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Why Redistribution? Some Responses

| 5 Comments

When I wrote, below, that some measure of enforced equality is necessary to the functioning of a democratic republic like ours, some commenters and other bloggers responded that the problem was that the elites captured the levers of power of the state, and used their control of the state to maintain their power. For example, over at Thought Mesh:

If we look at history and ask how elites have maintained their dominance what we see is that they used the power of the state to do so. It is through law and regulation that persistent aristocracies are created and maintained, not economics and business.
and in the comments:
The best way to ensure a turnover of power is to argue for free markets to remain in place, with little bureaucracy to ensure its stability. Walmart may be powerful now, but in a free market the only thing we can count on is continual productive change.
and
However, it is a mistake to assume that an unequal distribution of private wealth is, per se, evidence of a social problem.
Actually, yes it is a probem, and what these folks are demonstrating is first, a lack of historical awareness - remember why Teddy Roosevelt was famed for being the first major 'trust buster'?? This was the first large regulatory intervention, and why do you think it was necessary and popular? Or do you think it was unnecessary?

But lest we think we're past those eras, and as the 1980's stock analysts suggested, 'the old rules no longer apply,' I saw something in Business Week this week:

Commentary: Why the Market Can't Police Itself

Now that 10 Wall Street firms have agreed to settle charges of biased research, Congress and the Securities & Exchange Commission are facing a new question: Does self-regulation by Wall Street work?

The answer is a resounding no. It's not just that the New York Stock Exchange failed to act on phony research. More proof came when Sanford I. "Sandy" Weill, chairman and CEO of Citigroup (C ) (whose Salomon Smith Barney (C ) unit was implicated in the research scandal), was invited to represent the public on the NYSE board. Weill withdrew after a storm of protest.

Reports that NYSE Chairman and CEO Richard A. Grasso's compensation totaled $10 million last year were another troubling sign. Grasso's pay is set by a board-compensation committee, but he regulates most of its members. Among them: the chairmen of Bear Stearns (BSC ), Goldman Sachs (GS ) and Merrill Lynch (MER ). And on May 20, Grasso was reelected to the Home Depot (HD ) Inc. board, putting him in the position of both serving on it and policing its conduct. Grasso declined to comment. Says New York Attorney General Eliot Spitzer: "Fixing self-regulation is perhaps the most important policy issue facing the SEC."

And since Bill Gates keeps being brought up as an example of the worthy rich, an article on why Microsoft keeps getting such close government scrutiny:
The Microsoft Monopoly and its Effects April 2001 Edward J. Black President & CEO Computer & Communications Industry Association


As the evidence from the trial showed, heavy-handed abuse of market power may take different forms in different industries, but it doesn't lose its basic character or effectiveness. Antitrust law may be even more important in intellectual property based industries in which network effects and tipping are common phenomena and technological tie ins and dependencies create "locked in┤ customer bases. The Sherman Antitrust Act, the cornerstone of American antitrust law, prohibits monopolization, attempts to monopolize, or conspiracy with others to monopolize a market for goods or services. Microsoft is most serious violations involve efforts to protect its existing monopolies and expand them into adjacent markets through anticompetitive tactics.

...


Microsoft has frequently taken actions that harm original equipment manufacturers (OEMs), the largest source of revenue for their Windows operating systems, and in turn consumers at large. By not allowing OEMs to alter various aspects of Windows, including the bundling of Internet Explorer, the startup sequence, and the arrangement of icons on the initial user interface, Microsoft has prevented OEMs from providing consumers with meaningful choices and potential innovations in computing. Microsoft claims any modification would alter the user is ¬Windows experience,┤ but in essence is dictating that rather than going "where you want to go today,┤ you will go "where Microsoft wants you to go today, tomorrow, and indefinitely.┤ Hewlett-Packardobjected to these dictates, and expressed its frustration to Microsoft in a memo introduced as evidence during the district court hearing: "From a consumer perspective, we are hurting our industry ... If we had a choice of another supplier, based on your actions, I assure you that you would not be our supplier of choice." This behavior is what lies at the heart of the case and is classic anticompetitive maintenance of a monopoly, a clear violation of section two of the Sherman Antitrust Act. The practices of a dominant monopolist would be counterproductive and unthinkable for a normal business operating in a competitive environment. Most companies cannot, and will not, behave in the manner that Microsoft has ... competitive market forces simply will not permit these actions. If a typical company spent millions on a product only to give it away for free, they would be bankrupted. If a normal company alienated, threatened, and punished its business "partners," it would surely face retribution. However, such considerations are not of concern to Microsoft. Because of its entrenched monopoly, Microsoft need not heed countervailing forces in the marketplace. Microsoft can even give away Internet Explorer, reducing Netscape is ability to charge and profit from their own revolutionary web browsing software. Microsoft is able to show contempt for its OEM consumers because Hewlett Packard and other OEMs know that Microsoft is the only game in town. This lack of economic accountability is why a monopoly is held to different legal standards the law rightfully recognizes that the marketplace

As financial and legal technology advanced to permit the large corporation, the ability of these giant enterprises to distort the market in their favor can only be counteracted by the central government.

Now, I'll certainly agree that this presents its own set of meaningful problems. I'm trying to work toward a new kind of liberalism, because I see those problems, and I understand that interests - teacher's and prison guards' unions, as well as more traditional 'investors' in the political process who work buy regulation that serves their interests (think of the Fanjul sugar interests) - play the current government and regulatory scheme for all it's worth to them. Which is a lot.

But to imagine that somehow eliminating the government leg of this tripod will create a dynamic economy in which the Microsofts and Citibanks will somehow find themselves in fair competition with small companies is to have read too many Heinlein books. The large enterprises have - whenever not checked by greater powers - been very happy to consistently abuse the markets in their favor.

And, having distorted and abused the markets, they will continue to concentrate power until we are all living in Pottersville.

5 Comments

Could a corollary also be made for the inequity of power distribution v.a.v our electoral choices? Without term limits, the concentration of that kind of power is not subject to true market pressure, either.

Speaking of unequal distribution of wealth,could it be the result of the way that most societies tax creation of wealth so lightly?If I invest money in something,be it stocks or items of art or whatever,and the investment subequently rises in value,the profit will be completely mine.Most countries only charge some sort of 'sales tax'(usually low) when those investments are resold.

This contrasts with the way most modern governments gather revenue - by taxing income.In Europe as in North America,the tax system is heavily weighted towards income,corporate income and capital gains taxes.Let's look for a fair system of taxation.Wouldn't it mean that wealth gains from the appreciation of property ought to be taxed with the same rate as income from 'services rendered',be it work or interest on loans?

If one looks at the "super-rich" of the world,it is almost without an exception the case that the source of their riches is the appreciation of property value (usually stocks).Would a shift from taxing income to taxing wealth create a better society?

Opinions please.

PS.The above is in no way an endorsement of 'big government' or class warfare.I'm against tax progression in general.Spare the straw men.

JH:

"If I invest money in something, be it stocks or items of art or whatever,and the investment subequently rises in value,the profit will be completely mine."

In the US, the profit is taxed as a capital gain. You have a capital gain when you sell a capital asset for a profit. Any asset you hold as an investment (stocks, bonds, real estate, artwork, for example) is a capital asset.

JH;

I'm not sure if it would create a better society, but I'm sure that it would create a poorer one.

A.L.

Yes, I believe that "trust busting" was an ill-conceived, counter-productive action and that the country would be better off today if there had never been any anti-trust law. Here's how it works:

1) If you sell for less than your competitors, you're dumping.
2) If you sell for more than your competitors, you're gouging.
3) If you sell for the same as your competitors, you're colluding.

Moreover, anti-trust efforts certainly didn't significanly reduce the wealth of any of the rich it alledgedly targeted (one of your key goals) and has been used far more as a political weapon than an economic fairness one.

I'm not a fan of Microsoft but one notes that the anti-trust case against it was driven essentially by (1) resentful competitors and (2) money hungry attorneys. One notes the conspicious absence of any significant representation of the alledged victims. Beyond that, Microsoft managed to get off with basically a slap on the wrist. And on top of that, Microsoft, which previously had shared a a single K-street guy in Washington DC, now has an entire phalanx of them, buying legislation. In terms of preventing the consolidation of economic and legal power the Microsoft action made things worse. How can this not be considered an abject failure all around? Except of course for people like Joel Klein who used it to become famous.

It's true. A free marketplace never guarantees perfect operation; in fact, it will almost certainly produce a wide range of results, including failures.

Those failures are painful because they have real human consequences; people are forced into change, sometimes painful change. Heck, in the old days, people would starve.

BUT, the market also produces enormous economic growth through encouraging innovation, good logistics, increased production, etc. etc. In the long run, that growth solves even the biggest problems.

So it's a tough question: how to fairly prevent the hardships of failure without preventing the productive rewards? How to reduce the pains of failure without reducing the productive motivation to avoid it? How to establish guidelines without preventing productive risk?

I'm not sure, but of one thing I'm certain: anything that pushes back against market forces, instead of using them, is swimming against a strong river current and probably doomed.

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