"Every dollar collected through a capital gains tax is a dollar stolen twice"

"Capital gains tax represents one of the most egregious examples of double taxation in the federal code, yet politicians treat it as if they're taxing 'unearned' income for the first time. 

"You earn $100,000, pay income tax on it, and save $70,000 after the government takes their cut. You invest that already-taxed money in shares, real estate, or bonds. Ten years later, you sell for $140,000. The government swoops in again, demanding capital gains tax on your $70,000 profit. They're taxing the same economic activity twice: your initial productive work that generated the savings, then the delayed consumption that made investment possible. 

"Capital gains represent nothing more than the time value of money plus compensation for risk. When you save instead of consume immediately, you defer gratification to provide capital for productive investment. That $70,000 you invested didn't sit idle; it funded business expansion, job creation, and economic growth. The return you earned reflects both the productive use of that capital and inflation's erosion of purchasing power over time. 

"The double taxation becomes even more perverse when you consider inflation. If your $70,000 investment becomes $140,000 over ten years, but inflation averaged 3% annually, your real purchasing power increased by roughly $18,000, not $70,000. Yet the IRD taxes the entire nominal gain, including the portion that merely kept pace with their own monetary debasement. 

"Every dollar collected through a capital gains tax is a dollar stolen twice; once from your labour, again from your thrift."

~ Handre [translated from American]

"The Greens are proposing one of the most aggressive tax regimes of its kind anywhere in the developed world..."

 

"The Greens are proposing one of the most aggressive tax regimes of its kind anywhere in the developed world, resulting in a broad-based raid on Kiwis who’ve worked hard, saved, and built something over a lifetime. 

"The idea this only hits the wealthy simply doesn't stack up. One in five Kiwi homes is held in a trust, and the Greens would tax those assets from the first dollar. In Auckland, that means an annual bill of over $18,000 on a mortgage-free family home, or $3,600 for first home buyers with a twenty-percent deposit.

"And it doesn't stop there. A 33 percent death tax would force many families to sell farms, homes, or businesses just to pay the bill. Inheriting the average dairy farm would trigger a $1.2 million tax bill. There is nothing fair about taxing grief, or taxing the same income again when it's earned, saved, and finally passed on.

"Most countries that have tried wealth taxes have scrapped them because they drive investment and talent offshore. Death taxes are even worse, New Zealand tried one and abandoned it in 1993 because it crushed farming families and raised almost nothing.

“This package is light on evidence, heavy on populism, and green with envy.”

~ Austin Ellingham-Banks on the Taxpayer Union's 'NEW REPORT: Green With Envy: Wealth, Death, And Trust Taxes Examined'

"One 'solution' to inequality ... is the wealth tax. ... This taxing away of capital means less means of production and thus less production and higher prices. At the same time, it means less demand for labour and thus lower wages. [The] programme is a call for mass impoverishment....

"Taxing wealth is not merely a levy on individuals but a direct seizure of the capital required for production, which ultimately harms everyone's standard of living. ...

"As [Ludwig Von] Mises observed* ...., almost all of the technological advances of the last centuries are available to and can be fully understood by engineers in even the most impoverished corners of the world. What stops the implementation of those advances is not any lack of technological knowledge but a lack of capital. Thus, a farmer in India who has seen a tractor on television can easily understand the value of using one. What stops him from using one is certainly not any lack of technological knowledge. It is certainly not that he does not know how to operate a tractor or could not easily be taught how to do so. What stops him is that he cannot afford a tractor. He does not possess the capital necessary to buy a tractor and cannot find a lender to provide it. This is a lack of capital that probably could not be made good by any rise in the local capital/income ratio. It reflects generations of insufficient local capital accumulation."

~ George Reisman from his comment on 'The Problem with the Wealth Tax' and his 'Piketty’s Capital: Wrong Theory/Destructive Program' [emphases mine]

"New Zealand’s productivity challenges are strongly linked to low capital intensity. ... New Zealand’s slowing labour productivity growth is likely to reflect both slowing growth in innovation and declines in the capital to labour ratio. ... New Zealand’s capital intensity [already] lags other countries...."

~ Treasury from their 2024 report 'Causes of New Zealand’s low capital intensity'

* Ludwig Von Mises, in his chapter 'Capital Supply & American Prosperity'--in which he observes that "the average standard of living is in [America] is higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries."

The fuel crisis delivers a chance for genuine political leadership

"New Zealand does not possess the people, the capital, or the institutional settings to maintain our first world status. We are moving from the bottom of the OECD to the top of the developing world.

"[It's a] problem [when] ... the price of construction is the highest in the OECD, more than double the average, and ... the cost of capital formation '…which covers machinery, equipment and construction -- is 70% above average in New Zealand and also the highest in the OECD.'

"Meanwhile, global rating agency Fitch confirmed [this] gloomy assessment by downgrading the outlook for New Zealand from dismal to hopeless. I am paraphrasing. They noted that our promised return to fiscal surplus is perpetually delayed due to weak economic growth and expenditure proving more persistent than anticipated. ...

"[T]his [fuel] crisis [however] represents a greater opportunity [for real leadership]. It is chance for the Prime Minister to explain that we cannot borrow our way out of every economic shock. That the path back to fiscal solvency and economic vitality lies not in leveraging the sliver of headroom on the Crown’s balance sheet to avoid addressing our structural deficiencies but in aggressively dealing with those deficiencies.

"I do not mean to diminish the real progress his administration has been achieved but the underlying structural issues of over-regulation and lax fiscal discipline mean all we are doing is slowing the rate of decline.

"Leadership is about telling the electorate what they do not want to hear but need to understand; and that extends well beyond the prospect of a temporary fuel shortage."

~ Damien Grant from his column 'Is this moment that the PM forces me to eat my words? I hope so'

The Return of Chloe's Wealth Tax

Watch any rant by Chloe Swarbrick and, after the obligatory nods to te reo, to Palestine, and to passing laws to change the weather, she'll tell you that it's time for "the wealthy" to fund everything every government could dream of. 

It's really the only substantive policy she can articulate. Yet she remains blithely unaware that the fortunes she want to sack are not gold bars under the mattress but ownership stakes in operating companies, real estate, and other productive assets, so her Wealth Tax would function as a direct penalty on those investments. That penalty doesn’t remain confined to the wealthy. Capital formation is what drives productivity growth and wage gains, and policies that discourage it ultimately leave everyone worse off.

As Adam Michel explains in this Guest Post, the chronic government spending growth she advocates cannot be paid for by ever more aggressive taxes on a narrow subset of high-income taxpayers.  Not even in a US more stocked with billionaires than she'll ever see here ...

The Return of the Wealth Tax, Evidence Against Them Is Stronger Than Ever

by Adam Michel

Wealth taxes are back in the policy conversation— a good opportunity to review how wealth taxes work and why they have been called “one of the most harmful taxes ever created.”

Wealth taxes are unique in that they are not levied on an annual flow of income or consumption (like a sales tax). Instead, wealth taxes apply to a stock of assets and are usually intended to be primarily redistributive, aiming to reverse a perceived inequality in the distribution of resources.

Wealth taxes promise redistribution but more often deliver high economic costs, administrative complexity, and disappointing revenue. California’s proposal  to impose a broad-based wealth tax on the state’s billionaires illustrates how these taxes distort investment decisions, magnify fiscal volatility, and tend to evolve from one-time levies into permanent features of strained budgets.

Wealth Taxes In the Real World

Wealth taxes impose an additional layer of tax on the income generated by the underlying asset. Most wealth consists of productive assets deployed in the economy, such as active businesses and other physical investments. The annual income streams generated by the underlying assets—capital gains, dividends, and interest—are taxed through the normal income tax system.

The existing tax system already charges the wealthiest Americans high tax rates. A Biden administration Treasury study found that the wealthiest 92 Americans faced total state, local, federal, and international income tax rates of 59 percent. Recent research by four prominent liberal economists concludes that US billionaires pay higher tax rates than their counterparts in the Netherlands, Sweden, Norway, and France, and, contrary to the headline claim, the wealthiest taxpayers also pay the highest tax rates among all Americans.

Because wealth taxes are assessed on a stock instead of an annual income flow, expressing the tax rate as an equivalent income tax rate is more informative. Unless the taxpayer is expected to slowly sell off their underlying assets, the tax will be paid from annual income. Table 1 shows the equivalent income tax rate on underlying assets with different rates of return at different wealth tax rates. At the California top wealth tax rate of 5 percent, any asset earning less than a 5 percent annual pre-tax return would face income tax rates above 100 percent before paying other taxes. Bernie Sanders’ 2020 campaign proposal included a top wealth tax rate of 8 percent.

Net wealth taxes have been tested in other countries and repealed due to high economic costs and administrative burdens. Peaking at 12 in the 1990s, only four Organisation for Economic Co-operation and Development (OECD) countries still impose broad-based net wealth taxes today: Colombia, Norway, Spain, and Switzerland. The figure below shows the trend of wealth taxes over time.

Economic and Administrative Costs

Wealth taxes can impose confiscatory effective tax rates with predictable economic consequences. By directly reducing the after-tax return to saving and investment, they weaken incentives to build businesses, expand productive capacity, and take entrepreneurial risks. Because most large fortunes are not gold bars under the mattress but ownership stakes in operating companies, real estate, and other productive assets, a wealth tax functions as a direct penalty on those investments. That penalty doesn’t remain confined to the wealthy. Capital formation is what drives productivity growth and wage gains, and policies that discourage it ultimately leave everyone worse off.

Wealth taxes also distort capital allocation. Investors have a strong incentive to shift portfolios toward assets that are harder to value, easier to shelter, or more mobile across borders, rather than toward their most productive use. This encourages tax avoidance rather than genuine economic activity. It can mean less investment in long-term projects, more leverage, and greater reliance on complex financial arrangements to reduce reported net worth.

Wealth taxes are also administratively complex. Valuing a broad range of assets every year is extraordinarily difficult. Unlike easy-to-value publicly traded stocks, most wealth is tied up in closely held businesses, partnerships, real estate, artwork, and other illiquid or unique assets. Annual valuation invites avoidance and disputes, which raises compliance costs for both governments and taxpayers. It took 12 years for the IRS and the Michael Jackson estate to reach a court-mediated agreement on the value of its taxable assets. Going through such a process every year for all taxpayers with assets above or near the tax threshold is administratively impracticable.

Because of persistent administrative difficulties and taxpayers’ behavioural responses, wealth taxes raise comparatively little revenue. Countries that experiment with wealth taxes repeatedly find that taxpayers adjust their behaviour or move in large numbers, undermining optimistic revenue forecasts. Before France repealed its net wealth tax in 2018, the government estimated that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years.” 

Spain experienced a similar behavioural response following the 2023 “solidarity tax,” which raised just 40 percent of the projected revenue. Cato’s Chris Edwards summarises that “European wealth taxes typically raised only about 0.2 percent of GDP in revenues. Given the little revenue raised, it is not surprising that they had ‘little effect on wealth distribution,’ as one study noted.”

California’s Proposal Is a Warning for the Country

California’s proposed 5 percent wealth tax is especially notable because it would layer on top of the most progressive tax system in the OECD. The state already relies on taxpayers making over half a million dollars a year (the highest income 2.5 percent) to pay 49 percent of income tax revenue. They do this by combining high marginal income tax rates and heavy reliance on capital gains taxation, which makes revenues volatile and highly sensitive to the fortunes and domiciling decisions of a small number of taxpayers.

The initiative’s own findings make clear that this will not be a one-time tax. The ballot text explains that the wealth tax “would only modestly slow” the growth of billionaires’ fortunes in California. That admission undermines the premise that the tax solves any underlying fiscal or wealth distribution problem. If a tax leaves wealth largely intact, political pressure to repeat, expand, or permanently extend it is inevitable. This is what happened in Spain, when its “exceptional and temporary” wealth tax became permanent. California’s proposal should be understood in this light, not as a one-off correction, but as a test case for permanent wealth confiscation.

The lesson extends beyond California. Chronic spending growth cannot be solved by ever more aggressive taxes on a narrow subset of high-income taxpayers. Wealth taxes are not a solution to budgetary or economic gaps; they are a symptom of a broken fiscal system grasping for short-term revenue while postponing the difficult but necessary work of restraining spending growth. 

* * * * 

Adam Michel is director of tax policy studies at the Cato Institute, where he focuses on analysing the economic and budgetary effects of taxation in the United States.
    He is widely published and quoted in the Wall Street Journal, the New York Times, the Washington Post, and elsewhere. He has also appeared on Fox News, CNN, and CNBC to discuss tax policy and its economic effects. In addition to numerous book chapters, his scholarly work has been published in the Journal of Public Budgeting and Finance and Tax Notes.
    His post first appeared at the Cato at Liberty blog.

John Key is still a fucking moron

Cartoon by Richard McGrail from The Free Radical

I've been reminded this morning about what a clueless fucking moron we had as a Prime Minister for two-and-a-half terms. Back a few years ago when we were "rock stars." Remember that?

Anyway, here's John Fucking Key last month giving his considered analysis of what's wrong with New Zealand's economy now:

"The guts of what’s wrong is that the housing market is going down, not up,' he said.
    “When house prices go up, everybody tells the pollsters, ‘Oh that’s terrible, my son or daughter can’t buy a house. I feel really bad.’ The technical term for that is ‘bullshit’.
    “What they really do, is they say to their wife – or the wife says to her husband – ‘God, we paid $1 million for this house and it’s worth $1.7 million now.’ Quietly they go, ‘Oh, we feel rich’.
    “And then they go and borrow a bit from the ANZ and they go on holiday and they upgrade their kitchen, they feel good about life. So when you have a negative wealth effect, they feel bad.”

And I bet the roomful of home owners and property "investors" and National Party political advisors — no to mention all his former colleagues on the ANZ board —had a smug little chuckle into their at their man's shrewd witticisms. It's hard to know where to begin at his economic acumen however, 'cos apparently it's never begun.

Let's make it simple, since that's the best description of Key's grasp of things. Trump's been called a fucking moron for not understanding the economic destruction of tariffs. And rightly so. But Trump doesn't pretend to be in any way clued up about economics. Key does. And yet the fucking moron apparently knows nothing about a simple enough concept: capital consumption. It's a process of converting someone else’s wealth into your income.

And this is his one simple trick to fix the fucking economy.

You wouldn't believe it.

Here's what the fucking moron either doesn't know, or doesn't care to know.

That fucking "wealth effect" the moron talks about is paid for by one thing: it's paid for by eating the fucking seed corn. The seed corn is the part of your harvest you put aside to plant again next year. Without that seed corn, you have nothing to plant, and nothing further to harvest. What Key wants to "fix" the economy, the simple guts of it, is for is to eat the fucking seed corn. That's his recipe for success. 

Any fucking moron could get a "wealth effect" (and a poll bump) by consuming the seed corn.  But ultimately the farmer will pay a price; he'll no longer have anything to farm.

Fellow on the right enjoys Key's "wealth effect." Not so much farmers on the left.

But the difference in what Key proposes is even worse: he wants home owners to consumer other people's seed corn. Hayek used to call this "forced saving." Savers have to save more, or else, because the "seed corn" being consumed is theirs. 

Here's the thing: When mum and dad borrow a bit from the ANZ and go on holiday and upgrade their kitchen and put in another fucking ensuite, that's paid for by what was, or would have been, accumulated capital. The accumulated capital of those other savers. It's called "forced saving" because what pays for John Key's fucking borrowing is new counterfeit capital: i.e., new money that's been borrowed into existence to pay for the holiday, the new kitchen, the fucking ensuite. That counterfeit capital means savers are forced to save more just to keep up.

That's because this new borrowing is new money "injected into the economic system at a specific point" that advantages those consuming the counterfeit capital while disadvantaging those trying to save.

If the money or credit were evenly distributed among all economic agents, no “expansionary” effect would appear, except the decrease in the purchasing power of the monetary unit in proportion to the rise in the quantity of money. 

However if the new money enters the market at certain specific points, as always occurs, then in reality a relatively small number of economic agents initially receive the new loans. Thus these economic agents temporarily enjoy greater purchasing power, given that they possess a larger number of monetary units with which to buy goods and services at market prices that still have not felt the full impact of the inflation and therefore have not yet risen.

The purchasing power of these home-owners is paid for by the losses of savers. 

Hence the process gives rise to a redistribution of income in favour of those who first receive the new injections or doses of monetary units, to the detriment of the rest of society, who find that with the same monetary income, the prices of goods and services begin to go up. “Forced saving” affects this second group of economic agents (the majority), since their monetary income grows at a slower rate than prices, and they are therefore obliged to reduce their consumption, other things being equal.

In a nutshell Key's quick-fix for poll-driven success, and economic growth, is to grant home-owners purchasing power by quietly, secretly and unobserved, stealing from savers. ("By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." ~ John Maynard Keynes)

Recall that he said something similar when the problem erupted of paying to repair leaky homes. He said quite bluntly, not to worry,  inflation would fix that. Remember that when housing unaffordability was bad before he took office, and he promised to fix it. He didn't, of course. Instead, he did everything he could to put rocket fucking fuel under house prices. It would, he claimed, 'fix" the problem of paying for the problem. 

This prick has form.

He's either a calculating Machiavellian.

Or he's pig ignorant.

My money's on the latter.

RELATED:

• Key on housing affordability and elsewhere - NOT PC, 2007
• Counterfeit capital - NOT PC, 2008
• Mr Key’s dirty little secret - NOT PC, 2009
• We’re rock stars! - NOT PC, 2014
• How Do People Destroy Capital? - Keith Weiner, SNBCHF, 2015
• Housing bubble is consuming our capital - NOT PC, 2015
• The Reserve Bank’s war on capital - NOT PC, 2016
• Key admits to ‘crisis theatre’ and talks up house-price inflation - NOT PC, 2016
• John Key has had an unbelievable solution for affordable housing - NOT PC, 2017

The crucial - and unappreciated - function of wealth in an industrial economy

 

“A widespread ignorance of a crucial economic issue is apparent in most discussions of today’s problems: it is ignorance on the part of the public, evasion on the part of most economists, and crude demagoguery on the part of certain politicians. The issue is the function of wealth in an industrial economy. 

"Most people seem to believe that wealth is primarily an object of consumption—that the rich spend all or most of their money on personal luxury. Even if this were true, it would be their inalienable right—but it does not happen to be true. The percentage of income which men spend on consumption stands in inverse ratio to the amount of their wealth. The percentage which the rich spend on personal consumption is so small that it is of no significance to a country’s economy. The money of the rich is invested in production; it is an indispensable part of the stock seed that makes production possible. ...

"In view of what they hear from the experts, the people cannot be blamed for their ignorance and their helpless confusion. If an average housewife struggles with her incomprehensibly shrinking budget and sees a tycoon in a resplendent limousine, she might well think that just one of his diamond cuff links would solve all her problems. She has no way of knowing that if all the personal luxuries of all the tycoons were expropriated, it would not feed her family — and millions of other, similar families — for one week; and that the entire country would starve on the first morning of the week to follow . . . . How would she know it, if all the voices she hears are telling her that we must soak the rich?

“No one tells her that higher taxes imposed on the rich (and the semi-rich) will not come out of their consumption expenditures, but out of their investment capital (i.e., their savings); that such taxes will mean less investment, i.e., less production, fewer jobs, higher prices for scarcer goods; and that by the time the rich have to lower their standard of living, hers will be gone, along with her savings and her husband’s job — and no power in the world (no economic power) will be able to revive the dead industries (there will be no such power left).”

~ Ayn Rand, from her 1974 article 'The Inverted Moral Priorities,' collected in The Voice of Reason 

Less with more

 The OECD measured New Zealand's recent productivity growth against the OECD average.

We're not even average.

... aaaand here, by comparison, is New Zealand's growth in employment:

That's the measure of how many more folk it took to do that little bit more.

So we've had decent growth.

Just not in productivity.

Is this a measure of how much we're restrained here by regulation and the incessant whine of the grey ones in our ear?

A lack of capital?

Or is it something wrong with our nous?

What do you think ... ?

[Hat tip Eric Crampton]

* Yep, construction is an outlier. I'm not sure how productivity is measured here, but I imagine that's a reflection of how many more townhouses and apartments have been built in recent years, as opposed to stand-alone dwellings.

'China's Trade Surpluses are Not a Source of Strength'

“'China believes it has a mandate to rule the world,' and that it is using trade balances to accomplish this. ... But, ultimately, Chinese trade surpluses [don’t] help ... '[Right up to] 1839 ... trade favoured the Chinese.' Little good it did them: China [eventually] experienced military humiliation, political and social disintegration, and an eventual descent into communism. ...
   "China’s 'strategy of generating massive trade surpluses [would] not have worked [when money was] backed by bullion ... the trade surpluses incurred by exporting more than its imports [would] have caused China’s currency to appreciate ... [making] Chinese manufactures more expensive and less attractive for outsourcing…'
   "'That never happened' ... because [without a gold standard] China [could devalue] its currency, harming its own people...' .... China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. 

   "That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history [in both China and the US] .... [A] US deficit on the trade account must be offset with a surplus on the capital account ... [so] to maintain its export advantage was devious: it invested in the United States, 'buying US assets with US dollars ...The CCP today sits atop a $3 trillion hoard of assets, many of them American.' 

    "And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.
   "China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But ... it has tried this before [and] that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party....

   "As Adam Smith observed in 'The Wealth of Nations,' mercantilism can enrich a few individuals but not entire countries – it detracts from, rather than adding to, the general welfare."

~ Composite quote from John Phelan, Kevin Roberts and Richard Fulmer from the post 'China's Trade Surpluses are Not a Source of Strength'

"In the Minister’s words, 'Going For Growth outlines the approach the Government is taking to turbo-charge our economy.' Yeah right.

 

"The Minister [of Finance] also used her speech to announce the launch of a Going for Growth website complete with a 44 page document (15 of which are photos and covers, and another 9 are lists of things (being) done) titled 'Going for Growth: Unlocking New Zealand’s Potential' – in the Minister’s words, 'Going For Growth outlines the approach the Government is taking to turbo-charge our economy.'
    
"Yeah right.

"Now, to be clear, there are some (mostly small) useful things the government has done in the area of economic policy. There are also some (fewer in number) overtly backward steps ... and some important areas where the government has so far failed to act at all .... There is [however] just nothing in what the Minister said, or in what the government has done (or has concretely indicated it will shortly do), that comes even close to being likely to 'turbo charge' the economy.

"It isn’t even clear that either the Minister or her Treasury advisers has anything close to a compelling model and narrative about how we got into the longer-term productivity mess, let alone how we might successfully get out of it (if any politicians really cared enough to want to do so).

"We are told ... that 'Leaders around the world are being compelled to act more boldly than they have for several decades.' But there isn’t much sign of it ..."

"We are told that 'New Zealand’s low capital intensity is a key driver ... of our poor productivity performance.' No one disputes that business investment as a share of GDP has been low in New Zealand for a long time ... So the capital stock per worker is, in some mechanical sense, quite low. ...

"But ... the mentality is all wrong. Low levels of capital intensity are at best seen as symptom not as any sort of cause or 'driver' of productivity growth failures economywide. New Zealand has never had a particularly problem attracting finance ... And we should assume that, on average, firms and potential investors are responding rationally, and even optimally on average, to the opportunities they face.

"So the issue is not that firms are failing to use enough capital in their production processes – they are most likely doing what is best for them – but that, having regard to all the other constraints (taxes, FDI rules, RMA regimes, other bits of regulation, real exchange rates) there just aren’t that many attractive projects here in New Zealand. A highly successful New Zealand economy would be likely to be more capital intensive (and generate higher wages), but focusing on the capital intensity or otherwise is the wrong lens with which to look at the problem.

"Firms and investors respond to opportunities, and sometimes (often) governments get in the road and make investment ... unattractive."

~ Michael Reddell from his post 'Willis and Rennie speaking'

Socialists once argued that socialism was superior to capitalism because it would deliver a higher standard of living and more consumer goods. When it became abundantly clear that this was bollocks, the socialists shifted their arguments and began to claim that socialism—while perhaps economically inferior—was superior morally and philosophically. And thus was born the post-modern denial of that outrageous success in human progress, and environmentalists' objection to it. 

Stephen Hicks writes about this in his 2004 book Explaining Postmodernism. Ludwig Von Mises was on to this a half-century before when he penned his short book The Anti-Capitalist Mentality, explaining why the intellectuals of his day so loathed the free market.... 

The Noneconomic Objections to Capitalism

by Ludwig Von Mises

1. The Argument of Happiness

Critics level two charges against capitalism: First, they say, that the possession of a motor car, a television set, and a refrigerator does not make a man happy. Secondly, they complain that there are still people who own none of these gadgets. Both propositions are correct, but neither casts blame upon the capitalistic system of social cooperation.

People do not toil and trouble in order to attain perfect happiness, but in order to remove as much as possible some felt uneasiness and thus to become happier than they were before. A man who buys a television set thereby gives evidence to the effect that he thinks that the possession of this contrivance will increase his well-being and make him more content than he was without it. If it were otherwise, he would not have bought it. The task of the doctor is not to make the patient happy, but to remove his pain and to put him in better shape for the pursuit of the main concern of every living being, the fight against all factors pernicious to his life and ease.

It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would appear unbearable. To them the impulse toward ceaselessly aiming at the improvement of the external conditions of existence is inwrought. ... One of the most remarkable achievements of capitalism is the drop in infant mortality. Who wants to deny that this phenomenon has at least removed one of the causes of many people’s unhappiness?

No less absurd is the second reproach thrown upon capitalism — namely, that technological and therapeutical innovations do not benefit all people. Changes in human conditions are brought about by the pioneering of the cleverest and most energetic men. They take the lead and the rest of mankind follows them little by little. The innovation is first a luxury of only a few people, until by degrees it comes into the reach of the many. 

It is not a sensible objection to the use of shoes or of forks that they spread only slowly and that even today millions do without them. The dainty ladies and gentlemen who first began to use soap were the harbingers of the big-scale production of soap for the common man. If those who have today the means to buy a television set were to abstain from the purchase because some people cannot afford it, they would not further, but hinder, the popularisation of this contrivance. 

The inherent tendency of capitalism is towards shortening the interval between the appearance of a new improvement and the moment its use becomes general.

2. The Argument of Materialism

Again there are grumblers who blame capitalism for what they call its mean materialism. They cannot help admitting that capitalism has the tendency to improve the material conditions of mankind. But, they say, it has diverted men from the higher and nobler pursuits. It feeds the bodies, but it starves the souls and the minds. It has brought about a decay of the arts. Gone are the days of the great poets, painters, sculptors and architects. Our age produces merely trash. ...

'Fallingwater,' Frank Lloyd Wright, 1936

Among those who make pretense to the appellation of educated men there is much hypocrisy. They put on an air of connoisseurship and feign enthusiasm for the art of the past and artists passed away long ago. They show no similar sympathy for the contemporary artist who still fights for recognition. Dissembled adoration for the Old Masters is with them a means to disparage and ridicule the new ones who deviate from traditional canons and create their own.

John Ruskin will be remembered — together with Carlyle, the Webbs, Bernard Shaw and some others — as one of the gravediggers of British freedom, civilisation, and prosperity. A wretched character in his private no less than in his public life, he glorified war and bloodshed and fanatically slandered the teachings of political economy which he did not understand. 

He was a bigoted detractor of the market economy and a romantic eulogist of the guilds. He paid homage to the arts of earlier centuries. But when he faced the work of a great living artist, Whistler, he dispraised it in such foul and objurgatory language that he was sued for libel and found guilty by the jury. It was the writings of Ruskin that popularised the prejudice that capitalism, apart from being a bad economic system, has substituted ugliness for beauty, pettiness for grandeur, trash for art.

'Nocturne in Black and Gold: TheFalling
Rocket,' James McNeil Whistler, 1875

As people widely disagree in the appreciation of artistic achievements, it is not possible to explode the talk about the artistic inferiority of the age of capitalism in the same apodictic way in which one may refute errors in logical reasoning or in the establishment of facts of experience. Yet no sane man would be insolent enough as to belittle the grandeur of the artistic exploits of the age of capitalism.

The preeminent art of this age of “mean materialism and money-making” was music. Wagner and Verdi, Berlioz and Bizet, Brahms and Bruckner, Hugo Wolf and Mahler, Puccini and Richard Strauss, what an illustrious cavalcade! What an era in which such masters as Schumann and Donizetti were overshadowed by still superior genius!

Then there were the great novels of Balzac, Flaubert, Maupassant, Jens Jacobsen, Proust, and the poems of Victor Hugo, Walt Whitman, Rilke, Yeats. How poor our lives would be if we had to miss the work of these giants and of many other no less sublime authors.

Let us not forget the French painters and sculptors who taught us new ways of looking at the world and enjoying light and color.

Nobody ever contested that this age has encouraged all branches of scientific activities. But, say the grumblers, this was mainly the work of specialists while “synthesis” was lacking. One can hardly misconstrue in a more absurd way the teachings of modern mathematics, physics, and biology. And what about the books of philosophers like Croce, Bergson, Husserl, and Whitehead?

Each epoch has its own character in its artistic exploits. Imitation of masterworks of the past is not art; it is routine. What gives value to a work is those features in which it differs from other works. This is what is called the style of a period.

In one respect the eulogists of the past seem to be justified. The last generations did not bequeath to the future such monuments as the pyramids, the Greek temples, the Gothic cathedrals and the churches and palaces of the Renaissance and the Baroque. In the last hundred years many churches and even cathedrals were built and many more government palaces, schools and libraries. But they do not show any original conception; they reflect old styles or hybridise diverse old styles. Only in apartment houses, office buildings, and private homes have we seen something develop that may be qualified as an architectural style of our age. Although it would be mere pedantry not to appreciate the peculiar grandeur of such sights as the New York skyline, it can be admitted that modern architecture has not attained the distinction of that of past centuries.

The reasons are various. As far as religious buildings are concerned, the accentuated conservatism of the churches shuns any innovation. With the passing of dynasties and aristocracies, the impulse to construct new palaces disappeared. The wealth of entrepreneurs and capitalists is, whatever the anticapitalistic demagogues may fable, so much inferior to that of kings and princes that they cannot indulge in such luxurious construction. No one is today rich enough to plan such palaces as that of Versailles or the Escorial. The orders for the construction of government buildings do no longer emanate from despots who were free, in defiance of public opinion, to choose a master whom they themselves held in esteem and to sponsor a project that scandalised the dull majority. Committees and councils are not likely to adopt the ideas of bold pioneers. They prefer to range themselves on the safe side.

Side table by Eileen Gray, chair by Marcel Breuer

There has never been an era in which the many were prepared to do justice to contemporary art. Reverence to the great authors and artists has always been limited to small groups. What characterises capitalism is not the bad taste of the crowds, but the fact that these crowds, made prosperous by capitalism, became “consumers” of literature — of course, of trashy literature. The book market is flooded by a downpour of trivial fiction for the semi-barbarians. But this does not prevent great authors from creating imperishable works.

The critics shed tears on the alleged decay of the industrial arts. They contrast, e.g., old furniture as preserved in the castles of European aristocratic families and in the collections of the museums with the cheap things turned out by big-scale production. They fail to see that these collectors’ items were made exclusively for the well-to-do. The carved chests and the intarsia tables could not be found in the miserable huts of the poorer strata. 

Those caviling about the inexpensive furniture of the American wage earner should ... [realise that w]hen modern industry began to provide the masses with the paraphernalia of a better life, their main concern was to produce as cheaply as possible without any regard to aesthetic values. Later, when the progress of capitalism had raised the masses’ standard of living, they turned step by step to the fabrication of things which do not lack refinement and beauty. Only romantic prepossession can induce an observer to ignore the fact that more and more citizens of the capitalistic countries live in an environment which cannot be simply dismissed as ugly.

3. The Argument of Injustice

The most passionate detractors of capitalism are those who reject it on account of its alleged injustice.

It is a gratuitous pastime to depict what ought to be and is not because it is contrary to inflexible laws of the real universe. Such reveries may be considered as innocuous as long as they remain daydreams. But when their authors begin to ignore the difference between fantasy and reality, they become the most serious obstacle to human endeavours to improve the external conditions of life and well-being.

The worst of all these delusions is the idea that “nature” has bestowed upon every man certain rights. According to this doctrine nature is openhanded toward every child born. There is plenty of everything for everybody, they say. Consequently, everyone has a fair inalienable claim against all his fellowmen and against society that he should get the full portion which nature has already allotted to him. The eternal laws of natural and divine justice require that nobody should appropriate to himself what by rights belongs to other people. The poor are needy therefore only because unjust people have deprived them of their birthright. It is the task of the church and the secular authorities to prevent such spoliation and to make all people prosperous.

Every word of this doctrine is false. Nature is not bountiful but stingy. It has restricted the supply of all things indispensable for the preservation of human life. It has populated the world with animals and plants to whom the impulse to destroy human life and welfare is inwrought. It displays powers and elements whose operation is damaging to human life and to human endeavours to preserve it. Man’s survival and well-being are an achievement of the skill with which he has utilised the main instrument with which nature has equipped him — reason.

Men, cooperating under the system of the division of labour, have created all the wealth which the daydreamers consider as a free gift of nature. With regard to the “distribution” of this wealth, it is nonsensical to refer to an allegedly divine or natural principle of justice. What matters is not the allocation of portions out of a fund presented to man by nature. The problem is rather to further those social institutions which enable people to continue and to enlarge the production of all those things which they need.

The World Council of Churches, an ecumenical organisation of Protestant Churches, declared in 1948: “Justice demands that the inhabitants of Asia and Africa, for instance, should have the benefits of more machine production.” This makes sense only if one implies that the Lord presented mankind with a definite quantity of machines and expected that these contrivances will be distributed equally among the various nations. Yet the capitalistic countries were bad enough to take possession of much more of this stock than “justice” would have assigned to them and thus to deprive the inhabitants of Asia and Africa of their fair portion. What a shame!

The truth is that the accumulation of capital and its investment in machines, the source of the comparatively greater wealth of the Western peoples, are due exclusively to laissez-faire capitalism which the same document of the churches passionately misrepresents and rejects on moral grounds. 

It is not the fault of the capitalists that the poorer countries did not adopt those ideologies and policies which would have made the evolution of autochthonous capitalism possible. 

Neither is it the fault of the capitalists that the policies of these nations thwarted the attempts of foreign investors to give them “the benefits of more machine production.” No one contests that what makes hundreds of millions in these nations destitute is that they cling to primitive methods of production and miss the benefits which the employment of better tools and up-to-date technological designs could bestow upon them. But there is only one means to relieve their distress — namely, the full adoption of laissez-faire capitalism. What they need is private enterprise and the accumulation of new capital, capitalists, and entrepreneurs. It is nonsensical to blame capitalism and the capitalistic nations of the West for the plight the backward peoples have brought upon themselves. The remedy indicated is not “justice” but the substitution of sound, i.e., laissez-faire, policies for unsound policies.

It was not vain disquisitions about a vague concept of justice that raised the standard of living of the common man in the capitalistic countries to its present height, but the activities of men dubbed as “rugged individualists” and “exploiters.” The poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation, and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital.

All those rejecting capitalism on moral grounds as an unfair system are deluded by their failure to comprehend what capital is, how it comes into existence, and how it is maintained — and what the benefits are which are derived from its employment in production processes.

The only source of the generation of additional capital goods is saving. If all the goods produced are consumed, no new capital comes into being. But if consumption lags behind production and the surplus of goods newly produced over goods consumed is utilised in further production processes, these processes are henceforth carried out by the aid of more capital goods. 

All the capital goods are intermediary goods, stages on the road that leads from the first employment of the original factors of production, i.e., natural resources and human labour, to the final turning out of goods ready for consumption. They all are perishable. They are, sooner or later, worn out in the processes of production. If all the products are consumed without replacement of the capital goods which have been used up in their production, capital is consumed. If this happens, further production will be aided only by a smaller amount of capital goods and will therefore render a smaller output per unit of the natural resources and labor employed. To prevent this sort of dissaving and disinvestment, one must dedicate a part of the productive effort to capital maintenance, to the replacement of the capital goods absorbed in the production of usable goods.

Capital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving.

Neither have capital or capital goods in themselves the power to raise the productivity of natural resources and of human labor. Only if the fruits of saving are wisely employed or invested, do they increase the output per unit of the input of natural resources and of labor. If this is not the case, they are dissipated or wasted.

The accumulation of new capital, the maintenance of previously accumulated capital and the utilisation of capital for raising the productivity of human effort are the fruits of purposive human action. They are the outcome of the conduct of thrifty people who save and abstain from dissaving, viz., the capitalists who earn interest; and of people who succeed in utilizing the capital available for the best possible satisfaction of the needs of the consumers, viz., the entrepreneurs who earn profit.

Neither capital (or capital goods) nor the conduct of the capitalists and entrepreneurs in dealing with capital could improve the standard of living for the rest of the people, if these noncapitalists and nonentrepreneurs did not react in a certain way. If the wage earners were to behave in the way which the spurious “iron law of wages” describes and would know of no use for their earnings other than to feed and to procreate more offspring, the increase in capital accumulated would keep pace with the increase in population figures. All the benefits derived from the accumulation of additional capital would be absorbed by multiplying the number of people. However, men do not respond to an improvement in the external conditions of their lives in the way in which rodents and germs do. They know also of other satisfactions than feeding and proliferation. Consequently, in the countries of capitalistic civilisation, the increase of capital accumulated outruns the increase in population figures. To the extent that this happens, the marginal productivity of labour is increased as against the marginal productivity of the material factors of production. There emerges a tendency toward higher wage rates. The proportion of the total output of production that goes to the wage earners is enhanced as against that which goes as interest to the capitalists and as rent to the land owners. 

To speak of the productivity of labour makes sense only if one refers to the marginal productivity of labour, i.e., to the deduction in net output to be caused by the elimination of one worker. Then it refers to a definite economic quantity, to a determinate amount of goods or its equivalent in money. The concept of a general productivity of labour as resorted to in popular talk about an allegedly natural right of the workers to claim the total increase in productivity is empty and indefinable. It is based on the illusion that it is possible to determine the shares that each of the various complementary factors of production has physically contributed to the turning out of the product. If one cuts a sheet of paper with scissors, it is impossible to ascertain quotas of the outcome to the scissors (or to each of the two blades) and to the man who handled them. To manufacture a car one needs various machines and tools, various raw materials, the labour of various manual workers and, first of all, the plan of a designer. But nobody can decide what quota of the finished car is to be physically ascribed to each of the various factors the cooperation of which was required for the production of the car.

For the sake of argument, we may for a moment set aside all the considerations which show the fallacies of the popular treatment of the problem and ask: Which of the two factors, labour or capital, caused the increase in productivity? But precisely if we put the question in this way, the answer must be: capital. What renders the total output in the present-day United States higher (per head of manpower employed) than output in earlier ages or in economically backward countries is the fact that the contemporary American worker is aided by more and better tools. If capital equipment (per head of the worker) were not more abundant than it was three hundred years ago, say, then output (per head of the worker) would not be higher. What is required to raise, in the absence of an increase in the number of workers employed, the total amount of America’s industrial output is the investment of additional capital that can only be accumulated by new saving. It is those saving and investing to whom credit is to be given for the multiplication of the productivity of the total labour force.

What raises wage rates and allots to the wage earners an ever increasing portion out of the output which has been enhanced by additional capital accumulation is the fact that the rate of capital accumulation exceeds the rate of increase in population. The official doctrine passes over this fact in silence or even denies it emphatically. But the policies of bureaucrats and labour unions clearly show that their leaders are fully aware of the correctness of the theory which they publicly smear as silly bourgeois apologetics. They are eager to restrict the number of job seekers in the whole country by occupational licensing and anti-immigration laws, and in each segment of the labour market by preventing the influx of newcomers.

That the increase in wage rates does not depend on the individual worker’s “productivity,” but on the marginal productivity of labour, is clearly demonstrated by the fact that wage rates are moving upward also for performances in which the “productivity” of the individual has not changed at all. There are many such jobs. A barber shaves a customer today precisely in the same manner his predecessors used to shave people two hundred years ago. A butler waits at the table of the British prime minister in the same way in which once butlers served Pitt and Palmerston. In agriculture some kinds of work are still performed with the same tools in the same way in which they were performed centuries ago. Yet the wage rates earned by all such workers are today much higher than they were in the past. They are higher because they are determined by the marginal productivity of labour. The employer of a butler withholds this man from employment in a factory and must therefore pay the equivalent of the increase in output which the additional employment of one man in a factory would bring about. It is not any merit on the part of the butler that causes this rise in his wages, but the fact that the increase in capital invested surpasses the increase in the number of hands.

All pseudo-economic doctrines which depreciate the role of saving and capital accumulation are absurd. What constitutes the greater wealth of a capitalistic society as against the smaller wealth of a noncapitalistic society is the fact that the available supply of capital goods is greater in the former than in the latter. 

What has improved the wage earners’ standard of living is the fact that the capital equipment per head of the men eager to earn wages has increased. It is a consequence of this fact that an ever increasing portion of the total amount of usable goods produced goes to the wage earners. None of the passionate tirades of Marx, Keynes and a host of less well known authors could show a weak point in the statement that there is only one means to raise wage rates permanently and for the benefit of all those eager to earn wages — namely, to accelerate the increase in capital available as against population. If this be “unjust,” then the blame rests with nature and not with man.

* * * * 

Ludwig von Mises (1881-1973) was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. Mises' writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. (Some cogent quotes here from the great man.)

This post previously appeared at the Mises Blog.

We're just not very productive ...

 ... or maybe we're short of capital, and over-endowed with regulation?

If there is one graph that symbolises the relative economic decline of NZ [says Robert MacCulloch], then I believe it is the one below. It measures NZ GDP per capita from 1990 to 2022, and compares it with all other nations in our Asia-Pacific region. ...

The scale is logarithmic for a reason. It gives you a measure of the percentage increases in GDP per capita in NZ compared to other nations. Every single year over this 35 year period, as far I can see from eye-balling the graph, with the exception of 1998-99, NZ's percentage rise in GDP per capita has been way lower than the average. When I was in my 20s in the 1990s, NZ's GDP per capita was about 6 times the average in the Asia-Pacific region. As of 2024, our GDP per capita is only about 2 times the Asia-Pacific average. Give it another decade or two, and there won't be much difference - the rest of Asia will be richer than us.

 

Wealth taxes = loot + plunder

"The progressive personal income tax, the corporate income tax, and the capital gains tax all operate in essentially the same way as the inheritance tax. They are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.
    "By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. In addition, of course, they all operate to reduce the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. […] [T]hese taxes, along with the inheritance tax, undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living for everyone, not just of those on whom the taxes are levied. ...
    "Of course, many people will the line of argument I have just given as the 'trickle-down' theory. There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress, achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the critics of the misnamed trickle-down theory."

~ George Reisman from his book Capitalism: A Treatise on Economics (pp. 308-310.) Hat tip Per-Olof Samuelsson, who observes: "The productive rich (think Rockefeller, Carnegie, Ford, Bill Gates, Steve Jobs, etcetera, etcetera) actually flood the rest of us with wealth (and themselves become wealthy in the process). Taxing or expropriating them simply means to dam this flood. And this may make it appear 'trickle-down' – because governments and politicians will only allow a small portion of this wealth to trickle down to us; the rest of it lands in their own pockets."