Nationalization of Capital

            As the previous post described, there are a few reasons that account for the current economic crisis. One reason, the growing wealth disparity in the US, is one which deserves a bit more attention than it has already gotten. While wealth disparity may not be wrong from the views of a capitalist economy, it may be the root of many problems we experience today. One thought I have found myself wondering more often is whether we really should be looking towards a private market for capital investment. While it is important that capital be allocated to those parts of the economy which will use it best, I wonder if its truly necessary that this capital be privately owned and therefore the returns to capital being privately held. It is this privatized system of capital that may be one of the largest reasons for wealth disparity.

 

            In the American system, we always want inducement for investment. It creates a reason for individuals to save and allows these savings to go towards future economic prosperity. However, if I am Warren Buffett with a large amount of capital, I really don’t just have an inducement to save for future prosperity, but a necessity to save since outright consumption of that capital would be useless. In this case, the capital owners allocate their large stores of wealth into the public markets to find ways in which to grow this capital. At the same time, capital investors require larger and larger returns for riskier investments. For science research (biotech for example), the researching venture must pay out a large return to initial capital investors eating away much of the return for the actual augmenter of that capital. At the same time many science ventures are completely unable to receive investments from these capital owners since they will never be profitable within a ten year period or so. This has caused a large distortion in the American labor market moving many individuals out of careers in the sciences even though it is science research which ultimately creates the most amount of economic prosperity for society.

 

            This large amount of capital being invested by the wealthy owners of capital may explain some of the reason why we had too much money seeking too few investments. In this case, investors become less vigilant. If I only have 100 dollars savings from which to invest I will be much more vigilant with say 40 dollars of that investment, but if I have 100,000 to invest I am probably less concerned over a 40 or even 400 dollar investment. At the same time, with only 100 dollars I am much more risk averse to investing that money in a start-up biotech firm, but the individuals with 100,000 would probably have no problem taking 100 dollars to invest in a risky venture thinking that if they lost all of that investment it still would only represent less than 1% of their funds. At the same time, the biotech start-up having a large pay-off from a successful drug can yield many times the initial investment creating even more wealth for the individual with 100,000. These examples give a very simplistic view of how wealth dispersion can cause markets to be less vigilant and for society to see a larger dispersion of wealth as the system continues.

 

            The question that I wonder about at this point is, is it really necessary that individuals own capital that they use to invest in. It is certainly a radical proposition and would sound quite socialist if not communist to suggest that capital not be completely privately owned, but it is still something to give some consideration to. Certainly there should be rewards for the creation of economic wealth in our society, but should those rewards go to someone who merely gives capital to another person to develop, or to the individual who actually develops that capital into something. In this case, I’d argue that it is the scientist or thinker who should be capturing the economic rewards of their technological gains, not the capital owner. At the same time, economic returns for an individual would seem foolish to be in the billions. Take Microsoft for example, their productivity gains for society have resulted in a capital owner (Bill Gates in this case) being able to capture the economic returns for his technology. While I do not argue that Bill Gates does not deserve this as a mastermind entrepreneur or that he has used his money in foolish or wrong manners, I just wonder really of what use over 30 billion dollars is for any individual. At the same time his advancement has probably resulted in the loss of many jobs and the replacement of labor with capital across many industries.

 

            In a radical way, I think it may be more advantageous for the government to have a very large progressive tax allowing for a majority of the capital gains of any one individual to be captured by the public, and then this capital be reallocated back to private markets through a finance industry similar to the one we have today.  In this case, the rewards for superior capital allocation would go to the traders deciding the best places for capital to be allocated. At the same time, companies would be encouraged to allow for a larger portion of their earnings going to labor. In this case, it would allow individuals to work and be paid more in line with the cost of living whereas today many individuals continue to lose their jobs and wages are not rising in terms that are commensurate with the cost of living. This may be a subsidization of labor, but at some point it becomes necessary to subsidize labor (more on this later). This system would allow for individuals to apply themselves and make large returns (in the millions not billions) for their endeavors in science and technological innovation, but would not see a large portion of returns being captured by capital owners. Is it important that a man have a huge store of wealth or that he make that wealth into economic prosperity?

 

            It is true that this system may cause society subsidizing labor which may cause more individuals to become “lazy”, but a little thought into this supports the idea that there are actually greater returns for individuals who apply themselves in the sciences. Hopefully we would begin to see individuals work more towards researching and less towards law, finance, and medicine. For the other workers in society, a little thought would give way to us realizing that it is necessary to begin subsidizing labor in our society. Currently labor in the US is being replaced by both capital (in the form of machines and technology) and overseas labor. These two factors are economically good for society, but we see lots of opposition for them because it is showing that at some point labor is not worth anything. Think towards the future where society has created advancements in AI and robotics that allow for a massive portion of the labor force to be replaced. In our capitalist system, we have this idea that all this labor would then go and re-tool themselves as scientist or something which can’t be replaced, but this theory is foolish. There are clear limitations biologically for people such that not everyone would be fit for a new job in this new society. In this case, we have massive unemployment with the returns of the robotics and AI going to the capital owners of these machines and away from labor. Essentially there would be a set of Microsoft-like firms which see huge profits and huge returns at the expense of massive amounts of labor which becomes replaced by these machines. It may seem like a far off idea, but it may even be the reason today why wealth dispersion becomes a larger problem.

 

            This system would be a radical change from what we have been bred to believe. Capitalism resonates very strongly with our internal goals of advancement, however the system itself may not be the most ideal for society today. The way in which our society has developed leads us towards a future in which we may see a whole new form of feudalism and unrest. Where wealth is consolidated amongst fewer and fewer hands and a massive portion of the population finds themselves near poverty. I certainly hope this is not the case, but it may involve changes to our perception of capitalism and the optimal form of economy.