More from  Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth.  For a bit about Roy’s experience see The Great Debate  Part I

Let’s take socialism to an extreme.  Let’s make sure everyone earns the same amount… that would be fair, right?  So, for everyone that makes above average, we will take the difference and give it to everyone that makes below the average.  That way, everyone makes the same.  What would happen?  Easy.  I would quit working because I know that I don’t need to work to make the average wage.  In short order, the average would drop to zero as soon as the last guy figured out he was the only one working.  Extreme, yes, but incentives work in the trivial as well as the extreme.

Even if it is “Just another tired old solution that looks good on paper”, no system yet devised by man has improved the lot of ordinary people more than the productive activities unleashed by a free enterprise system.

So, what assurances do you have that “the top 3% will be divinely led to use theirs for R&D, business improvement, hiring new workers and all those other wonderful things Adam Smith promised we would experience in capitalist economies?”  If history is any judge, the answer is pretty clear on this as well.  Since 1978, the U.S. has cut the highest marginal earned income tax rate from 50% to 35%, the highest capital gains tax rate from about 50% to 15% and the highest dividend tax rate from 70% to 15%.  During this time, income tax receipts from the top 1% of income earners rose from 1.5% of GDP to 3.3% of GDP… an increase of 120%.  A fluke?  Nope.  When Kennedy cut the highest income tax rate from 91% to 70%, income tax receipts from the top 1% of income earners rose from 1.3% of GDP to 1.9% of GDP… an increase of 46%.  What happened between Kennedy and Reagan, you say?  The answer is the four stooges, Johnson Nixon, Ford, Carter and their redistributionist, Keynesian policies during which time U.S. equity prices decreased 20% in real terms and tax receipts from the top 1% of income earners went from 1.9% of GDP to 1.5% despite a rise in the top tax rates. Just another fluke?  Nope.  When Harding and Coolidge cut tax rates in the 1920′ from 73% to 25%, tax receipts from the top 1% of income earners went from 0.6% of GDP to 1.1% of GDP… an 83% increase.  A prescient example is Roosevelt’s “Soak the Rich” tax increase in 1936, raising the top income tax rate from 63% to 79% along with a host of corporate tax increases arguably sending the slowly recovering economy into a double dip depression, with unemployment rates rising again to 20% in 1938.  What happened to the tax receipts from the top 1% after the tax increase you ask?  You got it, they decreased as a percentage of GDP, even as GDP fell.  These examples are not cherry picked. Throughout history when tax rates on the top earners were substantially raised, production (economic activity) fell.  So did tax receipts from the rich… a certainty in percentage of GDP terms and more often than not in gross terms. “The fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues while the taxpaying base was exterminated” – Bartlett.

This is a continuation of Roy Fickling’s response in a debate that centers on promoting economic growth verses a more fair and even distribution of wealth.  For a bit about Roy’s experience see The Great Debate  Part I

The human existence revolves around individuals pursuing their own selfish interests. Period.  That’s it. Sorry, it is coded into the human genome… and a leopard has spots whether you like it or not.

Like albino leopards, every now and then a Mother Teresa or some other saint comes along; but the overwhelming majority of people on this earth look out for themselves before looking out for others.   There is no divine intervention on R&D, no benevolent investing, and no personal consumption for the greater good.  People spend money to make their lives more comfortable.  Companies invest to make more money for shareholders (and in turn, management).  Companies spend money on R&D so they can make more stuff to sell, thus make more money.  One can argue how wrong this behavior is and that we need to change it.  One can preach from the mountaintop, the pulpit, or the lectern; but such protests yield no greater results than howling into the wind… and the leopard still has spots.

Some argue that government is the answer… some system of policing individuals’ behaviors for the benefit of the greater good. But if you believe that government can change the behavior of humans pursuing their own self interests, you might as well stop reading now. If the desired result is improvement of the human condition for the maximum number of people, the question becomes: “to benefit the greater good, how does a society direct the collective efforts of individuals pursuing their own self interests”?  There is little debate that some system of rules must be in place for a society to function effectively.  Even the most right wing conservative would agree that we can’t just get up in the morning and decide which side of the road to drive on.  Equally, I know no one who doesn’t believe that we should have some system to take care of those individuals who are either physically or mentally incapable of taking care of themselves.  The degree to which we as a society restrict activity (rules) and take care of the less fortunate (redistribution) is the only honest debate.

When it comes to choosing an economic system that is most effective in producing the desired results (improvement of the human condition for the maximum number of people), the record of history is crystal clear and unambiguous, with no exceptions.  To paraphrase Milton Friedman, “the only cases in recorded history where the masses have escaped grinding poverty are where they had Capitalism and largely free trade”.  By the way, he said that before Communist China was “infected” with the incredible power of individuals pursuing their own self interests, resulting in 1/4 of the world’s population moving from abject poverty into middle class… in a word, “capitalism”.

What are our other choices? Communism doesn’t  work.  Communism cast more individuals into deep poverty, serfdom and even mass genocide than any system yet devised.  Oops.  I don’t even need to mention Feudalism, Marxism, Dictatorships, etc.   Socialism, which is hard to define due to the varying intensities employed by modern societies, yields better results than Communism, but produces average unemployment rates more than double what we see in America today and more than quadruple what we enjoyed for twenty years preceding the great recession.  For the same 20 year period, socialist countries yielded about 1/4 the GDP/Capita growth rate on average compared to capitalistic economies.

“Capitalism is, among other things, the revitalization of the world thanks to the opportunity to be lucky.  Luck is the great equalizer because almost everyone can benefit from it. The socialist government protected their monsters and, by doing so, killed potential newcomers in the womb.”

“Luck is far more egalitarian than even intelligence. If people were rewarded strictly according to their abilities, things would still be unfair- people don’t choose their abilities. Randomness has the beneficial effect of reshuffling society’s cards, knocking down the big guy.”

From The Black Swan by Nassim Nicholas Nicholas Taleb

“Here is the quickest way to determine if you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates. For most of the last hundred years, the United States has had both the strongest economy and the highest bankruptcy rate of any reasonably large developed nation. By contrast, the old Soviet Union had a bankruptcy rate of essentially zero. Many state-owned enterprises were organized to function like businesses.  They had managers and employees, bought materials, made and sold products. But none of them ever went broke.”

“And that told the whole story. Socialism, the socialists say, has never really been tried. And in a way that is true.  The Soviet Union was not a socialist economy so much as it was a crony-capitalist economy. The Soviet government loved the nation’s businesses so much that it would never let them fail. The crucial mechanism for this failure rate of zero was an almost entirely fictitious currency, the ruble of infinite flexibility, endless liquidity, and minimal value to cover the lies.”

“Every Soviet business manager was well stocked with excuses for not meeting quote, or even better, with a sheaf of dummied documents proving he had.  The government had no impersonal mechanism to punish the inefficient.  In order to shut down a failed state business, the government would have to (a) tell the truth, which would mean confessing the government’s own mismanagement, and (b) take direct responsibility for things like layoffs, an unpleasant experience even for politicians who regularly get 99 per cent of the vote.”

From Panic- The Betrayal of Capitalism by Wall Street and Washington by Andrew Redleaf and Richard Vigilante

Life in a modern, money economy… is characterized by ever greater distances between means and ends. Determining how to attain our ends is a matter of intellect, of calculation, weighing, comparing the various possible means to reach our goals most efficiently. Thus intellect, concerned with the weighing of means, comes to play an ever greater role.

From Capitalism and the Jews by Jerry Z. Muller