A Claim about Wealth Redistribution

In another forum I heard the claim, in response to an objection to wealth redistribution, that “capitalism” and “free trade” are all about “wealth redistribution. Indeed, this individual claimed, all economics was wealth redistribution.  This is based on the myth that in any exchange someone gains and someone else loses.

That turns out not to be the case.

One of the basic principles of economics, taught literally the first day in the microeconomics class I took in college, was that the “value” of any given “something” varies with circumstance.

One example of that is the principle that the more of something you have, the less each unit of that something is worth to you.  For example, if I have one apple, that apple has a certain value to me.  If I have 100 apples, each individual apple has a lot less value to me than if I only had one.  If I have a hundred apples I’m going to be pretty sick of apples by the time I eat that hundredth one.  If I have a thousand, I don’t think I could eat them all before they go bad.  If I have ten thousand, I know I can’t.  The apples beyond the point where eating them becomes a chore rather than a pleasure are worthless to me.

If someone else has one pear or 100 or thousand or 10,000 pears the same principle applies.

Now, if I meet that person with 100 pears I can trade him some of my apples for some of his pears.  Those apples I trade away are worth more to him than they are to me and the pears the other person trades away are worth more to me than they are to him.  The end result is that we both come away from the trade with more “wealth” (in terms of what each of us value than we started).  So long as the trade is voluntary, i.e. “free trade” (not coerced by force) that will always be the case.  The trade will only happen if both parties see themselves as coming out ahead.  It only goes away when the trade stops being “free.”

Thus, the economics of free trade, of voluntary exchange, is not a zero sum game.  It is about as far from a zero sum game as its possible to be.  It’s the very antithesis of a zero sum game.

And it can’t be “wealth redistribution” in that both parties of the trade end up with more wealth based on their own values.  The only way it even looks like “wealth redistribution” is when you have a third party, outside the trade, looking at it from the POV it values.  When that third party decides that the 20 apples I traded were worth less than the 30 pears I got back the claim is made that I “took advantage” of the pear person.  However, the pear person wouldn’t have traded those 30 pears unless they wanted the 20 apples more, unless they valued the 20 apples more.  From their point of view they may think they took advantage of me–except that I made the trade freely.

It’s possible, of course, for some individuals to amass a great deal of wealth in terms of what they value–more than some other individuals amass.  That does not invalidate the principle.  So long as the exchanges are voluntary, they only amass that wealth as they see it by providing something that other people value at least as much as they see it.  Henry Ford accumulated a great deal of wealth (in terms of money) by selling Ford cars.  He did so by making a great many other people personally wealthier (in terms of mobility and the freedom that entails) such that they were willing to give him that money for his cars.

Voluntary exchanges make everybody who engage in them richer. It’s only when force is involved (“you pay or I will do violence to you”) or deliberate deception (only the top layer of this basket is apples, the rest is just dirt but I’ll claim it’s apples) or failure to deliver (“thank you for these pears.  Apples?  What apples?”) does that principle break down.  And therein lies the three things government can do that actually help the economy–protect the individual from use of force, forbid the misrepresentation of goods and services being exchanged (i.e. act against fraud) and enforce freely entered into contracts.

In the end, free trade, voluntary exchange = “everybody wins.”

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5 thoughts on “A Claim about Wealth Redistribution”

  1. Absolutely correct, and well said.

    However, tax collection is not peaceful, and is not, ever, a “free market” activity, tho your 3 functions of gov’t need to be funded, somehow. (defense of self & property, punish fraud, enforce contracts; gov’t also must “define property”)

    Most folk have accepted the idea that the gov’t should also be a Big Charity, to help those less fortunate. Real charity is voluntary. The gov’t, using force to collect taxes, can NOT be a “moral charity”. However, gov’t actions are the biggest non-market way to redistribute wealth — it should be no surprise that the rich and powerful make sure to control gov’t so that the gov’t helps the rich get richer faster, with rules that favor the rich.

    Forced savings, like the Chile retirement system, should be the way that pensions are funded — so that people are forced to save for themselves, and what is taken from their current pay is added to their personal accounts. If they die, their account can be inherited by their descendants.

    The gov’t tax system can be adjusted to help families with kids get ahead faster — instead of the current system that helps rich owners of capital get richer faster. (Equalizing the tax on capital income, rate now at 14%, by reducing the top marginal income tax rate to be 14% instead of 24%, would be one way; tho politically more popular by raising the capital tax to 24%.)

    The system of helping the rich get richer faster has had the desired effect of making the economic pie larger, faster; and possibly faster than would be the case with families more able to consume at a higher level. But at the current level of OECD development, our society should be looking at the US median income and middle-class life:
    buying/ owning a home; at least one functional car; plenty of food (too much?); plenty of clothes; plenty of TV/internet & “infotainment”. Those willing to work should be helped, thru the tax code, to reach that middle class level sooner.

    There will always be a top 20%, and a bottom 20%, of median income or median wealth. But for those willing to work, society should be pushing to make it easier for them to have middle class lifestyle, or better. (Seen here is a bit of my own evolution from Libertarian into a free market Republican).

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  2. The end result is that we both come away from the trade with more “wealth”
    See? It *IS* about wealth redistribution. You redistributed your wealth to the pear guy, and he redistributed his wealth to you. And you both got wealthier! 😉

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  3. /tangential to post
    I would actually only add one bit to your excellent post: when we’re talking trade on a national/state scale, there is one other element, and that’s subsidy/tariff. When someone somewhere is, say, subsidizing one of the two players in that scenario, it isn’t exactly free any more.

    In your scenario, perhaps the pear guy has planted a bunch of apple trees that grow really crappy, wormy apples. Nobody in his family wants them, but it provides a glut of apples. And it drives down the value of the apples you want to trade him, so you end up with a lot fewer pears than you wanted for the apples you gave up (now you don’t have enough to go to the grape guy and get and give some wealth there, too).

    Now, if the marketplace is broader than just Apple Guy and Pear Guy, you can still make a good argument that it isn’t a horrible thing. But it requires knowledge, and a right view of what’s going on, so that you don’t speak blithely of “free trade” when it’s not really free.

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    1. The tariff/subsidy argument (which I’ve dealt with elsewhere actually) is almost always based on the fallacy of composition–the idea that if something is good, or bad, to a part of the economy it must be good/bad for the economy as a whole. Nothing could be further from the truth.

      The problem with that is that when you go beyond the simple two-person illustration the government subsidizing apples isn’t subsidizing the grower of apples but everybody who buys apples as well as everyone who sells things to those who buy apples (since the apples are cheaper they have more money to buy this other stuff).

      On the other side, that subsidy for apples has to come from somewhere. It generally comes from taxes on other stuff, which are now more expensive to the supplier of apples. So they get better apple sales, but at the cost of other stuff being more expensive.

      Tariffs are similar in that they slow down the import by driving up the cost of the imported good so that people would spend more than they would otherwise on that good and have less to spend on everything else. So the tariff might help local apple growers and “hurt” the foreign apple growers, but that’s at the expense of everyone else in your own economy. And, no, a tariff in return doesn’t “level the playing field” and reverse the harm done by a foreign tariff, instead it adds new “hurts” on both sides. It might be able to encourage the other side to reconsider its own tariffs but that depends a lot on how well one can “read” the other side.

      The big mistake people make is arguing words instead of things. We get this concept of “favorable/unfavorable balance of trade” and automatically assume that getting more goods and services from overseas sources than we provide to them is “bad” while the reverse is “good.” Yet that concept is from the 17th and earlier century merchantilists who measured the wealth of a nation by its gold reserves (and generally only worried about the wealth of the upper classes rather than the population as a whole). Adam Smith’s insight was that the wealth of a nation was really found in the goods and services available to the population as a whole. Thus the title of his book “The Wealth of Nations.”

      Thomas Sowell goes into this in some depth in the three economics books of his that I have read:
      Basic Economics
      Applied Economics
      Economic Facts and Fallacies

      The late Milton Friedman also discusses it quite extensively
      Capitalism and Freedom
      Free to Choose.

      I can highly recommend all five books to anyone wanting a good grounding in economics. I read them (well, listened on Audible) in that order and they were quite an eye-opener.

      Yeah, this is a bit of a pet peeve of mine. 😉

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