There’s a very good column by Thomas Sowell on the National Review Online discussing the folly of redistribution, and in particular wealth grabs. The context is the re-emergence of a video of Barack Obama saying how much he is in favour of redistribution (which is a lot less appealing to people in America than people here).
Advocates of wealth redistribution always seem to forget Milton Friedman’s ‘fixed pie’ fallacy. Friedman once said:
“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”
This is, of course, not how capitalism works. Prosperity is driven by the creation of new wealth and mutually beneficial trades. The problem is that most people see wealth inequality at a static point in time and assume that you can take from Peter to make Paul better off. But this totally ignores the dynamic effect on incentives.
“How can that be?” Sowell asks, “It is not complicated. You can confiscate only the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated.”
Hence, when the Soviet Union confiscated the wealth of rich farmers, food became scarce, making everyone worse off.
Sowell argues that the dynamic effects are extremely acute in a globalised democracy today, because of both the ability of individuals to move and the democratic process through which new taxes are first discussed before being implemented.
“A democracy must first have public discussions and debates. Those who are targeted for confiscation can see the handwriting on the wall, and act accordingly.
Among the most valuable assets in any nation are the knowledge, skills, and productive experience that economists call “human capital.” When successful people with much human capital leave the country, either voluntarily or because of hostile governments or hostile mobs whipped up by demagogues exploiting envy, lasting damage can be done to the economy they leave behind.”
In other words, the dynamic effect of taking from the wealthy and giving to the non-wealthy does not mean more wealthy people – it means fewer.
This is all worth bearing in mind with the Liberal Democrats conference likely to advocate new wealth taxes for the UK. Not only will wealth taxes not generate as much revenue as expected (as the wealthy pre-empt them), but they will have lasting damage as valuable human capital is lost.
In fact, with Nick Clegg having flown so many wealth tax kites over the past few months, somebody better point this out to him to prevent him having to issue another apology in two years’ time.