Free Market Institute of the Pacific

Exploring Business, Economics, and Freedom

Why “Redistribution” of Wealth Makes Us All Poorer

Growing government debt has renewed the discussion around increasing taxes on the higher income producers in society, perfectly underscored by the old Marxist dogma “tax the rich.” The idea being that simply redistributing wealth from those who have been successful or lucky to those who have not, would magically cure numerous ills and set a standard for “fairness.”

But there are calmer voices attempting to point out where the dangers of such thinking might take us.

Those who oppose such concepts on principal are accused of “being in the pocket” of “big oil” or some other “rich” entity carrying a negative connotation. This is great propaganda, but clouds the policy discussion. When an opponent argues they are not protecting the rich, but protecting all of us, they are derided. “How,” the mob cries out, “can taking money from the rich possibly damage the remainder of society?”

Let’s use the basic village model to illustrate exactly how that could come about. 

Imagine a village of 100 families. Years back they began to come together, perhaps around a water source, and created their community. Every family produces something of value which they can trade with their neighbors, allowing a degree of specialization and efficiency. 

Some of them are farmers...one family makes shoes...some weave clothing, and some make tools and farm implements. The village is in balance as long as each family creates enough product to trade for the amount of product they need from others.

Now we come to an important concept: the wealth of the village is the total of accrued production. In other words; every family is making "stuff" and growing "stuff" and a year's worth of that "stuff" is the annual gross domestic product of the village. Some of that stuff is consumed over the year, such as food, but some of it lasts for years or even decades. As long as everyone is producing as much, or more, than they consume, the wealth of the village grows. This growth in wealth benefits everyone in the village...it keeps prices down, and creates surpluses which are likely to be distributed to those who fall on hard times.

Now suppose we have two families whose chosen work is to grow chickens and eggs. There is a demand for both. Eggs are more quickly and more cheaply produced, as they don't have to be fed, matured, and slaughtered to be eaten. But they don't provide as much food value as a chicken either. Therefore, both families must calculate the best balance for production...how many eggs do they allow to hatch and grow into fryers? What mix would give them optimum profit?

This is a very normal business decision made every day by business owners world wide. Let's suppose family "A" elects to buy extra chicken feed and to allow 1000 eggs each year to be hatched and grown into chickens. They are taking a risk, and spending additional funds, on the gamble that they will make profit on the chickens despite the additional costs and the loss of income from the eggs.

Now let's suppose family "B" decides to concentrate on eggs and raise only 100 chickens. As it turns out, at year's end, family "A" has made the optimum decision and they are able to trade their combination of chickens and eggs for three times what family "B" is able to make on their chickens and eggs. So family "A" is suddenly more wealthy than family "B" as they have contributed more protein and more value to the village.

Members of family "B" are not happy...they are in the same business as family "A" but have made one-third the income. Grumblers in the village begin to promote the idea of "redistribution"...it's unfair, they say, that family "B" has worked in the same business as "A" but made so little comparative income. Eventually the grumblers convince the majority of people in the village to call for a new rule...and they force family "A" to give up some of their income to family "B" in a gesture of "redistributive justice."

So why is that wrong? It's not an ethical question...it's an economic one. Family "A" now has the same choice to make as they made the prior year. Do they spend extra money on feed...extra time for chickens to hatch and mature...slaughter the chickens...and take on all of that risk and expense if their added profits are going to be taken from them?

Here's where Marxist style theories always fall apart...at the point where human nature steps in. People do not adhere to theories written in books...they act in their own self interest. Family "A" decides the risk isn't worth it...so they elect to grow only 100 chickens the next year. The result...they will make less income, but it won't be taken away from them so they'll break even. The village will not have the 900 chickens as a food source. They will have more eggs instead, but the market proved that the chickens provided more value and protein than eggs alone.

So the village is poorer...it loses wealth. An economist, or any experienced business owner, would not be surprised...but many neophytes are shocked by the news. "But why?" they ask. "The only thing that happened was some wealth was transferred from one family to another. How could that possibly result in everyone being worse off?"

The simple village model explains the "why" clearly and simply. The real world is more complex of course. Imagine the effect on an economy when a few million small business owners are forced to make similar decisions based on government decrees. The results are devastating to the economy and greatly reduce the wealth of the people overall. This is not a hypothetical question...the economy of the United States clearly shows the negative result of such interventions over the years.

Human nature, and the willingness to balance risk with possible reward, will always win out...in any culture...any time...any place. That's why the rules of economics are in place. And not just models, but history, proves them to be true. Whether we have the good sense and wisdom to insist our elected officials abide by those rules...that’s up to us.