An Open Letter to Sam Harris
Dr. Harris:
Your argument is nothing more than a concatenation of economic fallacies---a perfect illustration of economic ignorance. People become rich by creating value for others (or by being loved by somebody who did so), or they come to it through violence (which is generally supported by the state). Wealth is either stolen or it is earned: And unless you are suggesting that men like Bill Gates stole their wealth, your argument does not hold water.
Markets do not have to be perfectly efficient: Perfection is not accessible to men; it is not a criterion upon which any course of action should be judged. Rather what should be considered is what the most efficient course of action is, and few proposals for government intervention consider the fact that those who are in government face incentives themselves, generally perverse ones---they are not perfect angels who will administer any plan given to them without deviation. Unless proposals for government intervention can demonstrate conclusively a way of reducing the principles-agents problems involved(as well as performing economic calculation, which will be discussed later), they are unlikely to be productive. Free markets don’t work perfectly; they merely work best.
As for your comments about the tax code, you are ignoring the fact that Warren Buffet pays less as a percentage of his wealth in taxes than his secretary because he is able to afford people who are able to game our serpentine tax code on his behalf. Nothing in your proposal addresses this basic fact. And, indeed, there is a simple solution: Simplify the tax code.
Your obsession with inherited wealth is pathological. Have you actually looked at the percentages involved: Vast inherited wealth is rare, too rare to be of practical concern to anybody except the envious. Furthermore, wealth rarely remains in a family for more than two or three generations anyway. Also, the ability to give your wealth to others upon your death encourages people not to start profligately liquidating their investments as they get older:The reason we have as much capital in the economy as we do is that people wanted to provide for their children after their deaths.
My strong guess is that you are an advocate of the labor theory of value and that you do not understand the role capital and investment play in the economy. Delaying consumption by putting one’s resources into creating tools/capital for others to use is another way of creating value that does not require immediate labor. So, the very fact that the rich’s investments are producing returns is proof that the capital they have acquired is valuable. Every time you see a factory, it is because somebody decided not to consume resources he was entitled to consume: Such an action is immensely valuable. Threaten to take those factories away, and you will find yourself with fewer factories.
The rich rarely consume any more than a tiny fraction of their wealth---most is wrapped up in capital. This capital---machines, factories, etc.---increases worker productivity. If you put an upper limit on people’s wealth, you will eventually reduce the amount of capital accumulating in the economy: and it is capital accumulation that produces progress and increases in the standard of living. The end result will be lower productivity of labor and, therefore, lower real wages. (Real wages are wages that are adjusted for inflation).
Let‘s turn to your discussion of money hoarding. Such cash hoarding would amount to a gift of that money to the populace at large: It would produce deflationary pressure that would increase the value of everybody else’s money---because the velocity of money, the rate of circulation, is just as vital as its quantity in determining the price level. What matters is how much money is circulating currently. The non-circulating cash hordes of a billionaire have a velocity of zero, and so they do not contribute to the price level. However, even if this were not the case, most rich people have their money invested: They do not have vast cash hoards. You are simply completely off base here: both practically and theoretically. (There is an interesting discussion, accessible to the layman, of this in Landsburg’s The Armchair Economist.)
But your discussion of “labor saving devices” (how this differs from a tool, I am not certain) is really precious. The theory of comparative advantage, formulated by David Ricardo, refutes the idea that a huge technological improvement could ever produce permanent unemployment. First, such a technology would not likely appear overnight---people would anticipate it and prepare for its effects. Second, no technological change can reduce a person’s comparative advantage in producing some commodity. For the same reason that the US can trade with third world countries, no person---no matter how unskilled (unless he is severely mentally handicapped) ---should find himself without a useful task to perform in the economy.
To understand comparative advantage, it is essential to understand opportunity cost. Put simply, opportunity cost is what you might have otherwise been able to do with a given set of resources: So, in going to college, the student’s opportunity cost includes the lost wages he could have earned working as well as his tuition. And if a man decides to use his bricks to build a house rather than a road, the road is the opportunity cost of choosing to build the house: He has to give up a road to get a house.
Imagine that Kobe Bryant was not only one of the world’s best basketball players but also its best mower of lawns: He can mow a lawn twice as quickly as any other person on earth. Would it still make sense for him to hire a gardener? The answer is yes because Kobe Bryant faces a huge opportunity cost in mowing his own lawn---he has to give up, let‘s say, a rare hour of leisure or even the chance to do a million dollar commercial. The gardener, however, does not have to give up a million dollars to mow the lawn, and will happily do it for twenty an hour---even if Kobe Bryant is a better gardener himself.
Well, this opportunity cost dynamic---the fact that differing opportunity costs create the opportunity of increasing productivity through trade---will not be changed by the emergence of a new technology. The law of comparative advantage will still hold: All the new technology does is create a person or organization more skilled at a given task---it changes his opportunity costs, nothing more. No matter what the technological change, people will still be comparatively best at something---and this will be the function they will serve in the economy after the technological change.
The fact that the extremely wealthy have acquired more wealth than they can possibly spend is actually the very reason they should be---above anyone else---allowed to keep this wealth. The fact that they can’t possibly consume all of it means that the overwhelming majority of it will likely remain in the form of capital, which in turn increases worker productivity and real wages.
Now, it is time to turn to your final argument for a wealth tax. I must compliment you on one thing: Your point about the effects of a voluntary infrastructure fund gets right to the heart of the issue. However, it---in fact---turns out that such an action would most likely be a bad thing economically. Without profits and losses, it is impossible to determine what the best employment of a given economic resource is. This is, of course, a reference to Hayek and his understanding of economic calculation and the role of prices in distributing information. Without those prices---real market prices for capital assets as well as profits---you can’t plan: Only profit shows you what a resource’s most valuable use is. Public infrastructure like the kind you are advocating is almost always a total waste: Just look at the grid lock on freeways and compare it to toll roads. The toll roads are clearly more efficient. Of course, the issue of economic calculation is quite complex: And the subject deserves a longer treatment than I can give it here. I will refer you to the work of Friedrich Hayek (specifically the book, Prices and Production.).
The tax you propose will also create a perverse set of incentives that will cause significant economic harm. Imagine that the owner of a 20 million dollar corporation is preparing to pay your tax on total property. He will be forced to liquidate his control of the company---perhaps taking the company public. Now, there are times when it is good to do this, but changing the management structure of a company can severely affect its profitability and efficiency: It is not a decision that should be forced on a company prematurely. What might have happened if Bill Gates had been forced to take Microsoft public before it was ready?
But the perverse incentives do not stop there. People just over the threshold will simply stop working---or destroy assets---in order to fall below the threshold and avoid paying the tax. A man may demolish the house he has on a piece of property to reduce its value---let’s say by 500,000 if he is only 400,000 over the amount that necessitates paying the tax: This would net him a savings of 540,000. However, the destruction of such an asset serves no economic good. The economy is simply out one house. It should be clear from the above illustration that the tax you propose is reckless and wasteful.
Lastly, this large scale divestiture of wealth that would be needed to pay your tax would glut the market with a supply of the very capital goods, stocks, and financial instruments that the wealthy own in such large amounts---percipitating a stock market and real estate crash the likes of which has never previously been seen. This glut of goods would drive down the value of the real estate and financial holdings of those in the middle class.
I am an admirer of your book, The End of Faith, and I am a fellow atheist, so I do not relish having to refute your argument quite so thoroughly as I have. But such fallacies deserve no quarter: You certainly don’t tolerate them when dealing with religion and science.
Sincerely,
Franklin L. Carroll IV