Misconceptions in Practice

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.

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