Makers, Takers, and the Future of American Economics

President Obama signs G.I. Bill Protection Order

We The People of the United States have come together with a defined set of six shared values: a more perfect union, justice, domestic tranquility, defense, welfare and liberty. (See Foundational Values: A More Perfect Union).

Our chosen economic system, Capitalism, must serve those values. Does it? Currently, no.

A common understanding of capitalism is that it will do exactly that if the “invisible hand” of the market is operating effectively. Given the assumption that people are created equal, in an effective market-based system, we should expect a natural distribution of wealth. Such as this:

 

How Are We doing?

Compare that ideal to reality. Here’s our current distribution of wealth:

Free Markets or Fair Markets?

Adam Smith, referred to as the father of capitalism, argued that a market-based economy would fairly and efficiently distribute wealth. The above chart should serve notice that either his theory is wrong or that we’ve erred in implementation.

Many “free” market advocates erroneously believe that Smith advocated libertarianism, where government does little to create or regulate the economy. This does not accurately reflect Smith’s ideas. He understood that markets are themselves a function of government. Adam Gopnik of The New Yorker sums Smith this way:

“It isn’t just that a free market can survive regulation; it’s that the free market is the product of regulation, regulation designed to protect the public from the kind of arrangement that, let’s say, allows people with undue influence on the government to have a lower tax rate than people who don’t. This makes Smith a firm believer in public goods: his state has an obligation to build roads and schools, establish an army, build bridges and highways, and do all the other things necessary for a sane polity in which the market can function naturally. Everyone should pay for them, and the rich should always pay more than others. “The rich should contribute to the public expense not only in proportion to their revenue,” Smith writes, “but something more than in that proportion.”

Makers & Takers: A Reversal?

The mantra of the Right is that our economic problems exist due to excessive regulation and taxation of the wealthy. They’ve set the Country at odds, between the so-called “Makers” and “Takers.” According to Mitt Romney & others on the Right, at least 47% of the Country are Takers, living off the productivity of the Makers.

If you have nothing, it’s hard to argue that you’ve taken something.

The top 20% control 84% of the wealth, while the bottom 60% control only 4.3%. If the Takers, as defined by the Right, were successful at taking, we’d expect them to control more than 4.3%. Right? We’re either lousy at taking or the Right are wrong.

If you have nothing, it’s hard to argue that you’ve taken something.

Perhaps the inequality found within the current distribution is due to a lack of productivity by the poor and working class? Are they just lazy? Look at this chart:

This shows the percentage change in 1) the average income of the top 1%, 2) the productivity of the average American worker, and 3) the average wages of the American worker. Since 1979, productivity has increased more than 60%; workers are producing more today than in 1979. Meanwhile, their wages have flatlined while the income of the wealthy has increased by over 240%.

So, the workers are “making” more, and “taking” less. The real makers in our economy are the working and the middle classes, and the takers are the wealthy, who use their money to unfairly rig our economic and legislative system. Exactly what Adam Smith warned about.

Social Capitalism?

Ours is a blended system of market-based economics (the liberty part of our shared values) and a strong social safety net (the general welfare part of our shared values).

Many look at the results of American Capitalism and conclude that Capitalism itself is fundamentally broken. I disagree; a properly constructed and regulated market-based economy can still be fair and efficient. Ours is a blended system of market-based economics (the liberty part of our shared values) and a strong social safety net (the general welfare part of our shared values).

A blended system is more perfect than a pure, single-theory system. Not everyone is equally capable of participating in a market system. Children, the elderly, the infirm; we must account for these members of our community. Basic social support programs increase a workers ability to be a maker.

I’m an advocate of Social Capitalism, a theory that blends the best of capitalism and socialism. Recognizing that a complex economy must account for vast differences in populations, there can be no one-size-fits-all solution.

Social capitalism: markets work best and output is maximized through sound state management of the macroeconomy. A strong social support network for the poor enhances capital output. By decreasing poverty, capital market participation is enlarged. Government regulation, and even sponsorship of markets, can lead to superior economic outcomes, as evidenced in government sponsorship of the internet or basic securities regulation. (source: wikipedia)

Define Our Values And Measure Our Outcomes

We’re busy fighting over labels such as “capitalism” and “socialism.” Those terms merely represent systems that are constructed to achieve outcomes. The outcomes matter more than the name of the system.

Our Constitution lists our shared values, which we should define in measurable ways. When we say we believe in liberty, what does that mean? What is it we intend when we list general welfare among our shared values? Are we achieving those outcomes? Does our economic system promote justice? Tranquility? Union? It should.

Our economic system must fit within the framework of our shared values; it must produce results compatible with those values. Our economic system is failing us, precisely because it is out of sync with our shared values.

Let’s fix that.

 

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  • John Clinton

    You have some very fundamental flaws all through your argument.
    First, let’s look at your math. For example, your first graph needs labels: is that 5% for wealthy and poor the quantity of people? Then why are you comparing it to the second graph, which represents the $s of wealth distributed by class? You’re mixing your data.
    Second, you seem to equate how much someone makes / takes with how much wealth they possess – you skip the part about CONSUMPTION. If you make more than you consume, you build wealth; if you consume all/more than you make, you don’t, right? You are defining the “success” of taking by how much you have LEFT (wealth), but the more accurate measure is how much you take, before consumption reduces that figure.
    Third, your baseline year can make or break chart #3. Think of the stock market: if you chose March 2009 as your starting point, it would look like it’s going gangbusters – when it was just rebounding from the Great Recession. Also, you’re showing WAGES, forgetting that employers have been paying more and more in NON-wage compensation (think healthcare costs).
    Overall, your argument doesn’t support your conclusions. You have an interesting idea, but it doesn’t stand up to scrutiny of the pillars you place to support it.
    Try again, please. If your idea is worth promoting, it’s worth doing it RIGHT.

  • http://www.facebook.com/timothyk Timothy

    John…thanks for your comment. I appreciate the feedback.

    The labeling of the graph is not a function of my math; it’s a function of communication. I think it’s clear what the percentages mean in context, but I agree it could be made more clear.

    A common practice when discussing wealth distribution is to divide the population into quintiles, or groupings of 20%. The first two graphs represent the quintiles of wealth distribution across the population. So, for example, in the first graph, the bottom 20% (population) would ideally control 5% of the Nation’s wealth. The next 20% of the population 25% of the wealth and so on. Let me know if that’s not clear.

    The final graph is not being directly compared to the first two, it is representing a related but different idea altogether. One of the common myths of unequal economic value across the population is the idea that ours is meritocratic economy where what you earn (by which you’re able to accumulate wealth) is based on your output or productivity. “Work hard and you’ll be rich!” goes the thinking. So, the final graph was meant to tease out this idea a bit, showing that even though the working class are working harder they’re taking home less pay. Accumulated wealth is not exactly the same as income, but I don’t think I’m unfairly conflating disparate ideas here.

    I don’t agree with you that consumption is a better standard of measure here. Wealth is accumulated beyond expenses. The wealthy are wealthy because their income is so much higher that beyond meeting their basic needs (the core of consumption) they are able to invest and save more. You seem to be suggesting that the poor and working classes would control as much wealth as the wealthy if they only consumed less and saved more. If so, that’s a fundamentally flawed understanding of economics.

    As for the baseline of the final graph…I’m using 30 years of data, which I think is adequate to show a trend. It’s not as if I’ve unfairly singled out some 5 year period. Are you suggesting that the trend I’m showing is not accurate? Google the concept and I think you’ll find that these trend lines are commonly accepted.

    Finally, while it may be true that employers non-wage compensation has been increasing, the fundamental point stands. Wealth disparity (again, I don’t think the two concepts are unrelated) is dramatically increasing. Why? What’s your explanation?

    That is the fundamental question. Our economic measures are out of line with the values that we’ve agreed upon within our community. Why? If you have a better explanation for this, please let me know your thoughts.

  • Richard W. Fraley

    I like most citizens, am concerned over the enormous debt, we find our country in. I realize that cuts are necessary, to get our financial house in order. It just seems to me, that the very people or politicians, that caused this debt, are now charged with eliminating the debt. Especially, when I see, they are aiming to do so, on the entitlements of our Seniors, Military and Middle Class Citizens of our country, while they continue to exempt the Wealthy and Corporations, and themselves, that have prospered, even during the past resessions and unemployment, that normal citizens have had to deal with.
    I personally believe, the bigest problem facing our country today, is the “Cost” of our Government, it’s self. They have voted themselves pay raises, to the point now, where they receive three times more then that of an average citizen. They also have very generous allowances, for staff, etc. plus, their own retirement benefits. They pass laws upon citizens, that they exempt themselves from.
    I don’t believe our Founders had any idea of any of the above taking place, when they compiled the Constitution of our Country. I feel, that the very Politicians, that we elected, for office, have circumnavigated the Consitution, a document, they took an oath, to defend and protect, to enhance their own personal wealth, even while, our citizens, as well as our country, is now faced with financial problems, never imagined.
    Perhaps, we need to reread the Constitution it’s self, it was written many years ago, when our country was first founded and quite small, as compared to today. There has been some admendments made to it, but, maybe more are in order.
    We the People, need to demand, that Government reforms are instituted now, so once again, our Government, is a Government of the People and for the People, as our Fore Fathers envisioned, not as Government has become today.
    It should be a Government of Citizens, even though, you hold an elected office, you are not “Royalty”, you’re still only a citizen of our country. You can not pass laws and exempt yourself from same.
    I really feel, that Term Limits should be manatory. Social Security Retirement only and Health Care also to be paid from their salaries as any citizen has to.
    Even our active duty Military pays into Social Security.
    If there are to be cuts in entitlements, then let’s start with Government Benefits, enough is enough.

  • http://www.facebook.com/timothyk Timothy
  • Timothy

    Note: I’m going to paste a copy of a conversation I’m having elsewhere. This is sort of mid-conversation, so it may not make entire sense, but you should be able to understand my point:

    My interlocutor: I think we do agree on the problem. Being a small business owner, I feel like the government is trying to fix the larger problem on the backs of the small businesses. The wealthy at the top are not being asked to shoulder the burden of healthcare, nor will they be paying more with a minimum wage increase. Like I said yesterday, this is all political. The democrats are getting killed on healthcare, so out comes minimum wage. It’s nothing more than a diversion for them. Like I said, they know the poor will not be helped by an increase in minimum wage. The middle class will bear that burden, but in the meantime they might win a few more senate seats and keep the senate. Not one bit of concern for the people. In a year from now, you and I will be discussing how come the middle class just can’t get going. Can this be stopped?

    My Response: when you say “I think the Government is trying to fix the larger problems on the backs of small businesses…” I sort of agree. But your word choice leaves me scratching my head a bit. Your use of “the government” echoes what I’ve found when I listen to or interact with the Right. “The Government” in this country is supposed to be “we, the people.” Of course, in reality, “The government” is open to being influenced and operated by those with power. Power, unchecked, runs all social organizations. The entire point of our democratic endeavor is to check the traditional power blocks and give that power back to the people.
    So, the question becomes, who is running our government? It seems to me that many on the Right keep looking at the poor as the problem. That those without the resources to fund and influence our government are the primary problems. Does that make any sense? Who pays for the lobbyists? Who funds the vast majority of political campaigns? This is becoming my mantra: when trying to find the source of problems in any society you focus on the powerless and the penniless, it is self-evident that you’re looking in the wrong direction.

    “The Government” is being overwhelmingly controlled by the wealthy. Overwhelmingly. To be clear, I’m suggesting that this influence happens on the left and the right. So, when you say “The Government” is trying to balance these problems on the backs of the small business owners…let’s place the blame where it exists by substituting “the wealthy” with “the government.” The wealthy are trying to balance this all on the backs of the middle class, including small business owners.

    For a prime example…the Republican nominee for President last election. Mitt Romney. Mitt Romney, one of the wealthiest men in America, paid 13% in taxes. Nearly 2/3 less than the average paid by a middle class family. And he not only felt no shame over this, he felt he was justified in this. Now, lest you suggest that the wealthy pay a disproportionate amount of taxes in this Country, that’s true…but also as it should be. The wealthy reap a disproportionate amount of the benefit from the economy, and their taxes are less as a percentage than what they reap from the economy. 84% of the wealth in this country is owned by the top 20% of individuals, and yet, for example, in 2007, that top 20% paid only 68.9% of the Federal Taxes. Again, take 84% of the wealth produced in the economy, and pay 69% of the taxes.

    Now, who constructed that system? You’d likely say “The Government.” But to be fair, as we’ve talked about, who funds government? Who can pay lobbyists? Who gets access to Senators and Congressmen? It’s not the poor. It’s not the middle class. It’s the wealthy. And isn’t that obvious? Isn’t it self-evident? Who is benefiting the most? Of course it’s those who have constructed the system.

    I’ll say again, I think the dems are only slightly better on this issue than are the republicans, but the GOP is so obviously in the corner of big business and big wealth that even considering them as a potential ally on these issues is a non-starter.

    As for the politics…it is so clear that there should be a bottom end to wages that I don’t think it even worth the argument. The idea that a business should be able to pay a worker less than what it costs that worker to live is simply another way that business has of externalizing their costs onto the backs of the poor and middle class. Of course there should be a bottom end (in as much as ye have done it unto one of the least of these, etc.). The question is how is that balanced in the entire system of our economy, and again, I think the hard work needs to be done on the top end. The Right keeps filling its followers with the idea that the poor are leaches, that the poor are a drain on our society and our economy. And yet, the productivity of the working class has increased steadily over the past several decades. And the GDP of the Country has increased. And yet the poor and middle class have seen declines in their real wages and buying power. So, who is sucking out the value of our economy? It’s an easy answer…just look at where the wealth is accumulating, and the rapid increase in that accumulation.

    So, while I agree with you that much is being asked of the middle class…the problem is, self-evidently, not the fault of the poor or any movement to treat the poor honestly and fairly. I consider the taking of productive work and paying that work less than a living wage nothing less than theft. And that theft, in my opinion, lays squarely on the shoulders of the top 20% and their exploitation of the middle and lower classes.