Tuesday, September 21, 2004

Why Class Warfare Is Bad for Everyone

Let's say the economy consists of two persons: A, who makes bread, and B, who invents things. A pays B in bread whenever B invents something that A wants.

B's first invention is the toaster. A likes it a lot, so he and B agree on a price for the toaster: B gets a loaf of bread a week for as long as the toaster works. So far, so good?

Now suppose that B invents TV. A really likes that invention, so he offers to pay B five loaves of bread for every week the TV works. B makes a counter offer of 10 loaves of bread per week. A doesn't think it's "fair" to pay that much for TV, so he forces B at gunpoint to accept five loaves a week. (Get the not-so-subtle dig at the coercive power of the state?)

Now B says to himself, "If that's the way it's going to be, I'm not going to the trouble of inventing anything else as complex as TV. I'll stick to simple stuff like toasters." So B keeps on inventing things, but they're not things that A would be willing to pay a lot of bread for.

Here's the quiz: Who's worse off because the "state" (A's pistol) intervened on behalf of the laborer (A) who envied the entrepreneur (B) -- A or B? Answer: Both are worse off. A doesn't get to enjoy the things B would have invented if the state hadn't removed B's incentive to invent them. And B doesn't earn as much bread as he could have earned for inventing things that would make A happier.

So, when you think of progressive taxation and other methods of redistributing income, think of A and B and the parable of the loaves.