“Capitalism and Freedom” Summary, Chapter 10: The Distribution of Income

by Danny Fenster

This chapter is a free excerpt from Quicklet on Capitalism and Freedom.

The West has progressively sought income equality as a moral goal through the use of the state. How is this justified, and has it worked?

The ethic of income distribution in a free society is "to each according to what he and the instruments he owns produce." If one man prefers to produce less and spend more time in leisure, and another the opposite for more income, equality of treatment is also important. Paying them the same amount exhibits unequal treatment.

Differing tastes for risk result in income inequality too. Redistributing the winnings of a lottery so that no one loses effectively denies all entrants the opportunity of entering the lottery in the first place; redistributing through taxes the earnings of investors who take risks to those who did not or who did and lost similarly deny people's ability to take risks. "The girl who chooses to become an actress rather than a civil servant is deliberately choosing to enter a lottery."


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The West has progressively sought income equality as a moral goal through the use of the state. How is this justified, and has it worked?

The ethic of income distribution in a free society is "to each according to what he and the instruments he owns produce." If one man prefers to produce less and spend more time in leisure, and another the opposite for more income, equality of treatment is also important. Paying them the same amount exhibits unequal treatment.

Differing tastes for risk result in income inequality too. Redistributing the winnings of a lottery so that no one loses effectively denies all entrants the opportunity of entering the lottery in the first place; redistributing through taxes the earnings of investors who take risks to those who did not or who did and lost similarly deny people's ability to take risks. "The girl who chooses to become an actress rather than a civil servant is deliberately choosing to enter a lottery."

Progressive taxation is much like redistributing lottery winnings; "taxes are imposed after it is already largely known who have drawn the prizes and who the blanks in the lottery of life.”

Inequality stems from inheritances also, raising ethical difficulties. The distinction is untimely untenable. What's the difference between inheriting a beautiful voice from a large estate? A wealthy man can pay for his son's training, set him up in business or make him a trust fund. Does it matter ethically that the child receives wealth from, respectively, his capabilities, his earnings or his inheritance, when he is likely to be wealthy regardless? It's illogical to say a man may not pass what he has earned onto his children as he pleases; that is his freedom.

This does not make the capitalist ethic right. "I am led to the view that it cannot in and of itself be regarded as an ethical principle; that it must be regarded as instrumental or a corollary of some other principle such as freedom."

If you and three friends are walking down the street and you spy a $20 bill. Are your friends justified in demanding you split the findings evenly? "Are we prepared to urge on ourselves or our fellows that any person whose wealth exceeds the average of all persons in the world should immediately dispose of the excess by distributing it equally to all the rest of the world's inhabitants? … Such a ‘potlatch’ would make a civilized world impossible."

We can't decide who deserves what through coercion.

Most wealth disparities can be seen as chance; the hard worker is deserving, yet owes these qualities to the fortune of good genes.

Despite lip service paid to 'merit' over 'chance,' we accept inequalities of chance more easily than inequalities of merit. "The goddess of chance, as of justice, is blind."

Individuals cooperate to satisfy wants efficiently. If each gets only what they put in, exchange is not beneficial. Payment based on product is necessary to encourage efficient resources allocation. The alternative is compulsion. One cannot be compelled to put in their best effort.

Still, payment based on product wouldn't be tolerated if not believed just. "Even the severest internal critics of capitalism have implicitly accepted payment in accordance with product as ethically fair."

The biggest criticism come from Marxists, who say labor is exploited by producing the whole of the product but receiving only part. This is valid only if labor is entitled to what it produces--the capitalist ethic. The alternative socialist ethic, "to each according to his need, from each according to his ability," would mean that labor were entitled only to what it needs, not what it produces. This is only one of many confusing issues in Marxism.

Inequalities in wealth create the patrons of the arts and sciences that make life-improving art and innovations for all; it is the very wealthy which fund artists and new technology companies that would not be funded by governments or individuals in socialist systems.

Capitalist system are characterized by "considerable inequality of income and wealth." But not more so than other systems.

Though criticized for materialism, the more capitalistic a country, the less spent on capital accumulation and the more paid towards worker’s productive capacities. In underdeveloped nations, nearly half of income is property based; in the developed world that accounts for only one fifth. "The great achievement of capitalism has not been the accumulation of property, it has been the opportunities it has offered to men and women to extend and develop and improve their capacities."

"There is surely drastically less inequality in Western capitalist societies … than in a status society like India or a backward country like Egypt." Capitalism has brought the luxuries of the wealthy to the masses, medicine aside, and have eliminated their backbreaking labor.

Interpreting information on the statistics of income distribution is endlessly complex and open to question. But generally, non-capitalist societies have wider inequality by any measure.

Governments have most often used graduated income and inheritance taxes to distribute income. Friedman concedes that it is not possible to definitively state if this has met their intended goals but believes they have done harm. They discourage the wealthy from becoming wealthier but have not made them less so. They've inspired loopholes that have made them ineffective while wasting the creative energies of our most competent men.

Regardless, they are undesirable. "I find it hard, as a liberal, to see any justification for graduated taxation solely to redistribute income. This seems a clear case of using coercion to take from some in order to give to others and thus a head-on conflict with individual freedom."

Friedman generally suggests a flat-tax structure as the most just, set at 23.5%, which he believes would deincentivize tax-avoidance loopholes and actually increase overall revenues.

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