Skip to comments.Income from Capital
Posted on 05/04/2010 7:41:59 AM PDT by JasonC
I wish to present a proposition for reasoned debate. I think conservatives should be able to agree on it, but I fear many here do not in their bones accept it. I think it is a key to our ideological conflicts and the political and economic diseases of our time.
Proposition - the income from capital is entirely legitimate.
It flows to its recipients because they entirely deserve it for the valuable service they have provided. Any attempt to outlaw it, redistribute it, destroy it, or legislate it out of existence or all recognition, is unjust on its face. It is economically beneficial, not destructive. Protecting and encouraging income from capital leads to additional capital formation and thereby enriches everyone, without exception.
I think that all liberal, western, modern societies can be held to this proposition as a standard of justice they recognize. Many modern ideologies do not, but the societies and their legal, public structure, do.
This is evidence that many modern ideologies are themselves unjust and are set on illegal courses. Communism was the paradigm case of this, but most other ideologies that have been in competition with it for the last 150 years have contracted portions of the disease.
I have a second proposition that is in practice more contentious, and that I believe properly separates right from left.
Income received simply as a result of government largesse awarded to a category from the public treasury, not for any services actually performed, is on its face unjust, and is economically wasteful.
After hearing responses to these claims, or comments on them, I have further points that I think follow from them but are not appreciated today.
And a racist, too.
Wow. We agree on two somethings.
Several problems with your proposition:
1. Not all capital was originally acquired by providing valuable services. The families of the still wealthy aristocrats of Europe and Latin America originally acquired their capital generally by being more successful thugs than others. I'm not sure those are valuable services to society.
Simiarly, drug lords in Mexico, oligarchs in Russia (who essentially stole the country from positions of influence in the government) and organized crime guys in the US acquire capital and often pass it on to their descendants. Their services to society are mostly if not entirely negative.
Historically speaking, crony capitalism has been much more common than free market capitalism. Those who acquire capital this way aren't providing valuable services, at least that's not the main reason for their acquisition of capital.
Indeed, historically speaking the main way to acquire a lot of capital is to invade somebody and take their stuff.
2. Second, third and twelfth generation descendants of those who originally acquired the capital by providing valuable services enjoy the benefits of that capital without in most cases providing equivalent ongoing value to society. IOW, in my opinion those who earn money in legal ways have a moral right to its enjoyment while those who inherit that money from them have only a legal right, not a moral one. Or rather their right to it is not a moral one in the same way.
Thanks for posting an interesting proposition. As you can see, I don't think it holds true in all cases, but it obviously does in many.
BTW, agree completely with your #2.
I don't care how you got $1000 dollars. You could burn it or eat it or hang it on your walls. If instead you lend it or invest it and earn an income by doing so, that income is rightfully yours for the useful service you have provided by not burning, eating, or hanging it on your walls, and instead lending it out or otherwise making it productive to the uses of other men.
When a socialist or a radical decides to arraign every owner of property before the bar of his private ideological requirements, and decides that no actually he isn't thoroughly Stalinist enough, or thoroughly libertarian enough, or holy enough - to me it makes not a damn bit of difference which piety is alleged, because its is a mere allegation and impudence regardless - and that therefore he doesn't deserve his property (or the income from it), and therefore it is just peachy to rob him - that is exactly what I am denying as the characteristic political evil of our time. On all sides.
Nobody needs an OK from you to own anything. If he owns it he owns it, its his, get your grubbing nose out. And if he then makes is available to productive uses, himself or by lending it out, he furthermore deserves the earnings his capital generates. And, to put it in a walnutshell, you don't.
I was looking for the word "risk" but I didn't see it.
I guess you forgot the second part of the proposition.
You know..........the part that says income from capital is not guaranteed?
That's the bit that says when capital is provided unwisely to bad risks and the deal goes sour, you get no income and instead get to eat your losses.
Risk.........reward........two different sides of the same coin.
If we're going to preach about the horrors of redistributing income from capital then we ought to include doing the same with losses incurred by the same process, I believe. You wouldn't want to give the impression that this is some sort of hymn to the infallibility and impeccability to those who provide capital, would you?
The income from capital is legitimate. The income from mere government handout dicated by some political fiat in general is not, and is certainly nothing like as legitimate as the income from capital. Check, props 1 and 2 already agreed.
Next notice that when a man receives a check from the US treasury in payment of interest on a government bond, he is receiving a legitimate income from a capital that he provided.
Next notice that when a man receives a check from the US treasury in payment of nothing in particular, as a middle class entitlement, he isn't.
Why is it then, that everyone on the planet appears to view the former as a "waste", we "got nothing for it", while the second is just peachy, the birthright of all Americans if not all modern citizens of the entire "welfare state" west?
Not to put too fine a point on it, by why is a social security check a sacred obligation, but interest on the national debt a horrible waste of resources? The second is superior to the former in law, in policy, and we've just agreed, in moral principle. (It is also cheaper, but that is another matter).
Yes? Are we still on the same page or not?
If corporate bonds typically default 1% of their principle value every year and lose half of that amount after all recoveries, then the risk payment is 0.5% per year - that suffices to amortize the experienced losses. We say it is the true insurance cost of the risk.
In addition to return of capital, and insurance cost or risk amortization, and also the true interest on capital I am saying it legitimate, there is another kind of reward often earned by some investments of capital. That is entrepenurial profit, from choosing a form of investment superior to the average use of capital. That isn't mere interest from capital either, though it is part of the earnings from capital and I claim a legitimate part of it.
But it is not required for the income from capital to be legitimate. Even a form of providing capital to others that earns no extra enterpenurial profit, and may not even take the risks associated with that; and even providing capital in ways that do not involve any risk to speak of, still deserve what they earn.
Distinguish the propositions, just to be clear about them - not saying this is the position you are taking. Some man might say it is only legitimate to earn any interest at all if you are at risk of losing everything and sometimes do, and might even say that the amount of the interest is only legitimate if the average losses in the long run equal the interest paid - he would be allowing the legitimacy of *insurance cost* but specifically denying the legitimacy of interest, or of income from capital simple *as such*.
And the full legitimacy of income from capital simply as such, is what I am maintaining. I claim that men do not need to run elaborate risks, nor to be right about entrepenurial profit opportunities no one else sees, to deserve an income for providing their capital to others for productive uses. I claim that simply providing that capital to others is itself a worthwhile service that deserves its income, even if all the other factors are completely lacking.
At what point do you consider unjustly acquired wealth to have acquired this invulerable patina of sacred prescription? You do agree it is possible to acquire wealth in an unjust and immoral way, I assume?
I’m curious because some recent lawsuits have resulted in recoveries by descendants of Jews robbed before and during WWII. That’s a good 60 to 70 years ago.
So apparently the present owners of those properties were not covered by your right of sacred prescription.
OTOH, if you extent property rights back far enough just about all real property was stolen from somebody and the present title is therefore invalid. Heck, this would mean American blacks are owed reparations for the undeniable crimes committed against the property rights of their ancestors.
I’m not trying to be snide, although I admit it’s a challenge. :) Some line must obviously be drawn where property rights vest in the possessor. Drawn too soon it results in criminals grabbing property and then claiming they have every right to it. Drawn too late innocent heirs suffer. Where do you think the line should be drawn and why?
Drug dealers, pimps, loan sharks, thieves, embezzlers line up on the right.
Now, reason with me.
If Bernanke issues a Quintillion new dollars and hands them out to passers-by, leaving your dollars worthless, is that theft?
And yes, that means modern Stalinish witch hunts by ambulance chasing lawyers are theft. Every bit as bad as the original acts they pretend to be so hot and bothered about. No, they aren't made any more excusable by the innocent men they attack, being in different demographic groups than those they claim to speak for.
In a walnutshell, the sort of men suing for Holocaust reparations would have been the first to burn the Jews themselves for a few gold fillings, and are pond scum.
Is the existence of public debt ruinous? Is debt of any kind a mortal sin? Is it, at least, pragmatically speaking the end of the republic and the American way and all things right and true? Should all debts we defaulted on in principle to, I don't know, make capital cheaper in the fevored dreams of some populist idiot or other?
Or is the income from capital, including income from the servicing of public debts, entirely legitimate and entirely earned by the beneficiary, in a way few other public payments are or can be? Surely, for direct services, say blood sweat and tears of a Marine, that is also entirely legitimate and worth every penny. But 2/3 to 3/4 of all government spending is of quite a different moral character, and paying the debt stands morally and economically higher than all that portion. Yes?
Perhaps a better word might be "entitled"? Is this some sort of financial "entitlement" mentality? Socialism for the providers of capital?
Your first two or three paragraphs were irrelevant to the point I was making. I'm well aware that expected risk is factored into financial transactions. My point was that when the models and the algorithms fail (as they sometimes do) resulting in income imploding and losses skyrocketing that should also be a part of your "proposition" but one which I didn't see mentioned.
I consider my own profession to be a "worthwhile service" to use your phrase. However, someone could invent something tomorrow which renders my service redundant and I'd be looking for a job. That's a "risk" I have to live with but it doesn't mean I deserve something if that "risk" becomes a reality.
And what is the snide slander doing in the thread, mucking up the principle of income from capital?
I'll tell everyone. Heresies about income from capital that amount to attempting to criminalize finance and indict modern American capitalism, as reckless and unsubstantiated as anything the commies engaged in and Mises fought so hard against, are rampant among pretend conservatives today, including on this site.
Which is why it is essential to get the underlying principle rock solid first. Men who provide capital to others deserve the income they derive from it. Full stop.
Three posts! A new record! Methinks thou dost protest too much.
Next I have to address the question whether there is a right to rob everyone who provides capital to another simply because he has done so. I claim there is not, in law or in equity. And I claim that you are pretending there is and don't have a leg to stand on.
One man lends capital to second, hoping to earn a profit on his capital. The second laughs and runs away with the money. I claim the second is a thief, has robbed the first, owes him what he took plus the interest agreed and probably damages as well. You claim the first "took a risk" and oops it "didn't work out" so he's just out of luck. In other words, you are proclaiming a right to rob anyone of capital provided to anyone else. And there simply is no such right. It is merely another attempt by populist deadbeats everywhere to justify their rapacious fraud against their creditors.
I can agree it is a rule of prudence to be careful about whom one lends to, and anyone may get "took" by thieves. But that isn't a defense of thievery or a denial of the rights of men robbed in that manner. It is merely a piece of street wisdom about where not to go in order to avoid getting mugged - not the legalization of mugging.
You on the other hand appear to be stumping for the legalization of mugging. Sorry, no, can't have that.
We can talk about prudence and policy about such theft when it does occur, endlessly, no problem. But first we have to be entirely clear that it is theft. Taking your creditors capital and walking away with it is not the creditor's fault for running the risk and his just deserts for being so gullible. It is just theft, and nothing can justify it, in law or equity or economics.
By your standard, to be a tad hyperbolic, if a guy robs a bank and then dies in a shootout with the cops while in possession of the loot, his heirs and assigns have an unquestionable moral right to the possession of that loot and any income they derive from using it as capital.
You know, you come across as a bit of a nut. You make some good points, but if you were less free about calling others commies your points might get more respect.
When you start calling others names rather than showing logically why they are wrong, you weaken your own case more than that of your opponent.
Inability to repay loaned capital does not equate to theft. Can we agree on that? My business as a maker of widgets may have folded despite my best intentions. I'm now broke and you're not going to get your loan back anytime soon despite my best intentions when I took it out.
Here's my proposition.
In any aspect of the free market there are "risks". For me, it's the risk that someone might invent something which means people no longer need my service. For you, it's the risk that economic circumstances may deteriorate resulting in loans defaulting.
We have to live with that risk.
Or do the providers of capital get a pass with that?
"PRESCRIPTION. The manner of acquiring property by a long, honest, and uninterrupted possession or use during the time required by law. The possession must have been possessio longa, continua, et pacifica, nec sit ligitima interruptio, long, continued, peaceable, and without lawful interruption".
Adverse possession may legalize even clearly "taken" property, if at the time it was taken their was color of title in favor of the new possessor, and he has held it since with similar stipulations as with prescription. Again the reason being to prevent pettifogging over ancient titles in a manner that destroys all property. If you knew the first thing about actual law relating to property, as opposed to your ideology and your pretence that is rules such things, this would all be clear to you, and you'd see who is the "nut" here, for denying it.
And yes some modern witch hunts have clearly violated these settled laws. So have any number of other modern practices of robbery that proceed by the exact same mechanism - slander the just possessor, defile his name, then rob him before a poisoned jury. Which hasn't changed since the days of Nero and Caligula and is every bit as notorious and wrong when men do it today, as it was then.
Limitation of liability, corporations not being the same as their owners, the protection of bankruptcy if all assets fail, these are all defenses against other items of value being conveyed to a just creditor in payment of the deadbeat robber's just debts. But his just debts they are, and he owes them, in equity and economically. A contract may specify collateral to be pledged in place of repayment; but that is not taken it is owed, and sometimes more to spare as well, when it is not sufficient to actually defray the debt.
There is no right to rob other men of their capital. If you lose it, you still owe it back to them, and honest men move heaven and earth to repay what they owe, and so remain honest men. Deadbeats run to the mercy of the law and the protection it affords to the despondent and ruined. That is mercy rather than justice, and it is exercised at the expense of the just rights of the creditor. And endlessly indulged by populist ambulance chasers and demagoguing politicians.
The economics and the morals of the matter are clear. Right is with the creditor, and if the debtor gets off the hook by hook and by crook, well that is what crooks do for a living. But right is exactly what it isn't.
It may be a teaching of prudence that all the creditor can expect to get is his collateral; it isn't equity or economics or morals. Those all dictate performance as contracted, no less. And falling short of that performance is not the birthright of all deadbeats, and paying for all deadbeats is not the birthright of all creditors, who are not your ATM.
You keep shifting the basis of your argument. I thought you wanted to discuss the morality of wealth, capital and the income derived from it.
Now all of a sudden we’re talking about the common law and equity. I’m well aware there exists established law on these issues. But law, as no doubt you are aware, does not necessarily coincide with morality. Law should grow out of morality, but it doesn’t always happen.
Other societies have had law quite different on these issues, without necessarily infringing on the natural laws of morality and ethics.
It is the height of cultural arrogance to assume that one’s own culture has expressed for all time the natural law, such that any differing from it must be immoral.
I said it was not theft.
Do I have to cut and paste the dictionary definition of "theft" for you?
Let's say I decide to make widgets and I come to you for a loan. We both agree it's a great idea and you give me the money in the usual financial contract format. Things go well for a while and the money flows. Then somebody invents a device which renders widgets obsolete. Nobody wants them, and I go broke. Bankrupt!
You take whatever collateral was agreed upon in the terms of the loan agreement but you've still taken a haircut.
When a man becomes a partner with another and ventures his capital alongside the other man in the same business, then he is an owner, and if the business fails he is out of luck along with said partner. That is emphatically not the position of a creditor who merely lent his own property on the promise of the venturer. He is owed his property back, by every means the venturer can devise, to the detriment of said venturer's own interests.
Bankruptcy is the act of seeking the coercive protection of the state against the just right of creditors to collect what is legally owed to them. Nowhere is it written that to go broke is to declare bankruptcy, and prudent businessmen conduct themselves in a manner that can repay their creditors, if not themselves, even if their business does not turn out as they had hoped. If capital is at risk of loss in the ordinary course of operations, it ought to be equity capital and not debt owed to a creditor.
You continue to pretend that creditors losing their shirts is somehow right and proper when it simply isn't. Sometimes what they are owed and deserve, cannot be paid to them, btu not because they are not owed it or do not deserve it. They do. The power to do right by them may fail one or another party; their right does not.
As for definitions, how's this one - "theft is the illegal taking of another person's property without that person's freely-given consent. The word is also used as an informal shorthand term for some crimes against property, such as burglary, embezzlement, larceny, looting, robbery, shoplifting, fraud and sometimes criminal conversion."
When a man takes property from another on his word that he will return it, and then fails to return it so that is passes to him against the prior agreement of his counterparty, that fits the definition given. One may quibble that an evil intent is part of the crime in usual cases, and this is true in law. For the man despoiled, it makes little difference. Moreover, there is a world of difference between such things occasionally happening as violations of right beyond the power of the parties to remedy, and defending it as normal and expected and even desirable.
Which, if you look around you, other men are doing right here and right now, even if you are not. And that is tantamount to denying the proposition I thought we had agreed to (on their part not yours), and to defending theft. Why are men claiming to be conservatives defending theft? I claim, because they see precious little right to income from property in the first place, and their attitude toward all lending is, if it pays OK, if it doesn't tough toenails and serves the creditor right.
Which way, lies sorrow. There is a reason the expression "as poor as thieves" is a proverb, and there is no prosperity in wholesale defense of the destruction of creditors for the sake of endless reams of self righteous deadbeats.
Indeed, I'd go so far as to say, the political hatred of the rich and endless excuses for despoiling them, are the root of all political evil in the modern west for about the last century and a half. Would that American conservatism were free of it! That is what I am trying to get established here.
Men have the right to their property, to having it returned to them paid in full as contracted when it is borrowed from them, and to the income from their property. And everyone trying to argue by a thousand twists of sophistry that they do not, in principle, is a deadbeat conniving with thieves.
I claim this is a core principle of conservatism in the modern era (since Burke at least). If you deny it, you are going to need a more cogent argument than "hey, if someone can't help it, so what, let property be taken without compensation of any kind, or any moral qualms". I can tell you what a pack of scoundrels stand ready to drive their trucks through that statement, and what little will remain of the stated initial principle above.
They will say, "any man has a right to only that income from property that he actually gets from it after we are done robbing him, and not a penny more. Therefore all our robberies are right and proper and expedient, and violate no right of anyone to anything that matters. If some rich people are despoiled in the process, well then, that's just a bonus". That I assure you is their doctrine. Please assure me it isn't yours...
What about income derived from labor? Is that any the less “legitimate?”
The old socialist doctrine, on the other hand, taught that all income from capital was "originally" due to labor and was "exploited" away from laborers by legal systems. And this is known to be false as a matter of economics, and unworkable as well. (Even a socialist economy must impute income to capital to allocate it efficiently, etc). Social democracy believed this socialist charge, and used it to justify expropriating from "the rich" by progressive taxation, as much as they believed the whole income of capital came to in their societies, then redistributing that amount as "social spending". This was buying the central economic fallacy of socialism and merely disagreeing about what means of addressing it was most efficient.
The same denial of the right to income from property, and the pretence that all of it "should" go to workers instead, runs through all modern radical ideologies. It exists on the modern populist right as the claim that income from finance is theft (through money doctrines), among anarchists and syndicalists, among Nazis, communists, socialists, social democrats, the modern liberal left with its goal of equality of outcomes. Many of these doctrines are more human or moderate than others, but at bottom all of them deny the legitimacy of income from property.
It is in fact the characteristic mark of conservatism that is recognizes and defends that right. This includes all the stripes of economic thought on the right with the exception of the finance-hating populist position mentioned above, and also of the moderate pro capitalist liberal left, say mid century Democrats, from Truman about to a Sam Nunn, say.
I guess it's a good thing for all concerned that you don't write the bankruptcy laws. If I understand your shtick correctly, all those who seek to discharge debts by virtue of bankruptcy are therefore to be considered thieves.
Theft is the deliberate taking of that which does not belong to you.
The fact that you repeatedly and deliberately apply this definition to material loss incurred as a result of economic circumstances foreseen by neither lender nor borrower forfeits your little remaining gravitas.
Nobody has "despoiled" you, you whining, entitlement-fixated drama queen. The guy who won't pay you, in turn may have debtors who won't pay him and so on down the chain. Is there some law that says that you are exempt from all of this? Debtor-creditor law provides ways in which debts may be recovered but there is no cast iron guarantee which is what you appear to want.
Are you completely bereft of basic common sense or are you just venting because you got stiffed when the housing bubble blew up?