Thursday, August 20, 2009

America's socialist roots

Just started reading Alan Beattie's "False Economy" and I'm not even 20 pages in before learning a very interesting piece of information. I wasn't aware of this, but 100 years ago, apparently Argentina and the US were pretty much in the same boat economically and socially. Both were emerging economic powers, ranked in the top 10 of world economies, with abundant resources, excellent access to global markets, stable democratic governments, etc. Obviously, the situation is dramatically different now...Argentina is close to third world nation status while the US has the most powerful economy in the world. The book starts off the explanation for the divergence with this:

Argentina settled its inland territories by auctioning off large tracts of land to the highest bidder. Yep, capitalism at its finest. So Argentina became a land of extremely wealthy aristocrats with huge tracts of land...and lots of minimally skilled, poorly paid workers to tend the land. Because the aristocrats were already loaded, they had little incentive to invest in the land or do much to make the economy more productive. Grazing large animals that made for good eating was a perfectly good way to use the land. Argentina came to be a land settled by a small portion of very privileged people, and huge portion of unskilled laborers who tended the land but had little attachment to it. Many were actually seasonal migrants. Few immigrants (~5%) became citizens. Few really committed to seeing the nation prosper because all the benefits were going to be reaped by the tiny minority anyway, so what was the point?

America, on the other hand, gave away many smaller tracts of land to lots and lots of people. Sounds pretty damn socialist if you ask me. America attracted many people with skills and initiative who simply didn't have the opportunity to benefit from their skills in the old world because it was too difficult to break out of the lower rungs of society. In America, on the other hand, they were given, for free, a piece of land, where they could live, and build on whatever talents they had. They could share in the wealth that was being created in America. Because so many people were given relatively small pieces of land, all of these people had an incentive to make the best of it, unlike the affluent in Argentina who already had plenty of money and had no incentive to wring all they could out of their vast landholdings.

Two obvious lessons:
-America has always had "socialist" leanings, and these "redistributive" policies have given us an incredible competitive advantage over nations where the rich continue to be rich and get richer.
-The idea that the rich will make the wisest investment decisions, since they obviously had to be wise to earn all that money in the first place, is bunk. That argument *might* have some merit for first-generation wealth, but the majority of the very wealthy got their wealth the old-fashioned way, they inherited it. Generally speaking, the wealthy aren't going put a lot of effort into finding the most productive use for every asset they control. People with lots of assets simply don't have time to find productive uses for all their assets. Without a healthy amount of redistribution, a society can wind up like early 20th century Argentina, where the people who would make productive use of assets have too few assets to matter, and the people who control most of the assets have too much to care about making productive use of them. Shit may roll down hill, but history does not support the notion that wealth trickles down.

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