The president seeks a fairer distribution of wealth; he claims not to admonish prosperity, but seeks to be sure it is shared.  There is a proven method to this noble objective and it lies under his nose. Instead of promoting it he is effectively destroying it.

In The Wall Street Journal, 1/26/12 Henry Nau writes Lessons from the Great Expansion.  (p A15 in the print version, the link may require a paid subscription, which I encourage.)

Excerpts:

Yes, “the middle class has shrunk,” as Mr. Obama said while campaigning last month. But not because it’s getting poorer, rather because it’s getting richer.

According to Stephen Rose of the Georgetown University Center on Education and the Workforce, fewer people live today in middle-class households with incomes between $35,000 and $105,000, while the percentage of households making less than $35,000 has remained the same. Where did the missing households go? They became richer. In the past three decades, the percentage of households making more than $105,000 in inflation-adjusted dollars doubled to 24% from 11%.

Even more importantly, the global surge in growth spread wealth from the rich to the poor countries, creating greater equality in global markets than ever before. Throughout this period, developing countries grew two and even three times faster than developed countries. As a result, the share of world GDP held by emerging markets increased to 22% from 13%, while the U.S. share remained steady at approximately 26%. The “Great Expansion” created a global middle class of some 600 million-800 million people in China, India, Brazil and other developing countries.

What were the policy trends that produced this Great Expansion? Precisely the free-market policies of deregulation and lower marginal income-tax rates that Mr. Obama decries.

HKO Comments:

Capitalism replaced the feudal societies where capital was allocated based on rank and privilege with an allocation based on merit and innovation.  The re-emergence of a more state controlled economy is in a very real sense a return to allocating capital based on privilege and power as opposed to individual merit and freedom. By overreacting to a short period of correction and adjustment this administration risks damaging the very best system for achieving the objectives he claims to value so highly.

Economist Alfred Marshall

In 1879 as Karl Marx was becoming popular in Europe Alfred Marshall wrote The Economics of Industry.   Marx was a reaction to the principles of Adam Smith.  Karl Marx focused on the distribution of an existing pie where Adam Smith sought the benefits for all of an expanding pie.  Marx saw the profit motive as leading to increasing alienation of workers and the inevitable collapse of capitalism.

Marshall’s obsessive effort to understand how business worked led to his most important discovery.  The economic function of the business firm in a competitive market was not only or even primarily to produce profits for owners. It was to produce higher living standards for consumers and workers.  How did it do this? By producing and distributing more goods and services of better quality and at lower cost with fewer resources. Why?  Competition forced owners and managers to constantly make small changes to improve their products, manufacturing techniques, distribution, and marketing.  The constant search to find efficiency gains, economize on resources, and do more with less resulted over time in doing more with the same or fewer resources. Multiplied over hundreds or thousands of enterprises throughout the economy , the accumulation of incremental improvements over time raised average productivity and wages. In other words, competition forced businesses to raise productivity in order to stay profitable.  Competition forced owners to shares the fruits of these efforts with managers and employees, in the form of higher pay, and with customers, in the form of higher quality or lower prices.

The implication that business was the engine that drove wages and living standards higher ran counter to the general condemnation of business by intellectuals.   Even Adam Smith, who famously described  the benefits of competition in terms of an invisible hand that led producers to serve consumers without their intending to do so, had not suggested that the role of butchers, bakers, and giant joint stock companies was to raise living standards.  Although Karl Marx had recognized that business enterprises were engines of technological change and productivity gains, he could not imagine that they may also provide the means by which humanity could escape poverty and take control of its material condition.

From Grand Pursuit – The Story of Economic Genius by Sylvia Nasar

Sylvia Nasar’s book traces the development of economics from Adam Smith through Milton Friedman.  The book gives a background of the key developers of economic theory by relating their thinking to their personal development and the history of their time.

Unlike the hard sciences where laboratory conditions can prove or disprove a theory in a short period of time, the impacts of economic theory only play out at the speed of history.  All too often in the development of economics, rational and mathematical models are humbled by the development of history and the unexpected genius of people who respond much different in the real world than the mechanical objects they are treated as by the brilliant but flawed theories of those intellectuals who confuse thought with understanding, and knowledge with wisdom.

From the New York Times: How the U.S. Lost Out on iPhone Work
By CHARLES DUHIGG and KEITH BRADSHER, 1/21/12

Scott Grannis writes in his blog Calafia Beach Pundit, Effective Tax rates are Highly Progressive, 1/19/12.

Larry Anderson writes for American Thinker, Venture Capitalism Not Crony Capitalism, 1/20/12:

Excerpt:

The moral difference between a Governor Keith and a Thomas Denham (venture capitalist)  is staggering. Keith made lavish promises (not just to Benjamin Franklin) based on the use of money that Keith did not have or that did not belong to him. People were seduced into Keith’s “investments” because of his position in the British government. Spending someone else’s money is easy, painless, and risk free — for both the “lender” and the recipient. (Benjamin) Franklin described Governor Keith thus, “He wished to please everybody, and, having little to give, he gave expectations.”

Denham, on the other hand, could not afford to tarnish his reputation by making promises he could not keep. Like many entrepreneurs, Denham was a venture capitalist and a retail businessman. He loaned and borrowed real money to and from real people. Franklin admired Denham..

HKO comments:

Venture capitalists take risks with their investors’ money, voluntarily placed at risk; crony capitalists use taxpayers’ money.  Venture capitalists do not make money buying companies and then shutting them down. Politicians use taxpayer money to buy votes and enjoy the fruits of their political power long after their Solyndras have paid their executive bonuses and shut down.

Crony capitalism is to capitalism what National Socialism (Nazism)  is to socialism.