On the Redistribution of Incomes; Sudha Shenoy

18 THE FREEMAN April tervention, but the roots of eco nomic' misunderstanding are even deeper than this. There is a whole body of pseudo-economic literature devoted to attempts to demonstrate that economic behavior results in contradictions that can only be resolved by government interven tion. These arguments deserve some examination. ~ , The next article in this series will concern "Meliorist Economics." ON THE REDISTRIBUTION OF'INCOMES SUDHA R. SHENOY THE IDEA of redistributing in comes and wealth has become a virtual dogma which few dare to question. It is one of the oldest parts of the socialist ideology ; even th'ose social democrats who oppose communism because it stands for "violent revolution," nevertheless argue that a "fairer" Miss Shenoy, from Ahmedabad, India, is a B.Sc. (Econ.) student at the London School of Economics. distribution of income is •one' of the best· safeguards against such revolution. And many who other wise oppose interventionism argue that redistribution is necessary to "correct" or "ameliorate" the "unfair" distribution of wealth and· income, .which they. believe' is one of the major flaws in, the' work ing of the free market. Thus, we hear protests that: "A mere 6 per cent of the people own 42 per cent 1966 ON THE REDISTRIBUTION OF INCOMES 19 of the nation's wealth"; or, "The distribution of. income in our. so ciety should not be allowed to be come so unequal that the great wealth at one end of the scale endangers the low incomes at the other."

What is most remarkable, how ever, is that this idea of redistri bution should· have tlcaught onu in just those areas-Western Europe, North America, and Australasia - that are distinguished from the rest of the world precisely. by their astonishing mass prosperity. What especially strikes the visitor from the underdeveloped world (and I would include here the areas be hind the Iron and Bamboo Cur tains) is that the wide range of products and services, which at home are enjoyed only by the miscroscopic minority, are here bought by the masses. The dif ferencebetween the developed and the underdeveloped parts of the world lies not in the amenities en joyed by the wealthy - who in cer tain respects, such as personal services, are better off in the un derdeveloped areas - but in the condition of the mass of the peo ple in the respective areas. In the one, a wealth of goods and services (with a corresponding variety of jobs) is available to virtually everyone; in the other, the lives of the masses are marked by a poverty, the very memory of which has vanished in the West if we may judge from the comments in economic history textbooks.

The Process Misunderstood Perhaps the basic reason for the plausibility of redistribution ist ideas is a, misapprehension of the nature of owne'rship and pro duction. and what earning an in come means in the context of a free market. The redistributionist seems to think that goods are "so cially produced" and then thrown onto a common heap, from which incomes are "individually appro priated" - quite arbitrarily. But there is a pattern to the earning of incomes in a free market: the size of the income earned depends on the extent to which the individ ual-in cooperation with other individuals - succeeds in satisfy ing the wants of his fellow men. Even capitalists must use "their" capital to produce for their fellow men. Legal title· to any collection of capital goods does not guaran tee that income will flow in auto matically.! For example, legal title to a hula-hoop factory in the United States today does not mean automatic profits to the owners more likely, it means heavy losses lOne. of the basic fallacies of Marx was the notion that capital would "auto matically beget profits." But the theory of a capitalist conspiracy to keep wages low and price~ high does not explain. why capitalists sometimes have losses.

20 THE FREEMAN April and strenuous efforts to salvage something from the wreckage. In other words, in a free market, even capitalists' incomes are "earned": by producing what their fellow men wish to buy.2 Since, in this context, the fulfillment of consum er needs is the rationale of the production of capital goods, it is the mass of consumers who, in a free market, must be regarded as the real economic directors, if not the legal owners, of capital. 3 In short, though legal title to all the thousands of factories and millions· of machines may lie with a numerical minority, this vast accumulation of capital is not used to produce exclusively those items consumed by the few. The super markets are not stocked with cavi ar and champagne for "the 6 per cent who own 42 per cent of the nation's wealth": the supermar kets bulge with ite·ms for mass consumption. The vast amounts of capital equipment in the developed nations are used principally to pro duce an enormous variety of goods and services - includipg leisure for the vast majority of the peo ple. The production of luxury 2 Aristocrats and manufacturers, for instance, certainly were not the chief buyers of the coarse-and cheap-cottons produced by the first factories at the be ginning of the Industrial Revolution.

S Ludwig von Mises, Socialism (Lon don: Cape; and New Haven: Yale Uni versity Press, 1951) pp. 37-42. goods is a mere trickle compared with this outpouring of goods for mass consumption. Contrast this with conditions in such countries as China or Soviet Russia - where vast amounts of resources are drawn into the con struction of industrial or hydro electric complexes that are useful only in the light of their rulers' military ambitions or for such technologically spectacular but otherwise useless feats performed b-y Sputniks and Cosmonauts. How much easier life could have been for Ivan Ivanovitch and his wife and family if these resources had been allocated according to the principle of consumer sovereignty! Production and Trade What does redistribution mean in practice? The goods and ser vices we consume - and which con stitute our real income - have all been produced for us by our fel low men, in exchange for what we have produced for them. If any of us wishes to consume more - i.e., have a higher income - he must either produce more of the things his fellow men want - or some of his fellow men must voluntarily turn over to him what they have produced, without asking any thing in return. In other words, if we wish to consume more with out producing more, someone else must produce for us without him1966 ON THE REDISTRIBUTION OF INCOMES 21 self consuming. The principle is not changed if some third per son, on our behalf, pays those who produce for us.

There is, of course, a third method of having more; and that is by seizing what others have produced, and thus forcing them to do without. And this is what is really involved in theredistribu tion of incomes via the state ap paratus - progressive .taxation to "soak the rich," and various "wel fare" measures ostensibly aimed at raising the real income of the very poorest. Aside from the ques.. tion of whether these aims are in fact achieved (which they are not4 ) it must be seen that compul sory redistribution of this type is just another form of capital con sumption. 5 How is this? We must ask what the "rich" would have done with the income if it had 4 Progressive taxation actually serves to maintain the existing distribution of wealth and income: true, the already wealthy are prevented from getting wealthier, but those seeking to rise are prevented from rising at all. See Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), pp. 803 if., and David McCord Wright, Democracy and Pro,gress (New York: Macmillan, 1948), pp. 94-103. For the British experi ence with "equalitarian" welfare serv ices, see the various Hobart Papers is sued by the Institute of Economic Af fairs, London.

5 See F. A. Hayek, The Pure Theory of Capital (London: Routledge and Kegan Paul, 19(1), ch. xxv. been left in their hands. The an swer is, they would have saved it Le., demanded capital goods. But if this income were handed over to those whose incomes are very much lower, they ·would not save it; they would use, it to .purchase consumption goods. The effect then of such redistribution would be that' consumption goods are pro duced where capital goods would have been produced - i.e., there' is capital consumption. 6 Redistribution cannot, there fore, continue indefinitely. Once the capital has been consumed, the "high" incomes derived from its use will no longer be available to be redistributed. Nor can we as sume that those who do earn higher incomes will passively ac quiesce in having ever greater pro portions of their income taxed away. After a time, progressive taxation defeats its own ends. The individual simply ceases to earn the income in taxable form - or as in some countries, is forced to start keeping two sets of books.

Observe, too, the inconsistency here: on the one hand, it is the 6 If resources are scarce, we cannot have more of both; if, with the Keynes ians, we wish to argue that there are always unemployed resources, then we are implicitly assuming either (a) that these resources are perfectly versatile, or (b) exactly the right sort of resourc es are available in exactly the right proportions.

22 THE FREEMAN April people themselves who, in a free market, create these "high" in comes by buying what the "cap italists" help to produce - and then, the people propose to "cor rect" the "unequal" distribution of the market via the political process!7 Redistribution in Backward Countries What about redistribution in other contexts - say, in an under developed country, or under feu dalism? Now, the characteristic mark of such precapitalistic or noncapitalistic situations is the extreme poverty of the masses, against which the comparative wealth of the few landlords and nobles appears even more harsh. In these situations, the problem is to produce sufficient goods; i.e., to buildup the capital resources re7 I am not saying that the developed areas today are, or at any time were, paradigms of the free market. In fact, only 80me free market principles were ever applied in the past; and the last 100 years have seen an accelerating movement away from even this. What I am saying is that we should try to clari fy the ideas in terms of which we at tempt to interpret the real world. If we wish to have a system based on gov~rn mental direction rather than one based on the principle of consumer sovereign ty, we should be clear about this.

quired to produce the consumption goods for the masses. The question of political redistribution hardly arises. This is not, of course, to dis parage the ideal of voluntary giv ing. It would not be necessary to add this, were it not for the per sistent misunderstanding of the implications of free market prin ciples with respect to charity. Economics certainly does not as sume that all men are selfish mon sters - though a great many peo ple, who should know better, go on talking in this fashion. Eco nomics is concerned only with the principles governing the allocation of scarce resources among com peting ends; it says nothing about the ends themselves. And, for most people, these ends will in clude, as a matter of course, the assisting of those who are in need. The pity is that in so many coun tries, especially underdeveloped ones, heavy taxation - including direct taxes, indirect taxes, and the hidden tax of inflation - is making it more and more difficult to continue all those traditional forms of giving that formerly were regarded as the privilege and the duty of the many who felt they could afford it. ~ miniTHOSE WHO SPEAK glibly of "allo cating purchasing power" - by which they mean the 'forcible re distribution of wealth, patently a political function - are prepared to employ means that are both im practical and immoral, and alas, these persons are in full charge of the poverty debate today. If the sentimentalists casually prescribe, and get, massive crop supports to aid poor farmers, it is because there are all too few cool heads around to point out that such aid is at the expense of the urban poor, in the form of higher food and cloth ing prices, loss of jobs, and an infla tionary attack on the value of sav ings and fixed pensions, not to mention the bad psychological ef fects on both the' farmers and the urban poor involved in the unjust transfer of wealth.