That’s Just Capitalism

Sure, rigged, “crony capitalism” generates enormous inequality. But unrigged capitalism does the same thing.

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Max Sawicky wrote two pieces recently about the viability of a left strategy focused on opposing rent-seeking. The pieces conclude that this is not a viable strategy for many reasons, closing importantly on this note:

The liberaltarian view acknowledges market deficiencies of interest to progressives but applies questionable weights to them and neglects more potent remedies. The Left has better answers — most of which our evanescent libertarians would reject. Rather than indulge the back-sliding tendencies of Democrats, the more logical course is to pry liberals away from their anti-state nostrums and their faith in the chimera of virginal, competitive markets.

Naturally, I agree with Sawicky on these points. Though I would state the problem somewhat differently.

The libertarian populist position — which is embodied in various forms in the work of Brink Lindsey and Steve TelesDean Baker, and Barry Lynn — maintains, correctly, that our current version of capitalism ends up paying many rich people more than their labor and capital is actually worth, these excess payments being the definition of “rent.” Folks writing in this genre also have various ideas, some good and some bad, about how capitalism could be reformed to reduce or eliminate some of these excess payments and thereby bring payments to labor and capital closer in line with their “true” price.

To the extent that these reforms reduce inequality some, they are worth considering. But to the extent that they endorse the underlying idea that economic justice obtains whenever we have eliminated all the rents and each factor of production is receiving its correct price, they have to be rejected.

An economy that distributes the national income based solely on the marginal productivity of each unit of capital and labor is an economy that will still feature massive levels of inequality and poverty. This is so for three reasons:

  1. Around half of the population neither works nor owns a considerable amount of capital. Their true factor income is around $0.
  2. There are considerable productivity differences between different kinds of jobs, and so wage differences would also remain very high even in the absence of rent.
  3. Capital is distributed extremely unevenly and so capital payments would remain very unequal even without rents.

No amount of increasing competition, trimming intellectual property rights, or lowering barriers to entry would solve these problems. More specifically, eradicating rent-seeking would not solve these problems because these problems are not caused by rents. Instead, we need a big welfare state to fix problem one, strong (“rent-seeking”) labor organizations to fix problem two, and the redistribution and socialization of capital to fix problem three.

To put it in the simplest terms: the libertarian populist says that rigged capitalism creates huge inequality, but the truth is that unrigged capitalism does the same thing. Libertarian populist arguments correctly point out that policies that inflate the factor payments collected by the rich are bad. But factor payments are bad at distributing income period.