In a previous post I argued that the wealth of the rich (more precisely: of capitalists) could not be justified by reference to the principle that "each person deserves that amount of wealth that reflects her productive contributions". Capitalists need not do anything productive in order to be capitalists. The pure capitalist earns everything from owning and nothing from working (that is, to the extent that a capitalist can be said to earn from working, she is to that extent not a pure capitalist).
But, as I discussed in the previous post, this story about desert and productive contributions is only one among many. Another (perhaps the most popular?) story that's told to legitimate the wealth of capitalists is that their wealth is a reward for having taken bold risks. Or, put another way, since the capitalist risks her capital when she invests it in some business venture, she deserves exclusive rights to all of the returns above and beyond costs paid out for raw materials, wages for workers, etc.
This story is told so frequently that it almost seems odd to question its plausibility. But how plausible is it?
Let's try to first figure out exactly what its saying. Is it saying that people should be rewarded in proportion to how much risk they take on? That can't be right. That would mean that the riskier I behave, the more I should be rewarded (whether or not the risk pays off). But, of course, it's a fact about risks that they can turn out for better or for worse (otherwise they wouldn't be risks). Risks always involve some element of luck and chance wherein the risk could turn out badly. But nobody in their right mind would say that the mere fact that I've taken on some risk (whether or not it pans out) means that I should be rewarded. For example, no one would say that some particular capitalist, just because they take on risks, deserves a return on their investment. If I, for example, invest in a business that has a 10% chance of succeeding, and it doesn't succeed, nobody thinks that this entitles me a cash "reward" of any kind.
But if that's not what's meant by "reward for risk", what is? Perhaps what's meant is that the capitalist's riches are her reward for having taken a risk that ended up panning out. If I bet against the odds and win, then it looks like what I get is my reward. Why not say the same about capitalists whose investments pay off?
There are several things to say here. First, it's just false that risky capitalist activity actually gets higher rewards when it pays off. Sometimes it does, sometimes it doesn't. And lots of capitalist activities aren't risky at all. An investment need not be risky to be very lucrative. If some public asset (a natural monopoly, say) is privatized and I get ownership of it, I may be able to charge fees and earn big profits even though there is virtually no risk. Or, consider that many financial institutions are, and they know that they are, "too big to fail."
We must also take into account that risk context sensitive in various respects. What may be risky for me (given my situation) may be less so for you (given your situation). Imagine a working class person who saved money for years to open up a small coffee shop. This is surely a risky activity since she will need to take out big loans on a project that could very easily go bust (and it's not as if they have millions to spare if it does). Now, imagine that I invest $40 million of a $140 million fortune in relatively low-risk securities that turn out to pay out big dividends. Instead of risking my capital on start-ups, I put it all in well-established, multinational corporations. So, I'm reaping large cash "rewards" from my investments, much larger (even in proportional terms) than the returns a successful small coffee shop owner will ever earn. But I am taking on very little risk whereas the newly petit bourgeois coffee shop owner is taking on a great deal of risk. There are innumerable examples of this sort. What they show is that capitalism doesn't, as a matter of fact, distribute wealth in accordance with the principle that riskier bets (that pan out) receive larger cash rewards than those that involve less risk.
But this isn't likely to satisfy defenders of the "risk and reward" view of why the capitalist's earnings are legitimate. They will probably reply by offering two different objections. The first has to do with the idea that capitalism is a fair game where the winner deserves to take all the spoils of victory. The second has to do with incentives and innovation. I'll examine (and refute) each in turn.
The first objection is as follows. Capitalism can be thought of as a fair game in which everyone (legally speaking) has a chance to be a successful capitalist. As long as the rules of this game are fair, then whatever outcome results from it is legitimate. So, for example, when I play blackjack and the casino hasn't rigged the game in their favor, and both the casino and I have consented to play the game, whatever I take home in winnings is legitimately mine. Capitalism, you might think, is the same way. If I risk $10 million on a risky investment and it pans out, why aren't I entitled to (or deserving of) all of the cash returns in the same way that I'm entitled to the cash returns of the game of black jack? In fact, wouldn't taxing the capitalist's profits be similar to stealing a gambler's winnings, even though she made a fair bet in both cases?
There are a number of things to say here. We might ask whether the "game" of capitalism really is fair (I shall argue that it isn't, and that the gambling/investing metaphor is misleading). But even if it is fair, we might still ask whether it makes sense to structure our economy like a winner-take-all casino game. I shall argue that there are deep problems (both structural as well as normative) with allowing the economy to be run like a casino.
Let's examine the fairness of the "game of capitalism." First, recall where capitalism comes from (read Part 8 of Capital for a detailed historical analysis): the expropriation and killing of indigenous peoples and European peasants, the forcible seizure and enclosure of commonly owned land, colonial domination and forced labor, the enslavement of human beings, and so on and so forth. And we could add that capitalism didn't leave imperialism, violence, oppression, racial domination, coercion, theft, and expropriation behind after the 17th and 18th century: these have been permanent features of the system throughout its existence. So the "game" is rigged from the start. There has never been a "level playing field" from which to begin the game.
But, suppose that there was a level playing field. Would that fix capitalism's problems? Would that mean that the "game of capitalism" is actually procedurally fair? I think not. First of all, not everyone can play the game of capitalism. In order to play, you must have something to invest (because that's one of the rules of the game). Now, defenders of capitalism will say that nobody is legally excluded from playing the game. But that's clearly a flawed argument. First of all, it's a fact that lots of people, indeed the vast majority of people, do not have the discretionary funds to play the game. David Schweickart makes the second point forcefully as follows.
Suppose you and I flip a fair coin; we each bet a dollar per round; heads I get your dollar, tails you get mine. The game is "fair" in the sense that we both face the same odds at any toss of the coin. However, a complication arises when we look at the game in light of its initial conditions. If I enter the game with $20 and you with $10, you are twice as likely as I to go bust. If you do go broke, and another player enters with $10, he will be three times more likely to be cleaned out than will I (because my initial stake has been supplemented by your losings)... So the large investor, although he has more to lose, is less likely to lose than is the small investor. Add to this that wealth gives one access to information, expert advice, and opportunities for diversification that the small investor lacks, and we see that the balance between magnitude of loss tilts toward the wealthy.What this shows is that even textbook "ideal" capitalism isn't a fair game.
But there are further problems with this game, even if it was "fair". First of all, it presupposes that some people are playing the game--the capitalist investors--while others, who own no capital to invest, do the work--the workers. And while the capitalists are busy playing the casino-like game of capitalism, workers have no say in what is going on. Yet, and this is key, they stand to lose even more than the capitalists if the bet fails. That is, if a capitalist investor loses $10 million on a deal, but still has $3 million back at home, it's not as if he will be going hungry any time soon. But if 2,000 workers lose their jobs, we can be sure that they don't have million dollar nest eggs sitting at home waiting to be spent. Unemployment, as millions of Americans know first hand, can be absolutely devastating--particularly when wages and benefits are so meager even during periods of full-time employment. Capitalists, of course, stand to lose more in absolute dollar terms, but because of the diminishing marginal utility of money, it means much less to them. Think of the way that the economic crisis has gone thus far. The reckless, profit-driven investments of the financial sector produced a global crisis that has had devastating effects on working class living standards at the same time that it has primed the pumps for austerity administered from above. The point is this: casino capitalism is unfair because it presupposes a class of working people who can't play the game but, nonetheless, stand to lose a great deal if the capitalist's gambles don't pan out.
Imagine a capitalist who replies to a labor union as follows. "I risked all of my capital on this business, so who are you to collective bargain to get a piece of it? That's unfair because I assume all the risk, yet you want to share in the rewards." Now, we've already seen that this doesn't work because the workers do share in the risk--the risk of losing their job--even though they are guaranteed none of the winnings. But we can also add that it's not as if the workers were asked to share in the risk. It's not as if the boss will ever say: look, if you like, we can make this a worker-owned and worker-run collective in which we all share the risk (and the profit) equally. So it doesn't make sense to complain that workers share none of the risk.
One further thing to say regarding the idea that our economy is best thought of as a casino-like game in which the winner takes all. It is not clear that it makes any sense to structure basic economic institutions in this way at all. The economic system should exist to draw on the mutual benefits that we get from social cooperation. What we can accomplish together is far greater than what we can accomplish alone: that should be the basic organizing principle of any just economic system. The casino-style setup, however, exploits the fact that an economy requires mass participation, takes this mass participation for granted, and then haphazardly doles out lump sums to individuals who happen to get a good roll on the dice. That makes no sense to me. Let's use the power of economies of scale and increased productivity to maximize human capabilities, to meet socially recognized needs, to do great things together that we couldn't have done alone. Rather than being trapped inside a casino that I never asked to enter in the first place, I'd rather be a member of a self-governing community in which the condition for the free development of each individual is the free development of all.
But there is one last objection to my argument--which has to do with incentives and innovation--that I mentioned above. It goes as follows. A flourishing society requires that people take risks, innovate, try out new methods and techniques, and produce new things that may not ever pay off. I agree so far, but the objection isn't finished. It continues: in order to get people to take risks and innovate, they must be motivated by large cash rewards. And that means that capitalism is the only system in which innovation and risk-taking can flourish, because without the big cash rewards that the market hands out to successful businesses people wouldn't be motivated to innovate.
First of all, we've seen that capitalists don't need to do any innovating at all. They can pay someone else to do it. Capitalism--where there is private ownership of the means of production which are run in order to enrich the owners--does not distribute wealth in accordance with who is the most innovative or who takes on the most risk to make some socially useful good. There is no close connection between being a capitalist and being an innovator. R&D departments--many of them subsidized by public funds (this is called "externalizing costs")--do that. Much R&D is located within universities--which are more feudal, guild-like institutions than they are capitalist.
Second, it is demonstrably false that people need huge cash rewards in order to innovate and do great things. Great scientists, great novelists, great musicians and artists, and so forth rarely do what they do out of a single-minded focus on cash reward. Think of those who develop open-source software. I think it is true of a lot of people that if they were guaranteed a basic standard of living, they would be happy to spend a large portion of their time developing open-source, free software for the betterment of all. There are too many examples here to count. People, of course, want an adequate standard of living in which they don't want for any basic necessities, in which they have adequate leisure and a degree of discretionary spending. But that doesn't mean they have to have huge million-dollar rewards to socially-useful things.
Finally, capitalism thwarts a ton of really important innovation while it privileges others. Many know about the strange murder of the electric car. There are other examples of this kind --particularly green technologies that aren't profitable or undermine the profitability of natural resource extraction. In fact, we may never know how many great ideas are out there that haven't been given a try simply because capitalist production can't earn a profit off them (or because they take too much long-term planning or upfront investment, as is the case with much green technology). To be sure, there is a place for competition to determine who should win socially-produced funds for some new innovative project. But that doesn't require capitalism. Despite encroachment from corporations and moneyed interests, grant funding for scientific projects doesn't involve capitalist markets or profits.