It is Impossible to Redistribute Wealth

Wealth cannot be redistributed. It can only be created or destroyed. Only riches can be redistributed.

Of course, this only raises the question of what the difference is between riches and wealth. So a few definitions are in order.

It is possible to have riches without wealth, and wealth without riches. The richest person in the world 2,000 years ago did not have anywhere near the wealth of your average poor person in the United States today. The richest person in the world 2,000 years ago was certainly living far better than everyone else at the time, but he did not have air conditioning and central heating, a gas or electric stove, a smart phone with immense computing power, or access to clean water and abundant food year around. These the poor in the U.S. have.

Where does this wealth come from? Wealth emerges when two individuals engage in a mutually beneficial transaction, so that each person is better off — that is, each person is wealthier as a result. If I value a new cell phone more than the $100 it costs, I will exchange my $100 for the cell phone. And of course the owner of the cell phone wants the $100 more than the cell phone, or else they would not trade, either. Now, I may value the cell phone $101 or $10,000, and it doesn’t matter — I’m still better off. And the other person is better off as well, even if I would have paid far, far more than I did, because they valued the cell phone somewhere below $100. When two engage in such a transaction, wealth is created. Wealth is an increase in value in the world, and value increases are subjective to the people involved.

Another way of understanding wealth increase is to understand the degree to which one has to work to get a given object. We work fewer hours to get the same items as we did 20, 50, 100 years ago. More, there are more things available than there were 20, 50, 100 years ago. Insofar as wealth is an increase in the number of things people value, wealth has increased in the world.

Please note that this increase in wealth does not have much is anything to do with money. Money is a way to reduce transaction costs, and thus contributes to wealth creation, but money itself is not wealth.

And money and objects are themselves not wealth. By themselves, merely accumulated, they are riches. If I collect money and put it under my mattress, I have riches. But few if any actually horde money and objects. They use them. When used, money and objects create wealth. When not used, they are mere riches.

So, if I have $100, and I split it between me and someone else, I lose $50 in riches. Now, if I feel better about giving the money than I would if I kept it, there would be an increase in wealth for me (and there certainly would be an increase in wealth for the person getting the money, since they are getting the $50). But suppose that someone came alone and took my $100, split it, and gave me half and gave someone else half, and I didn’t want that to happen? Then I would be worse off, even as the other person is better off. If I would pay $10 for this to not happen, and the recipient would pay $5 for it to happen, there is in fact a loss of wealth.

Of course, what would really happen is the person who had his money split would decrease his trust of others. This decrease in trust would reduce the likelihood of him engaging in mutually beneficial interactions in the future, since he would trust people less, meaning that less wealth would be created. The social consequences for things like theft or forced “generosity” are to reduce wealth in the economy. This is why there are laws against theft; and where theft is most strongly fought, wealth increases. Countries with kleptocracies are naturally the poorest.

Do note too that when my $100 was split, my riches were split, not my wealth. My wealth in fact was reduced below the $50 — it’s actually a loss of $50 + the $10 I would have paid to not have it happen. And it’s really more than that, given the loss of future wealth. The recipient, on the other hand, had an increase in wealth — $50 +the $5 he was willing to pay. Plus, whatever transactions he makes with the $50 will also increase his wealth. But that increase will end with the end of the $50. Meanwhile, I will continue to lose wealth from whatever future transactions I shy away from after my reduced trust has set itself up in me. The wealth I lose will be much more than the wealth gained by the other, meaning there is a net loss in wealth.

Now, this scenario is probably not exactly playing itself out when it comes to taxes, of course. But other ways of reducing wealth do take place. Hiring tax accountants and lawyers rather than investing the money in wealth-creating ventures, for example. Yes, they are providing a service with value, but it only has value in a taxing regime. Outside a taxing regime, that money would not be spent on them, they would have other things to do in the economy, and the money spent on them would be spent/invested elsewhere. Plus all the money spent trying to keep money from being taxed is a cost as well. Further, money that is taxed to give to another first has to pass through the hands of bureaucrats — who must be paid, of course — before the recipients get it. And that is a cost of the transaction. This could be minimize with a basic income guarantee, but there would still be some degree of transaction cost there.

And consider the fact that money is transferred from the rich to the poor. That, of course, is what we would expect (and what many want), but this is not without social cost. The rich aren’t just sitting on their money. More often than not, they are investing it. They may invest in new ventures, or they may invest in other companies, or they may invest in their own companies, expanding the company or lowering prices to be more competitive. If prices go down, that benefits all buyers, increasing their wealth. If the company is expanded, more can be made, driving prices down. And expansion means the need for more employees. Employees are exchanging valuable labor for pay, which they use in the market to buy things they value. Business expansions are thus wealth-increasing any way you look at it. But if you tax away that money, that ongoing wealth-creation cannot take place. Instead, that money is given to someone who will engage in limited wealth-creation, since that wealth creation will cease with the end of the money.

So consumption spending has very limited, and very short-term wealth creation capabilities. Investment spending, on the other hand, has more open-ended, more long-term wealth-creation capabilities. Entrepreneurs of all kinds are wealth-creators, and it is important, if we want wealth to spread throughout society, to not deprive entrepreneurs of the capital they need to invest.

In other words, when you have mutually beneficial transactions, you have a positive sum game. Both parties are better off, and wealth increases. When you have true gift-giving, there is also an increase in wealth through the division of riches. However, when you have an interaction where one party does not want to participate — unless you do something good for me, I’ll do something bad to you — then you necessarily have a negative sum game. One party is worse off, and wealth decreases. Now, if taxes aren’t this last kind of transaction, you have to ask yourself why it is that you have to threaten people with prison to get them paid. The very existence of a threat tells you that you have a negative sum game where wealth is decreases through the redistribution of riches.

So that is the difference between wealth and riches. And that is why riches can be redistributed, but wealth can only be created or destroyed. Riches can be increased through theft, war, taxes, accumulating gifts, or mutually beneficial transactions, but wealth can only be created through mutually beneficial transactions or freely given gifts. Theft, war, and taxes destroy wealth. Necessarily. Now, it may be possible that one thinks some other social value is more important than wealth, and that keeping people poor is worth that value, so we should nevertheless tax the rich and redistribute their riches, but we shouldn’t make the mistake of saying we’re redistributing wealth. We’re doing nothing of the sort.