Saturday, November 12, 2011

Is the Wealth of the Rich Legitimate? Part 1

Is the wealth of the rich in contemporary capitalist societies legitimate? Of course not. But the rich have a vested interest in making sure that the majority of the population --who aren't rich-- think that their wealth is legitimate. It hardly matters whether it's aristocratic privilege, family lineage, racial or sexual supremacy that makes a group dominant. It remains true that dominant groups almost always try to preserve the basis of their own dominance.

Dominant groups typically have two (analytically distinct, but in practice interwoven) means of maintaining dominance. The first is obvious. Dominant groups typically monopolize control of the means of exerting physical repression. If you push too hard against the status quo, dominant groups will always (if possible) push back with physical repression in order to protect their dominant status.

But dominant groups never maintain their dominance through naked violence alone. They have another means at their disposal: ideology. That is, dominant groups stabilize their rule by telling stories about why their rule is legitimate. Think of the "divine right" of Kings, the "positive good" doctrine that purported to justify the dominance of Slave owners, the so-called "civilizing mission" that Colonization attempted to carry out, the supposedly "scientific", technical expertise of bureaucrats. The stories the rich tell about the supposed legitimacy of their wealth are a key part of this long tradition of lying to the masses to protect privilege and power.

What are those stories? The most common one is that the rich deserve their wealth because they work hard to produce it. Because the wealthy (the "job creators"!) make such important productive contributions to society, the story goes, they deserve every cent they earn. Another story is that the rich deserve their wealth because they undertake a great deal of risk when they invest it. Yet another story that is told, perhaps the least plausible of all of them, is that the rich deserve their wealth because they sacrifice more than others (by saving and foregoing consumption). Finally, there is the claim that the wealth of the rich is legitimate because they are legally entitled to it in a regime of private property where ownership titles are distributed by way of voluntary exchanges.

Now, in practice these legitimating narratives are often run together and interwoven. The war of ideas is never as clear cut and organized as academic discourse aims to be. But for our purposes --that is, for the purpose of showing that all of these stories are pure fiction-- we'll examine them each separately in a series of blog posts (of which this is the first). In examining each, I'll follow closely along the lines of the arguments put forward in David Schweickart's excellent book Against Capitalism. Anyone interested in seeing a detailed, rigorous refutation of every familiar argument in favor of capitalism would do well to pick up a copy. In what follows, we'll just examine the first. The other stories will be taken up in subsequent blog posts.

The first story says that the wealth of the rich is legitimate because it is their reward for making productive contributions to society. A more technical way to say this would be the following: in a "purely competitive free market" what the wealthy earn directly corresponds to their marginal productive contribution in the economy. In neoclassical economic theory --which is little more than an elaborate way of cheerleading for (rather than critically analyzing) capitalism-- this is called the "marginal productivity theory of distribution." As an early defender of this view puts it, "the natural effect of capitalist competition is... to give each producer the amount of wealth that he specifically brings into existence."

Before we show why capitalism is not a system in which each receives according to what each produces, we need to do a bit of table setting. In order to produce anything at all, two things are required: labor and means of production (e.g. factory equipment, instruments, technical knowledge, land, space, etc.). It is a fact about capitalist societies that the vast majority of those who labor for a living do not own the means of production they use at work. The owners of the means of production are usually distinct from the group uses those means. Up to this point we've been talking about "the rich" or "the wealthy" --but to be more precise we're actually interested in capitalists (i.e. that group who earns a living by owning, rather than using, the means of production).

Now, everyone knows that those who labor (by using means of production) to produce goods make productive contributions to society. Auto workers, for example, use their own two hands to build cars that wouldn't have existed if they hadn't built them. Their productive contribution is clear, and so it is with all workers in society. But what we want to know is whether capitalists actually make any productive contributions to society in order to receive their income. If they did, and if capitalism rewarded their productive contributions proportionately, it would look like their wealth was pretty legitimate.

But what is the productive contribution of capitalists in our economy? Notice that we can't just define their productive contribution in terms of what they receive from the market, since that is circular. We want to know whether the market actually gives each what they deserve. So we can't very well say that what people deserve is what the market gives them --that begs the question. What we're trying to figure out is whether the market actually distributes according to productive contribution.

Some will say that the contribution capitalists is their entrepreneurial spirit and innovating attitude. Others will say that capitalists do a lot of work co-ordinating and managing the productive process. No doubt ingenuity and creativity are required to make a capitalist firm successful. Even a socialist society would require ingenuity, innovation and "entrepreneurial" spirit of some kind or other. Likewise, co-ordination and workplace organization are essential. But notice that capitalists can simply pay someone else to do all of the innovating, all of the managing, and all of the co-ordinating. And they often do. If I'm a capitalist, I can hire a management consultant, an industrial engineer, and a research and development team to do all of the managing, organizing and innovating. But I'm still a capitalist --and I'll still earn handsome sums of cash for myself (indeed, I'm in a position to earn far more than anyone else in the entire firm even though I don't do any real work). So in this case, where's the productive contribution that supposedly legitimizes my massive sums of wealth?

Some will say that what I'm doing is "providing capital". After all, we said that two things --means of production and labor-- were needed to produce goods. We know that workers make contributions by laboring to produce things. But it is, of course, true that the means of production (e.g. capital, the factory space, instruments, etc.) add value to the final product. And capitalists, by definition, own and control the means of production. So aren't they performing an essential productive function by providing it? Couldn't we say, then, that this is productive contribution that justifies capitalist wealth?

But let's think about this for a moment. What exactly is going on when a capitalist provides capital? They are doing nothing more than "allowing it to be used". They are doing no more than granting permission to make use of an already existing material thing --e.g. factory equipment, raw materials, etc. But, as Schweickart points out: act of granting permission, in and of itself, is not a productive activity. If laborers cease to labor, production ceases in any society. But if owners cease to grant permission, production is affected only if their authority over the means of production is respected. If it is not, then production need not diminish at all. Workers can continue doing exactly what they were doing before --producing corn and bread and steel and machine tools and all the other commodities required by their society. Whatever the owners are doing when they grant permission for their assets to be used, it should not be called 'productive activity'.
To drive the point home, consider the following example.
Suppose a government suddenly nationalizes the means of production, then does nothing else but charge workers a tax to make use of it. We wouldn't say, would we, that the government is engaging in productive activity, or that the tax is a return for the government's productive contribution? Not even if the tax rate is exactly equal to the marginal product of the productive labor.
But some will reply here that there's a difference between providing physical means of production (e.g. raw materials, tools, factory equipment, etc.) and providing capital investment funds to finance a productive endeavor. Surely providing an already existing material thing --whether it be factory tools, land, etc.-- is not a productive activity. It is no more than granting permission. But isn't financing production by lending capital a productive activity that takes a great deal of skill? Schweickart gives us an excellent example here: "Consider a person with a chest full of cash, eager to invest. How he acquired it need not concern us. We want to understand how his disposal of it will increase production. To produce something, there must be brought together equipment, raw materials, and laborers. Let our investor lend his money to an entrepreneur who purchases these necessaries. The laborers are set to work with the machinery and raw materials, and soon goods are produced. It is all quite simple. But notice, this is also a matter of granting permission. The workers, the raw materials, and the machinery already exist. The workers could begin production themselves, except that property rights intervene. They cannot gain access to the machinery and raw materials, for these things are the property of others. To use them, one must have permission, which the entrepreneur secures by means of her borrowed capital." But permission is only needed if one respects the authority of the legal titles to ownership of the things needed to produce. So the workers could produce just as well without permission if they didn't respect that authority. It follows, then, that permission is in no way a productive contribution.

Take another of Schweickart's examples:
Suppose, instead of relying on our friend with the chest full of money, the government simply rolled out its presses to produce the same quantity of crisp bills and gave them to our entrepreneur. Exactly the same production would result. But would we want to call the printing of the money a productive activity? That would surely be misleading, perhaps dangerously so, tempting officials to believe that rolling the presses longer and longer would miraculously generate wealth.
The point of all of this is that "providing capital" is not a productive activity. But if that's true, then we are forced to conclude that capitalists, qua capitalists, make zero productive contributions even though the market gives them the lion's share of the surplus created by society. As even John Kenneth Galbraith put it,
No grant of feudal privilege has ever equaled, for effortless return, that of the grandparent who bought and endowed his descendent's with a thousand shares of General Motors or General Electric. The beneficiaries of this foresight have become and remain rich by no exercise or intelligence beyond the decision to do nothing, embracing as it did the decision not to sell.
Or, if you'd like another example, examine a graph showing real wages for workers and worker productivity from 1973 to the present. What you'll notice is that productivity goes way up whereas wages stagnate. Someone reaped all of the difference and got filthy rich, but it wasn't the workers who were producing more and more each year. Again, we see that market distributions don't reflect productive contributions.

So what explains the fact that capitalists own the vast majority of wealth in our society? They don't receive this wealth as a result of any productive contribution they make. When they earn interest or dividends on their invested wealth, they need not do anything productive at all. When they make millions from arbitrage, they haven't done anything productive whatsoever. So in virtue of what do they earn such vast sums of wealth? In virtue of their ownership. Whereas the vast majority of us have no choice but to earn a living from the work that we do, capitalists earn their riches merely by owning things. But if the vast majority --the 99%-- does 100% of the productive activities in society, how could be legitimate that the unproductive 1% owns and controls the lion's share of the wealth produced? Good question.

So, what I've shown is that a certain argument, i.e. that capitalism distributes wealth according to productive contributions, is false. In a series of upcoming posts, we'll look at other fairy tales told by the rich to protect their wealth and power.


Devin Finbarr said...

Let's look at the case of Evan Williams. He started a company writing project management software. The idea did not work out. He tried to pivot the company towards writing one of the first blogging platforms. Everyone else in the company quit due to lack of money. He worked alone, for a year, living on ramen trying to make the company work. The idea finally took and his software became popular. Google purchased the company and you now use the platform yourself to write your blog. Williams made millions dollars from the sale of Blogger to Google.

Does Williams deserve his millions? If not how much does he deserve?

Let's say that Williams then invests $1 million of his wealth in a solar panel startup that has only a 10% chance of succeeding. The company does well, and his $1 million turns into $10 million. Is this $10 million "deserved"? What if the $1 million turned into $100 million?

I agree there are many millionaires who do not deserve their wealth. But I want to explore if any deserve their wealth, and if there is any non-subjective way to determine which earnings are deserved and which are not.

Rocky Rococo said...

There is I believe a third major component of the ability of ruling elites to maintain their hegemony, which today's technologies of communications and "information" make more effective and efficient than ever before. These are the elements of distraction, diversion and division, and I believe that they are the most powerful barriers to social change of all. For instance, today Americans on average watch 4 hours of television a day. Besides providing them immobilizing distraction, it also allows their heads to be filled up with images and messages which serve to divert attention from concrete political/social/economic realities, and also to foster scapegoating and propagate false "facts" and entirely fictional realities (e.g. poor people getting mortgages caused the global financial crisis.)

Until those of us who do not accept and submit to the hegemonic system are able to overcome the strategic disadvantage these tools of capital put us at, I'm afraid we'll simply have to accept life in an increasingly repressive and unequal corporate state.

Yours in service to Cross and Capital,

Rocky Rococo

t said...

@Devin Finbarr

Much of the Evan Williams example has to do with reward for having taken risks, but I didn't address that in the post (I'll address that in an upcoming post since it's a separate argument from the one I deal with in the post, i.e. "x deserves her wealth because it reflects her productive contribution").

Here are a couple of thoughts. First let me clarify a bit what the argument in the post attempts to show. Defenders of capitalism often claim that the distribution of wealth it generates is legitimate because market distributions reflect productive contributions. I refuted this argument by showing that capitalists --those who own the means of production-- need not do anything productive at all to earn vast sums. Of course, many capitalists do do some work, whether its planning or co-ordinating or whatever (although most pay others to do this for them). But the point is this: even those capitalists who are hard-working entrepreneurs don't get paid according to their productive contributions. They get more --because the lion's share of capitalist's income is derived from their ownership of a scarce factor of production.

There's more to say here. In general, deservingness has nothing to do with how the market works. The market responds to supply and effective demand. Imagine that I sell jugs of water during a drought and make a handsome sum. Do I deserve these earnings in the same way that I deserve a trophy for winning a race? And why is the particular price I get for the jugs what I deserve in this case? Suppose, for example, that the drought ends and price I earn per jug of water sold decreases substantially. Am I now less deserving than before? The point is that market distributions don't reflect who deserves what. It reflects who is legally entitled to what based on the exchange of ownership titles. That is different from desert. If a stranger randomly gives me her house as a gift, I may then legally own the house but do I deserve it? Or imagine that I inherit a vast sum from a Grandparent. I am legally entitled to it, given the rules of the market, but do I deserve it?

So, take the Evan Williams case. He clearly did some innovative things that have been helpful for a lot of people. But why, then, should we conclude that he deserves a particular sum of money for having done it? Perhaps, given certain market conditions, he can command some particular figure (and, given some other set of conditions, perhaps he could command another). But that's not the same as deserving it. In fact, I don't see where deservingness of money enters into it. Think of people who develop open-source software (an incredible service that I reap the benefits of every day!). Are they being wronged because they haven't yet been given some sum of cash (how much? who decides?) that they can be said to deserve? And there's another complication here, which has to do with perpetual rewards. Suppose I come up with some great innovative technology that reflects a huge contribution to society. Is it just for me to be rewarded (again and again) for something I did in the past? It makes more sense to say that the inventor is legally entitled to her royalties (not that she deserves them). I haven't yet said anything about entitlement to property (on the basis of voluntary exchange) --I want to write about that in a future post.

t said...

@Rocky Rococo

What you're describing strikes me as similar to what the Frankfurt School Marxists called the "Culture Industry". I agree with you that the corporate media, especially when looked at in terms of its cumulative effects of long periods of time, tends to preserve (rather than challenge) the status quo. Moreover, it is true that cultural production (TV, film, music, magazines, etc.) tends to have a similar function. But it isn't uniformly bad --there are cracks and contradictions everywhere. And where there are cracks and contradictions there is space for critical thinking.

Still, although the media and the Culture Industry have conservative effects on consciousness, I think the OCcupy movement has shattered the assumption that Americans are too deluded to ever fight back. Hundreds of thousands of people --in hundreds of different cities-- are participating in the movement because they are convinced that our political and economic system is dominated by the 1% (despite all the lies they've been told by teachers, the media and movies). There is a huge radicalization going on right now and people are asking questions like "is capitalism the best we can do?". The task of radicals is to participate in and deepen this radicalization. So, while I see what you're saying, I don't think a general attitude of pessimism about social change makes sense given what's going on in the world right now.

Devin Finbarr said...

First off, I agree that most defenders of capitalism err when they say that in a market system wealth earned is a direct result of productive contributions. In reality, great fortunes are usually earned by some combination of productive output, risk taking/luck, and the capturing/creation of a natural or artificial monopoly.

Also, obviously those who inherit money do not in a cosmic sense "deserve" that money. They did not accumulate that wealth via productive enterprise. But if you wish to allow people to spend their money as they see fit, some people will give their money to the undeserving. In such a situation the wealth of the underserving would be "legitimate" but not "deserved."

Let's drop the word "deserving" (which is too subjective) and the word "legitimate" (which is too much of a synonym for legal, which thus restricts us to the status quo) and use the word "proper". We'll define that someone's wealth is "proper" if he or she would have earned a similar amount of wealth in a well designed, reasonable, optimal (but not utopian) economic system. So for instance, in my opinion, the wealth of the former CEO of Bear Stearns is improper because he earned his fortune by exploiting a "heads-I-win, tails-you-lose" game that was built into a very dysfunctional financial system.

I think the wealth of Evan Williams is proper. A well designed, reasonable economic system needs to allow people to reap the rewards of taking risks. A reasonable way of doing that is by saying, "If you write computer source code and develop an internet property (, you have ownership over that property, and reap a substantial percentage of the rents and profits from that property." So if Evan Williams forgoes $100k+ in salary to take a risk creating an innovative web publishing platform, and it turns out that other people find his product valuable, I think he should be able to reap the rents of selling access to the intellectual property he created. If he earns millions, those earnings are proper.

It is also proper that the government tax some portion of this wealth and broadly redistribute it. Some portion of Evan Williams earnings come by capturing a scarce resource (the market opportunity for blogging software). Furthermore his earnings are only made possible by a broader technological, social and legal system. He stands on the shoulders of giants.

So it is proper that tax rates are high enough so that wealth is broadly distributed. Those who are lucky enough to capture winner-take-all market opportunities should not keep all the wealth. But the rates should be low enough so that entrepreneurs and investors still have an incentive to take big risks.

What kind of tax rate should that be? I don't know. There is no good, objective way to answer to the question. If I was King and had to choose some tax level, I would probably go with: No corporate taxes - just tax dividends and capital gains. The first $500k of lifetime capital gains and dividends would be tax free. The next $5 million of life time capital gains and dividend income would be taxed at 33%. The next $5 to $40 million would be taxed at 40%, and everything over $40 million would be taxed at 60%.

In the above system, which I would consider reasonable and close to optimal, Evan Williams would still make millions. Thus I consider his wealth "proper".

I look forward to your future posts on risk taking and entitlement to property.

t said...

For me, the key Marxist insight here is that what matters first is production, not distribution or consumption. That is to say, we have to restructure production relations if we're going to get to the root of the matter. Concretely, that means that the problem isn't, at bottom, one of how much to tax, or how much wealth people deserve. The fundamental problem is the private ownership of the means of production by a small class. As Marx put it in the Critique of the Gotha Program:

"Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production itself. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of non-workers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor power. If the elements of production are so distributed, then the present-day distribution of the means of consumption results automatically. If the material conditions of production are the co-operative property of the workers themselves, then there likewise results a distribution of the means of consumption different from the present one. Vulgar socialism has taken over from the bourgeois economists the consideration and treatment of distribution as independent of the mode of production and hence the presentation of socialism as turning principally on distribution."

Of course, there are still important questions that remain. After production is brought under the democratic control of the community, how should we determine the distribution of certain socially produced goods? My view would be that it depends on the good. Citizens of a socialist society would be able to determine --through collective self-governance-- how to distribute different social goods. Human beings, living in communities together, create, produce and distribute amongst one another all kinds of "goods" (e.g. respect, recognition, honor, rights, work, money, commodities, office, education, medical care, etc.). It should be up to citizens to determine how, given the social meaning that these goods have, they should be distributed. Letting the capitalist market--dominated as it is by the drive to accumulate profit--forecloses the possibility of allowing citizens to determine this collectively.

A lot of the points you raise about Williams have to do with risk-taking and reward for innovation, so I'd be curious to know what you think of my most recent post.

Anonymous said...

People throughout history have exploited other people. Their exploiting will stop soon -- they'll be 6 ft. under before they realize it!