Some Observations on Free Markets and Income Distribution

Consider these points, for starters, (1) we have had periods of good distribution of income (1950's and 1960's and much of the 1970's) with free markets as well as bad ones (1890's and currently), suggesting the problem is not free markets per se, as long as the antitrust laws are applied to keep those markets free (1890's); (2) there is no alternative economic organization to free markets except government making some or all of those decisions in the style of central planning and no one argues for that anymore because government does so poorly in the US; (3) economic regulation by government -- especially our lawless and whored ones -- doesn't work because regulators become the captives of the regulated, but the antitrust laws did work because they were enforce by private lawyers and their injured clients who had great incentive -- they could recover three times actual damages and attorneys fees; (4) troublesome free markets depend on a lawful and enforced legal superstructure to allow their operation and we don't have that now in key markets because we are into a period where sound laws have been destroyed or emasculated and nothing is enforced -- some markets are too much abused.

Now, more directly as to why we have the present maldistribution of income, here are the key reasons: (1) disparities in the quality and quantity of mostly higher education. High quality education is no longer available in significant quantities to all who want it. I and a few others in the early 1970's were able to make it into and thru that system to the top of it without family support. Now that is almost impossible. Only the rich can really afford the high tuitions and those tuitions are screening most out and leaving them disadvantaged and less productive. Tiny South Korea produces more engineers than we do. Broad scale, high quality education is failing in America and the rich are becoming more productive and earning more than the rest of Americans because of that. This is a truly big part of the problem.

(2) government, at all levels, generates much maldistribution by means of (a) its methods of contracting, outsourcing and obtaining and using tax dollars and borrowings, (b) whored legislation and favors for those who buy them from government, (c) turning a blind eye toward law enforcement and by gutting laws the rich want gutted, (d) not doing what is needed to protect and promote the public interest because of direct and indirect bribes given to legislators and other government workers, (e) tax policies that favor capital gains and the rich so they pay very low taxes compared to earlier periods when our nation did well and had a better distribution of income.

(3) the income maldistribution and continuing trade deficit we run both permanently depress our economy and lower our incomes because the rich spend a lower proportion of their income on consumer goods and services and money we spend for goods and services from abroad is money we don't spend for goods and services at home. Incomes, especially of the middle and lower classes, are lowered and the rich gain from producing goods abroad for importation to to and sale in the US, further skewing the income distribution.

(4) A corporation is not a free market. It is an island dictatorship. The CEO and his officers control. They can set their compensation and that of their friends at whatever their board will let them get away with. To be sure, those further down the ladder will get commensurately less, but who is to stop it. This is another factor accounting for the maldistribution of income, to be sure.

Finally, the world is undergoing a great macro wage equalization due to free competitive forces in the global market for labor. Wages in America have fallen and those in the Pacific Rim, China and parts of Europe have risen. Producers world wide are getting more bang per buck. But the tide is starting to swing back as we do a dampened oscillation toward an equilibrium. Some Pacific Rim and European wages are rising now above American wages and America could compete quite well if it did not have the educational productivity problem I describe in (1). Still there is hope of many jobs coming back to America, especially the more skilled work, leaving the less skilled work to China. Still, we need to sharpen up.

I could go on, but these are the highlights. However, income distribution remains a problem under capitalism for reasons I have described elsewhere. Free markets will not fix that. Consider those at the bottom end of the wage scale. Remedies for these problems won't seriously help the workers at Walmart. Education will not help if they lack the capacity for it. Certainly the world requires janitors, store clerks and the like.

The problem here at base target is that of the Marxian theory of surplus of labor that will drive unskilled labor's wages down further and further. Fortunately, most such labor is localized -- a Chinese peon can't mow your lawn or flip your burgers -- and that is a limiting factor. But the problem remains.

This more generally is the distributional failure of capitalism I have mentioned. The marginal value of one's productivity is too thin and compromised a reed to hang a hat on. That is why I argue we need income redistribution in the form of free health care and other social services and heavily subsidized higher education in the manner of the Scandinavia countries. I have written at length on that elsewhere here.