Sunday, October 5, 2008

Capitalism's Potential for Income Inequality: Scourge or Benefit

(This is the 3nd installment in a series of articles about the problems associated with government's attempts to ignore free market principles in a free market world ecomony.)

There is Nothing Wrong with Capitalism.

The American Heritage dictionary defines capitalism as an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

This is not a hard concept to understand. In a capitalist system, private citizens are permitted to own the means of production, the capital, and can freely invest in that capital out of the increased production, or the profits returned. The more they invest, the more the capital can produce, the higher the profit, the higher the standard of living. Good picture.

Income Inequality: Scourge or Benefit?

I do not defend the companies whose poor compensation strategies allow their executives to be paid untold millions even as their enterprises fail. There is no excuse for this. It is an abomination and an aberration to appropriate capitalism.

The knock, particularly on American capitalism is the apparent inequality it seems to produce. There are a relatively small, but ever growing number of executives and entrepreneurs earning millions while millions of others are earning a relatively small amount.

Remember basic economics. For economic stability, all participants in the economy must provide some contribution to the economy in proportion to the resources they consume.

However, because of age, or infirmity, or whatever, some percentage of every population will not be able to contribute in proportion to their consumption. By the same token, some percentage will be capable of producing more than they need. The balance is struck when the production of the more capable can be allocated to serve the needs of the incapable. This is what happens when a father produces enough to feed his children, as of yet too young to produce for themselves.

This is exactly the condition that has occurred in our well developed capitalist system.

There are the relative few who, through investing in the capital they have purchased and improved, produce substantially more than they need. It is because of this group that our standard of living is ever increasing. There are more who, not wishing to shoulder the risk and responsibility of capital acquisition and improvement, make other, smaller contributions, roughly equivalent to the resources they use, and consume. And there is a yet smaller group who cannot, or will not produce as much as they use or consume. All benefit from the high standard of living available in this country, perhaps the highest in the world.

The Real Conditions Behind Income Imbalance

As I have said, there is an income imbalance. It may even be growing, and may even be a problem, worthy of correction. But the current approaches deny the realities at work, some going so far as to destroy the conditions which encourage the improvements of the quality of life which we all enjoy.

Capitalist Income Imbalance is Essential, Even Good.

The cause of any economic imbalance and its potential remedies are being erroneously identified. Greed and injustice are blamed. Those few who "overproduce" are being accused of performing some injustice. Their "over-production" is viewed, not as the positive contribution that it is, but as some ill-mannered, inappropriately realized gain.

This thinking ignores this important reality: Their production is voluntary. These "over producers" could, just as easily, choose to produce only what resources they use, or consume. They could choose not to invest, and, therefore, not contribute to increase the standard of living for us all.

Legislation and Regulation: A Dangerous Way to Correct the Situation.

With this perspective, increasing law and regulation become the tools used in effort to correct the situation. Investment is penalized. Earning is discouraged. Progress is thwarted.

This approach can only destroy an economy. Eliminating high producers will reduce the resources available, and the improvement of the capital, the means of production, which will lead to a decrease in the standard of living for a growing population. Law and regulation can be used to minimize the imbalance, however. The playing field could certainly be leveled. But, doing so will reduce the productive capacity as the population grows. It will put the economy in decline.

I don't care how socialist or utopian you may be, you don't want the USA to become a 3rd world, simply balanced, economy.

The next installment will offer real practical considerations to the perceived problem of Income Inequality. It has to do with connecting compensation to productivity.

CJ Coolidge is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at


Ousizch said...

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From: Ousizch

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