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POLITICAL THEORIES TO THE RESCUE

It’s only natural

In the previous part, we have seen how the shape of the bell curve remains more or less unchanged when we move from Poor to Average to Rich countries.

This fact did not escape political theorists; humans as they are, they decided to do something about it. It is only natural.

What politicians decided to do is to change the shape of the curve. Their desired shape and their intended consequences, is something that we will study next

In general terms, the notion of changing our environment (to suit our needs instead of sitting cold in the dark dying of famine and disease), seems like a good idea. However, there are exceptions for every rule. This is one of those cases.

In traditional politics, we usually divide the field in three philosophies: left, center and right.  We will analyze each case separately. In order to do so, we will use Averageland’s curve.

However, before we get to that, we need to look at the total amount of income available in each economic class (poor, middle and rich) per person.

First, we create three separate buckets to differentiate between Poor, Middle and Rich classes.

For Averageland they would be:

  • Poor Class Net Income:      $0 to $83
  • Middle Class Net Income:   $84 to $122
  • Rich Class Net Income:      over $123

Then we add all the incomes of all the people in each bucket. Then, we divide this number by the number of people in the bucket.

This way, we can calculate what is the average net income per bucket. If we would to do this calculation in real life, we would get something like this:

 

Distribution Income of People

 

This picture is based on real statistical data from several countries, however, the data changes considerably depending which country you are looking at. In the first world countries, the ratio of average net income in each class per person is approximately 1 to 10 to 100 for poor, middle and rich classes respectively.

In other words, rich people are about 100 times richer than poor people and about 10 times richer than middle class people. Is this a surprise? Surely not.  We are just pointing out these numbers because they will come handy in the next sections.

 

Center Politics

There is no government on earth that is pure center, politics-wise. They are all tinted by the left or the right or, more likely, left and right simultaneously depending from which direction the wind is blowing today.

However, for instruction purposes, let us consider a “pure-center” government.

Such a government is pro-status-quo. This means, that if we elect a half dead cactus instead of this kind of government we would get exactly the same result. In economic terms, they are the “do nothing” party. They are chair warmers, not doers. As such, it is not their intention to change the shape of the bell curve, but to ignore it.

However, they are not neutral from an economic point of view because they are the “spend” party. Spending is the basic tenet of all politicians. As such, this type of government will simply spend, spend and spend. They will, of course, tax, tax and tax so that they can spend, spend… you get the idea.

The question that we must ask now, is this: what will all this taxing and spending do to the bell curve? Will we be better off or worse?

 

Center-Politics Intended Effect

These politicians are not trying to achieve “social justice” (aka buying votes) by changing the bell curve. They are just stealing from everybody and spending it on “selected” classes (i.e. low income voters). They do so because buying votes from poor people is relatively cheap and since quantity of votes matter, this is the most efficient way.

They steal by taking from everybody, including the poor. However, they do so by stealing a little bit more from rich people than they do from poor ones. Or they tax everybody the same percentage (a flat tax). They are not concerned with the social distribution of wealth; they are only concerned with spending.

This  graph shows what is that they intend to do.

 

Center Politics Intended Effect

 

They take (mostly from rich and middle class people) and give to the poor. As a consequence, poor’s net income rises dramatically (and artificially), sometimes even surpassing middle class’ real net average income.

They assume that because rich people have too much money, if they steal a percentage it won’t matter. The bell curve won’t be affected and they will be able to keep stealing from the rich and the middle class.

 

Center-Politics Unintended Consequences

As with anything economic, there is no free lunch. If somebody takes money from a highly efficient and productive owner and diverts this money to pure consumption, the whole economy suffers.

Think of it this way. Rich people and the middle class tend to invest their money. This investment is capital to be used for productive purposes. This money is what makes economic growth possible.  By removing some of this money from circulation, center-politicians are slowing down economic growth. This affects everybody. At the end of the process, the curve and the income distribution looks like this:

 

Center Politics Unintended Consequences

 

As you can see, there are many variations from the original.

To begin with, the curve is no longer bell-shaped. Technically speaking it went from a Gaussian distribution to a Poisson-like distribution.

The curve has also shifted to the left. Although it is clear that we no longer have people under the Poor limit (the curve starts at $83), we also don’t have rich people either!

What’s worst. The Middle Class peak has shifted from a maximum of $103 to a maximum of only $92. And to make matters even worse, the Number of People in the Middle Class Bucket has increased from 1000 to 1200!

If we look at the bar graph, we also notice that:

  • Total amount of taxes have decreased
  • Average Net Income of all Classes has decreased

All this requires an explanation. By taxing everybody, the center-politician has managed to remove productive capital from the markets. Less capital means less profits. Less profits means less taxes and worse economic conditions for everybody. This means that people now earn less than they did before and there are now more people earning less!

Sure, the Poor Class is better off, until we take into consideration a tiny vicious cycle. The worse off the economy is, the higher the taxes will be. The higher the taxes, the worse off the economy will get. In other words, no matter what the center-government does, the economy gets progressively worse. As this happens, there is less tax money to shift to the Poor Class. Eventually, the amount of money is so low, that the government either stops shifting money or starts printing it. Whit the advent of heavy inflation and even hyperinflation, the economy is destroyed and with it, all Classes suffer enormously.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Austrian Economics In Pictures - Part 3

 

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