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Jan 10 2014

Naked Capitalism

The Power Parable

Ian Welsh

January 9, 2014

Imagine that you have crawled out of the desert. You have not drunk in days, and if you do not have water soon you will die. Only one man has water, but he will not give it to you for free, he wants to be paid.

What is that water worth? To put it another way, what is your life worth?

One answer is that your life is worth everything you will ever earn, minus the cost of subsistence. The water-seller might say “if you die, you will never earn anything again. Therefore everything you earn is because I gave you water. So this water is worth your life’s income.”

Now you might not find life worth living under these circumstances, which amount to slavery. If the water-seller had many possible customers crawling out of the desert, he might find that too many people would rather die than pay, and might reduce his price somewhat to maximize his profit. If one quarter of people would rather die than pay, he might reduce the price to two-thirds of his customers life earnings, and see if most of them were willing to pay that.

Over time he might find that, knowing he’d take two-thirds, once saved his customers wouldn’t work very hard: just enough for subsistence and some alcohol, perhaps. So he might continue to experiment-how much could he take to maximize his profits?

But there is another possibility, back at the original bargain “your earnings, or your life?” What if you decide to take the water whether the water-seller wants you to have it or not? What if you’re willing to use violence? You’re weak, you might not win and if you lose you’re dead, but you might win and if you do you don’t have to pay anything. And if you win, you could start selling water yourself.

The water-seller has to take this into account. Which means he either has to reduce the price he charges so it’s not worth people trying to kill him, or he has to spend some of his profits on security. Thugs, pretty much.

But why pay for his own thugs? Why not pay government, and use its thugs? Everybody chips in some money, the government creates police and an army, and they make sure that customers don’t just take the water. They also solve another problem we hadn’t mentioned, making sure that people keep paying up later once they are no longer dying for thirst. The government enforces the water-seller’s contracts.

It should be pointed out that the water-payer is getting a lot more out of the governments thugs than most ordinary people are. Even if we assume the new police enforce all contracts and stop violence against everyone (as best they can), this guy has a lot more enforcement needs and a lot more people who want to kill him than an ordinary person. So even if everyone pays, say, 10% of income for the police, our water-seller is doing well out of this.

But why should the water-seller pay 10%? If the government has politicians whose money is separate from the government’s money, who can’t just use it as their purse, why not give them personally, say, 2% in gifts. That’s enough money to make them, personally, filthy rich. And they can lower water-seller taxes (after all, he saves lives and is a lynchpin of the economy) and raise them on other people. With a bit of work he might not pay any direct taxes, only gifts, and the rest of the population will pay for the enforcement of his contract rights. Yes, that reduces the post-subsistence money he gets from the people whose lives he saved, but for every dollar spent on enforcement he would have only gotten two-thirds anyway.

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