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Incentivizing Wealth Creation

Posted By Marcus Holland On Tuesday, January 14th, 2014 With 0 Comments

In my own version of forward contract hedging, I’ve locked in my Diet Coke costs for the next two months, 50 bottles for delivery at £1.25 per 2 litre bottle. Counter-party risks:

1) The Tesco delivery van gets lost
2) The Tesco delivery driver drops the 50 bottles on the floor
3) I wipe them out of Coke supplies and they can’t fill my order
4) The sheer weight of my 100 litre Diet Coke delivery causes TSCO vans to run up huge petrol bills for shareholders and the company goes bust.

This would have a similar effect to telling the average person they could not own more than £100k in assets, before each additional £1 was taken off them. The difference being, that when American businessmen “down tools” and see no point in working, no business would operate. There wouldn’t be any wealth to seize, because the wealth simply wouldn’t be created.

Sort of like saying “a car would be a lot less heavy without the engine, if we took it out, the car would be far more efficient”. You can take a wrench to the engine, but there are only so many things you can fiddle with, without the car ceasing to function altogether.

The trick is to incentivize wealth creation while ensuring that society on a whole benefits from jobs being created, incomes being generated, and greater business profitability. That’s currently a little skewed, something we should expect naturally – the rich get richer over time. Ordinary Americans (and British) should participate more in the profits of businesses, most easily obtained through share ownership, but for many reasons they can’t/won’t. The 82% figure shows that the “business owning classes” in America will naturally enjoy an exponential increase in their fortunes relative to ordinary people over time – more could be done in making ordinary people understand and seek to take ownership positions in businesses.

You can levy greater taxes on the ownership of businesses, but you’ll still have the majority of business owners in the richest 5%. You’ll be lowering incentives, in order to push more money into the inefficient public sector. Alternatively, you can try to encourage ordinary people to take part in the growth of wealth within a country through greater capital ownership. In my view, the focus shouldn’t be on taking assets away from business owners, but doing more to ensure ordinary people are taking part in business ownership.

Maybe that could be achieved by a People’s Fund of some description. But in a capital-driven system, almost everything has to be incentivised to be efficient. Robin Hood schemes fail to achieve that – you need to make people want to behave in a certain hard-working way.

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