One noticeable and persistent income difference is that between those who get their hands dirty and those who wear a suit. I am over generalizing a bit, as there are high paid mechanics and the like as well as low paid clerical workers who wear a suit, but you know what I mean. I am referring to the “skill positions” within bigger businesses, or the expensive consultants retained by smaller business and individuals. Such people get high pay because they have difficult to obtain specialized skills and knowledge. Such people will always get paid well.
However, these people need not absorb as large a fraction of the national income as they do currently. These occupations are heavily subsidized by the government – largesse for the not so poor.
Accounting is a necessary part of doing business. However, a very small business that is a sole proprietorship or a family business could get away with fairly simple and imprecise books – except for the fact that all businesses are actually subsidiaries of a large public corporation: The Internal Revenue Service. This means that all businesses, no matter how small, must keep books to corporate standards.
Profit is a difficult thing to precisely define. How much did the tractor depreciate this year? How much good will was accumulated? What is the value of the unsold inventory? The correct answers are unknowable. The accounting profession has developed a wide array of conventions to make educated guesses at such things. Adherence to such conventions makes it possible to compare businesses fairly.
A sole proprietorship should not have to know these conventions, however. Unless the business is up for sale, or a loan application is at stake, a sole proprietor should be able to work with internally determined rules of thumb without having to hire a specialist. But, with the income tax, there is no such thing as a true sole proprietor. This provides plenty of extra business for Certified Public Accountants.
The Finance Wizards
Once upon a time, you could store liquid wealth in a safe in the form of gold coins and feel pretty comfortable that those coins would hold their value. True, doing so was to lose some potential interest, but when safety was important, cash was a good option.
With the creation of the Federal Reserve Bank, the value of money has been destabilized. This was especially true when the Fed was actively trying to joystick the economy. (It is less the case when we have an Objectivist as Federal Reserve Chairman.) With the government manipulating interest rates and the money supply in order to try to trick the economy into doing things it doesn’t want to do, an entire industry has grown up to second guess the actions of the Fed and other central banks. Billionaires have been created in the process. [Further reading: Alan Greenspan’s gold bug essay in the Ayn Rand book]
The creation of a wide array of interesting financial instruments (derivatives) has done much to stabilize the economy of late according to those in the Rational Expectations School of economics. [cite Liberty article]
Update (2018): The paragraph above (written in 2003) looks pretty embarassing in hindsight! Certain financial instruments can make things look more stable in the short term, while making the system more brittle in the longer term. See Nassim Taleb's Antifragile for a deeper discussion. Or see my newer Finance and Freedom web site my some of my more recent musings on the subject of economic stability.
The Human Resources People
Once upon a time, payrolls were in the form of cash to the workers. This made it simple to pay workers. (It also provided opportunities for bandits; look at some Westerns.) Now, employers track HMO contracts, life insurance, disability insurance, 401(k) plans, flexible spending accounts, federal income tax withholding, state income tax withholding, Medicare withholding, Social Security withholding, and state and federal unemployment insurance.
Keeping track of all these items is not free. The bookkeeping and form filling costs come out of the paychecks of those “doing the work.”
Do you deal in expensive German luxury cars? If so, write your Congressman and tell him to pass more laws. Redundancy is good. Clarity is bad. Favor laws whose meaning cannot be determined until decades after passage. Favor ten categories of murder, all with the same penalties. (Hate crime laws are a good start.) Pass lots of special laws for special cases. But even while your representative is making lots of detailed law, make sure he leaves plenty of leeway for the judge and jury so that the size of proper punishment is a matter of personal opinion.
The government subsidizes lawyers. Lawyers make lots of money. Yet this is somehow considered “liberal.” What am I missing?
We will always need lawyers, and good lawyers will make good money. But the current situation is excessive at best, corrupt at worst.
How to simplify the legal system and make it a proper tool for justice is a big subject, beyond the scope of this chapter. So for now I will simply leave you with some references for further reading. Just keep in mind that legal clarity and simplicity is a progressive issue.
- Simple Rules for a Complex World by Richard A. Epstein
- Law's Order by David D. Friedman
- Fuzzy Thinking by Bart Kosko
- The manual for QuickBooks