When considering the variation of socio-economic conditions in any country, particularly in South Africa, ‘capitalism’ is axiomatically blamed for the continuous cycle in which the ‘rich become richer’ and the ‘poor become poorer’. There is little, if any, economic or empirical evidence to substantiate such claims. Furthermore, the reluctance to question the lack of evidence works in favour of Keynesian [1] school economists; it augments their authority and influence in government, since their credibility remains unquestioned.
In order to understand how this unnatural transfer of wealth exists in the modern economy, we first need to analyse history. When gold coin was established as a medium for exchange, the kings of Europe were presented with an opportunity. They periodically collected all the coins from the nation’s citizens, with the pretence that coins of the ‘same value,’ but different physical designs, would thereafter be returned [2]. However, the gold coins were smelted and diluted through the addition of other metals; the royalty would retain the ‘extra’ gold and mould coins for their personal use. In this manner, the royal classes of the world were able to pay for their expenses and lifestyles without performing any form of labour.
The total number of coins in the realm increased, but the citizens were returned the same number of coins; the royals held the difference. Since the overall value of the economy remained constant, but the supply of coins (or, more broadly, money) increased, the value of individual coins relative to that of goods and services was reduced. The wealth of citizens, who held the same number of coins as before, was affected in the same manner. Effectively, the royal classes instituted a system whereby they could create something of value, where previously there was none; in truth, this is only accomplished through some form of fraud or theft. In other words, wealth was secretly transferred from the poor and middle class to the rich.
Contemporary economists question the relevance of this illustration. However, its significance surpasses relevance when we consider what happens today. In the modern context, this mechanism of monetary inflation is substantially less complex. Governments (aristocracy) need not collect and reissue currency; instead ‘loans’ (money printing and dilution) from central banks fund government spending (paying expenses) and allow operations to continue. While direct taxes form part of government revenue, inflation constitutes the difference. As in the historical model, wealth is diverted from the poor and middle class. What remains to be proven is how the rich, in particular, are unaffected.
Although the response to the recent global recession best illustrates how this happens, this phenomenon is constant in a fiat [3] monetary system. Governments around the world initiated quantitative easing (QE) programmes – in essence, credit expansion facilitated by nothing other than monetary inflation (since a direct tax on the citizens would cause civil unrest). Thus, based on the historical model, wealth is transferred away from those with a fixed quantity of money to recipients of such credit.
This transfer is enhanced by the fact that those with the newly printed money, or credit, are free to use it before general prices adjust for monetary expansion; fixed or pre-determined incomes are always last to adjust for inflation. In turn, companies receiving inflation-based credit can thus continue to compensate their directors and stock holders massively, which explains why the wealthy are unaffected by inflation.
What is evident from careful analysis of the mechanisms and consequences of monetary inflation is that it is not free-market capitalism that diverts wealth away from those who rightfully earned it. Instead, it is the actions of governments and ‘crony-capitalism’ which impose this silent but detrimental tax on the masses. This alone forms a satisfactory refutation for the exhausted and misguided axiom.
1) The Keynesian school of economic thought is based on the works of John Maynard Keynes. He proposed that governments become active participants in the economic markets, mainly through currency monopolisation and artificially setting interest rates. The government ‘bailouts’ for corporations as a solution to the late-2000s recession were prompted by Keynesian understanding.
2) See Rothbard, Murray N. 1991. What has government done to our money? Auburn: Ludwig von Mises Insitute. III, 4, pp. 59-60.
3) The term ‘fiat’ derives from the Latin ‘it shall be,’ since fiat money becomes legal tender through government decree. Fiat money is not backed by a tangible asset, resulting in a highly variable, unstable ‘value’. It is also not a free-market phenomenon, since, given the choice to do so, the free-market would tend to choose ‘commodity money’ over ‘paper money’.
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