Wages of Abstinence and Risk

Two posts ago, I rehashed the point that owners of capital income do not produce it and therefore have no desert-based claim to it. One post ago, I responded to the rebuttal that they do in fact do work to receive capital income, namely the work of deploying and managing capital. In that post, I rehashed the point that capitalists don’t do this work, but rather money managers and executives (who are paid) do it. So, it would seem, we really do have 30% of the national product flowing out to people who have no recognizable desert-based claim to it.

Of course, as I pointed out in my first post, this is not a total bar to arguing against the current set of arrangements. There still remains the utilitarian argument for them: regardless of whether capitalists can be said to deserve this 30% of the national income, providing it to them in the manner that we do creates specific price signals and incentives that leave people much better off than if that 30% was distributed in some other manner. This is a viable enough argument (though I think it too is defective), but crucially it is not a desert argument. It does not proceed by explaining why specific capitalists can be said to individually deserve the income they receive based on their production; rather, it makes a much more collectivist welfare point about why it is good to give it to them anyways. (Although I won’t pursue it here, this is identical to the dominant argument for transfer incomes as well.)

You might think that the utilitarian argument would be enough to satisfy the pro-capitalist side. But, quite remarkably, it doesn’t seem to do so. Deep down, it appears that they still crave some way to attribute capital income to something the capitalist is doing. This impulse is understandable: it’s hard to legitimate a system that gives the wealthiest among us 30% of the national income each year while also admitting that they didn’t do anything to produce it. In the cloistered world of higher-level philosophical debates, you can sustain an argument of that sort. Selling it to struggling people who, though actually working for their income, receive a tiny fraction of what billionaires passively capture each year seems like it could be difficult. Those who receive this capital income don’t generally seem too enthused about the purely utilitarian explanation for it either.

When first faced with this problem, the natural first move appears to be to claim the capitalist is actually working. That was what my second post (linked above) was in response to. Once that is knocked down, the capitalist apologist moves into ever more abstract terrain.

Wages of Abstinence
Perhaps the most amusing of these more abstract individualist justifications for capital income comes to us from old-timey economist Nassau Senior. Senior argued that the capitalist is being compensated (and indeed deserves to be compensated) for their sacrifice in the form of abstaining from consumption in the short-term. You see, these people could have just gobbled up their income in leisurely ways, but instead they forwent that leisure and consumption and invested it, taking a short-term hit to their well-being that deserves recompense down the line. Although this “wages of abstinence” argument is initially an old-timey justification for capital income, I still see it pop up in debates all the time.

In my view, this argument was well-handled by Ferdinand Lassalle in his 1864 tract “Kapital und Arbeit”:

The profit of capital is the ‘wage of abstinence.’ Happy, even priceless expression! The ascetic millionaires of Europe! Like Indian penitents or pillar saints they stand: on one leg, each on his column, with straining arm and pendulous body and pallid looks, holding a plate towards the people to collect the wages of their Abstinence. In their midst, towering up above all his fellows, as head penitent and ascetic, the Baron Rothschild! This is the condition of society! how could I ever so much misunderstand it!

Lassalle’s quote contains a number of interesting, and I think correct, threads. One of those threads pertains to the compensation of what we might think of as inframarginal sacrificers. For those with huge stocks of money, like Baron Rothschild, it is hardly any sacrifice at all to defer the consumption of even the great majority of their fortune. What else are they realistically going to do with it? They already live lavish lives and consume all that they can realistically want. The level of short-term hedonic sacrifice involved in their investing their fortune rather than consuming it is zero or nearly zero.

At the same time, though not mentioned by Lassalle, poor people who take pains to save money undertake relatively huge short-term sacrifices while receiving nowhere near the same compensation for that sacrifice as the super-wealthy. Even compensation per unit of capital invested clearly does not match sacrifice levels as the rich and poor receive the same compensation despite dramatically different levels of sacrifice involved in making the investment. (In reality, the rich actually receive higher return on capital than the poor, making this problem even worse.)

After wages of abstinence fades away for the silliness that it is, we are then told to look towards risk. You see, the capitalist doesn’t just put capital in and get passive income out. There is at least some chance that they don’t get passive income out and may even take losses. Indeed, the compensation of capital investment directly relates to the risk that such a thing will happen.

As I pointed out earlier, this argument also is not compelling. Under capitalism, two people taking on identical risks (e.g. equities with the same risk profiles) do not receive identical compensation for doing so. In fact, that is integral to the whole idea of risk. Compensation on the basis of risk is no different, on an individual deservingness level, than compensation for lottery winnings. In both cases, money is put into the system with some level of risk of loss (in the lottery winner’s case, huge levels of risk) and then, if you are a lucky one, you get a bunch of money out. This compensation is not based on individual desert (whether productive or otherwise); rather, it is based on the exact opposite of it: randomness and good fortune. It’s gambling.