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#138 - Redistribution the Capitalist Way


"Over the long-term, big companies of America behave more like biology than they do anything else. In biology, all the individuals die and so do all the species. It’s just a question of time. And that’s pretty well what happens in the economy too." - Charlie Munger


Redistribution, the Capitalist Way

I won't pretend to have all the answers to the current political divide, nor will everyone agree with what I have to say about it. But the least I can say is that I've given it a lot of thought and tried to approach it from a logical, unemotional way.

I believe much of the disturbance and political divide we are witnessing today is due to economic inequalities and deeply felt notions that both opportunities and outcomes are only available to select socioeconomic groups. There are many varying schools of thought as to how to dissolve these tensions. This is mine.

Let me start by saying I am a "card-carrying capitalist" with one addition: a "card-carrying capitalist with a conscience." As we play forward the current narrative between the top 1% and the bottom 90%, the lion's share of net worth gains will continue to go to the top due to the inherently different returns to capital vs. returns to labor. More and more of our country's equity will be owned by fewer and fewer hands. In fact, economic inequality hasn't been this great since the early 1900's.

The tension will continue to build on both sides of the aisle as proponents for Labor and Capital (left and right) continue to retreat to their corners. Ray Dalio has written extensively about the arc of a society's development, and in almost all historic cases, the wealthier in society had two choices: to willingly distribute ownership of property, or to let the State step in and forcibly redistribute capital.

So what is the best solution?

I believe the key lies in broader ownership of the American Economy. This is redistribution, the capitalist way.

In fact, I think the solution was spelled out roughly speaking in a Catholic Encyclical written by Pope Leo XIII on the rights and duties of Labor and Capital in 1891. You may ask, "what does this have anything to do with redistribution?"

Bear with me.

Pope Leo clearly understood the depth of enmity and strife between Labor and Capital in 1891 and finds a logical middleground that is neither too communist or too capitalist. Rather, he reaches two conclusions that are intuitively simple but still relevant 130 years later:

1. Private property is based on natural law. It is against the natural law for a State or individual to dispossess another's property rightfully earned through their labor either through illegal means or legal means (excessive taxation):

"The right to possess private property is derived from nature, not from man; and the State has the right to control its use in the interests of the public good alone, but by no means to absorb it altogether. The State would therefore be unjust and cruel if under the name of taxation it were to deprive the private owner of more than is fair."

2. The prevailing laws should favor broad ownership over concentrated ownership.

"The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners. Many excellent results will follow from this; and, first of all, property will certainly become more equitably divided... If working people can be encouraged to look forward to obtaining a share in the land, the consequence will be that the gulf between vast wealth and sheer poverty will be bridged over, and the respective classes will be brought nearer to one another."

Thus the question to answer becomes:"how do we achieve broader ownership of America's plentiful capital by both laborers and owners alike?"

This is where the 'conscience' part comes into play. Owners have to get creative and create pathways to ownership for employees and prospective employees. They have to create the incentive that allows for anyone willing to work and develop their skills to be on a path to ownership. At the end of the day, incentives power all human behavior, and I believe if more paths to ownership were available, people would respond in an overwhelmingly positive way. I could write at length about incentives, but I will sum up my thoughts in one point: when it comes to human behavior, there really is only the carrot or the stick. Show me the incentives, I'll show you the outcome.

If we can achieve a broader distribution of ownership in America's economy, I believe we can preserve the greatest wealth generating system in the history of mankind. Indeed, we may even accelerate growth as more people believe they can own a piece of the outcome of their labor instead of merely trading time for money!

This is all abstract in nature, but I'd like to get practical and hear from subscribers: what are the best examples of private or public companies offering employees pathways to ownership?



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Permanent Equity 2020 annual letter (Permanent Equity)


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