The Marxist Origins of Income Redistribution

After my series of articles on the role of government under, respectively, Keynesian and Austrian economic theory, it has been claimed that I am downplaying the analytical ties between Keynesian theory and arguments for redistribution of income. 

I always welcome critique, even when, as in this case, it is unfounded (for reasons that my article on a Keynesian, libertarian government explains). But since the issue was brought up, let me explain where to find the true origins of arguments for income redistribution: in Marxist economics.

Marxist theory is built around the so called labor theory of value. A product earns its value not through a market evaluation of what buyers are willing to pay for it – also known as the equilibrium price – but through the labor that workers put into making the product. Here is how it works, in a nutshell:

• Working Will uses four hours produce Gadget G; 
• Every hour has an objective value; 
• The value of labor is based on the reproduction cost of labor; 
• The reproduction cost of labor is determined by the smallest resources needed to secure that Working Will can come back to work tomorrow and produce more Gadgets.

In one day, Will builds two Gadgets. The money he makes is precisely what he needs to buy himself food, shelter, clothes and other basic items so that he can come back to work tomorrow and produce two more Gadgets.

Enter Capitalist Carol. She has taken her savings out of the bank and bought some equipment that can help Working Will produce twice as many Gadgets per day. Production doubles and sales double. The revenue will now be divided between Working Will and Capitalist Carol. By definition, we now have an income distribution problem, the solution to which is one of the following:

a)     They should split the revenue equally, whereupon Will would get the same amount of money as before;

b)    They should split the increased revenue evenly;

c)     The income distribution should be determined by the supply and demand of each of the production resources.

Common sense suggests that the revenue should be determined by the relative scarcity of each of the resources. If Capitalist Carol could easily find another worker but her equipment is rare, then reasonably she would get most, if not all, of the extra revenue. If on the other hand the supply of equipment – capital – is ample but labor with Working Will’s skills are few and far between, then he will get the bulk of the extra revenue.

Marxist theory suggests a different distribution model. Based on the theory of labor value Working Will only needs to produce two Gadgets to sustain. With Capitalist Carol’s equipment he produces four Gadgets per day. Therefore, Marxist theory dictates, he is working half the day “for himself” and half the day “for the capitalist”.

Herein, Marxists say, lies an injustice. There is no reason why Working Will should spend any part of his workday working for anyone else but himself. Consequently, Marxist theory dictates that the income distribution problem be solved by transferring the property right of production equipment – capital – to the workers. Thereby they can produce twice as much as they could without capital, but keep all of the proceeds for themselves.

The problem with this argument is the suspension of property rights. In the late 19^th century, when Marxist theory was spreading like a political plague across Europe, his followers were divided into two major groups: those who took his word literally and demanded confiscation of capital in the name of the workers, and those who realized that the confiscation of property rights would take an armed, violent revolution, which was not conducive to the accomplishment of a “better” society.

Violent property rights antagonists have gone down in history known as Communists. Those who want to combine Marxist theory with at least some respect for property rights are better known as Socialists or Social Democrats. The welfare state was born from the latter movement, as a systematic effort to fundamentally change the distribution of income in modern industrialized nations.

At the heart of the welfare state lies the premise that when income is distributed between workers and capitalists according to free-market principles, then the outcome of the distribution is inherently unfair. The nature of the unfairness was, originally, directly based on Marxist analysis, but has evolved over time into a general argument that any differences in income are unfair by default. This more open argument is based on another of Marx’s contributions, namely the principle that everyone shall provide, with his work effort, to the best of his ability but that everyone is compensated not by what they provide but by what they need.

The phrase “from everyone according to ability, to everyone according to need” has come to define the legislative implementation of the welfare state. Progressive income taxes take “from everyone according to ability” while entitlement programs provide for everyone “according to need”.

By redistributing income the welfare state weakens the meaning of the property right. Owning a business no longer means unabridged proprietary control over all aspects of that business. Government lays claim to a portion of the income produced by that business, and thereby in part by its capital stock. Using the terminology from Marx, this means that the business owner works part of every workday for government before himself.

However, this is not the most important element in the welfare state’s incursion into the free market. The most important part is the very fact that there are moral arguments raised against free-market income distribution. Strictly speaking, the Marxist argument against free-market distribution is not a moral argument, but an analytical conclusion. It is derived from false premises and therefore false in itself, but precisely because of its analytical status it is more respectable than arguments made on strictly moral grounds.

Either way, though, any argument for income redistribution is false already at the outset.