Friday, 3 March 2006

Do the rich really make us all poorer?

'The rich keep getting richer!' screams economist Paul Krugman. 'So what,' says George Reisman in his latest blog.

Actually, they both say it far more learnedly than I just summarised, but what you got was the gist of it. Blaming something he calls "power relations," Krugman claims there is a "rising oligarchy" in the U.S. whose incomes are increasing while the incomes of the country's grunts have essentially stagnated or declined. "The essential thing to understand here about Krugman is that he is a Keynesian," responds Reisman.
And as Mises observed, “The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.” This failure is present in Krugman’s hostility to economic inequality.
So Reisman concedes Krugman's point then? Well, not exactly. Krugman's failure, which he shares with many others of many different stripes, is that he thinks of income purely in terms of something to consume -- something with which to purchase consumer goods. But for the most part, the rich don't spend their income loading up their plates with ever more food and gravy; they invest it.
The truth, which real economists, from Adam Smith to Mises, have elaborated, is that in a market economy, the wealth of the rich—of the capitalists—is overwhelmingly invested in means of production, that is, in factories, machinery and equipment, farms, mines, stores, and the like. This wealth, this capital, produces the goods which the average person buys, and as more of it is accumulated and raises the productivity of labor higher and higher, brings about a progressively larger and ever more improved supply of goods for the average person to buy.
And not just goods: "The capital of business firms is also the foundation of the demand for labor. The wealthier and more numerous are business firms, the greater is the demand for labor and the higher are wage rates." Thus, as Reisman says there are two great benefits to all of the capital owned by some:
The capital of others is the source of the supply of the goods they buy and the source of the demand for the labor they sell. And the greater is that capital, the greater is this two-sided benefit to everyone. To the extent that the supply of goods produced is greater, prices are lower. And to the extent that the demand for labor is greater, wages are higher. Lower prices and higher wages: that is the effect capital accumulation.
But what about the manifest inequality complained about by Krugman right at the start? Incomes have declined or stagnated, haven't they? Here Reisman agrees, and here he too blames "power relations," specifically the forcible government intervention in the economic system.
...the more extensive the government’s intervention becomes, the greater becomes the gap between the life that people must live and the better life they could have lived had the government not stood in their way. At some point government intervention becomes sufficient to cause people to live not only worse than they might have lived, but worse than they actually did live in the past.

This last is what has been happening to the American people since the era of the “New Frontier” and the “Great Society.” Since that time, the weight of government intervention has become sufficient to stop or nearly stop economic progress for large numbers of Americans and to cause actual economic decline for many.
Read on here to see Reisman spell out just how government meddling makes you poorer. The rich are getting richer, perhaps, But the rich could also be getting us richer, if only government would get the hell out of the way.

LINKS: Graduates versus oligarchs - Paul Krugman
Answer to Krugman on economic inequality - George Reisman's blog

TAGS: Economics, Politics, Politics-US

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