Monthly Proposal No.6: levy taxes on heritage for the sake of meritocracy

It is written in the Universal Declaration of Human Rights that all human beings are born free and equal in dignity and rights. But the subjective value of these rights depends on the possibility to use and appreciate them.

Not only but especially in capitalism the right to own and consume therefor depends on personal income and wealth. Still people seem to prefer a slightly unequal distribution of income and wealth and even seem to accept a very unequal distribution as long as they are able to believe that it is caused just by different effort and merit. However, I claim that people do not accept the status quo. They just temporarily tolerate it because of their systemic dependency. They know that the income distribution is not an outcome of perfect markets. And no one can explain the distribution of wealth by effort and merit.

The most obvious way to gain wealth without any own effort is heritage. It is no merit to be born into a rich family. It is even hard to justify, why a children should be born equal in rights but unequal in the possibilities to use them. So there has to be found a compromise. Even if it is a human instinct to care for ones relatives and even to bequeath them, the extent of heritage should not be allowed to challenge meritocracy.

So not only egalitarian but also whoever wants to plead capitalism as a meritocratic system should care about the decreasing tolerance for unequal distributions. That implies he or she should be interested in re-establishing the at least the credence that a minimum of meritocracy still exists and levy taxes on heritage.

Degrowth vs. Decarbon

In reply to my last post, Katharina linked to a think tank arguing for “degrowth” as a strategy of preventing further global warming. My mini model seems to support exactly that strategy: reduce consumption and production to reduce greenhouse gas emissions. But there is another way to deal with the problem, which is usually referred to as “decarbonization”. This strategy calls for reducing the use of greenhouse gas emitting modes of production, like switching from coal to nuclear power. In my experience both strategies tend to be supported by the same set of people. But think about them in terms of my model and you realize that they cut in opposite directions – the more we “decarbonize”, the less we need to “degrow”, and vice versa.

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Climate Policy, GDP and Welfare

The 5th assessment report of the IPCC is drawing a lot of attention for its claim that reducing greenhouse gas emissions would only have small costs in terms of gross social product, that “saving the planet” is cheaper than we might think. I have not read the report in detail and I am in no position to say whether the IPCC got it right or wrong.

However, it occurred to me that the IPCC is asking the wrong question. They ask how much mitigation policies would cost in terms of (world) GDP. But climate policy is a classic case where GDP is a very bad indicator of economic welfare. Greenhouse gas emissions are a byproduct of producing goods and services and they cause global warming, which is arguably a bad thing, i.e. a negative externality. Individual consumers and producers do not take account of the negative effects of their consumption/production decisions on society and therefore consume and produce too much.

Here is how that works in a simple model. (For the visual types, here is how it works graphically: climate policy graph.)

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The Bank of England on money creation

Money creation makes people go nuts. Everyone can verify that claim by searching youtube for “money creation” or “money multiplier”, which will turn out a long list of clips telling you the SHOCKING TRUTH about our FRACTIONAL RESERVE BANKING system. Interestingly the money creation craze can be found on both ends of the political spectrum. To socialists, the fact that banks create money out of thin air proves that they are the ultimate force of evil in the world, designed to enslave the working class in a never-ending spiral of debt and compound interest. Libertarians, on the other hand, go “Money out of thin air! Inflation! Theft!”.

Introductory economics textbooks are partly to blame for this confusion. Most of them present an oversimplified model of money creation that goes something like this: there is an initial deposit of $100 with bank A. Bank A keeps 10% (say) as reserves and lends out the remaining $90. This new loan ends up as a deposit with bank B. Bank B keeps 10% of it as reserves and lends out $81, which will end up in bank C, and so on. By the magic of infinite series, the initial deposit of $100 creates new money in the amount of $1000; it gets multiplied by a factor equal to the inverse of the reserve ratio.

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Illiberal Ideas Hiding Behind Liberal Names

Bringing up the name of famous economists in order to try and give credibility to otherwise often fairly dubious ideas and theories is pretty common, and in terms of marketing it certainly works. Yet more often than not it seems that these ideas in fact run very much against what the economists that are used to supposedly enhance their credibility actually wrote and thought. Adam Smith’s “Invisible Hand” is probably the most wide-spread, misunderstood and misquoted one of them. From Marx to Keynes to Friedman, every famous economist has fallen victim to these wrongful association in the past, and I find the economics profession has been doing a fairly bad job at setting the record straight or even trying to do so.

The latest occasion that also leads me to write this post is the Free Market Road Show that is currently touring all of Europe and beyond. Some of the planned speakers are actually very interesting and knowleadgeable – Madrid’s event last week, for instance, featured Mark Klugmann who presented some ideas on “charter cities” (he is currently advising Honduras’ government on how to turn these into a reality), a topic that has fascinated me for a long time (and for which I started writing a blog post over a year ago, yet never finished). Another speaker at the event was Barbara Kolm, president of the Friedrich A. v. Hayek Institute – which is also what brings me back to my original topic.

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