Milton Friedman once made a distinction between political questions and economic questions. Whether or not every American should be afforded a minimum standard of living is a political question. How to accomplish such a goal is an economic question.
Low level thinkers fail to see the distinction between political questions and economic questions, and generally look at the world in terms of problems and solutions. Higher level thinkers not only see the distinction between political questions and economic questions, but they also see that ‘solutions’ rarely exist. In the vast majority of cases, every economic ‘solution’ to a political decision involves a set of tradeoffs. High level thinkers want to find the best set of tradeoffs possible, while understanding that none of them are apt to be perfect.
Let’s stick to the question of every American having a minimum standard of living. The United Stated has a GDP of $20.5 trillion, and a population of roughly 330 million people. If we divide the total national income by the total number of people, we get $66,666.67, which means that the total national income is enough to provide every single person in America with $66,666.67 per year, were that income divided evenly. A married couple without children would have $133.333.34 to live on. A family of four would have $266,666.68.
The median household income for the United States in 2019 was $68,703, and the average household had 2.6 people. The typical household, then, gets about 40% of the income it would get, were income distributed evenly.
Low level thinkers often believe that capitalism is a system in which, if there are five people and five donuts, one person gets all of the donuts, and four people go without. These people often say that under socialism, each person would get one donut. This is a common sort of comparison, and it makes socialism look much more fair than capitalism, but how accurate is this comparison?
A higher level thinker would make a different comparison. Under capitalism, if there are five people and 100 donuts, one person will have 50 donuts, one person will have 20, and three people will have ten. Under socialism, there would be no donuts, and all five people would starve.
The reason low-level thinkers like socialism is not hard to figure out. In a system of five people and 100 donuts, most of the people have half of what they would have, were the total income evenly split. It is very easy to tell people with ten donuts that they are being exploited by the person with 50 donuts, when an even split of donuts would give each person twenty.
The reality is that the only reason there are any donuts at all is that one person had the idea to open a donut shop. This person took all the risk, and organized the other four to work for him or her, with one of the other four acting as a manager, and the other three producing the 100 donuts. Whether or not the distribution the market creates is ‘fair’ is irrelevant.
Low level thinkers often believe they have a choice between having ten donuts under capitalism, or twenty donuts under socialism, but that’s not how it really works. A higher level thinker understands that there are really three choices:
- Work for the donut shop owner and get 10 donuts, with the possibility of one day becoming manager and getting 20 donuts,
- Open their own donut shop and have an indeterminate number of donuts, with the possibility of getting rich along with the possibility of going bankrupt, or
- Go socialist and have no donut shops to work in, no owners to work for, and no option of ever becoming an owner.
Of course, when a nation first goes socialist, there is a donut shop, and at first the people might even get some semblance of an improvement. The people will never get twenty donuts, but they might get 12 or 13. The socialist leaders will take the rest.
Without any incentive to run the donut shop well, the socialist leaders will see the number of donuts produced decline, until the donut shop barely produces enough donuts to give the socialist leaders what they believe is their fair share. Rather than blaming their own poor leadership for the lack of donuts, the socialist leaders will blame the workers – who would still produce 100 donuts if only they were not greedy and/or lazy.
This is where socialism really gets fun… The leaders will give the workers quotas on how many donuts they have to produce, but will not give the workers the means to meet those quotas. The socialist leaders will then throw those employees who miss their quotas the most, into gulags, where the majority of them will die, serving as an example to the other workers of what happens when lazy or greedy workers fail to meet their quotas.
This is, obviously, a very simple example, but it is also exactly what really does happen when low-level thinkers take over a free market economy, and start playing with distribution without considering the impact of incentives on production. When I was a child, for example, Venezuela was by far the richest nation in South America (and the 4th richest nation on Earth) with a vibrant, diverse free market economy. This was, incidentally, before Venezuela discovered it had oil. Chile, in the meantime, had a socialist economy, and was easily the poorest nation in South America.
Hugo Chavez decided that Venezuela had too much income inequality, and decided to fix things. Today, Venezuela is easily the poorest nation in South America, and is one of the poorest nations on Earth – in spite of the fact that they discovered the largest deposits of untapped oil reserves in the world. Venezuela’s oil companies look just like our donut shop example in that, as soon as Hugo Chavez nationalized the oil companies, oil production rapidly declined.
Chile, in the meantime, went free market, and is today easily the richest nation in South America.
There are many such examples. At the start of the Korean War, both North, and South Korea, were very poor. Seventy years later, South Korea is as wealthy as are the nations of Western Europe.
Higher level thinkers understand that production follows a pareto distribution, in which half the output is produced by the square root of all participants. If you look at just the smaller number of people who produce half of all output, the square root of them produce half of their output. If you follow this through to its natural conclusion, a relatively small number of people will have a great deal of income, and the typical worker will earn somewhere around half what they would earn were all income spread out evenly – which is exactly what we see with the national income of the United States.
Imagine trying to ‘solve’ the pareto distribution of touchdown passes in the NFL. Right now, half of all touchdown passes are thrown by the square root of all quarterbacks (and are caught by the square root of all receivers). One quarterback will win the Super Bowl, and that tends to be the quarterback with the most touchdown passes (the NFL having become a pass-happy league). Would we improve the game if we spread all touchdown passes out evenly? Would you watch football if every game ended in a tie, with every team having the exact same score every week? Would players put in the same level of effort if their effort had no impact on the results?
If we move from football to books, the square root of all published authors represent half of all books sold. A small number of authors, like Stephen King, become very wealthy.
Income follows the same basic pareto distribution, and this has a huge impact on wealth.
Low level thinkers will sometimes grant that production follows a pareto distribution, and that we should not mess with income inequality enough to destroy production levels (as Venezuela did), but then they will attack wealth. Does Paris Hilton deserve to live off the empire her father built?
It is amazing how much parents are willing to sacrifice for their children, and particularly when parents have every reason to believe that their children will live better lives than they did. The investments parents make, sacrificing their own material needs to better the lives of their children, drive the investments in capital expansion, upon which our economy depends for growth.
What is an economy, anyway, other than the total economic impact of everything everyone does? A government cannot control the economy without also controlling the people. Low level thinkers believe we need government to control the economy, if the economy is going to work for the people, but working for the people is an economy’s natural state. Some government intervention may make the economy more efficient, but for the most part all the government does is to get in the way. Low level thinkers will talk about air bags and things like, that, but to the degree that people want air bags, car companies would have put them in anyway. The government never mandated air conditioning or power windows in cars, and those things have been standard equipment for twenty years.
The only thing government does is to make people buy things they do not want.
Low level thinkers look at time in a non-linear way, such that when we talk about free markets, they’ll accuse us of wanting to do something absurd, like going back to the days of child labor. Higher level thinkers understand that when child labor was normal, nobody thought to question it. It was only after the vast majority of families were sending their children to school (rather than to work) that anyone thought about banning child labor, and in many cases, forcing parents not to send their children to work brought a return of what child labor replaced: child starvation.
The truth is that economies do not go from abject poverty to our modern standard of living overnight in any economy, but in a relatively free market, lives do improve over time. It took South Korea seventy years. Over time, living and working conditions improve. Our lifestyles are better than were the lifestyles of Americans 100 years ago not because our balance of government vs. free markets has improved, but because today is built on top of the progress of the past.
Low level thinkers will point out that free markets can have recessions. What these people leave out is that other types of economies can also have recessions, except that when socialist systems fail the impact is far worse than anything that happens in a free market.
Positive progress is not guaranteed, either. Lives in places like North Korea, The Soviet Union, Venezuela, and other places that strayed too far from free markets, have been destroyed. The 20th Century is filled with examples of countries that tried collectivism, and that collectively collapsed. The 21st Century seems filled with people who want to commit the same errors that plagued the 20th Century, which is probably because so many of the people alive today did not live through what happened in the 20th Century.
Those who were killed by collectivism in the 20th Century were destroyed by low level thinkers, who were focused on ‘solving’ problems rather than on finding better trade offs, and who generally did not understand the systems they were tinkering in.
Systems are complex. It should come as no surprise that those who do not know what they are doing are far more apt to break complicated systems than to make them better, no matter how noble their intentions may be.
And if we truly had a fair society, low level thinkers would be held accountable for the harm they do, in spite of their good intentions. Instead, someone like Bernie Sanders will take over a country to see his policies kill millions of people, and will suffer no personal consequences himself. Later on, history will repeat somewhere else.
There is only one way to stop history from repeating, and that is to have society at large start to think at a higher level.