The Investor's Dilemma

The whole point of Distributism is to restore distributive justice to the economy. It does this by ensuring that most men and women have access to property, the means of production. Without this, they cannot properly bargain for wages, and the wage contract becomes leonine, that is, based on inequality. The employer can hold out much longer or (in today's economy) outsource the work to subsistence laborers in other countries. The worker is therefore forced to accept whatever terms are offered, and distributive justice is violated. However, this causes a great imbalance in the economy, a disproportion between supply and demand.

It would seem that in a leonine labor market the capitalist will gain all that the worker loses. And certainly in the short term this must be true. The investor thinks himself happy to increase his profit by lowering his labor expense. And for any given investor, this is true. But if it is the general condition of the economy, a severe problem arises. For as Chesterton pointed out, you cannot lower the amount that your employee makes without also lowering the amount that your customer can spend; they are the same person. If one manufacturer out-sources his labor to a subsistence country, he will gain a great advantage over his competitors. But if everyone does it, not only will he lose his advantage, he will lose his customers. Economics is much like accounting: it is purely a question of balance. This problem is at the root of the investor’s dilemma.

When the worker gets less than his productivity demands, capital concentrates at the top. But while wealth is concentrating, the market is narrowing, for the market depends on a broad base of consumers; a narrow base simply cannot spend fast enough and purchasing power is lost to the economy. The result is an increasing concentration of capital and a less-stable market. Capital thus has a more difficult time finding decent returns, because more capital is chasing fewer investments in a narrow market, and returns fall. This leads to several consequences. The first is that consumption must be subsidized by consumer credit if the markets are not to fail entirely. However, consumer credit leads to further concentrations of wealth, thus exacerbating the problem. Further, such credit mortgages the future: you can increase consumption by a borrowed dollar today only by decreasing it by that same dollar, plus interest, tomorrow. Which leads to a further need for consumer borrowing, a greater concentration of wealth, etc. A vicious cycle is set up that must fall of its own weight.

The second effect of wealth concentration follows the first: risk premiums become flattened or disappear entirely. The search for returns in a narrowing market exploits every possible market niche in ever-more sophisticated and incomprehensible ways. More and more loans are made to weaker and weaker borrowers at lower and lower rates. Wider and wider segments of the economy are caught up in increasingly risky loans, and are caught up without being aware of it. But while risk premiums may disappear, risk itself does not. It may hide, but it will surface, given enough time. And when it does, investments that seemed sound turn sour. And when large numbers of loans turn sour at the same time, banks, hedge funds, pensions, mutual funds, and ordinary investors discover risks in their portfolios that they did not know they had; they did not know they had these risks because the risks were not properly priced. At the same time, failed loans cause a drop in the underlying asset values; asset values change, but debt remains. Risk is replaced with uncertainty. There is a crucial difference between the two: risk can be priced, uncertainty cannot. Risk is looking at a package of 1,000 loans and being able to say, with some degree of confidence, "5% of these loans are likely to fail." Uncertainty means looking at the same package and saying, "I have no idea how many are likely to fail."

The investor’s dilemma is simply that he got what he wanted and found he didn’t want it at all. He wanted more than that to which he was entitled in order to increase his financial security, and found that he destroyed the security of the whole economy. But getting more is no good if it merely means someone else gets less. The balance is destroyed and an unbalanced economy is headed for a fall. Only by a proper sharing, a sharing in accord with distributive justice, can economies maintain their balance.

Today, this scenario is being played out, as it has often been played out in the past. The government is likely to attempt a bail-out of the market. This will end up rewarding the people who made the bad loans and the bad investments and punish everybody else. It will restore, for a moment, the confidence of the markets, but at the cost of inflation, that is, at the cost of taking a little from everybody and giving it to a few. Further, it will likely end up multiplying uncertainty, not reducing it, as well as encouraging the very behaviors that got us here in the first place.