The idea of the free market is that if you produce something that is of value to others, they will be willing to give you money for it.
In this way, as each business and each worker improves their ability to help others by producing an ever better product or providing an ever better service, they naturally make more and more money. Those who work the hardest and help others the most make the most money, while those who help others the least make the least.
Those who believe in the free market believe that allowing any two (or more) parties to trade goods for money at any price they both agree upon leads to both the greatest good for the greatest number and is also the most moral and fair economic arrangement for a society.
One of the primary arguments, perhaps the primary argument, against capitalism and the free market is that “the game is rigged”. It is commonly repeated that the top 1%, the people who own “the means of production” like factories, land and businesses control too much wealth and can use their money and power to increase their income while most of us poor, underpaid working shlubs don’t have much of a chance.
Therefore, we need ever more government “New Deal” and “Great Society” programs, thousands more laws backed by force, over 200 government bureaucracies and other non-free market remedies in order to address this intrinsic unfairness and inequality in the free market.
So let’s put on our best scientist and detective hats, take an unbiased look at the evidence and see if this “rigged game” theory stands up to the cold hard facts.
I found a report from the U.S. Department of the Treasury, Office of Tax Analysis, using data from IRS Statistics of Income, Individual Income Tax Files for tax years 1996 and 2005.
Once you get in the 1%, you stay in the 1%, right?
So if the game is rigged, once you get in the 1%, you stay in the 1%, right? Once you have all that money and power, you can “control the market” to ensure you have an unfair advantage, as the theory goes.
Sure, every once in a while, one of the 1% might have a fall from glory and somehow end up among the rest of us due to some spectacularly bad gambles or a nasty crack habit, but in general, once you get on top, you stay on top, right?
What is the truth? What percentage of the top 1% in 1996 used all that money, power and connections to stay in the top 1% for just the 9 years between 1996 and 2005? The theory would say pretty much all of them. Maybe 99%? 95%? Lower? At least 80%? No? C’mon, Paul Krugman is about to blow a gasket! At least more than half, right?
The truth is, that less than half of the top 1% in 1996 managed to hold on and stay in the top 1% just 9 years later. (42.6% to be exact.)
There are several factors behind this truth. First of all, many in the 1% in any given year are there because of a rare event, like selling a business, selling stock that just got vested, having a mega hit movie or record, or just getting a once-in-a-lifetime project opportunity.
If you track people who file a tax return in the top 1%, you find it is most common that they are only in the 1% for one year in a decade.
In fact, one out of every 31 of these fabled 1% households fell all the way down to the very poorest quintile in this 9 year period. So much for money and power keeping you on top, eh?
Let’s learn more:
Those at the bottom have no chance to move up, right?
If you live below the poverty line, everything is rigged against you, right? You have no connections, no money, no power, no chance, right?
But again, the facts contradict this theory. Over half of the households in the lowest quintile in 1996 had moved up into higher income quintiles by 2005.
In fact, more than one in seven of the poorest households (15.2%) actually went from the lowest quintile to one of the top richest quintiles.
One in seven. Went from poor to rich.
In just 9 years.
Not due to government programs, but the good ol’, capitalist free market.
In fact, for people who start out in the bottom 20 percent, over 95 percent are no longer there 15 years later. In fact, more of them reach the top 20 percent after that period of time than remain in the bottom 20 percent.
Read the facts yourself
You can read the whole study here and form your own conclusions:
But it is unarguable that the facts do not support, and in fact contradict, the theory that the free market is a “rigged game”.
Contrary to the popular belief that “the rich get richer and the poor get poorer”, the facts are that this is the exception rather than the rule.
But if the “rich get richer and poor get poorer” meme is a lie, why would so many promote the idea?
The greatest detectives in history have relied on a simple, three word strategy for finding the truth:
“Follow the money.”
Politicians love the income inequality meme because “social justice” makes a great campaign speech, and gets tons of applause, donations and votes, and rallies support from those who feel entitled to more than they earn. And ever more huge government programs means politicians can live high on the hog, using their ever-increasing power to get rich beyond measure.
In fact enough is currently spent on government programs to redistribute income to give every household under the poverty line the equivalent of a $210,000/year income.
The more programs there are, the more power government officials have, the more they can reward wealthy friends who can reward them in return.
Politicians fear the truth because if word got out that in a free market anyone can get ahead by just working hard and devoting themselves to helping others, then sooner or later people might decide we don’t need federal and state governments spending over a trillion dollars each year on programs ostensibly to “correct the inequities of the free market”. Without these trillions passing through their fingers, there’s less money and power for politicians, and far less chance of gain from political office.
Journalists love the meme because it riles people up, makes them indignant and righteous, and increases their audience, which drives advertising revenue for their corporate parents and thereby their own salaries.
While it’s true that many of the 1% who did stay on top did so due to government welfare, “bailouts” or other largesse from the public treasury, there no doubt it would be better if we were more upwardly mobile.
But what factors limit opportunity for unskilled workers? It’s easy to find the answers: excessive taxation and regulation, along with poor education, are the primary limiters of opportunity in the USA.