Oct 4 JDN 2461318

Libertarians are fond of economic parables. There are a lot of variants of this particular floating about, including some that already take it in a convincingly left-wing direction, but the most famous is probably this one, from Paul Zane Pilzer:

In his book, Unlimited Wealth, Paul Zane Pilzer tells the story of ten people who live on an island. Their entire existence is made up of waking each morning, spending the day fishing, eating the two fish they each catch, and then going to bed. Their sustenance depends on the fish they catch, and they save nothing. If anything goes wrong with the plan (sickness, lack of fish to catch, etc.), there is no provision or store of food to take from.

Now, two of the ten people devise a plan to build a boat and net with the hope of catching more fish. After completing the project, they go out into the ocean and catch 20 fish in one day, equaling the output that it used to take all ten to accomplish prior.

The development leads those on the island to a fork in the road. Since two people can now produce the same amount of food that previously required all ten people, the other eight are able to work on other beneficial projects, such as farming or construction. Eventually, the island can progress to a point where it has raised its standard of living, is able to survive hard- ships, and can trade with other islands for goods and services.

On the other hand, the other eight people might become jealous of the two new “heroes”.

Income inequality has been created, with the two boaters possessing most of the fish. Out of their envy, they might devise a plan to levy an 80% “income” tax on the boaters, thus taking 16 of their 20 fish and redistributing it to the other residents.

If the island chooses to tax and redistribute, nobody wins. Each is no better off than before (they only receive their two fish per day), and the boaters lose their motivation to work as hard fishing and maintaining their equipment. The island will slowly drift into a society of subsistence living.

Just as those on the island benefitted from the invention of the boat and net, society benefits

from the opportunities that innovation and entrepreneurship provide, as well as the wealth it creates. The government can add value through things such as national defense, law enforce-ment, and fire protection, but left unchecked, it can overreach into the private sector leading to a hindrance in growth.

This story (or some variation on it) seems to convince a lot of people that redistribution of wealth is bad, which is interesting to me, because it’s really not a very convincing argument.

First of all, let’s consider the story on its own merits: Everything happens as stipulated, and there are now two entrepreneurs who are able to catch 20 fish per day while everyone else can only catch 2.

If there is no tax imposed, then how are the other people supposed to get any more fish than they did before? This new wealth is entirely owned by those two entrepreneurs. The only way that other people could specialize in new industries and make the island more productive would be by trading with those two entrepreneurs, who have every incentive to collude and ensure that the prices they demand for their extra fish are exceptionally high. (Also what if it was just one entrepreneur? Then he has a monopoly.)

Conversely, if the income tax is imposed and everyone gets two fish for free, what’s to stop them from specializing and doing other work, now that they have enough fish? The assumption seems to be that these people would only be motivated to do work other than subsistence fishing if they would otherwise starve, which seems like an obviously false understanding of human nature. As long as they would get some benefit from doing additional work—and remember, by assumption, they have skills that would allow them to be productive in farming, construction, etc.—they are likely to in fact do additional work.

Now, if the tax is indeed so high that the entrepreneurs are no better off than they were under subsistence fishing, then perhaps indeed they would stop producing such high output. But what if they were merely somewhat better off, rather than maximally better off? Say the tax is 40%, so they each keep 6 fish and then the other 8 people on the island each get 1 free fish and then have to fish for 1 on their own.

Yes, you can stipulate that they will refuse to be more productive if they are taxed at all, but is that really how this would work in reality? In fact, you could just as well instead stipulate that they are highly altruistic, or motivated by the intrinsic joy of discovery, and say that they would happily innovate even if they received no benefit at all.

Moreover, I think it’s important than in all of these stories, the inequality is very mild.

10% of the population making 10 times the income of the other 90% of the population is more equal than any society has ever been since the founding of civilization. (It’s probably less equal than most forager societies.) Even allegedly communist societies are not this equal.

In reality, we live in a society where there is one man—one man—who owns $900 billion. The median household wealth in America is about $200,000.

If we consider $200,000 equivalent to 2 fish, what would $900 billion be? 4.5 million fish.

Say those 2 fish weigh about 2 kg each, for a total of 4 kg. You could of course carry them in a single basket, and they would reasonably feed you and your family for a day.

Then those 4.5 million fish would weigh 9,000 tonnes, which would require 300 full-size shipping containers just to hold it all. They would provide enough food to feed an entire major city.

The US produces about 5 million tonnes of fish per year, which is about 13,000 tonnes per day—so this amount of fish would constitute the majority of all fish caught in America.

Do we still think it’s wrong to tax away some of that wealth to help everyone else?

Elon Musk is of course an extreme outlier, but we have plenty of inequality aside from him:

The top 0.1% of US households owns five times more wealth than the bottom 50%.

Indeed, the average wealth of the bottom 50% of households is only about $60,000, while the average wealth of the top 0.1% is over $398 million.

This means that if we were to take half—just half—of the wealth of the top 0.1%—just the top 0.1%—and spread it evenly to the bottom 50%, we would more than triple the wealth of the bottom 50%, giving each household an additional $199,000—an entire house in an affordable area. And the top 0.1% would still be left with an average wealth of nearly $200 million each.

This is why libertarians want to talk about imaginary islands with 10 people on them.

If there are only 10 people and the rich are only 10 times as rich as the poor, things don’t sound so unreasonable. Trying to reduce that inequality feels greedy, and any downsides become very salient.

But when you look at the actual inequality in our society, it is staggering. It is appalling. And there is simply no plausible way to justify this level of inequality, no matter what would happen to “productivity” or “growth” or “innovation” if we took efforts to reduce it—and, indeed, what they don’t want you to realize is that the evidence of such harmful effects is in fact quite weak, as the US had very high tax rates on the rich in the 1950s and had plenty of innovation and economic growth.

And what if the rich didn’t invent the technology at all?

What if they simply happened upon it, or inherited it from someone else? What if keeping the technology maintained is actually very cheap, and so requires no particular incentive? Should we then allow them to hoard all the wealth just because they happened to be the ones who ended up with the technology?

This is surely a far more accurate depiction of most rich people, who are not in fact brilliant scientists or inventors, and indeed most of whom inherited some significant proportion of their wealth.

In fact, I think inheritance is often under-estimated as a factor in wealth acquisition, because people tend to think of it as a matter of proportion.

Despite popular belief that he inherited his father’s emerald mines, Elon Musk received fairly little direct financial support from his parents, only on the order of about $100,000 (in today’s money) in loans. His wild success started with selling a tech startup for $330 million (a tech startup I’ve never heard of called Zip2, that I highly doubt was ever actually worth $330 million).

So, given that he has $900 billion today, that $100,000 sounds almost negligible, right? That’s only 0.0001% of his wealth, and he even paid it back later. So that makes him 99.9999% self-made, right?

But here’s the thing: Most people could not get $100,000 from their parents to start a tech company.

Indeed, most people could not get $100,000 from anywhere to start a tech company. So even if they have a brilliant idea for a tech company (and “online city guide software” doesn’t sound particularly brilliant to me?), and all the skills required to make it successful, they simply could never get it off the ground in the first place.

Also, I really don’t see how this tech company was particularly brilliant or innovative; it just seems like they were in the right place at the right time and had someone at the helm who is absolutely peerless at hype (that is Elon Musk’s skill: He is the greatest master of hype in the world), so they were able to convince some idiots at Compaq that their silly little tech startup, indistinguishable from hundreds of other silly little tech startups, was somehow worth $330 million.

This is not a story about Elon Musk being uniquely brilliant or hard-working. This is not some kind of deep innovation that our society needs and we must be very careful to avoid inhibiting in any way. I am quite confident that if Zip2 had never existed, or Compaq had never bought it, Elon Musk would not be as rich as he is today, but the rest of the world would have gone on basically the same. And while SpaceX and Tesla represent genuine innovation, it is not at all clear that their innovation had anything to do with Elon Musk in particular, nor that it would have been greatly reduced if we had somewhat higher tax rates on income and capital gains.

But sure, let’s let him keep his 300 shipping containers full of fish while other people starve. That’s “liberty”.