“Why Society’s Biggest Freeloaders are on Top”: A Review

A friend, Carrie Mook Bridgman, reached out on Facebook and asked my opinion of Rutger Bregman, “Why Society’s Biggest Freeloaders are at the Top” Here’s what I think as a mainstream economist.

This article is true in part, especially where it makes general statements. It is also misleading in parts, where it makes statements that are true in some cases, but not in all cases.

Is it workers who create products and wealth or is it owners of businesses? Can businesses operate without workers?  Generally no. Can workers operate productively without capital and entrepreneurship?  Generally no. The answer, then, is both workers and owners (i.e. capitalists) create wealth.  There are two fundamental questions here:

  1. Assuming we wish to increase the average standard of living, we must increase the production of goods and services, and thus wealth. How do we do that?  The market system (i.e. capitalism) has proven to be a very effective way to do that in history.  It was the market system that motivated the Industrial Revolution that raised the standard of living in the developed world above the subsistence level. Is the market system perfect? Our market system in the 21st Century U.S. is not.
  2. How do we (as society) divide up income and wealth?  The goods and services a society produces generate the income earned and the wealth created.  The U.S. has largely adopted the market system of economic organization which implies a certain way of dividing up income and wealth.  Let’s explore this in more detail.

The author of the article above, Rutger Bregman, observes that there are two ways of making money: earning it through work, and unearned income, which means income from savings.  The author implies that the former creates wealth, while the latter just expropriates it, or to put it in his words, “someone who uses their control over something that already exists in order to increase their own wealth… at others expense.” 

In order to create income and wealth, workers and businesses must create something consumers value. Workers working alone without the equipment and technology provided by the business aren’t very effective, which is to say they find it difficult to create much value.

Slight Wonking Out tangent: In a sense, the author is conflating two similar concepts: economic rents and rentiers. An economic rent is the difference between the return on an asset in a particular use and the return on the next best use of the asset.  Think about what Michael Jordan earned as a basketball player vs. what he would have earned as a golfer (say).  That difference is the unique return to his basketball skills.  Is it fair that Jordan earned so much playing basketball? Fairness is subjective, but we can say that his earnings were based on market forces.  As long as the demand for his services was as high as it was, he could earn as much as he did.  Because his skills were unique, he was able to capture most of the value from his skills. For most workers, this is not the case.

Compare this to a rentier.  In the 19th Century, a person who owned a lot of land, could rent the land out and live on the earnings.  Is that fair?  Again, that’s subjective, but we should consider a few things.  Where did the land come from? Suppose the person saved for years to purchase the property.  Then the rents he or she earned were based on their hard work and willingness to save. (Do you consider yourself a leach on society because you have money in the bank?  Probably not, but it’s the same argument with rentiers.)  But what if you inherit the land?  Does that change things?  Perhaps we could argue that it does, since  you didn’t work and save yourself.  But we also generally think it’s appropriate to leave inheritances to our children.  So the answer here isn’t completely obvious. End of tangent.

Businesses are successful when they create and sell products consumers value.  We don’t usually criticize grocery stores for selling groceries, because they provide a necessary service.  (Also, for what it’s worth, the profit margin on grocery sales is pennies on the dollar, so they make their money on volume, which requires happy and thus repeat customers.)

Businesses have strong incentives to create value, both with existing products and by creating new ones.  This is a benefit to society, both because the products have value and because the revenues generated are distributed to workers and owners.  

But businesses also face a conflicting tendency–to exploit market power.  Few people believe that an iPhone isn’t a marvelous product.  (Value creation)  But how does Apple manage to charge $1000 or more for one?  The answer is Apple’s market power–the ability to raise their price and not lose all their customers.  Just as Michael Jordan had market power, Apple is able to charge a high price for its product. In a sense, the problem is us, consumers.  As long as we are willing and able to pay high prices for products that we value, we will have to do so.  What is the solution?  The answer is competition.

Conservatives argue for free market capitalism.  They have valid reasons for this.  Free markets generate the most efficient economic outcomes, which means the highest average standard of living in a country.  Free markets exist when there is sufficient competition among firms that no firm has significant market power.  If Chevrolet charges much more for a pickup truck than Ford does, some people will buy Ford pickups instead.  That potential loss of customers keeps Chevrolet in line. As a result, firms earn only reasonable profits.

Liberals observe that in the real world many markets lack sufficient competition, so that the few firms that exist in a market have significant market power, allowing them to charge higher prices and earn high profits. A good example is pharmaceuticals.

How do we correct for businesses exploiting market power? Only the government has the power to be a counterweight, since government defines and enforces the rules of the game, i.e. how markets are allowed to work.  Does government always get it right?  No.  Governments are made up of fallible human beings, but absent government regulation, private markets will fail.

But wait, there’s more.  In an economy where government plays an active role in managing markets, there is the possibility of crony capitalism, where actors with power and money (e.g. corporations and rich individuals) can influence government officials to favor their interests.  This has also been described as welfare for capitalists.  The poor have often been criticized as takers (i.e. recipients of welfare).  But who is in a better position to obtain benefits from the government (e.g. thru the legislative process), the poor or the rich?  But in the case of the latter, we call it agricultural price supports, or defense spending. Economists are taught that if it quacks like a duck, it’s probably a duck.

Bregman also states, “[M]uch of the financial sector has become downright parasitic. How instead of creating wealth, they gobble it up whole.”  This is a bit of an overstatement.  During the lead-up to the Global Financial Crisis in 2008, yes, this was true; but in general, much less so. Banks provide mortgages to middle class Americans, and they provide loans to small and medium size businesses. Our lives would be very different without the financial system.

Bregman concludes, “Yet it doesn’t have to be this way. Tollgates can be torn down, financial products can be banned, tax havens dismantled, lobbies tamed, and patents rejected. Higher taxes on the ultra-rich can make rentierism less attractive, precisely because society’s biggest freeloaders are at the very top of the pyramid. And we can more fairly distribute our earnings….” On that last point, I agree.

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