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April 18th 2016 print

Peter Smith

The Dismal Science of Perpetual Jealousy

Those who harp about "inequality" will talk themselves hoarse over the election season to come, insisting that the  gaming of our economic system is the only explanation why some grow very rich and many do not. Just like the poor, class envy will be with us always

occupy australiaAccording to “Labor’s agenda for tackling inequality,” the Growing Together report, “inequality is at a 75-year high.” Nonsense is immortal in the hands of the left. A fundamental law of capitalism which, heretofore, has received little recognition or exposure is the antidote.

I flirted with calling it Smith’s Law but if it were any good no doubt a somewhat better-known Smith, Adam, would be mis-assigned the credit. Mind you, Smith is such a commonplace name that pseudonymity would probably be suspected. Some years’ ago I got into a heated wrangle on the Liverpool FC website about the worth of the then-coach and was accused by one of my antagonists of hiding behind the obvious pen name of Peter Smith. He clearly regarded my name as akin to Joseph Blow or Donald Duck. So modesty prevails and I will just call it ‘the fundamental or inbuilt law’.

There is a heap of talk these days about rising inequality. It will no doubt be a central issue in the US elections and would be the only issue of note for socialist Bernie Sanders in the highly unlikely event he were to win the Democratic nomination. Jeremy Corbyn is on board the Bernie bandwagon as, without a shadow of doubt, is Labor’s Andrew Leigh (Battlers and Billionaires).

Thomas Piketty, Capitalism in the Twenty-First Century, gave the issue (as specious as it is) a literary boost. My review, “The Questionable Equations of Thomas Piketty” in the June, 2014, issue of Quadrant, did a fair job (British understatement) of exposing the flaws in his arguments.

Recall that the Occupy Wall Street movement began in 2011; inspired, in part, by the focus that Piketty and a colleague, Emmanuel Saez, had earlier given to the wealth and income of the so-called “one per cent”. Piketty and Saez were by no means alone. For example, Nobel laureate Joseph Stiglitz (“Of the 1%, by the1%, for the 1%”) is one among a number of prominent ‘socialist economists’ (in itself, by the way, a contradiction in terms) who gave the issue a kick-along.

Whether and to what extent inequality of income and of wealth has increased over recent decades is a matter of debate. I am not sure what has happened to wealth but it seems clear to me that income inequality has grown. Whatever the state of affairs, I don’t care and neither should you. People who do care have a socialist axe to grind or a vague feeling that the game is rigged and that they personally deserve to be better off than they are. People who don’t care believe that their financial position is a product of their own efforts, taken together with the vicissitudes of life. The last group of people are healthy; the first group suffer from varying degrees of undiagnosed paranoia.

As a preamble to the fundamental law — which I confess to having been banging on about for a while without earning plaudits — let me say that we desperately need rich people. Richer people save and invest a lot and this drives and underpins capital investment and embedded technological progress, without which life would get mean and miserable for everyone. Poorer people as workers contribute to making the prevailing pie; however they spend all or most of their earnings and therefore contribute next to nothing to growing the pie. Of course they do eat the pie.

Don’t get me wrong. Eating the pie is a necessary part of the economic equation. But as Michael Douglas in character pointedly exclaims in The War of the Roses to his wife, played by Kathleen Turner: “It’s a lot easier to spend it than it is to make it, Honeybun!”

The implication of spreading the wealth will be more spent on consumer goods and less on capital goods. Future growth and prosperity will suffer. But, many say, surely a balance is required. Nuts I say, if you mean by that redistributing income and wealth from the rich to the poor beyond providing adequate safety nets.

The distribution of income is not divorced from the generation of income. In a capitalist system — the only system capable of ensuring our growing prosperity in a finite world — people are paid according to the contributions they make to production. Disengaging reward from contribution, which is what redistribution aims to do, is not compatible with capitalism. Socialism does that — ‘each according to his needs’ — and quite predictably leads to stagnation and impoverishment.

A qualification is in order. Redistribution, via progressive taxation and the welfare state, has in fact gone beyond providing a safety net and capitalism has survived. That is true. Capitalism is resilient – to a point. But make no mistake. Prosperity has suffered. The counter argument is that the poor have benefited and would otherwise have been cruelly used by less-trammelled capitalism. Not true.

Fortunately, capitalism has an inbuilt law which absolutely prevents the richer few from harming the poorer many. To wit: capitalists, as distinct from criminals and communist commissars, only become rich when lots of people among the 99% are able to buy and enjoy the products and services supplied by the aforementioned capitalists. This is possible only if capitalists employ enough people and pay them enough so that those people are able to buy and enjoy the products that the capitalists collectively produce. Ergo, the impoverishment of the 99% is incompatible with capitalists becoming rich.

Now, with this law in mind, consider an extraordinary and fanciful observation often made by moronic leftists (not, by the way, a contradiction in terms). According to Wayne Swan, writing in The Monthly back in March, 2012, the benefits of industrialisation and technological advances in Britain and Europe in the 19th century went “overwhelmingly to the fortunate few.” As I wrote at the time (“Wayne’s Fanciful World”, QOL, 9 March), this leaves us with the ridiculous idea that the rich must have stockpiled clothing and food in vast warehouses; wrapped thousands and thousands of empty houses in barbwire estates; and kept trains, and later motorcars and cameras and all kinds of goods, in giant storage parks with armed guards around the perimeters. Ill-gotten booty denied to the populace. How they made a profit out of that only Swan knows. Incidentaly, Swan’s epistle was so steeped in class envy and paranoia, especially about Gina Rinehart, that even Media Watch took it to task.

OK, Swan is not an economist. So, take trained economist Adair Turner. Turner (his lordship) was the former Chairman of the UK’s Financial Services Authority and is now attached to the Institute of New Economic Thinking, established in 2009 by George Soros. In a lecture at The Cass Business School in March 2014, he compared the present day with the period 1830 to 1860 when “the lion’s share of rising prosperity went to capital owners not workers.” Turner is actually referring to savings of monetary wealth; to pieces of paper, not to real wealth. Swan and Turner and their fellow travellers simply don’t know what they’re talking about. They don’t know about the fundamental law.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Comments [11]

  1. As posted elsewhere:- Thomas Sowell, to my mind Americas foremost living economist/philosopher had some questions that are appropriate to ask Wayne Swann and all redistributionist LABOR/GREEN axis type as often and as forcefully as possible.:-
    1- ‘What is your ‘fair share’ of what somebody else has worked for and earned?’ – I could only add to Thomas’s original question by asking all leftist journalists to tell me clearly and succinctly – ‘what should MY ‘fair share’ of what I have earned or made be? And I would then like them to justify why it should be less than 100%. People who work involuntarily for others are in essence slaves.
    2- Thomas Sowell again posed a question on the ‘slavery’ issue which is very appropriate here. If confiscation of 100% of a persons’ effort is regarded as slavery – at what percentage does it cease to be slavery? This question is especially applicable to all ‘progressive’ tax advocates who wish to make our tax system even more punitive.
    It should be pointed out, vigorously, to any and all ‘redistributionists’ that before any wealth can be ‘redistributed’ it must first be created, and pointed out even more forcefully that freedom/free markets/capitalism allows for more new wealth to be created than ANY other system. That is why the ‘poor’ in the ‘western world’ are better off than many of the ‘rich’ in other parts of the world. If it was possible for wealth creation to be legislated for/enforced at the point of a gun, then the Soviet Union experiment for economic management would have been successful and the now partly extinct USSR would be dominating the world politically and economically.

  2. Doubting Thomas says:

    Thomas Sowell’s shopping lists would be worth reading. For starters, I would offer his “Wealth, Poverty and Politics: An International Perspectve” and “Black Rednecks and White Liberals” as a first taste of the thinking and erudition of this brilliant man.

  3. Ian MacDougall says:

    In a capitalist system — the only system capable of ensuring our growing prosperity in a finite world — people are paid according to the contributions they make to production.

    I think that you might find that statement hard to maintain, Peter: in whatever economic environment. If that is the case, and IS the explanation for the growing divide in incomes and wealth, then the ‘contributions made to production’ by the corporate executive layer must have been growing faster than those made by the average weekly earners: ie the workers further down the line from them.
    A simpler explanation is better IMHO: people are paid according to their strategic position – ie proximity to the till and freedom to help themselves (without breaking any laws) to its contents.
    From http://www.smh.com.au/business/ceos-take-home-70-times-average-salary-20130919-2u2kl.html#ixzz46AJfF1DY

    But while fixed pay has decreased, cash bonuses have risen, with the bosses of Australia’s leading companies still taking home almost 70 times the national average salary…
    Research by the Australian Council of Superannuation Investors and proxy advisory company Ownership Matters shows the average fixed salary for an ASX 100 executive fell 2.6 per cent to $1.9 million in the 2012 financial year. Including bonuses, Australia’s top bosses took home an average of $4.7 million – only marginally lower than $4.72 million in 2011.
    The 10-year trend, however, is much more stark, with executive fixed pay increasing almost three times as fast as inflation since 2002, and nearly 70 per cent faster than average wages growth.

    Also: http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/Economic-Roundup-Issue-2/Economic-Roundup/Income-inequality-in-Australia

  4. a propos says:

    Devastating exposure, bravo Peter! Since you have a temerity to think for yourself, In the Soviet Union you’d be branded as “an enemy of the people” and, after a kangaroo trial, either would be expelled from the Motherland of the world proletariat or shot out of hand in Lubyanka’s basement.

  5. Bill Martin says:

    So very simple, isn’t it? Yet, being constantly bombarded with the socialists banging on about inequality, fairness, exploitation and the like, one’s faith in the truth of the matter needs regular bolstering, such as this excellent article. Thanks again, Peter.

  6. Renato Alessio says:

    The Credit Swisse Global Wealth Report of a few years back said that Australia is the richest country on the planet on a Median basis. And we are significantly ahead of the next richest, Belgium, and twice as rich as those at equal third position, namely Britain, France and Italy. The USA is well down on the list.

    Note well, this is on a Median basis – there are just as many adults above the median figure, as there are below the median figure. It weeds out the effect of having scores of billionaires in some countries, which makes the countries look wealthier on an Average basis, but don’t accurately give a good picture of how the average Joes are doing.

    Thus inequality may be at a 75 year high in Australia, but in comparison to other countries in the world, we are ridiculously more equal than any of them.

    The other way of looking at it is that in Australia, the richest 10% of the people own 50% of the wealth. But in the USA, the richest 10% own 74% of the wealth, while in the UK the richest 10% own 85% of the wealth – and in other countries the richest 10% own even more of the wealth.

    At the other end of the scale, 6% of the adult population in Australia owned US$10,000 or less (though the 6% figure will be higher now that our dollar has dropped). In a staggering contrast, a whopping 29% of the population of the USA owned US$10,000 or less.

    So, instead of our Socialists giving themselves a pat on the back and saying,
    “Well done, we have achieved our objective in an absolutely spectacular manner compared to our comrades in the rest of the world, and we haven’t sent our country into some economic death spiral in so doing!”
    they instead vehemently argue in isolation and at the margin, in order to deliberately incite jealousy in the population. This is the same population where poor old age and disability pensioners can save enough to go on cruises or cheap trips to Bali.

    The difference between jealousy and envy?
    Jealousy is when one see someone in jaguar, and thinks -”I really want one of those. That goddam pr##k, what did he do to deserve it?” (i.e Person feels worthless and doesn’t try to improve himself)

    Envy is when one see someone in jaguar, and thinks – “I really want one of those. How can I go about getting one? Working harder perhaps? That may be feasible, I’ll do it.” Or “That may be feasible, but I can’t be bothered, I’ll get a Toyota instead” (i.e. Person doesn’t feel worthless, and may seek solutions to get what he envies, or may abandon the idea)

    Though in some countries, the meanings of two are reversed.
    Regards.

    • ianl says:

      Sorry Renato, but you have envy and jealousy comlpletely reversed. It’s a common enogh error.

      Envy describes the feelings one has when one covets something someone else has. So your comment: “That goddam pr##k, what did he do to deserve it?”” accurately enough describes envy. A common enough example of adding spite to envy is a deliberate, deep scratch along the side of a new Merc. But envy is way more corroding than that. It is about the most corroding emotion in the human range. Superannuation in Aus demonstrates this perfectly. If one obeys the law, adds a bit each year over and above the statutory amount and maintains a more or less steady career for 40 years, one may well finish with in excess of $1m in super savings. This enrages huge numbers of people who achieve none of those modest goals. So Govts continually fiddle the rules to vent that envy and scoop the votes from the vents.

      Jealousy is the feelings one experiences when you have something you wish to deny to others. This is most commonly experienced in romantic or sexual attachments. Although I don’t discount its’ intensity, it is geberally lkess corroding, and more obvious in exoression, than envy.

      • Renato Alessio says:

        Hi Ian,
        My explanations of the two terms comes from psychologists in the Rational Emotive Behavious Therapy and the Cognitive Behaviour Therapy schools of psychology. They treat Envy as a healthy negative emotion (because it can lead one to doing something positive) and Jealousy as an unhealthy negative emotion (because it leads to rage and an inability to do anything). Your explanations are not uncommon, however.

        Your example of the one million dollar superannuants is particularly relevant. Unbelievably, Scott Morrison bowed to just such general jealousy (envy?) and altered the rules, such that to get a part pension, the maximum assets a house owning couple can have is $823,000 from 2017, whereas at the moment they can be “millionaires” with up to $1,170,000. This ignores the fact that old age pensioner couple who get the pension and the associated health card benefits, are actuarily being funded by around $1.3million.

        So those people who have put money away for 40 years and save $1 million wind up worse off income-wise, than people who have never put a cent away. And the real “millionaires” are now the old age pensioners.

        A colleague at another forum did have a very good solution for this. In order to maximize benefits, a couple is best off owning only $375,000 from next year. So, if they have accumulated $1million in super, obtain the difference in cash, which is $625,000, then go down to the casino and bet it all on something which is double or nothing. If they win, they will have $1.625 million and can tell the government to get lost. If they lose, they will be maximizing their income. So in practice, they can’t actually lose.
        Regards.

        • ianl says:

          Thanks for the reply. Yes, the LNP Govt is about to smash confidence in long-term superannuation savings yet again. The power of the spiteful envy motive !

          >Rational Emotive Behavious Therapy and the Cognitive Behaviour Therapy

          These people need still their kindergarten teachers. They are still puerile – Cognitive Therapy and other Fairy Stories. Envy is a positive emotion ? OMG, we have no hope with these deadsh!ts around.

          And you’re right about usings savings as a casino stake.

  7. acarroll says:

    Here’s a very interesting interview with an expert on IQ heredity and economic performance:

    https://youtu.be/nTdMY9RI-7E

    Taking money away from the wealthy (predominantly the higher IQ people in society) leads to a shrinking pool in general.

    Having said that, let’s not discount that organised criminality (requires intelligence as a pre-requisite) can siphon wealth away from those who could use it for the greater good. Parasitism like this needs to be strictly policed wherever it exists.

  8. Ian MacDougall says:

    Ian MacDougall
    Your comment is awaiting moderation. [!]
    April 18, 2016 at 8:03 pm [!]
    In a capitalist system — the only system capable of ensuring our growing prosperity in a finite world — people are paid according to the contributions they make to production.

    I think that you might find that statement hard to maintain, Peter: in whatever economic environment. If that is the case, and IS the explanation for the growing divide in incomes and wealth, then the ‘contributions made to production’ by the corporate executive layer must have been growing faster than those made by the average weekly earners: ie the workers further down the line from them.
    A simpler explanation is better IMHO: people are paid according to their strategic position – ie proximity to the till and freedom to help themselves (without breaking any laws) to its contents.
    From http://www.smh.com.au/business/ceos-take-home-70-times-average-salary-20130919-2u2kl.html#ixzz46AJfF1DY

    But while fixed pay has decreased, cash bonuses have risen, with the bosses of Australia’s leading companies still taking home almost 70 times the national average salary…
    Research by the Australian Council of Superannuation Investors and proxy advisory company Ownership Matters shows the average fixed salary for an ASX 100 executive fell 2.6 per cent to $1.9 million in the 2012 financial year. Including bonuses, Australia’s top bosses took home an average of $4.7 million – only marginally lower than $4.72 million in 2011.
    The 10-year trend, however, is much more stark, with executive fixed pay increasing almost three times as fast as inflation since 2002, and nearly 70 per cent faster than average wages growth.

    Also: http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/Economic-Roundup-Issue-2/Economic-Roundup/Income-inequality-in-Australia