To illustrate just how society happened to get organized in such a way that unearned income is the standard rather than the rare exception, consider an example. There is a piano player, quite good, who performs for some people in a room, and gets paid for it. He did some work, received some earned income for it, and everything worked quite nicely. But in the audience, there was a person with a recording instrument, and he received permission to record the music. It was an excellent copy, allowing the music to be reproduced by anyone with a copy of the copy and the right equipment.
The copyist makes copies and sells them by the millions. Who gets the profits from this? In our society, it is the piano player, who owns the copyright to his music. What did he do to earn the profits created by mass duplication? Absolutely nothing. He played to a room and was paid for it, and that payment was a measure of his ability and a reimbursement for his time. If the room had a copyist in it, he did no extra work, but because of the copyright laws, he gets a huge amount of unearned income. This is the essence of unearned income.
Copyright laws have many purposes, but one is to funnel large amounts of money, unearned, into a very few pockets. Consider a different society, that had no copyright laws, but instead had copyist guild laws. In this society, all the profits of the mass duplication go to the copyist, by law. The piano player has nothing to say about it, just as the copyist in the first example has no claim on the mass duplication profits turned over to the pianist. Why do we have laws for copyright and not for copyist guilds? It could have happened a different way. The essence of the socioeconomic system being developed in this blog is that unearned income should not be generated or distributed, and instead, costs should come down or profits should be allocated to those who contributed to the increase in benefits that mass duplication entails.
It is possible to take this pair of examples and make them more complicated, and thus attempt to fog up the clarity that comes from a simple example. Those who live on unearned income would love to maintain a fog around the actual facts of mass distribution profits. The large amount of mass duplication profits allows the hiring of storytellers who can obscure the essence of the situation. However, sticking with the simplicity of this pair of examples can make it clear to anyone how arbitrary it is that huge unearned benefits go to one person and not another.
A cynical person might say that laws which support this type of unearned income and the other many kinds of unearned income are written by politicians who favor concentration of benefits in the hands of a few who can show their gratitude for these laws to the politicians. This preference is simply one aspect of the most fundamental feedback law in economics: the concentration of money provides the means for further concentration of money, and concentration of income works the same way.
This particular type of unearned income manifests itself in many forms in our society. The propriety of the allocation is never questioned, and various agents spring up to justify it or take advantage of it. Someone receiving large amounts of unearned income is often lionized or turned into a celebrity, as if that somehow changes the fiction that the huge amount of income is somehow earned into a fact, when it is not. The person who receives such largess from society knows, from observation, that it is necessary to spend some fraction of it on maintaining the myth that it is earned. It should not be surprising, with so much money flowing to people with a gift for words, that there is no end of obscuration of elementary facts, and no limit to the attempts to justify, without there ever being any criticism of the unearned income, the receipt of it. Society has grown up with this situation, and has never known anything differently and has never had a tradition of questioning the arrangements we are all presented with upon birth. Perhaps it is time to do that.
Two other examples might help demonstrate how pervasive unearned income allocations are in our society. The first one is the very old one, mentioned by Winston Churchill, in his famous speech on the taxation of real estate profits. When someone buys a property, it could very well be the law that they have the right to use the property, and sell it for what they paid for it, give or take some inflation, and also reflecting the improvements made in it if they were well documented. The buyer would pay an assessed value, and the difference would be made up by the local region. Instead of a person buying a piece of land and making a large profit when it becomes more accessible because of highway construction or nearby development, those who pay for the highway construction or nearby development would gain the profit, or make up the loss if one occurred. These are two ways of administering land ownership, and there are benefits to each. The one we use happens to be the one which tends to concentrate income and wealth in a few hands, as it would if the Fundamental Feedback Principle of our society was operating, and of course it is.
The second example covers executive pay. For some reason, we have a tradition, almost universal, that those higher up the management chain receive higher, often substantially higher, salaries. The work might be less demanding at higher levels, less detailed, less time-consuming, not requiring continual attention, more amenable to ready-made solutions or lacking in consequences of wrong choices, and so on. Nevertheless, the salary must go up with hierarchical levels. Why is that? Because at the top there can be a huge collection of wealth, which fits in perfectly with the Fundamental Feedback Principle, allowing the bestowing of favors on politicians who support the law, but even more in this example, allowing unearned income to be given to boards of directors who approve such salaries. Hierarchical pay structures are so common, there are never questioned. No one seems to ever evaluate if positions near the top require much less effort and talent than ones near the middle. It is a completely untested assumption, and may be totally wrong in many cases.
These three examples show that society arranges its laws to coincide with the Fundamental Feedback Principle, meaning laws are written in such a way as to allow concentration of wealth and income, and specifically to do so in ways where the income and wealth are unearned. Is this a desirable condition or result? Is it time to have a substantive discussion about the utility of it for society as a whole?
Of course there are some benefits to the concentration of income and wealth, one of which being this concentration allows major projects and start-ups and other novel ventures to be funded by the initiator requesting funds from one of the benefactors of society’s Fundamental Principle. However, the proper counter to this is that there may be other ways of providing start-up capital and other types of capital, and they might have advantages that balance any that wealth concentration does. The proper answer to claimed benefits of the existing system, or any particular components of the existing system, is that there may be many alternatives which have not been tried. It is a corollary to the Fundamental Feedback Principle that those who benefit from concentrated wealth can support economists, publicists, and other lackeys to write declarations that no other way can possibly work or not work as well as the existing system. It could be quite true that some alternative would have a flaw in it which would cause average productivity to decline or some other ill effect, but no demonstration of that has been made, merely pontification.
Wealth concentration does more than just allow publicists to dump mountains of material into the information commons supporting wealth concentration, it also allows the control of media so that some form of censorship of ideas disputing the benefits of wealth concentration, if they ever were to become popular, even slightly. It allows control of education, via donations and sponsorships, via research support, via simply flattery by someone of high status, as well as other means. What happens is that the choice of economic system which happened to be victimized by the Fundamental Principle is locked in place, as that very same Fundamental Principle marshals forces against change and even against the questioning of the system. Instead of healthy discourse and questioning of everything related to economic assumptions, the Fundamental Principle has the auxiliary effect of squashing such discourse, not be violent means or threats, but by supporting the opposing side, which favors wealth concentration, by orders of magnitude more funding. Thus, there is a very difficult path to be followed by anyone who wishes to question our economic system and present alternatives.