I've been spending a lot of time lately pondering James Livingston's insights on how modern, high-productivity, post-industrial economies work, as expressed in two of his posts which I link to and encapsulate here.
What finally closed the loop for me was re-reading Ray Kurzweil and others on past trends, and what the future holds: exponential growth in productivity.
I think I can best encapsulate my conclusions by asking a question: What would happen if labor productivity increased a thousandfold? So creating a certain amount of stuff/goods/prosperity currently requires a thousand workers; suddenly, it only requires one.
Those 999 workers suddenly have no "legitimate" claim to any of that stuff, because they don't do anything to "earn" it. Those kind of claims are inscribed in both law and practice, so those 999 workers don't get any of that stuff/goods/prosperity/money. How could they? They're superfluous.*
Put aside for a few paragraphs the ultimately inescapable issues of fairness, equity, and "just deserts."** Can such an economy work?
No. Because those 999 people don't have any money to buy the goods that the one person produces. And there's no way that one person can purchase/consume all the goods produced. So they don't get purchased. So they don't get produced.
The economy--which is essentially a huge logrolling enterprise--stalls and stops.
This is a simplistic thought experiment. In particular, it assumes that the same amount of goods will be produced--ignoring the inevitable efforts of those 999 people to produce more goods, and get paid for them. (As productivity increases so the one guy can produce everything everyone "needs," they will be increasingly unsuccessful in doing so because their labor becomes steadily less valuable.)***
It's simplistic, but it still represents--accurately and increasingly--the state of modern economies since the industrial revolution. The spectacular efficiencies of technology and corporate capitalism make labor (especially low-skilled labor) increasingly valueless. So in the real world a few people make a lot of money and a lot of people make less money. Absent some intentional intervention, it's an inevitable result of rising labor productivity.
Left to its own devices, this system will inevitably grind (or crash) to a halt as more people fall off the log. That one person can't keep it rolling while all the others drown nearby.
So why does the log keep rolling? Because of redistribution in modern, prosperous economies. It maintains the necessary level of "aggregate demand" as productivity increases.
Free markets don't achieve that distribution or maintain that demand (as explained above, they work in the opposite direction), so government has to do it—for the good of all, including the one person standing there all alone on the stationary log.
It's no coincidence that:
1. Every thriving, prosperous, modern country has significant redistribution systems--social support services, infrastructure spending, wage laws, labor protections, and yes, welfare. There are no exceptions. (The relative merits and demerits of those systems require far lengthier discussion.)
2. The two great economic crashes of the past century occurred when social support systems were at a historically low ebb, and inequality (in wealth and income) was at an apogee.
A certain amount of government--and redistribution--is not simply desirable in a high-productivity economy; it's necessary for a modern economy to operate. The U.S.--taxing 28% of GDP compared to Europe's 40%--has been the epicenter of both of the the aforementioned crashes. The only modern economies (of any size) that tax less than the U.S. are Mexico, Japan, and (barely) Korea.
At 28%, the U.S. appears to be teetering at the bottom edge of the range in which a modern economy can prosper and thrive.
Or...it's already tipped off the edge—again.
* A semi-aside: who gets that one job? It looks decidedly like a matter of luck. Any number of the 999 could do the job just as well. Perhaps "merit" is the criterion, but merit is both widespread and difficult to gauge. Even if you use smarts and industry as the measures, let's face it: some people are just lucky enough to be born smart and industrious; others aren't. (And let's not even get started on the lucky-sperm contest for being born wealthy.) Meanwhile, most of those 999 people have no hopes of landing the one job; remember that by definition, 50% of people have an IQ below 100.
** The "fairness" argument has justifiable legs. That one person does all the work, so that person "deserves" all the returns for that labor. Counter: those 999 people are out of work (or receiving low wages while working hard) through no fault of their own; given the huge prosperity that productivity and efficiency provide, don't they "deserve"--just by merit of being alive--to live decent lives? See "luck" in the previous footnote.
*** Take this thinking further, to the world Kurzweil describes--in which computer-driven nanotechnology can take the wood in your house and reconfigure the atoms into latticed nanomaterials sufficient to build several skyscrapers. It can convert a pile of dirt into a thousand Thanksgiving dinners. Who gets "paid" for that? (If this future seems fantastical, imagine living in 1508 or 1808 and looking forward to the way we live today. And remember: that efficiency is increasing far faster today, and the pace of that increase is itself increasing.)