All Commentary
Friday, April 1, 1966

On the Redistribution of Incomes

Miss Shenoy, from Ahmedabad, India, is a B.Sc. (Econ.) student at the London School of Economics.

The idea of redistributing in­comes and wealth has become a virtual dogma which few dare to question. It is one of the oldest parts of the socialist ideology; even those social democrats who oppose communism because it stands for “violent revolution,” nevertheless argue that a “fairer” distribution of income is one of the best safeguards against such revolution. And many who other­wise oppose interventionism argue that redistribution is necessary to “correct” or “ameliorate” the “unfair” distribution of wealth and income, which they believe is one of the major flaws in the work­ing of the free market. Thus, we hear protests that: “A mere 6 per cent of the people own 42 per cent of the nation’s wealth”; or, “The distribution of income in our so­ciety should not be allowed to be­come so unequal that the great wealth at one end of the scale endangers the low incomes at the other.”

What is most remarkable, how­ever, is that this idea of redistri­bution should have “caught on” in just those areas—Western Europe, North America, and Australasia — that are distinguished from the rest of the world precisely by their astonishing mass prosperity. What especially strikes the visitor from the underdeveloped world (and I would include here the areas be­hind the Iron and Bamboo Cur­tains) is that the wide range of products and services, which at home are enjoyed only by the miscroscopic minority, are here bought by the masses. The dif­ference between the developed and the underdeveloped parts of the world lies not in the amenities en­joyed by the wealthy — who in cer­tain respects, such as personal services, are better off in the un­derdeveloped areas — but in the condition of the mass of the peo­ple in the respective areas. In the one, a wealth of goods and services (with a corresponding variety of jobs) is available to virtually everyone; in the other, the lives of the masses are marked by a poverty, the very memory of which has vanished in the West if we may judge from the comments in economic history textbooks.

The Process Misunderstood

Perhaps the basic reason for the plausibility of redistribution­ist ideas is a misapprehension of the nature of ownership and pro­duction and what earning an in­come means in the context of a free market. The redistributionist seems to think that goods are “so­cially produced” and then thrown onto a common heap, from which incomes are “individually appro­priated” — quite arbitrarily. But there is a pattern to the earning of incomes in a free market: the size of the income earned depends on the extent to which the individ­ual — in cooperation with other individuals — succeeds in satisfy­ing the wants of his fellow men. Even capitalists must use “their” capital to produce for their fellow men. Legal title to any collection of capital goods does not guaran­tee that income will flow in auto­matically.’ For example, legal title to a hula-hoop factory in the United States today does not mean automatic profits to the owners —more likely, it means heavy losses and strenuous efforts to salvage something from the wreckage. In other words, in a free market, even capitalists’ incomes are “earned”: by producing what their fellow men wish to buy.2 Since, in this context, the fulfillment of consum­er needs is the rationale of the production of capital goods, it is the mass of consumers who, in a free market, must be regarded as the real economic directors, if not the legal owners, of capital.³

In short, though legal title to all the thousands of factories and millions of machines may lie with a numerical minority, this vast accumulation of capital is not used to produce exclusively those items consumed by the few. The super­markets are not stocked with cavi­ar and champagne for “the 6 per cent who own 42 per cent of the nation’s wealth”: the supermar­kets bulge with items for mass consumption. The vast amounts of capital equipment in the developed nations are used principally to pro­duce an enormous variety of goods and services — including leisure —for the vast majority of the peo­ple. The production of luxury is a mere trickle compared with this outpouring of goods for mass consumption.

Contrast this with conditions in such countries as China or Soviet Russia — where vast amounts of resources are drawn into the con­struction of industrial or hydro­electric complexes that are useful only in the light of their rulers’ military ambitions or for such technologically spectacular but otherwise useless feats performed by Sputniks and Cosmonauts. How much easier life could have been for Ivan Ivanovitch and his wife and family if these resources had been allocated according to the principle of consumer sovereignty!

Production and Trade

What does redistribution mean in practice? The goods and ser­vices we consume — and which con­stitute our real income — have all been produced for us by our fel­low men, in exchange for what we have produced for them. If any of us wishes to consume more — i.e., have a higher income — he must either produce more of the things his fellow men want — or some of his fellow men must voluntarily turn over to him what they have produced, without asking any­thing in return. In other words, if we wish to consume more with­out producing more, someone else must produce for us without himself consuming. The principle is not changed if some third per­son, on our behalf, pays those who produce for us.

There is, of course, a third method of having more; and that is by seizing what others have produced, and thus forcing them to do without. And this is what is really involved in the redistribu­tion of incomes via the state ap­paratus — progressive taxation to “soak the rich,” and various “wel­fare” measures ostensibly aimed at raising the real income of the very poorest. Aside from the ques­tion of whether these aims are in fact achieved (which they are not4) it must be seen that compul­sory redistribution of this type is just another form of capital con­sumption.) How is this? We must ask what the “rich” would have done with the income if it had been left in their hands. The an­swer is, they would have saved it—i.e., demanded capital goods. But if this income were handed over to those whose incomes are very much lower, they would not save it; they would use it to purchase consumption goods. The effect then of such redistribution would be that consumption goods are pro­duced where capital goods would have been produced — i.e., there is capital consumption.5

Redistribution cannot, there­fore, continue indefinitely. Once the capital has been consumed, the “high” incomes derived from its use will no longer be available to be redistributed. Nor can we as­sume that those who do earn higher incomes will passively ac­quiesce in having ever greater pro­portions of their income taxed away. After a time, progressive taxation defeats its own ends. The individual simply ceases to earn the income in taxable form — or as in some countries, is forced to start keeping two sets of books. Observe, too, the inconsistency here: on the one hand, it is the people themselves who, in a free market, create these “high” in­comes by buying what the “cap­italists” help to produce — and then, the people propose to “cor­rect” the “unequal” distribution of the market via the political process!

Redistribution in Backward Countries

What about redistribution in other contexts — say, in an under­developed country, or under feu­dalism? Now, the characteristic mark of such precapitalistic or noncapitalistic situations is the extreme poverty of the masses, against which the comparative wealth of the few landlords and nobles appears even more harsh. In these situations, the problem is to produce sufficient goods; i.e., to build up the capital resources required to produce the consumption goods for the masses. The question of political redistribution hardly arises.

This is not, of course, to dis­parage the ideal of voluntary giv­ing. It would not be necessary to add this, were it not for the per­sistent misunderstanding of the implications of free market prin­ciples with respect to charity. Economics certainly does not as­sume that all men are selfish mon­sters — though a great many peo­ple, who should know better, go on talking in this fashion. Eco­nomics is concerned only with the principles governing the allocation of scarce resources among com­peting ends; it says nothing about the ends themselves. And, for most people, these ends will in­clude, as a matter of course, the assisting of those who are in need. The pity is that in so many coun­tries, especially underdeveloped ones, heavy taxation — including direct taxes, indirect taxes, and the hidden tax of inflation — is making it more and more difficult to continue all those traditional forms of giving that formerly were regarded as the privilege and the duty of the many who felt they could afford it.



¹ One of the basic fallacies of Marx was the notion that capital would “auto­matically beget profits.” But the theory of a capitalist conspiracy to keep wages low and prices high does not explain why capitalists sometimes have losses.

2 Aristocrats and manufacturers, for instance, certainly were not the chief buyers of the coarse—and cheap—cottons produced by the first factories at the be­ginning of the Industrial Revolution.

3 Ludwig von Mises, Socialism (Lon­don: Cape; and New Haven: Yale Uni­versity Press, 1951) pp. 37-42.goods is a mere trickle compared with this outpouring of goods for mass consumption.

4 Progressive taxation actually serves to maintain the existing distribution of wealth and income: true, the already-wealthy are prevented from getting wealthier, but those seeking to rise are prevented from rising at all. See Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), pp. 803 ff., and David McCord Wright, Democracy and Progress (New York: Macmillan, 1948), pp. 94-103. For the British experi­ence with “equalitarian” welfare serv­ices, see the various Hobart Papers is­sued by the Institute of Economic Af­fairs, London.

5 See F. A. Hayek, The Pure Theory of Capital (London: Routledge and Kegan Paul, 1941), ch. xxv.

6 If resources are scarce, we cannot have more of both; if, with the Keynes­ians, we wish to argue that there are always unemployed resources, then we are implicitly assuming either (a) that these resources are perfectly versatile, or (b) exactly the right sort of resourc­es are available in exactly the right proportions.

7 I am not saying that the developed areas today are, or at any time were, paradigms of the free market. In fact, only some free market principles were ever applied in the past; and the last 100 years have seen an accelerating movement away from even this. What I am saying is that we should try to clari­fy the ideas in terms of which we at­tempt to interpret the real world. If we wish to have a system based on govern­mental direction rather than one based on the principle of consumer sovereign­ty, we should be clear about this.

  • Sudha Shenoy, PhD (1943–2008) was an economist and economic historian. From 1986 to 2004, she worked as a lecturer in economics at the University of Newcastle in Australia. She was an Honorary Associate in Economic History at the School of Policy and an adjunct scholar at the Ludwig von Mises Institute. Shenoy’s father was Professor Bellikoth Raghunath Shenoy, an eminent Indian economist who studied under Friedrich Hayek at the London School of Economics.