What I want to see presidential candidate, Gary Johnson, say to those who supported Bernie Sanders in the Democratic primary:

So Bernie Sanders and I mostly agree on what are generally called “social issues.” We both support gay marriage, drug decriminalization, the right of a woman to choose abortion, etc. Where we differ is in what is generally called “economic policy.” Bernie wants more taxes and regulations on “millionaires and billionaires.” He says that large gaps in income and wealth are “wrong, immoral, and not what America should be about.” But why? When someone makes more money than I do, and he does it honestly, without stealing and without government favoritism, I say “Good for him” or “Good for her,” not “How dare that person be rich; I’m gonna cut that bastard down to size with taxes and regulations.”

But high inequality is inherently bad economically, you say? It contributes to stagnation? There’s no good reason to think so.

Studies that supposedly show that higher inequality reduces growth generally find tentative results that are very susceptible to the authors’ biases. They generally tend to ignore the fact that there are different kinds of economic inequality that there is strong theoretical reason to believe have very different impacts on growth. For example, there is the sort of inequality that results from government favoritism, as in the Saudi royal family and the Russian “oligarchs,” and the sort of inequality that results from free and voluntary trade, as in the case of Steve Jobs and Bill Gates.

When we look at the big picture, we find that many countries that have high wealth inequality also have high GDP per capita and high economic growth. If we look at West Germany and East Germany in the 1970s and ’80s, we see two very culturally and geographically similar societies. West Germany was a relatively free market with relatively high wealth inequality, while East Germany was a society where the government tried to enforce wealth equality. West Germany was clearly better off than East Germany, economically.

When individuals and companies get to keep more of the wealth they produce, people have a bigger incentive to become successful entrepreneurs. It also gives the most innovative and efficient producers the capability to expand, grow and reinvest. This gives more people access to their products at better prices. (See the case of Standard Oil for an example of this.)

But large differences in wealth alone are proof of a “rigged” and unjust system, you say? They can’t happen honestly and without government favoritism? I strongly disagree.

There are two major facts that allow capitalist trade, wealth inequality and justice to go together. The first is the fact that the values of things are relative to each individual:

If I’m building a house and I don’t have a hammer, I have a good reason to go out and buy one. The owner of the hardware store I go to has ten hammers and is not building any houses. I pick out one hammer and buy it for $10. I make the trade of $10 for the hammer, because I value that hammer more than other things I could buy with the $10 at that time. The hardware store owner makes the trade because he values the things he could buy with the $10, more than that hammer. I value the hammer highly because I can’t finish my house without it. The store owner places a low value on the hammer because he’s not building a house, and he has nine more hammers. By trading, both I and the store owner gained value.

Because the values of goods and services are not intrinsic properties of the things, but relative to each individual, trades can benefit both sides. [Note however that the fact that something is relative does not make it subjective. See: Values Are Relational, But Not Subjective.]

The second fact that allows inequality to be consistent with justice is that the valuable goods and services around us, which constitute wealth, are not static resources. They are created from raw materials by human effort. Differences in income can result from differences in how much wealth individuals produce. Different kinds of work can produce tremendously different amounts of wealth. (Generally, mental work produces much more wealth than physical work.) Under capitalism, those who produce more wealth for others get more in return.

Wealth is not the same thing as money, so everyone can be wealthier and better off, even if the money supply is held constant. People can earn less money than they did before, yet have more purchasing power, because prices have fallen more than their monetary incomes. [See: Wealth is Not Money — Monetary Wages vs. Real Wages.]

In a free market, self-interested people will only make trades that they judge will have net benefit for themselves. If both parties to a trade are self-interested, and the trade is voluntary, they must make a win-win trade. If one of the parties is mistaken in thinking that they will win from the trade, then they bear the consequences of the mistake and this will give them incentive to learn and do better next time.

If someone is really unfortunate and finds himself in dire straights, self-interested individuals will likely judge that he is deserving of help. [See: Other People as Egoistic Values Versus Other People as Objects of Self-Sacrifice in Ayn Rand’s Philosophy.] Help from friends, family, and benevolent strangers can distinguish between those who are good but just unfortunate, and those who are bad, irresponsible, or malicious. They will tend to judge who is deserving of help, and who is not. Government welfare doesn’t do that: it takes money by force from those who earned it and doles it out indiscriminately to those who didn’t, regardless of their moral character.

I agree with Bernie Sanders’ statements that cronyism is a serious problem. Businesses should not get special favors and money they didn’t earn. But where Bernie seems to think the solution is more government regulation and control, I think it is a symptom of too much government regulation and control. Cronyism and lobbying tends to show up in the most regulated industries, not the least regulated. Finance is heavily regulated, and the government protects and bails out big banks. Pharmaceuticals are controlled by the FDA, and the FDA often keeps smaller competitors out of the market. Cronyism was virtually non-existent in the less-regulated tech sector, until the government pursued the anti-trust case against Microsoft. Now, Microsoft has a division in Washington D.C. for lobbying purposes. (Apple and Google now both lobby, too.)

To understand why government regulation inevitably breeds cronyism, imagine you’re a regulator. One of the qualifications for your job is a strong knowledge of the industry you regulate. So you probably worked in that industry for a number of years, and have some friends and connections in the industry. Now when one of your friends comes to you and says that this regulation, or that “possibly unethical” company is really hurting his company, you are put in a position of subtly favoring his company or harming your relationship with your friend.

But now, let’s say the government puts in strong controls against conflicts of interest, or you are someone with the iron will to resist temptations like the above. There is still a very strong pull to cronyism for you. Why? Well, as a regulator, you believe that your control of your industry is critical to its safe, responsible, ethical and smooth operation. In short, your control is responsible for making sure your industry operates well. If you believe this, then you believe that anything that threatens your control of the industry threatens other people’s well-being and your own job security.

When new companies come into your industry with new people, new ideas, and new ways of doing things, your control of your industry is threatened. You haven’t developed the relationships with the company executives to know whether they will “play ball” with you. You haven’t developed standards to evaluate the new processes. You think that the disruption in your industry could severely damage the “public interest,” (whatever that is.) So you are hostile to revolutionary technologies and radical innovations. You regulate strongly in favor of large, established companies that have well-known people and well-known ways of doing things.

This is why government regulation inevitably leads to cronyism. The solution is to free up markets. When the government is constitutionally restricted to merely being an arbiter that protects people’s rights against physical force, theft and fraud, it can be impartial. If the government is not empowered by the people to manage and maintain industries, government officials have no capacity to favor one company over another. Any attempts at cronyism would be obvious–as well as unconstitutional–and anyone involved could easily be caught and impeached for corruption.

Markets can and do function very well without intrusive government regulation. The market for electronics technology is an excellent example. “Disruptive” innovations bring huge improvements for consumers and falling prices, not chaos and destruction.

I’m running for President of the United States, and no president can wave a magic wand and make his or her vision for the country a reality. But my economic policy pushes in the direction of freer, more innovative markets and less cronyism. If you want honesty and justice in our governmental system–if you oppose cronyism and corruption–if you want long-term economic prosperity, you want more people in government with economic policies like mine.

For everyone who is concerned with economic justice and wealth inequality, I recommend reading Equal is Unfair: America’s Misguided Fight Against Income Inequality by Yaron Brook and Don Watkins.

—–

Related Posts:

Bernie Sanders and the Injustice of “Democratic Socialism”

Why Moral Theory is Needed in the Fight for Liberty, Not Just Economics and the Non-Aggression Principle

Why Healthcare in the US is So Expensive, and What Can Be Done About It

19th-Century Capitalism Didn’t Create Poverty, But Reduced It

Socialism and Welfare vs. Justice: Why Inalienable Private Property Rights are Required for Justice

Book Review — RooseveltCare: How Social Security is Sabotaging the Land of Self-Reliance