suppose that you are suggesting that capital-formation for companies to invest comes from the surplus wealth of the higher-paid employees, which would be available for investment. Companies themselves would have to be able to skim profit off the total wages paid to employees, since otherwise the corporations themselves would have no motive to form, risk capital, and expand by investing more capital. Unless there is a steeply progressive tax system, concentrations wealth would gradually be re-created by the profitable or unprofitable interactions among people, so a steeply progressive tax system to constantly restore some measure of equality would be needed. Ultimately, the net effect of profits generated under the influence of this steeply progressive tax would be that they would be spread out again among the mass of people.

 

I wonder how much wealth differential is really required to induce people to work harder? In a society where everyone had essentially the same amount of money, very small differences in holdings might generate all the sense of prestige and luxury that would be needed to encourage the required effort. If I have a three-room cottage with a television, a computer, and a bicycle out front, I might stare out the window curtains in envy all night at your four-room cottage with its flat-screen tv, computer, and moped, eager to do more overtime the next day to get a moped as good as yours someday.

 

If such small differences in wealth would suffice to encourage the hard work and competitiveness society requires to be productive, then a huge amount of capital would be left over to invest in social programs to guarantee humane care for everyone regardless of need.