The inadequate or wrong concepts of current economics lead to a number of misconceptions, some examples of which will be given.
“Soak the Rich”
The “soak the rich” taxation policy sometimes advocated or practiced by the political left is based on a confusion about the nature of wealth.
The idea is to tax “wealth” from the “rich” members of society and redistribute it, making the rest of the people “richer”.
But what the “rich” have is a disproportionate share, not of the country’s wealth, a static variable, but rather of its throughput, a dynamic variable. One determinant of throughput is the incentive offered to the “movers and shakers” among business people to exercise their skills to the best advantage, to maximise throughput within the prevailing limits. This incentive lies in the extent to which they can increase and maintain their personal throughput. Taxing most of it away, nationalising businesses, reduces the incentive and the national throughput rate.
The result is that the government has less throughput to redistribute than planned. So expectations must be disappointed, or, if they are to be met, this can only be in the short term at a greater cost of future throughput by borrowing from the future in the form of increased government budget deficits.
The consequences are that inflation takes place, due to the fall in throughput relative to the money supply, and heavy government borrowing and higher inflation exert upward pressure on interest rates.
These results reduce the throughput rate further, increasing the gap between expectations and what’s achievable.
Private and government measures to close this gap will strengthen the forces that created the gap and thus be absolutely counterproductive if they take the form of more private and public borrowing, more insistent wage demands, more strikes, and further increases in the money supply.
This subject will recur in various contexts.
Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons