The Lessons of History About Wealth and the 80/20 View of Social Engineering

02/24/2015 07:47 am ET | Updated Apr 26, 2015

"Since practical ability differs from person to person, the majority of such abilities, in nearly all societies, is gathered in a minority of men. The concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history." So said Will & Ariel Durant, distilling 5,000 years of history, back in 1968, in a short collection of essays daringly titled The Lessons of History. Nearly half a century later, their thesis has a contemporary ring.

I stumbled across this little gem when one of my readers, Rohan Thompson of Sydney, kindly sent it to me. The writing is superb and reminded me of Edward Gibbon, whose monumental work, The History of the Decline and Fall of the Roman Empire, written from 1776 to 1788, can still be read with immense pleasure and instruction. Will Durant, a historian and philosopher, was actually a socialist, reformer and civil rights campaigner, and a person of enormous personal goodwill, which makes his rather conservative conclusions doubly interesting.

I don't entirely agree with his thesis, but it made me think. It can be summarized very succinctly, in three stages.

First comes the concentration of wealth, which inevitably follows the concentration of abilities in a small minority of people.

Then, as the concentration of wealth becomes increasingly obvious, comes pressure for redistribution from the rich to the poor.

Finally, "the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty."

The Formula for Greek Recovery

He gives the example of Athens in 594 BC, where the disparity of wealth had reached a dangerous climax. The poor and the rich were at daggers drawn. But then "good sense prevailed; moderate elements secured the election of Solon." Although an aristocrat and businessman, Solon devalued the currency - Greek politicians of today please note - thus easing the pressure on debtors. He ended imprisonment for debt, cancelled arrears on taxes and mortgage interest, instituted a highly progressive income tax, and gave free education to the sons of soldiers killed fighting for Greece. "Within a generation almost all agreed that his reforms had saved Greece from revolution."

"The government of the US, in 1933-52 and 1960-65, followed Solon's peaceful methods, and accomplished a moderate and pacifying redistribution; perhaps someone had studied history. The upper classes in America cursed, complied, and resumed the concentration of wealth."

"We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution ... all economic history is the slow heartbeat of the social organism ... of concentrating wealth and compulsive recirculation."

Koch's Quibbles

I find it a bit surprising that a person of the Left can so readily buy the line that wealth creation is in some sense the natural result of unequal abilities. Apart from the obvious point that the rich have better education and contacts, so that someone from a privileged background - Bill Gates, for example - has a head start and the economic freedom to pursue an eccentric interest (in his case, computers before they were mainstream), there is also the less obvious point that the ability to make money is not an indicator of extraordinary general intelligence or social worth.

Perhaps this is clearer today than in 1968. But I tell you, I know plenty of money-makers, and I have practised the art myself a little, and it does not require extraordinary ability. In the pantheon of general skills, I would place it a little above successful flower-arranging, and far below what is required to win at Wimbledon or even the Rio Open. Quite apart from the fact that money-making has a much higher element of luck than almost any other respected skill, the insight required to make a fortune is usually intellectually negligible, and often requires as much skill in capturing value - through restriction of competition - as in creating it. In this regard, Bill Gates is much more typical than, say, Steve Jobs.

I hasten to add, though, that the precarious foundation of wealth creation does not justify a large measure of redistribution. For we have to ask whether, these days in a rich society, redistribution benefits anyone very much, apart from the idealistic - or opportunistic - politicians who sponsor it.

Redistribution is good if it increases the total wealth in society, or saves people from destitution. Redistribution - as in the 1930s - can sometimes do both simultaneously.

But redistribution can also be bad, in three ways.

First, it usually tends to increase the power of the state. Except when anarchy beckons, this is nearly always a bad thing. The state is usually inefficient, oppressive, and given to wasting money on white elephants or even worse, black ones - by which I mean war and the whole apparatus of "defense", for which read "aggression". Once you have a mass of armed forces, with privileged access to power and a vested interest in conflict, the temptation to throw its weight around becomes irresistible. America and the world would be richer, more free, and happier places if the US military were a quarter of its current size.

Even worse, redistribution inevitably brings dependency. To live off the state means to fail to live off one's own efforts. This is as true of the upper-middle-class civil servant or general as it is of the poor. Anyone employed by a large organization has very little discretion for "doing their own thing." The population is enormously talented; but only a small minority of people actually use more than a tiny fraction of their abilities. They don't have to; they are not encouraged to; and often they are not allowed to.

Third, high rates of taxation usually mean low rates of tax receipts. If income tax was reduced in any country by, let us say, a third, within a few years the tax receipts would probably be higher. Redistribution can thus frustrate its own purposes. Redistribution is great for tax accountants and for antisocial and criminal activities, but it is not very good for the poor. If you doubt this, look at the relatively high standard of living of the bottom quarter of the population is countries such as Switzerland or Singapore, where taxes are relatively low; or at the progress made by the poor in countries such as India or China, where forced redistribution of wealth in recent decades has become much more moderate.

Redistribution matters less than Social Mobility

The Durants had remarkably little to say - at least in The Lessons of History - about social mobility. For a society to be fair and dynamic, redistribution is of much less importance than high social mobility. Let us be clear, social mobility means the ability to fall just as much as it means the ability to rise. A society where the rich all remain rich is just as bad, or worse, than one where the poor all remain poor.

The real problem in society is not that the rich are getting richer and the poor, poorer - which is arguably true in the US, but not in Europe, and certainly not in the world as a whole - but that social mobility within most countries (though not in the world as a whole) is declining. The reasons are complex, but there are two which I think are supremely important.

One which is apparent to many is that the gap between high quality education and mainstream education is getting larger. The rich overwhelmingly have privileged access to the very best universities and other sources of knowledge - and just as important, appreciation of its value.

The less obvious reason is that it is much easier for the middle and upper classes to start their own businesses. They are much more likely to have a little capital themselves, the ability to risk a fresh start, contacts who will supply more capital, and the ability to argue their case persuasively. And today, the best route to riches and social mobility is to start a business. For sure, only a small minority will succeed in making much money. But those who do, will make a great deal. Generally they are the people who need it least, and for whom upward social mobility is least necessary.

Conclusion: the 80/20 View of Social Engineering

If we want to improve the fairness, cohesion, and overall wealth of our society, we have to make it much easier for those near the bottom to become successful entrepreneurs. The last way to do this is through general redistribution and the power of the state. The best way to do it is to redistribute the quality of education and the desire and chance to start a business.

As always, a large majority of good results follow from a small proportion of causes. A few aspects of redistribution are vital, but most are a waste of energy, or worse. Only if we focus on education and stimulating the entrepreneurial urge where they are currently weakest can we build a better world.