Are the rich necessary?

The rich are essentially parasites

A student working as a summer farmhand explains:

“I had been on the baler all day, the usual ten hours. The Nevada sun was hot, and the work was dusty. As usual, Mr. Phelps [the farm owner] had been cruising around, checking on us from his air-conditioned, white Lincoln Continental. We were sweating for just over minimum wage. He wasn’t working, but he was making the profits. It . . . didn’t . . . look fair . . . to me.”

A student working as a summer farmhand¹

10hours on the baler

>minjust over minimum wage

1air-conditioned Lincoln, cruising

Allof the profit

Nothing here is in dispute. What is in dispute is what it means.

Wealth causes poverty; without rich people there would be no poor people

Political commentator George Will thinks this argument absurd: “People are not hungry in Bombay [now Mumbai] because people are well-fed in Boston.”²

But Argument 2 cannot be dismissed so readily. The fact remains that if the top one percent of American earners gave away half their net income after tax to charity, and those funds went directly to the American poor, poverty as defined by the government would be eliminated.

It is true that these same funds spread globally would barely dent the problem. There is an especially acute moral dilemma sorting out national versus international claims, since the global poor have so much less than the American poor. But the observation that desperately poor people need more money, and that others are awash in money, is indisputable.

One dot in a hundred. Half of that one dot’s income after tax, given away and delivered to the American poor, would end poverty as the government defines it. The same money spread across the world would barely dent the problem.

The problem is not simply that very rich people do not share adequately with the poor

The larger problem is that the rich steal from or exploit the poor, that, as Proudhon said, “property is theft.”³

The book of Isaiah in the Bible tells us that “The spoil of the poor is in your houses; what mean ye that ye crush my people, And grind the face of the poor? Saith the Lord, God of hosts.”⁴

Each generation rediscovers this idea anew. As heiress Abby Rockefeller, a great-grandchild of John D. Rockefeller, Sr., has written:

“That riches and poverty were interwoven, that one fed on the other, that the many suffered because of the few; that good and bad fortune were inextricably linked—this was new for me. It was compelling.”

Abby Rockefeller⁵

The notion that rich people and their corporate agents grind poor people into the ground, exploit them, steal from them, deny them decent living standards or healthcare, or otherwise abuse them, may be articulated at the national as well as the personal level. Monsignor Alfonso Lopez Trujillo, Secretary General of the Latin American Bishops’ Conference, has written that “the United States and Canada are rich because the peoples of Latin America are poor. They have built their wealth on top of us.”⁶

Julius Nyerere, long-time president of Tanzania, suggested that the economically advanced “First World” faced a choice between reparations and revolution: “In one world, as in one state, when I am rich because you are poor, . . . the transfer of wealth from the rich to the poor is a matter of right. It is not an appropriate matter of charity.”⁷

Ronald J. Sider, equalitarian author of Rich Christians in an Age of Hunger, agrees with Nyerere’s diagnosis but not his prescription of rich countries giving away far more money. Sider thinks that it would be better for the West to acknowledge that its wealth has been taken from others, then reduce its need for wealth by leading a simpler, less extravagant lifestyle.⁸

1. c. 700 BCIsaiah: the spoil of the poor is in your houses
2. 1840Proudhon: property is theft
3. 1960sTrujillo: they have built their wealth on top of us
4. 1970sNyerere: a matter of right, not of charity
5. NowA Rockefeller heiress, arriving at it herself

The same charge, made across twenty-seven centuries by people with almost nothing else in common.

Our economy needs rich people precisely because they are rich

Everyone—rich, middle class, or poor—benefits from an expanding economy. An economy expands by becoming more productive. We become more productive by learning how to produce more and more, better and better, with the same number of workers. Productivity increases as we give workers better tools. In order to afford these tools, we need to put away some of what we make each year. That is, we need to save, so that we can invest the savings in the tools we need.

The problem then arises: how to induce people to save? The poor cannot be expected to save, because they need every dollar for basic needs such as food and shelter. Middle class people will save something for emergencies, children’s education, or old age. But they have many immediate needs and desires, and in any case their savings will eventually be consumed, especially after retirement. The rich, however, are different. They have so much money that, in aggregate, they simply cannot spend it all. They are, in effect, forced to save.

“The notion of the rich gluttonously stuffing themselves is inexact, the stomach capacity of most individuals being approximately the same. Of course, the larger . . . a [person’s] income, the greater will be [the] consumption of luxury goods. . . . But even such luxury wants [cannot] absorb the whole of a very large income. The result is that the unspent portion of the very large income is saved.”

Wilhelm Röpke, economist⁹

Historian Paul Johnson comments further: “As people who acquire riches quickly discover, once you are well-fed, clothed and housed, you have to spend your money on competitive ostentation—or save it. Either choice brings problems and worries. . . . [In any case,] amassing wealth has nothing to do with happiness.”¹⁰

Of course, one can decide that the state will take over the saving and investment function by taxing away the rich person’s wealth. But the problem quickly arises that the state, unlike rich people, never runs out of things to spend money on. Moreover, public officials are like other people: they prefer to spend rather than save, and there is no way to compel governments to become savers, since governments by definition control the social instruments of compulsion. In the case of the Soviet Union, the government chose to spend larger and larger sums on weapons, and that money could not simultaneously be used for productive investment.

Just how important is savings and investment? In the first place, it is precisely the failure to save and invest, and to protect savings, that has kept humanity so poor. In the second place, it may be argued that our very lives depend on the steady increase in our capital. As economic writer Henry Hazlitt has pointed out,

“Aside from the notorious fact that the condition of the masses is enormously better than it was . . . before the Industrial Revolution . . ., there is the still more notorious fact that the population of the world since then has increased [many-fold]. It was capital accumulation that made this possible. This means that . . . [many] of us owe our very existence to the savings and investments of our forebears.”

Henry Hazlitt¹¹

Poor

Middle

Rich

SpentLeft over, and therefore saved

An illustration of the claim rather than a measurement. Stomach capacity is much the same for everybody; income is not.

There cannot be too much saving if it is invested properly

Some economists have responded that the rich save too much and spend too little, that jobs would be more plentiful and everyone would be better off if money came out from under mattresses and circulated more freely. This would be true if the rich really kept their money hidden in mattresses. But the lure of earning interest or capital gains usually ensures that money circulates whether it is spent or saved. If a rich person buys a yacht, this creates jobs for yacht-makers. But if, instead, the rich person buys some shares of stock from a company, and the company then uses the money to build a plant, there will also be more jobs for plant construction workers as well as plant workers.

In terms of immediate new jobs created, spending and investment are equivalent. But there the similarity stops because investment spurs productivity, which leads to economic growth, which creates new jobs for the future.

“Contrary to age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor, but helps to alleviate that poverty. No matter whether it is their intention or not, almost anything that the rich can legally do tends to help the poor. The spending of the rich gives employment to the poor. But the saving of the rich, and their investment of these savings in the means of production, gives just as much employment, and in addition makes that employment constantly more productive and more highly paid, while it also constantly increases and cheapens the production of necessities and amenities for the masses.”

Henry Hazlitt¹²

The rich should of course be directly charitable in the conventional sense to people who because of illness, disability or other misfortune cannot take employment or earn enough. But, as Hazlitt puts it, “the most effective charity on the part of the rich is to live simply, to avoid extravagance and ostentatious display, to save and invest so as to provide more people with increasingly productive jobs, and to provide the masses with an ever-greater abundance of the necessities and amenities of life.”¹⁴

Buy the yacht

1. Yacht-makers are paid
2. They spend their wages
3. The yacht exists

Buy the shares

1. Construction workers build the plant
2. They spend their wages
3. The plant employs plant workers
4. Output per worker rises, so pay can rise

In immediate new jobs the two are equivalent. There the similarity stops: the two emphasized lines arrive later, and only on one side.

The rich have vital work to do too, and if they shirk it or do it badly, they will lose their money

A superficial reading of Hazlitt might suggest that the rich are rather like the modern, constitutional monarchs of Britain. Their job is simply to be there, they can be as passive as they wish. But this would be a misreading.

Hazlitt expects more of the rich. He expects them to work, preferably to work intelligently and hard, but at least intelligently, and to earn their keep, not only by saving and investing, but by investing wisely. This can sometimes be accomplished by hiring others to make decisions, in which case the rich are investing in other people rather than directly in businesses. But however the rich do their investing, it is the results that count. If the present guardians of social savings invest well, as measured by business profits and economic growth, they deserve to stay rich or become even richer. If they invest poorly, the system will quickly take their savings away, as it should.

The problem of quality, as opposed to quantity, of investment lies at the heart of economics. But it has received surprisingly little attention from modern economists. Only a rare text focuses on the importance of making sound investments, even though quality arguably matters much more than quantity of investment in producing economic growth.

Economics textbooks generally do recognize the importance of innovation and risk-taking in the economy, which is another important facet of rich people’s investment job. Governments can also, of course, supply risk capital, but rich people arguably do it better because their investment decisions are less politicized, their cash is less bureaucratized, and their sheer numbers increase the odds that a long shot, but ultimately good, idea will get funded.

It is a major error that so many societies have tried to develop themselves while warring against their own most experienced and motivated developers, the rich.

Money to invest

Invested wellMeasured by profits and growth. They stay rich, or get richer.

Invested badlyThe system takes the savings away. As it should.

Which is the part that distinguishes a rich person from a constitutional monarch, whose job really is just to be there.

The charge that the rich can only make others richer through a “trickle-down” process is false

Equalitarians often mock their opponents for espousing a “trickle-down” theory of economics, one that wants to make the rich richer as the first step in making others richer. Mary Landrieu, former Democratic senator from Louisiana, concluded that “This whole [idea that wealth will] ‘trickle down’ is hogwash.”¹⁵

The first question to be asked here is whether this is what opponents of equalitarianism are really saying, that the rich must benefit first in order for others to follow. Thinker and commentator Irving Kristol describes “trickle down” as a “nasty phrase” for what is really a socially desirable process, but agrees that “the businessman . . . is very likely to reap visible ‘disproportionate’ rewards, while the benefits of his activity gradually and indirectly ‘trickle down’ to the rest of us.”¹⁶

Economist Thomas Sowell sharply disagrees and regards the very concept of “trickle down” as erroneous. As he says,

“It is nonsense to [describe economic growth as] “trickling down” [from the rich]. . . . The [rich person’s] investment has to happen first, and workers have to be hired and paid first, before the investor has any hope of reaping any gains. Since capital gains come last, not first, they do not “trickle down.””

Thomas Sowell, economist¹⁷

1. 1stThe investment is made
2. 2ndWorkers are hired and paid
3. 3rdOnly now, if at all, does a gain appear

Sowell’s objection in one line: capital gains come last, not first. Whatever is happening, it is not trickling down.

What would actually happen if the government decided to seize rich people’s assets entirely in order to give them to the poor?

The rich hold most of their wealth in the form of bonds, stocks, or real estate, all of which rise and fall in price depending on market demand for them. If word spread that wealth would be redistributed, buyers of these assets would disappear and prices plummet. Later, after assets were seized, they would have to be sold in order to provide cash to distribute. But these sales, with few off-setting buyers, would quickly prove impossible.

Meanwhile, companies, unsure of the future flow of savings, would stop investing, with the result that many people would lose their jobs. In effect, then, the great risk of all redistribution schemes, however well intentioned, is that savings and investment, that is, the capital underlying the economy, are simply destroyed. Even if the rich voluntarily decided to sell their assets in order to distribute cash to the poor, the same sequence of events would unfold.

1Word spreads that wealth will be redistributed

2Buyers disappear and prices plummet

3Seized assets must be sold, with few buyers left

4Companies stop investing; people lose jobs

The same sequence unfolds even if the rich sell up voluntarily and give the money away.