In all the calls I come across from the Left, it is not often to find examples of how rich people are attacked because if they are allowed to keep more of their wealth (even if is legitimately acquired and without coercion), the money disappears. Forever, kid. It’s lost.
Yes, you read that right. The money vanishes into a black hole. An argument against “trickle-down” economics (which is a term no serious free marketer I have heard of actually uses) is that nothing “trickles” anywhere. Apparently, there is this place, someone on Earth, where money is just sitting around, gathering dust, all on its unproductive exile, just waiting to be rescued by a benevolent State so it can be put back into work. It sounds like a first draft of the plot from the Count of Monte Cristo and the bit about the secret treasure that Edmond Dantes discovered and used to persecute his foes.
Why do I mention this bizarre idea? Because I read it defended and set out in a book, The Future Of Finance: The Rising Tide of Fintech Lending and the Platform Economy, by Francesco Filia and Daniele Guernini, (Whitefox Publishing, 2024). The book is a mostly informative account of how modern digital technology is changing finance. It talks about the role of blockchain; decentralised finance (DEFI) and other developments. It has lots to commend it if you want to understand these ideas, and the use cases in finance for technologies such as AI. But…some of the economic contentions in the book are bonkers.
For example, the authors claim that “we know” that wage growth and equality drive economic growth. (No clear evidicence is given for this contention.) They argue that wage growth continued for about 100 years until 1970, when it apparently stopped.
However, that begs the question of whether there was a lot of equality in that period. Was there a lot of equality, in relative, equality-of-outcome terms, during the “Gilded Age” of the Rockefellers, Carnegies and the rest? (There was not, but the rising tide of wealth nevertheless was considerable.) Was there much of that during the 1920s? I suspect that equality, brought about by steeply progressive tax rates (and they caused issues) did not really manifest itself greatly until after WW2, and even then, given exemptions and other forces, American society in some ways was less egalitarian than in Western Europe.
The authors argue that a labour shortage drove this wealth growth, but surely, absent the restrictive and destructive impact of labour union restrictive practices, it was superior capital investment, and hence superior productivity, that meant tight labour markets coexisted with rising real wages in certain countries. (West Germany rapidly overtook the UK, and it was a country where income tax rates kicked in at higher levels, unions were less obstructive, and there were fewer price controls under the Adenauer administrations than, say, the UK.) The authors make no reference whatsover in this part of the book to investment in capital. But it is total factor productivity (physical capital, human capital, etc) that makes the difference over time to income growth. The US labour market was, relatively, less unionised in the post-war period than the UK one, for example, but the standard of living in the US rose relatively faster, as Milton Friedman pointed out in his book, Free to Choose.
The idea that real incomes have somehow stagnated because wages have stopped rising ignores what might have caused that stagnation. I argue that they get causation back to front. If it is a shortage of labour that causes wages to rise, then surely, absent state intervention, capital will flow into machinery and the like to make up the shortfall, and such a country will also attract immigration (hopefully, of the sort that adds value via skills). In the US, as recounted by Alan Greenspan and Adrian Wooldridge in their masterful account of American capitalism, that’s exactly what happened. During the 19th century, even before the US Civil War, the US saw tremendous growth of labour-saving devices to handle this labour shortage issue. For instance, the McCormick reaper-binder, Singer sewing machine, and more. Light bulbs, early air conditioning…you name it, have also increased returns on human labour because light bulbs allow 24-hour shift work; AC enables places that are otherwise stinking hot to be more economically viable, and so on. And this capital equipment made US workers more productive and increased their real income, other things being equal.
But it is on page 64 that Filia and Guernini ramp up their error wholesale and put forward what I call the “consumption theory of wealth”, which puts spending, rather than investment, innovation and creativity, as the cause of why we are better off: I am going to quote a passage in full:
“When employees and ordinary people (as opposed to odd people, ed?) have more money in their pocket, they spend it. The go out and spend money in restaurants and bars or entertainment venues, they buy new cars or modernise their homes. As a result, that money goes into the real economy to create demand for goods and services and helps businesses prosper and the economy to grow. But when already wealthy people and business owners keep more money via tax cuts, that money is squirrelled away. It’s dumped in offshore trust funds to minimise tax till further or it’s used in stock buybacks. It never reaches the real economy. All it does is to create even greater inequality.” (My emphasis in bold.)
So, if a person saves any money or “squirrels it away”, it is potentially gone. The idea that savings are important, and a source of investment, is totally absent in this account As several on this blog such as Paul Marks regularly point out, a problem in many modern economies is that when investment is financed by central banks’ printing of money, and not real savings made possible by foregoing consumption, it bids up the factors of production, and that without injecting yet more funny money to keep the party going, there’s a crash. The importance of savings cannot be overstated in making sustainable growth possible. The authors claim, with no real evidence, that if money is salted away in a low/no-tax jurisdiction such as the Cayman Islands, Mauritius, Jersey or Dubai, that this money disappears. It’s gone. But that’s plainly rubbish: that money is invested. Why else put it offshore? Even if that money is put into government bonds, that is lent to someone to finance something.
It is true those who use such jurisdictions hope to reduce their overall tax, and in many cases, they defer tax burdens rather that remove them. After all, a person may still want to repatriate their wealth eventually, for whatever reason, and they pay tax on it when that happens. They could, I suppose, give it to charity – but then that money will also go into the “real economy”.
But the idea that money that is not taxed goes out of existence is beyond bizarre. I don’t even know if Thomas Piketty, the French academic who called for progressive taxes and assaults on wealth, went so far into arguing that rich people’s money just vanishes from “real economy”.
Anyway, apart from page 63 and 64, it is a decent book.
Me thinks, the authors failed to put 5 minutes of thought into economics before they sat down and wrote their book.
So we should not allow ordinary people to build up their pension funds as this piles up money ‘out of reach’? I distinctly remember my pension fund managers talking about how they invested the funds to generate more cash.
I also remember the socialists talking about ‘investing’ other peoples’ pension funds as if there were huge piles of money laying around unused. Perhaps it is a common misapprehension?
Of course there is a way to destroy money, and that is to give it to the government in taxes. By no means am I saying that tax money is never spent productively, but it is often spent on stuff of so little value that it is wasted. Only a government spending other people’s money could be so wasteful. Anyone else spends their money with a lot more care — which is to say they try to get as much value in products and services as they can for the money they spend. Spending other people’s money? Not so much, and especially so if you HAVE to spend it to save your budget getting cut next year, or if you HAVE to spend it to buy votes so that you get elected again next year.
This author’s distaste is not for money being parked and thus not being “productive.”
It is entirely about money not being subject to his jurisdiction’s regular and frequent taxation.
IOW, he’s PO’ed that he’s not getting his share of it.
Actually… there’s a certain truth to it. In my opinion, it’s not money that disappears, but value.
Let’s say a rich person really does sock all that money, in whatever form, into the ground. Heck, we can even use gold bars for our example.
The value represented by that money could have been used to drive further investment, especially building human capital, knowledge, more know-how. But because it’s stuck in the ground it does nothing.
If enough people do that, put their money somewhere unproductive, then in a simplistic model, there won’t be any investment in human capital, knowledge is not only not gained, but perhaps even lost.
So, the money is not destroyed, but the value certainly is.
Fraser’s example is another example. My opinion is that the money is not lost – a million dollars is a million dollars after all, but because of the inefficiencies involved, value is lost instead – the amount of stuff that can be bought with that million dollars has decreased because the corruptocrats have siphoned away its value.
Because of stuff I’ve been writing, I’ve been thinking long and hard on the meaning of human capital, deflation, and what economic growth means.
@The Wobbly Guy
Let’s say a rich person really does sock all that money, in whatever form, into the ground. Heck, we can even use gold bars for our example.
Although I agree with your comment, it is worth saying that rich people don’t do that, because rich people make their money work — it is why they are rich. A perfect example of that I saw recently said something like “Elon has so much money it is ridiculous — anything over a billion dollars should be taxed at 100%”. But the truth is Elon doesn’t have 400 billion dollars. He has stock that is valued at that, but if he sold it all the price would crash and he would realize much less than that. In fact generally speaking the way most of these super rich people live is by taking a loan from a bank collateralized on their stock.
Elon is not Scrooge McDuck. He does not have a basement full of gold coins. He has ownership of productive assets that are creating products, services and wealth for many, many people. Elon has said on many occasions that he is proud that many of the guys working on the line at Tesla are millionaires from working there.
However, there is some of Elon’s money that is completely unproductive. And that is the tens of billions of dollars in taxes he paid, and that the government poured down some useless rathole. If he had kept that money it would have been productively used to create new jobs, new products and services, improved people’s lives. Instead it was used to buy a billion condoms for people in Mozambique, or weapons for Ukraine which were then sold to drug cartels in Mexico to make Ukrainians rich and Mexicans dead, or to buy off lobbyists to ensure campaign contributions to get Chuck Schumer (or, in fairness, Lindsay Graham) re-elected.
I know where I think the money should stay.
No, it’s just being used in a way *you* do not value but someone else does.
That is just about the stupidest thing Tucker Carlson ever uttered, and that’s really saying something.
If enough people do that, put their money somewhere unproductive,
You mean somewhere like the government?
The whole “Ukrainians are corrupt so let a Russian set of thugs conquer it” has been doing the rounds on parts of the internet where a few of Trump’s more ardent supporters reside.
Ukraine does have corruption. So does Russia. So does the USA. The recent USAID revelations have been an eye opener. Rory Stewart got his share, where was mine?
So no society is perfect. But if we will only support a perfect society when it is invaded, our enemies will surely multiply.
Johnathan Peace is correct – when someone, seriously, uses the term “trickle down economics” they reveal themselves as a Collectivist – no actual free market person believes in this term.
As for the idea that saving is hoarding – this seems to have been pushed by (although not invented by) J.M. Keynes (although Lord Keynes contradicted himself on so many things it is possible to cite him for-and-against almost anything).
Take some examples of actual saving – such as Abraham Derby saving profits he made from iron working so he could invest in better methods, or Josiah Wedgewood saving profits so he could invest in better ways of making pottery.
Someone who believes that such “capitalists” (for that is what they were) should, rather than saving some of their income, should have spent it all on consumption, that society would have been better off if they had done that, is just wrong, flat wrong.
As for high taxes to take away most of the wealth of “the rich” – well California is doing that right now, combined Federal-and-State taxes on “the rich” in California (unless you can make a corrupt deal – and, I admit, some rich people do that) are higher than they are in Britain or in most nations.
So, according to the Collectivist thinkers, California should have very low poverty – as “the rich” are taxed are very highly taxed – both on ordinary income and on Capital Gains.
Errr – California used to have low poverty, back when I was born it was probably the most prosperous society in the world, but now it has very high poverty, adjusted for the cost of living, some of the worst poverty in the Western world.
So contrary to “Megan and Harry” the high tax policies of California are not the way to go.
“wage growth and equality drive economic growth” in the same way that wet streets drive rain.
As for the Credit Money (fiat – whim, command, edict) system – well yes it does lead to artificial wealth, to a small group of people who are very wealthy at-the-expense-of everyone else – hardly a new discovery as the Irish economist Richard Cantillon explained the process by which this happens – some three centuries (300 years) ago, that is why it is called the “Cantillon Effect”.
High taxes are not going to prevent this – if they did then California and New York City (places of extremely high taxes on the wealthy – and vast amounts of government spending directed at the poor) would be egalitarian places, not the places of extreme income and wealth inequality that they actually are.
By the way – as I have mentioned New York, the sea level is not really rising much (as the media and the education system falsely claim) – what is really happening is that the land is subsiding, partly due to the pumping out of ground water.
As with tax and monetary policy, if you diagnose a physical (physical science) problem wrong – you will come up with the wrong solution.
Just as high taxes and lots of government spending are not a cure for the economic problems of New York City – so a war against C02 emissions is not a cure for the physical problem of New York City.
Indeed the same people who benefit from the corrupt money spigot that is the New York Federal Reserve (people such as Warren Buffet, Micheal Bloomberg and Larry Fink – BlackRock) are the ones who bang on about the need for high tax rates – to distract-attention-from how they benefit from the monetary system. And, no surprise, the same people (Buffet, Bloomberg, Fink and so on) bang on about “Global Warming” and “Carbon” (the mean Carbon Dioxide – C02) whilst entities they are connected with (if only indirectly) continue to pump out ground water and make the land subside.
“Do not look at what I am doing – look at the shining bauble I am waving in front of your eyes with my other hand”.
Some years ago, I read Robert Heinlein’s first attempt at fiction, the novel For Us, the Living. In it, his hero invents a card game designed to illustrate how the economy works, and Heinlein gives the rules (obviously this was before he had figured out how to write fiction!). And I got out some cards and tried it out—and I noticed that the game assumed that when a business spent its revenues on supplies, or labor, they went back into the economy, but its profits just disappeared, and thus were not available to purchase what it and other businesses produced. Now, Heinlein wrote this when he was influenced by Social Credit (as he still was in the 1940s, actually), and it seems to reflect Social Credit views, which were also cited favorably around the same time by John Maynard Keynes. So this idea that businessmen are all Scrooge McDuck with a huge money bin that they never spend, and that that pulls cast out of the economy, seems to be a widespread economic myth.
This mistake of being fooled by watching the money is quite common. If I were hypothetically to burn a $100 bill, the world would indeed
lose $100 of nominal wealth. But the world would not lose anything in terms of real wealth, just it does not gain anything in terms of real wealth
when the government prints a new $100 bill. Changing the amount of money (in existence or in circulation) doesn’t affect real wealth in practical terms, it just changes the purchasing power of a dollar. What matters is not the nominal number of dollars but the productive capacity.
This sounds like a variation on the broken window fallacy.
If money is squirrelled away, how come it earns interest, despite inflation and devaluation? Obviously it must be invested and therefore it is part of the economy.
staghounds – correct Sir.
They have cause and effect the wrong way round.
It is a very old debate in economics – some people argue that “demand” (spending) drives the economy, and others argue that work (production) needs to happen before consumption can happen.
For once Karl Marx got something right – he was on the production (work) side, he believed that a society (people) have to produce before they can consume.
The classic person for arguing this, correct, case is J.B. Say (the great French economist) – you have to produce before you can consume, unless you want to get poorer-and-poorer, eating Capital.
J.M. Keynes (a century later) opposed J.B. Say – but Lord Keynes was wrong, utterly wrong, flat wrong.
Heinlein showed a better grasp of the fundamentals in later work, where Lazarus Long was running a colony’s bank, and horrified another character by shovelling banknotes into a fire. “They’re just exchange tokens, they aren’t worth anything. Your grain has value, Fred’s ironmongery has value, this paper is worthless, and I don’t have the space to store it.”
jgh – the paper (now not even paper – just lights on a computer screen) has “value” because Professor Krugman’s “men with guns” (his very words – curse him), say it does – with their tax demands and legal tender laws.
In an honest economy, money is a commodity that people choose (choose) to value, before-and-apart-from its use as money – as a medium or exchange, and a store-of-value.