Godwin’s Law in 2017

Hitler probably did compare people to Nazis....

Godwin’s law is an adage that, as a discussion on the Internet grows longer, the probability of a comparison involving Hitler approaches 100%. A corollary is that the first person in the discussion to mention Hitler loses.

I’ve been thinking about Godwin’s law, and, while there is value in not minimizing the atrocities of the Holocaust through comparisons to trivial wrongs, Godwin’s law is problematic in that it doesn’t provide any recognition of how fascism actually develops. Thus, Godwin’s law may be use to imply an argument is fallacious when the comparison is actually fair.

The rise of fascism

The issue is that fascism doesn’t appear as an overwhelming tsunami, but rather a slowly rising tide. There’s a well-known saying about the rise of Nazism that I always thought was apocryphal that is actually from a lecture by Martin Niemöller, a pastor imprisoned in Nazi concentration camps for seven years:

            First they came for the Socialists, and I did not speak out—
                        Because I was not a Socialist.

            Then they came for the Trade Unionists, and I did not speak out—
                        Because I was not a Trade Unionist.

            Then they came for the Jews, and I did not speak out—
                        Because I was not a Jew.

            Then they came for me—and there was no one left to speak for me.

Now, this is a beautiful rallying cry about the dangers of complacency during the rise of totalitarianism, but—as long as you think it’s apocryphal—it can easily be dismissed as an elegant but cynical attempt to inspire resistance. But knowing that it isn’t just a saying makes it hold much more weight.

It’s not someone’s attempt to convince me to fight. It’s a man expressing his experience. It’s not communist propaganda encouraging me to sacrifice my own interests for others, but rather Pastor Niemöller condemning himself for choosing not to act when he could have.

To me, that’s powerful. It makes me wonder how Niemöller said those words, about the expression on his face.

Tiny changes

And that brings me back to Godwin’s law. That law is designed so that trivial things aren’t compared the immense monstrosity of the Holocaust. But the thing is, fascism doesn’t start with the Holocaust. Rather, it is a parade of tiny incremental changes that only after long years add up to the deepest horror.

Milton Mayer discusses this idea in detail in an excerpt from his book They Thought They Were Free. It’s excellent writing, allowing the reader to truly understand how the good citizens of Germany could allow this atrocity to happen.

“You see,” my colleague went on, “one doesn’t see exactly where or how to move. Believe me, this is true. Each act, each occasion, is worse than the last, but only a little worse. You wait for the next and the next. You wait for one great shocking occasion, thinking that others, when such a shock comes, will join with you in resisting somehow. You don’t want to act, or even talk, alone; you don’t want to ‘go out of your way to make trouble.’ Why not?—Well, you are not in the habit of doing it. And it is not just fear, fear of standing alone, that restrains you; it is also genuine uncertainty.

“But the one great shocking occasion, when tens or hundreds or thousands will join with you, never comes. That’s the difficulty. If the last and worst act of the whole regime had come immediately after the first and smallest, thousands, yes, millions would have been sufficiently shocked—if, let us say, the gassing of the Jews in ’43 had come immediately after the ‘German Firm’ stickers on the windows of non-Jewish shops in ’33. But of course this isn’t the way it happens. In between come all the hundreds of little steps, some of them imperceptible, each of them preparing you not to be shocked by the next. Step C is not so much worse than Step B, and, if you did not make a stand at Step B, why should you at Step C? And so on to Step D.”

And this is the problem with Godwin’s law. Each step toward fascism is so small that it is trivial by itself and therefore Godwin’s law would apply. But these trivial steps are what create a fascist regime, so Godwin’s law serves us poorly.

The bottom line

This incremental change is why people should be concerned about leaders who introduce the idea of “false news” to attempt to silence and discredit their critics, who make edicts targeting particular religions, or who praise people for extrajudicial killings of suspected criminals. Fascism is about building a wall, not in a day, but brick by brick over the course of years.

The Problem with Playoff Hockey

The benefits of cheating

The Stanley Cup finals are starting today. In the last few years, my interest in hockey has waned, partly because I’m not participating in hockey pools anymore and partly because I find the games more frustrating than entertaining. This year’s playoffs has illustrated that in spades.

Hockey should be a fast-paced game of skill. The players are skating on ice—they’re able to move faster than players in any other team sport. While zooming around, they’re using sticks to control a small black puck. It’s incredibly skillful, and should be among the most entertaining sports to watch.

But it isn’t, and that’s because of the refereeing.

The problem

There are a bunch of rules in hockey. For instance, you’re not allowed to take your stick in two hands, and use it to batter opposing players’ backs. You’re also not allowed to swing your stick like an axe across the opposing players’ hands. You’re not allowed to grab and hold the other players, or even hook your stick around their body and force them to pull you along like a water skier. You can’t even block people from getting to the puck, deliberately impeding their path.

These are all good rules—they’re either important for player safety or to ensure that the game flows. And flow is what you want. It makes the game more exciting, and ensures the players can showcase their skills.

But, for these rules to make any difference to the result of the game, referees must enforce them by calling penalties when players break the rules. And often, even in the regular season, that doesn’t happen, and it gets even worse in the playoffs.

Don’t affect the game

During the playoffs, commentators and many fans say that referees shouldn’t affect the outcome of the game. “Let them play” is a common refrain when fans think too many penalties are being called. But the result of this chorus is that in the playoffs, penalties are rarely called. Players violate the rules in flagrant ways, and the referees sit by and allow them to do it.

The result is a bizarre situation where if a player accidentally shoots the puck into the crowd, they are penalized (because such a penalty is mandatory), but axing a players hands, potentially breaking a bone or severing a finger isn’t (because the referee doesn’t want to call a penalty that might “affect the outcome of the game”.)

The thing is, by not making the call, the referees are affecting the outcome of the game.  They’re basically saying, “the team that is willing to cheat and physically injure the other team is the team that deserves to win”.  The referees are giving a massive advantage to the cheating team, and abandoning their responsibility to protect the health of players.

Today’s extremes

This clip of Messi, arguably the best soccer player in the world, nicely illustrates the tactics that players ought to use on defence when the referees don’t want to affect the outcome of the game.

Essentially, the right strategy is to target the other team’s best players. Smash them with sticks. Tackle them to the ice. Heck, elbow them in their face to break their jaws. If Sydney Crosby or Evgeni Malkin are so injured they can’t play, or if they have to try to skate around and control the puck while dragging a 230 pound gorilla everywhere, they will have a much harder time scoring. I have no skill at hockey, but, as long as the referees don’t call penalties, I’m pretty sure I can almost completely nullify the best players in the world.

The bottom line

This is why playoff hockey is so frustrating. I want to watch end to end action. I want to watch exciting plays. I want to see the abilities of the best players in the world showcased in the most important games of their lives. But, referees deliberately not enforcing the rules results in boring games where you take away the skill, enabling the most mediocre players to counter the best.

The High Cost of Healthcare

A competitive disadvantage illustrated

Last weekend was the Berkshire Hathaway Annual Meeting. Unlike most corporate meetings, the discussion at Berkshires meeting often strays far from the performance of the company into broader economic and political topics. It’s understandable—Warren Buffett and Charlie Munger have a way of cutting through ideological obfuscation when dissecting an issue, and both are intellectually honest in a way most people aren’t.

It’s worth watching the full meeting, but the discussion I found most interesting revolved around the cost of healthcare in the USA.

Taxes vs. Healthcare

Buffett notes that corporations have been railing against corporate taxes for decades, arguing that corporate taxes make America unable to compete with other countries, that lower taxes are the only way American businesses can prosper. The government has been responsive to this argument. Buffett observes that corporate taxes have fallen from about 4% of Gross Domestic Product in the 1960s to about 2% of GDP now.

In contrast, healthcare spending in the USA has grown from 5% of GDP in 1960 to 17% now. But the USA is unique in that much of that healthcare spending falls on corporations because most medical insurance in the US is provided by employers. This creates an interesting incongruity. While corporations rail against corporate taxes amounting to 2% of GDP, they seem to totally ignore the 17% of GDP cost of healthcare.

It looks even worse when you look at it from the perspective of global competitiveness. The worldwide average healthcare expenditure is 9%. Canada, the closest comparable country to the USA, spends about 11% of GDP. Thus, USA is spotting about eight percentage points more on healthcare than the average country, and six percentage points more than Canada.

To me, that makes healthcare spending the elephant in the room. Corporations that are vociferous about a potential two percentage point difference in corporate taxes should be far more worried about healthcare costs. That’s where American corporations are at a huge competitive disadvantage.

The difference between USA and everyone else

Charlie Munger is unlike most Republicans in that he doesn’t allow the party line to override the evidence—as I said, he’s intellectually honest. He states flatly that the cost difference is because of socialized medicine in other countries. In essence, the high cost of privatized medicine puts American companies at a competitive disadvantage compared to those in countries with socialized medicine.

I think this is a solid argument. I’d argue that the private healthcare system probably hurts America even more when it comes to innovation and entrepreneurialism. If your medical insurance is tied to your job, then it greatly disincentivizes you from leaving your job to start a new, innovative business. It would be irresponsible to leave your family without health insurance while you’re creating a company.  You’d literally be gambling their lives to do so.  Thus, privatized medicine is almost certainly hurting American innovation.

Why is it this way?

So if privatized medicine is so bad for corporations, why aren’t corporations fighting for single-payer? I think it’s a combination of ideology and incentives. Most people who run successful companies tend to believe in free-market capitalism. Their ideology often doesn’t distinguish between places where free-market capitalism works and where it fails. Thus, without much thought, they assume that the free market works in medicine, when it actually doesn’t.

Second, there are huge vested interests in maintaining the existing private system. That 17% of GDP isn’t just disappearing into the ether. It’s money flowing toward hospitals, doctors, pharmaceutical companies, insurers, drug distributors, and medical device companies. Each of these parties has a huge incentive to keep the money flowing—they care about the issue a lot, and lobby accordingly.

The people who would benefit from lower costs—essentially everyone else—care about it a bit, but not nearly as much as the medical industrial complex. The average person is going to express their opinions, but they aren’t going to throw money at politicians to get their way. And, even if they were inclined to throw money, they don’t have much money, not compared to the medical industry.

So, with bought politicians, the inferior system continues.

The bottom line

I don’t have any hope that this issue will be solved any time soon. That said, it is still an interesting issue to discuss. Because the data is so clear-cut, privatized medicine provides a good gauge of the degree to which someone who holds Republican views is intellectually honest and data-focussed, or if ideology is all that matters to them.

Authorities Want a Housing Bubble

Skyrocketting debt as people spend money on overpriced houses.

One of my favorite quotes is from Upton Sinclair, “it’s difficult to get a man to understand something, when his salary depends on his not understanding it.” I’ve always assumed that the quote was cynical, but more intended to be amusing than an absolute judgement of how the world works.

But, the more time that passes, the more I’m starting to believe this quote actually reflects reality. Look at people’s reactions global warming. It’s a problem that is now likely to have a major negative impact on everyone, costing hundreds of millions of lives. But the paychecks of powerful people depend on not believing in global warming, so in the USA, denial is the official policy.

Something similar is happening in Canada with the housing bubble.

Some history

Look at the chart at the top of this post that compares Canada and USA’s debt to income ratios for consumers. It shows how, relative to their incomes, people took on massive amounts of debt to buy real estate. The USA’s line begins to fall in 2007 as the housing bubble in the USA pops. Essentially, Americans could no longer service the huge debts they took on. The bubble popping led to the Great Recession.

As a result of this speculative fervor over real estate, the financial system nearly collapsed. Banks usually lend money to each other overnight for about 0.1 percentage points more than they’ll lend it to the central bank. During the financial crisis, they demanded 3.65 percentage points more, because they were terrified that the other banks would collapse overnight. We were literally on the edge of the entire financial system locking up, with nobody lending to anyone else.

And what caused America’s housing bubble in the first place? After the tech bubble popped around the turn of the century, the central banks kept extremely low interest rates for too long. People took on too much debt to buy overvalued houses because the financing was so cheap. They gorged themselves on debt and were killed when houses stopped going up.

The Bank of Canada

This narrative is well-established. Stephen Poloz, the head of the Bank of Canada, must know it. But instead of heeding the warning, he’s pretending none of it happened.

After the Great Recession, the Bank of Canada lowered rates to “emergency levels” in an attempt to keep the system liquid. That worked, and the economy recovered.

So, learning from the experience with ultra-low rates in the USA—the growth of the American housing bubble, the huge amounts of debt taken on by consumers, and the subsequent crash—the Bank of Canada normalised rates after the threat had passed, right?

No. Not at all.

Instead, they kept interest rates at “emergency levels” for a decade, always deciding that the economy simply wasn’t strong enough for rates to increase.

And the result is almost identical to the USA in the early years of the 21st century. Housing prices have skyrocketed. Consumer debt is insanely high compared to incomes—even higher than it was in the USA at the height of their bubble.  British Columbia has had negative savings rates (i.e. people in aggregate spending more than they earn) for over fifteen years now.  People are borrowing huge amounts to buy massively expensive houses anticipating that they’ll increase in value forever.

And what’s Poloz’s reaction to this? A couple weeks ago, he said even a rate hike to over 5% wouldn’t cool the hot housing markets.

What’s going on here?

Really? Is he that stupid, believing interest rates don’t have any impact on housing prices and speculation?

No, I think we just have to look to Upton Sinclair for the answer. Poloz is scared of looking like an idiot if he increases interest rates and crashes the housing market. So, he’s closing his eyes to the consequences of his actions.  It doesn’t matter to him if Canadians take on debt they can’t afford or can’t retire because they lost all their money speculating on overpriced houses.

What matters to Poloz is getting through his term without upsetting the boat, the same thing that matters to every politician.

Heck, you see the same thing in the recent changes the Ontario provincial government has enacted in Toronto. They’ve added a foreign buyers tax on houses, but have excluded pretty well everyone from it. Even foreign students can buy without paying the tax (because every student needs to own their own their own multimillion-dollar home). The government’s goal wasn’t to cool off the market, but rather appear to be taking actions to cool off the market.

The bottom line

This housing bubble experience has changed my views on politicians. I used to believe that most politicians are in the job because they want to make a positive difference, and that, despite their poor reputation, politicians care about more than just making money and holding onto power.

But, seeing politicians’ reactions to this housing crisis—seeing them ignore Canadians who risk ruining their financial lives by taking on massive amounts of debt to buy overvalued assets— I’m no longer convinced that’s true.  Because now, politicians’ salaries depend on them not understanding the causes and consequences of this housing bubble, and so that’s the way they’re acting.

A Second Solution to Corporate Tax Avoidance

Water drops reflecting the image of an airplane passing overhead

It’s common for corporations to avoid taxes by locating operations in jurisdictions with low tax rates. In essence, this results in countries adopting a “beggar thy neighbor” strategy, lowering their corporate tax rates to attract foreign operations

Last week I talked about one strategy for reducing the value of this avoidance strategy, taxing companies based on their full global income. One of the main problems with that approach is getting reliable data from companies—a country can get information about what happens within its own borders, but getting information from outside its borders requires the co-operation of other countries. Thus, with that approach, it would be relatively easy for corporations to cheat on their taxes and not be caught.

To deal with this problem, I’ll propose a second strategy to deal corporations relocating to avoid taxes, one I like to call, “concede defeat”.

Just give up

In a global economy with local taxation, there’s essentially no way to avoid bad neighbors who will offer sweet deals to persuade companies to relocate. So, countries should become the “bad neighbor” first by replacing corporate income tax with a sales tax. Instead of taxing companies based on their income, which opens the door to countries offering better income tax deals, tax corporations based on their sales in your country. In essence, become the “bad neighbor” who steals corporations from all over the world.

If companies want to sell in your country, they can’t avoid a sales tax. There is no way for companies to hide the sales that they make in your country, so there is no way for them to avoid such a tax. Relocating won’t do them any good—they’ll still have to pay taxes in your country.

Some downsides

There are, of course, downsides to this approach. First, this sort of adjustment shifts the tax burden from companies with the highest income to companies with the highest revenue. This change would have real consequences. Today, if you’re running a company that is just barely above break even, your company won’t be paying income taxes. But, if you’re required to pay a tax based on your sales, it would greatly increase your taxes, potentially driving you into bankruptcy (and throwing your employees out of work).

A profitable company with high margins, on the other hand, would become even more profitable, since the tax on its revenue would be lower than the previous tax on its income. Optically, this would look bad, as it would effectively lower taxes on the most profitable companies.

That said, perhaps the tax rate could be graduated based on the revenue of companies, so companies with higher revenue essentially paid a higher marginal tax rate on their sales. It would be hard to police such a tax since companies would try to avoid higher tax rates by creating subsidiaries, but in a computerized age, I imagine it is possible (such as, for example, making all subsidiaries use the same tax identification number as the their parent company).

Even so, a tax based on revenue rather than profits would be borne disproportionately by low margin businesses.

Exports

The other issue with this sort of tax is that exports are essentially not taxed. Right now, if a company is profitable, they pay income tax on both their domestic profits and their profits from exporting. If you only have a domestic sales tax, you lose the tax on exports.

This could be addressed by taxing exports, but then you’re back into the situation where it’s in a company’s best interests to fly away to another country to avoid taxes, which is what we were trying to fix. But if you don’t tax exports, I don’t see a good way to avoid this problem.

Maybe the solution is protectionism—don’t tax the exports, but tax the imports to maintain your tax base. That makes life very good for global companies located in your country, and bad for companies not located there, but, in a “beggar thy neighbor” world, perhaps that is the best option.

Regressiveness

One of the other big concerns about this sort of tax is that for consumers, it would be regressive. Everyone, regardless of income, would pay the same sales tax as a percentage. But the poor are required to spend almost all their income to survive, whereas the rich aren’t. Thus, effectively the poor would be spending a higher percentage of their income on this sales tax than the rich.

In general, I find this sort of argument confusing, because it seems to attribute the full cost of the sales tax to the consumer rather than the corporation. But, if you extend that same argument to corporate income tax, then are corporate income taxes equally regressive now, since the consumer is paying their income to corporations which have higher prices to accommodate those corporate income taxes?

To me, both sales and corporate taxes look almost equally regressive, unless you assume that the staples the poor buy are low margin, and are therefore provided by corporations that don’t have high profits, so pay low taxes, while high-margin luxuries are provided by corporations with high profits and high taxes. But that seems to me to be a poorly-supported argument.

Rather to me, it looks to me like sales taxes are highly visible to the consumer, so people make generalizations about their regressiveness, while corporate taxes are less visible, so people assume they are only borne by the corporation, not the people buying the corporation’s products. Thus, I think the degree to which the cost of corporate taxes are borne by the poor is unclear.

In any case, if you do assume that sales taxes are regressive and wish to address that in some way, the government can issue tax credits to the poor, just as they do with the GST.

The bottom line

Such a change in tax policies would be widely derided as a transfer of taxes from corporations to individuals, so is probably politically infeasible. But, I think it’s not quite that extreme—taxes on corporations increase prices for everyone, so are not so different than taxes on individuals.

Thus, I’m not sure if eliminating corporate taxes in favor of a sales tax is a good idea or not, but it seems like, in a global world, it’s almost inevitable. Either you need co-operation between countries globally to ensure a fair, auditable corporate income tax system (i.e. my first solution), or you need to force corporations to pay taxes on the items they sell in your country (i.e. my second solution). I don’t see any third option.

One Strategy for Eliminating Corporate Tax Avoidance

51 places to hide money

One of the interesting arguments of the right wing is that corporate taxes should be reduced or eliminated because otherwise, corporations will build their business in jurisdictions with lower taxes. To a certain degree, this is true—a huge proportion of tech manufacturing happens in Ireland because of its attractive tax benefits.

However, this is also a bit of a red herring argument because it assumes that the only way that countries can deal with this issue is by lowering taxes instead of focusing on reducing tax avoidance. I see two potential ways to deal with this issue, one of which I’ll discuss today

Look around the world

One method of dealing with this issue is by taxing corporations based on their global income, rather than just domestic income. One common way corporations avoid taxes is by setting up subsidiary corporations in countries with low taxes. The subsidiary will pay the low taxes on sales outside the company’s home country, and the cash will sit in the subsidiary indefinitely since, if it is bought back to the home country, it will be taxed.

Over the last few years in the USA, there has been a debate about whether corporations should receive a tax holiday on foreign profits (i.e. whether corporation should be allowed a brief period of time to move those profits to the USA without paying full tax on them.) The theory is that those profits would stimulate economy rather than just sitting around in some offshore bank account. To me, that sort of strategy would just further encourage this sort of tax avoidance, so probably isn’t a good idea.

Instead, I’d suggest taxing companies on their full global income, including the income of all domestic and foreign subsidiaries and parent companies. In cases where a subsidiary isn’t fully owned, it could be taxed proportionately, or taxed as if it were fully owned if the ownership is more than, say, 25%. After all, often the reason for the creation of subsidiaries is to avoid taxation or liability, both of which aren’t actually things that benefit society as a whole. (e.g. Do we view it as acceptable if Canadian subsidiary pollutes in China because the pollution is done through a Chinese subsidiary?)

Some problems

There are, of course, some problems with this approach.

First, there is a double taxation problem since companies could have the both countries trying to claim the taxes. For instance, suppose Ireland has a 10% tax and Canada has a 25% tax. It would be unfair for a Canadian company’s Irish subsidiary to pay 35% tax. To avoid this, companies could get tax credits for foreign taxes paid, effectively paying 10% tax to Ireland and 15% tax to Canada.

Second, if the taxation of subsidiaries isn’t proportional to ownership, it would make joint ventures less attractive, but to me, that seems like a reasonable sacrifice (mostly because I suspect that if taxation was proportional to ownership, people would find some way to exploit that feature as a taxation loophole.)

Taking the ball and going home

Third, companies might not want to do business in your country if you taxed this way. As far as I know, taxing companies based on not just their subsidiaries but also their parent company would be unprecedented. But if you don’t do that, the business can just set up the parent company in a non-taxing jurisdiction and operate as before. Taxing the parent is one of the only ways to ensure the company won’t avoid taxes by setting up in Antigua.

But you can see why Apple might hate this. Perhaps only 4% of their profits come from Canada, but Canada is trying to tax 100% of Apple’s $45 billion in profits. That might be enough to make Apple not want to sell in Canada. But, if you actually believe in the invisible hand of economics, this likely won’t matter long term, since other companies will rise in Canada to create the products that Apple would refuse to sell here. The market won’t be as efficient as it would be otherwise, but that’s a natural consequence of taxes in every case.

What’s more, if USA imposed this sort of taxation, Apple would have no choice but to give in because that market is so big that they couldn’t avoid it. And, if all countries did this, you’d have solved the problem of companies relocating their operations to low-tax locales.

Documents, please

One of the biggest challenges in this form of taxation would be getting accurate global documentation. As the Canadian government, you can force Canadian subsidiaries to feed you documents, but you can’t force a Chinese subsidiary to provide you with accurate information.

This problem could be solved in two ways. The first would be with a global tax treaty, where documents were shared between governments to ensure fair taxation. In theory, this sounds good, but in practice, it might be tricky, since I imagine many of the rich people practicing tax-avoidance strategies are also influential in government. Thus, while the governments of all countries seem to have an incentive to reduce tax fraud, in practice, the individuals running the government may not.

Thus, another alternative is prosecution of corporate executives. In the last few decades, corporate malfeasance has been punished by corporate fines (i.e. not actually punishing the people who committed the crimes). If, however, you actually threw corporate tax cheats in prison (e.g. literally putting the whole board of directors and the ten highest level managers of the corporation in prison for a decade) for the discovery of tax fraud, then I think it would help to address this problem. Essentially, this standard for proving guilt shouldn’t be “did you know about the tax fraud?”, but rather, “In a well-run corporation, should a person in your role have been responsible for, or able to recognize, the tax fraud?”

The bottom line

This solution certainly isn’t perfect. Businesses relocating to low-tax jurisdictions is a challenging problems with no easy solutions. Nevertheless, as globalization makes this sort of tax-optimization easier, the issue becomes even more important to solve, even if all solutions are flawed.

Is Capitalism Monopoly?

Capitalism transforms monopoly

A reader recently send me a comment about whether there was some way to structure capitalism so that it doesn’t become the end game of Monopoly. By this, I think he meant capitalism eventually resulting in all the income generating assets belonging to a small subset of people with the rest of the population poor.

This question amused me, since Monopoly was originally intended to illustrate the evils of capitalism, but it’s also a good question, because I think even pure free-market capitalism isn’t as extreme as Monopoly.

Wealth accumulating to the few

Like Monopoly, capitalism does lead to gross wealth disparities. In essence, it’s easier for the rich to become richer than it is for the poor to become rich. This is true for several reasons. First, the poor are so focused on basics like food and shelter that it’s hard to find the resources to focus on wealth building. If you need two jobs to pay for food and shelter for your family, you don’t have the time or money to start your own business. In contrast, wealthier people only need focus a tiny portion of their time and money on subsistence, leaving the rest, potentially, for wealth generation.

Second, it’s easier to make money when you have money. For instance, the stock market might average 7% returns over the next year.  If are never likely to have more than $200 to invest in any year, it’s not really worth your time to learn how to invest in the market. But if you have $10,000 or $100,000 to invest, it’s worth your time to shoot for higher returns.  And this sort of reasoning is not limited to the stock market. In fact, many investments are literally unavailable to people of low net worth.

Third, companies that are successful are usually successful because they have a competitive advantage (e.g. a brand, a monopoly, dominance in a market that is too small to support more than one company).  Thus, companies that have become winners—and made their owners wealthy—are more likely to continue to succeed than some random new entrant without competitive advantages. The winners keep on winning. This is actually the core of Warren Buffett’s investment strategy.

Fourth, some business success is luck, but some is also skill. You’d expect the more skillful business people to have a greater chance of success in their business endeavors than less skillful people. So, you’d expect successful entrepreneurs to have a disproportionate number of skillful business people, and these entrepreneurs on average to have a better chance of continuing to accumulate wealth than a random selection of people. Again, winners are more likely to keep winning.

Why it’s not Monopoly

So, without any wealth redistribution, you’d expect wealth in a capitalistic society to naturally accumulate with a small minority. But, this model seems to assume that life gets worse and worse for the poor as a handful of rich dudes just get wealthier and wealthier. Nothing could be further from the truth because of a) the math associated with generational wealth transfers and b) capitalism’s creative destruction.

The most noteworthy thing about generational wealth transfers is that they don’t work. Almost everyone has a large number of descendants because population growth is geometric. If everyone averages 2.5 children, then, in a few generations, that billion dollar fortune will be spread across two children, sixteen grand children, 39 great-great-grandchildren. And not all those people will be prudent with the money, and certainly not all of them will have the business skills of the person who created the wealth. Thus, the wealth is diluted back into society. The wealthy will become unwealthy.

So, while the mechanics of capitalism ensure wealth is concentrated in the hands of the few, the few are constantly changing.

Creative destruction

An even more important factor is capitalism’s creative destruction. Competitive advantages are intended to ward off creative destruction, but destruction tends to happen anyway. Microsoft’s Windows monopoly was completely dominant in the 1990s. But, with the rise of the internet and smartphones, it’s much less important.  Bill Gates is still rich, but not nearly as rich as he’d been if Steve Jobs hadn’t started making iPhones.

Of course, this doesn’t result in the poor becoming wealthier relative to the rich, but it does result in the poor becoming wealthier in absolute terms. Competition drives down prices and leads to new innovations that benefit everyone, even the absolute poorest. Lower prices mean the poor get more bang for their buck. Innovations are often within the reach of everyone, even the poor. Very few people in first world countries don’t have telephones, TVs, and indoor plumbing.

And most people understand that. A few years back, NPR asked whether people would rather be rich in 1900, or middle-class now.  Over two-thirds would rather be middle-class now. To me, it’s a complete no-brainer. Would I rather have the Internet or servants? Would I rather have antibiotics or silk sheets?

The creative destruction of capitalism encourages those innovations, leading to better lives for both the rich and the poor. The fact that the decision is so easy shows how powerful capitalism is.  (Assuming you believe that making money is one of the driving forces behind innovation, which I do.)

While the poor are still relatively poor, they’re still much wealthier than the rich decades ago.

My bottom line

So, I think capitalism isn’t naturally a game of monopoly because the poor win even as they lose and because over generations, the winners change. That’s not to say that governments shouldn’t redistribute wealth to make the game more even, but rather that even with an unbalanced distribution of wealth, most people benefit from capitalism, even the poor. So, the real challenge is figuring out how to even out the game without destroying the benefits of capitalism. (Which, to be fair, is what the reader was asking in the first place.)