Gregory Loutsenko

Student ID: 4052904

Why do the poor not expropriate the rich?

Premise

Imagine a country in which every individual has a direct vote. In this country the wealth and
income is concentrated in a minority. The median wealth and income is below the average
level of wealth and income. This means that the majority of people could increase their
income and wealth by expropriation. The majority could vote for a 100% tax on everyone
and then redistribute the tax so everyone gets equal income and wealth. The majority will see
an increase in their income and wealth compared to before the redistribution.

This situation has not been observed in reality. Why?

Expropriating and redistribution

For now I abstract away from political philosophy and simply assume expropriation and
redistribution is interchangeable with redistribution.

Although redistribution through a 100% tax has never existed in modern times, a situation
close to it existed between 1930s until 1980s in most Western democracies. Therefore the
premise that 100% redistribution has never happened is not entirely correct. During this
period graduated income taxes rose to 97.5% in UK and 91% in USA (chapter 20, Hayek
1960). The proceeds were redistributed through welfare programs. But such wealth and
income redistribution has since been rolled back.

Therefore:

• Redistribution is a continuum with total redistribution described under premise being

at one end of this continuum.
• The premise that extensive redistribution has never happened ignores that the
situation quite similar to the premise has existed for a time.
• The original question might be restated: Why have voters rejected extreme
redistribution after having it? However I will abstract to the original question.

The following may be possible answers to the title question. The first two categories are
reviewed in Harms and Zink (2003):

• Political process: mechanisms of politics never allowing the premise to be the

equilibrium policy.
• Inter-temporal trade-offs: even if political process did allow redistributionist policy to
be equilibrium, voters reject it because redistribution hurts their future selves.
• Government’s practical inability to administer redistribution.
• Ethical grounds: expropriation is wrong.

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Gregory Loutsenko
Student ID: 4052904

Political process

Political process may answer the title question.

Not everyone goes to vote. In OECD1 countries voter turnout rarely exceeds 70%i and as
Conway (1985) pointed out this could make the decisive voter be in a larger quintile of the
income distribution. However a good political campaign could get enough poor to go and
vote for redistribution. Australia has compulsory voting yet has relatively low wealth and
income taxes. Voter apathy cannot fully answer the question.

Lobbying could prevent redistribution from being equilibrium policy. Lobbying could be
simple bribes or more tacit methods like campaign contributions and publicity campaigns.
This can have a large impact on the final manifesto of the party and its implementation once
in power. Political support function (Peltzman 1976) models these interactions. It is
conceivable that the rich minority will have resources to mount a large lobbying effort to stop
or soften redistribution. At the same time the poor may lack sufficient resources to mount an
effective counter campaign. However in truth there are plenty of pro-redistribution lobbying
groups representing low income and wealth voters, e.g. the elderly. It is thus ambiguous
whether lobbying prevents redistribution being equilibrium policy.

Breyer and Ursprung (1998) suggest that the rich minority could form a coalition with the
middle class and thus have the majority against redistribution. The rich could promise to
transfer (bribe) enough wealth to middle class for them to be indifferent to full redistribution.
This would leave the rich strictly better off than under full redistribution. This interaction in
reality is complicated by how the bribe is paid. The transfers are paid through public goods
and subsidies. Since most do not read party manifestos, many may not realise there is such a
tacit agreement (imperfect information). However this explanation fits reality well because
most parties often try to appeal to the middle class as well as their own core supporters. This
mechanism has strong potential explanatory power for redistribution not being equilibrium
policy.

Roemer (1998) suggests a model where political parties represent views on more than one
issue. He developed an abstract model where voters have two distinct opinions, one on
redistribution and one non-redistribution issue, e.g. religion. The income and wealth
distribution is as described in the premise. Median wealth and income are below average. It
is assumed that the poor are mostly pro-redistribution but many are pro-religion. The rich
minority is mostly anti-redistribution and mostly pro-religion. There are two parties. Party 1
is pro-redistribution and is anti-religion and party 2 is anti-redistribution and pro-religion.
Roemer’s model shows that if enough poor care more about religion than redistribution, party
1 will not win if it sticks to pro-redistribution and anti-religion manifesto. Both parties
eventually end up coming to the middle on both issues.

Roemer’s model is quite accurately models real politics. Elections are often defined by one
issue which makes redistribution irrelevant. For example, 2004 USA presidential election
was defined by views on Iraq war and foreign policy. Single issue parties rarely win
1
Consisting of democracies

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Gregory Loutsenko
Student ID: 4052904

elections because the voters do not trust these parties with other issues. Roemer’s mechanism
also has also strong potential explanatory power for redistribution not being equilibrium
policy.

Political process could explain how redistributive policy never becomes equilibrium policy.
But historically there have been parties which advocated absolute redistribution and have
been elected. For example the British Labour party for a long time advocated extreme
egalitarianism through redistribution. Political process does not explain why redistribution is
rejected by voters in the long term.

Inter-temporal trade-offs

Even if political process did allow for redistribution being equilibrium policy voters may
reject it on inter-temporal grounds.

The inter-temporal trade-off is the idea that redistribution may have different outcomes in
short- and long-term.

Individuals may believe that they have a strong prospect-of-upward-mobility (POUM)

(Hirschman 1973). If redistribution scheme is permanent, the decisive voter who may
believe he has good POUM would be prevented from gaining income and wealth in the
future. This would mean the decisive voter would vote against redistribution. This may
explain resistance to redistribution particularly in places where social mobility is great. If a
voter perceives to have good opportunities, e.g. good loan opportunities and education
opportunities, and he has seen others around him ‘move up’ he is more likely to resist
redistribution.

However POUM incentive being the answer to the title question is moot. Social mobility
appears to be higher in Nordic countries, which have far bigger redistribution, compared to
Anglo-Saxon countries, which have smaller redistributionii. Thus social mobility could still
be easy in a redistributive environment. Of course logically if one only considers two
extremes of no redistribution and absolute redistribution voters with high POUM would not
want to vote for absolute redistribution.

In reality capital markets often shoes failures and cannot efficiently find all investment
opportunities. For example start-up firms often fail because they cannot secure enough credit
even though they are financially viable. Further, capital investments tend to be ‘lumpy’ with
high fixed cost, e.g. research and development in pharmaceutical or aeronautical industries.

This reality may have two different consequences (Perotti 1993). If the decisive voter is
unable to invest into projects he wishes to because he does not have enough wealth (capital)
but is able to invest after redistribution, he will vote for redistribution. However if he is able
to undertake investments he wants with his original wealth and then after redistribution is
unable he will vote against redistribution. This is assuming redistribution is not permanent;

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Gregory Loutsenko
Student ID: 4052904

allowing the poor to keep returns on investment of capital gotten through initial
redistribution.

Perotti identified that it may not matter what investment opportunities the decisive voter may
face. Even if only few rich individuals are able to invest in all the projects they wish, this
may have ‘trickle-down’ effects, a sort of externality, for everyone else. It remains beneficial
to the decisive voter to allow some to have high levels of wealth and income compared to
him. An example of this may be John Boot. John Boot invested heavily into pharmaceuticals
and eventually benefited the poor with cheap and effective drugs.

Harms and Zink (2003) pointed out that richer individuals may save more as their wealth
increases. Thus overall saving tends to rise with unequal distributions of wealth. This means
that overall investment and hence economic growth would be higher without redistribution.
This is even if capital goods were not lumpy and capital markets functioned perfectly. Thus
the decisive voter may reject redistribution because it would reduce economic growth. There
is a caveat. Individuals are not the only ones who save. Public institutions and firms are their
own legal entities and hence own wealth and carry out saving. If capital markets were to
function properly and the rich tie up most of their wealth in firms and then the proposed
redistribution was to happen, savings may not be affected much. However in reality capital
markets are imperfect and the rich do not tie up all their wealth in firms.

A clear effect of absolute redistribution exists on the tax base. Full redistribution confiscates
all proceeds from employment of one’s labour or capital (wealth). Although some
compensation is provided by redistribution, the incentive of income from supply one’s labour
and capital is severely reduced. Combined with depreciation of capital and free riding, the
overall capital stock would be driven to nothing. People do not want to work if all of their
income will then be taken. Thus there is a trade-off for the decisive voter between having a
bigger share of the pie now versus no pie at all tomorrow (Meltzer and Richard 1981). Of
course one must assume that voters have enough foresight to predict the described effects on
the tax base.

With tax-competition (Wilson (1986), Edwards and Keen (1996)) and improved
communication and transport technology both labour and capital could easily flee absolute
redistribution to seek better returns. Immigration which may create positive knowledge
transfers as well as reduced input costs is discouraged by absolute redistribution. Thus even
without free-rider problems the capital stock will be reduced to nothing as it flees abroad
living nothing to redistribute. The decisive voter again has incentive to reject redistribution.
It is possible to stop capital and labour flight by putting up barriers to it. However since
many poor as well as the rich like visiting and investing abroad, and appreciate virtues of
international competition, strong barriers has been rejected in real life.

The fact that redistribution ultimately hurts the tax base is probably the strongest answer to
why the poor do not fully expropriate the rich. The effects of such redistribution have been
observed in real life. Although not in a democratic environment, a clear example is
Prodrazvyorstka implemented during War Communism period in Russia. Under
Prodrazvyorstka all agricultural produce was confiscated and then redistributed equally.
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Gregory Loutsenko
Student ID: 4052904

Following the implementation of Prodrazvyorstka agricultural production plummeted and a

famine took place.

Government inefficiency

Although it may seem simple in theory, in practice absolute redistribution is hard to

administer. There would be a large increase in embezzlement and corruption as individuals
and bureaucrats try to siphon off funds.

A black market would develop. This would be costly to everyone as it leads to violence and
market inefficiencies. The government would probably respond by curtailing non-economic
freedoms which would make both the poor and the rich worse off.

The decisive voter may strongly oppose such state of affairs regardless of his monetary
outcome of redistribution.

Ethics

Humans are utility optimisers. However not all utility comes from monetary outcomes.
Some derive considerable utility from perceived virtuous deeds. For example charity
workers often have possibilities of higher wage employment but do not choose it. Even if the
monetary outcome of redistribution was worthwhile in the long-term the decisive voter may
reject it based on ethical grounds.

There is a view that people have natural right to own property and enjoy any rewards from its
employment as long as it does not interfere with others’ natural rights. Under this view
redistribution described would be thought of as robbery. Many people share this view and it
is built into constitutions of most democracies, e.g. “We hold these truths to be self-evident,
that all men are created equal, that they are endowed by their Creator with certain unalienable
Rights..."2. However this view is not the only one. Redistribution may be ethically justifiable
through other ideas of rights.

This argument does not answer the title question because such liberal views have always
existed but they did not stop substantial redistribution during mid 20th century. In fact idea
of natural rights is now out of favour with many thinkers.

Conclusion

The notion that political mechanisms and ethics prevent full redistribution does have logical
merit. But during 20th centuries many parties came to power wishing to install full
2
United States Declaration of Independence

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Gregory Loutsenko
Student ID: 4052904

redistribution and many did create very high levels of redistribution. Thus these explanations
fail to fully answer the title question.

The notion that voters rejected redistribution because it has negative effects on their future
economic condition seems to be the best explanation for why the poor do not expropriate the
rich. The negative effects come from reduction of pie to be shared and the inability of the
government to effectively do the sharing.

People do not have access to perfect information and are not perfectly rational. They may
fail to foresee negative outcomes of full redistribution. This may explain why during 20 th
century voters voted for extensive redistribution but then voted for anti-redistribution
government, e.g. Thatcher and Reagan. It seems that the voters were dissatisfied with the
consequences of redistribution, namely reduced economic condition, increased government
inefficiency and interference in people’s lives.

It seems that the answer to the title question is that the poor do not expropriate the rich
because they realise that redistribution will not be in their best interest in the long term.

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References

Epstein, Richard A. 2008. Supreme Neglect. Oxford University Press: Oxford.

Harms, Philipp, Stefan Zink. 2003. Limits to redistribution in a democracy: a survey. European
Journal of Political Economy, vol. 19, pages 651 – 668.

Hayek, Friedrich. 1960. The Constitution of Liberty. Routledge: Oxon.

Roemer, John E. 1998. Why the poor do not expropriate the rich: an old argument in a new garb.
Journal of Public Economics, 70, pages 399 – 424.

Endnotes

http://www.onlineopinion.com.au/print.asp?article=3822 – Peter Tucker. 2005. Voter turnout,

voter ignorance and compulsory voting. Australia's e-journal of social and political debate
ii
http://www.suttontrust.com/reports/IntergenerationalMobility.pdf – Jo Blanden, Paul Gregg and
Stephen Machin. 2005. Intergenerational Mobility in Europe and North America. Centre for
Economic performance