Inequality of Power and the Role of Capitalism

The issue of wealth inequality that bothers so many people in the West has really nothing to do with wealth. It is reported that the wealthiest 1% own about 40% of assets in America, with the top 10% owning around 80% of the country’s wealth. The term “wealth” here obviously does not refer to a mountain of cash stashed away in a vault, but rather, to ownership of companies, bonds and so on. The wealthiest people aren’t taking any money out of the economy, what they do have is a leading share of control over the assets that make up the economy, be it land, real estate, machinery, vehicles, companies, and so on. And indeed, even if a person were to stash their money in the bank, the bank itself would invest it immediately into the economy, for unless the money is used for productive means (in the basic sense of producing more money rather than any deeper sense) it will lose its value over time through inflation.

Inequality of wealth then is inequality of power, and for obvious reasons public sentiment is always against it. Nobody likes to have less power than his neighbor, especially when he doesn’t understand the difference between things like equality of means, equality of ability and equality of rights. The journalist naturally panders to the public since they have nothing to gain by promoting an unpopular argument and everything to lose – after all, the journalist doesn’t take part in public service, all they’re after is a form of prestige gained by telling their readers what they want to hear. In actuality, inequality of power is neither good nor bad – it is just the natural outcome of social interaction within our species (a power hierarchy will form through any interaction). The question of good and bad in power distribution is this: where is the power going?

In free market capitalism control of assets goes to those who are able to keep and multiply them. In other words, wealth goes to those who can nurture it. In all other systems, wealth goes to those who can take it. The difference between a capitalist country with an adequate justice system and a dictatorship or some lawless authoritarian regime is that wealth is distributed more predictably into the hands of those who are able to do something productive with it rather than to those who merely have the means to seize it. In an authoritarian regime, a group of aristocrats divides the assets of others among themselves, oftentimes fighting for who gets the choicest cuts. Because this aristocracy is composed of brutes and not businessmen (one needs the right qualities for the job), their ownership of the assets leads to their gradual depreciation; how fast the depreciation happens depends on the ineptitude of the owners. In time, they inevitably destroy the value of their assets and are driven to plunder more. The inequality of power exists just the same in an authoritarian regime as it does in capitalism, the difference is that the brutes, not businessmen, hold the assets.

To keep their wealth a businessman must grow it above the level of inflation. If they don’t do this they will become poorer, so in effect, a businessman must not only do no harm to their wealth if they wish to retain it, they must actively invest it productively – productively in the sense of producing more wealth (or just more money, in the sense of basic speculation) rather than in some deeper sense of being useful to society, but the two correlate more often than not. The capitalist distribution of power is a distribution in which the most capable (on average) have control over the most assets. This control is not given out by means of delegation, but by the forces of the market, and it is precisely those blind forces that allow for the most prudent to rise and for the careless to fall. Obviously some wealth – and thus power – will fall into the hands of the incompetent, either by being inherited or by being acquired by corruption rather than enterprise. The question, however, is not what system is perfect (none are), the question is which system will best purge itself of incompetence. Capitalism has thus far proven to be the most reliable system for this task. The alternative is to let the political elite hand pick those to whom wealth and power is distributed (which would be themselves and their friends)1, and we can imagine where this leads (just compare the state of the economies of West and East Germany when the country still had the ideological divide, or North and South Korea today – the people managing those economies didn’t set out to drive their countries into ruin, it happened because the direct incentive to manage a profitable enterprise was taken away and replaced with the incentive of feeding a bureaucratic system upon which their little share of bread depends). The value of capitalism is not that it provides equality of means – it certainly does not – the value lies in allowing for the more competent to control the most wealth by letting the prudent rise and the inept fall, and in respect to this task it is the best system we have.2

  1. A critic of capitalism might argue that this is not what they want at all, and instead suggest that what is needed is a mild redistribution of wealth, i.e. heavy taxation for the very rich so that their money could be used for the creation and maintenance of public infrastructure that everyone, not just the rich, may enjoy. This sounds good until you realize that the wealth is already distributed. As mentioned earlier: the very rich don’t have a stack of gold in a vault that they are keeping away from everybody else (at least not since the creation of fiat money), they have a majority ownership share of the country’s assets – the assets being the companies and products that the public make use of every day. The value of the luxury goods they own may be excessively large compared to an average citizen, but they are nothing compared to the value of the rest of their assets that everybody else makes use of (land, real estate, companies, products, etc). In this way, the people who have thus far best been able to manage those assets are in control of those assets. If you try to funnel the money away from businesses towards politicians you would end up transferring control from people whose primary business is to manage enterprises to people whose primary business is politics.
  2. It needs to be noted that there is a large parasitic element in today’s capitalist system in the form of speculators who do little more than try to game the inefficiencies of the market (through speed, better information, inflation of value, etc.). This element of the market does not invest in the classical sense but speculates, and is largely responsible for the recent financial crash (through the creation and distribution of toxic bonds). This element will always exist in a free market, and the best way to deal with it would be to let it bear the costs when it fails rather than bail it out as current governments have done (thus preventing the market from purging itself of incompetence and fraud).
October 2014