From my essay on Pascal Boyer’s Minds Make Societies.
Concerning economic inequality, Boyer writes,
… the economy or society as a whole is construed as a gigantic collective action, to which everyone contributes in one way or other, and from which they may receive rewards.
… humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s.This reinforces the instinct that economic inequality must be derived from power rather than from merit.
You might call this behavioral meta-economics. Like behavioral economics, it looks at human inclinations to commit errors. But what I mean by behavioral meta-economics examines human inclinations to commit errors in assessing markets and large-scale society.
The challenge that economics teachers face is helping their students to understand and overcome behavioral meta-economics. Although he did not use that term, I think Scott Sumner’s post expressing doubts about the value of teaching behavioral economics is derived from a view that teaching behavioral economics might be counterproductive in getting students to overcome their behavioral meta-economics.
Second link doesn’t work.
“humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s”
Isn’t this generally true though. Economics also teaches that in perfect competition excess profits are driven down to $0. Peter Thiel basically makes this point all the time. Shouldn’t we assume that people in the stratosphere of wealth are benefiting from natural monopolies or ownership arrangements that cause them to disproportionately benefit.
Even in situations where you have wildly productive people, are we so certain that the rewards really match their productivity. Let’s say Microsoft really is full of very productive people. Is Bill Gates that much more productive than the very productive programmers working for him? Then some of his top managers? If through some accident of history one of his underling owned Microsoft and Bill Gates worked for him, would we really say that their productivity flipped?
I think it’s more accurate to say that because Bill Gates owns Microsoft he’s been able to siphon off a portion of the productivity of his many productive employees because of the institutional power relationship. Yes, those employees are always looking for the best deal they can get, but transaction costs prevent them from achieving maximum share of the productivity (say, you could make more working for a competitor firm in another city, but then you have to leave behind your extended family or have a spouse give up a job).
I’m willing to buy that people who can engineer power plants and program computers are many times more productive than garbage men. And I can buy that entrepreneurs that organize economic production are many more times productive then lots of other people in our economy. But at a certain point, it gets a bit ridiculous. Both in terms of a fairness sense (are they really 1000x more productive) and an incentive sense (do they really decide not to do things because say their tax rate when they are billionaires).
I could easily argue that the lack of resources for young smart people stifle innovation more than billionaire taxes. Or that the tax rate on the middle class is a more incentive harming way to raise revenue than a billionaires tax.
In general fighting against the “secret stash” impulse is a good idea, but let’s not spend our political capital defending billionaires.
Wasn’t the early days, 1994 -2004, suppose to change this? We forgot how much the early internet was like Oklahoma land rush and the internet was taking to the entrench large corporations. (Of course the smarter large corporations adjusted here from 1997 – 2004.) And Bill Gates is interesting example as Microsoft was held back by the Clinton administration in a lot of ways.
I know internet companies benefit from decreasing marginal/average cost curves, the ability to slightly overpay the best talent, way overpay to buyout potential competition, remain one step in front of the competition, user ease, etc. but it is fascinating to see internet companies become oligopolies/monopolies model quickly. (Of course, I still wondering how Uber is going to survive when VC money runs out.)
I agree that Gates or Zuckerberg are not likely 1000x times more productive than other workers. I think they are beneficiaries of things like early market entry and network effects. There’s probably lots of other people who came up with similar products who simply by chance did not come to dominate the market. Twitter seems to me to be an obvious example of a product who success was completely based on luck.
However, I’m not sure that having some government agents take that money and redistribute it is going to be an improvement over letting Gates and Zuckerberg keep it and reinvest it in something else, cause we know they aren’t stashing it under the pillow. It’s all going back into the economy somewhere. The government is hardly a neutral arbiter, it has it’s own incentives. If you took both Gates and Zuckerbergs fortunes and combined them it wouldn’t even fund it for a day.
So do they deserve all that money? probably not. But neither does anyone else. At least they acquired it through voluntary means, for the most part, which is more than you can say for many other people.
Zuckerberg famously blew a bunch of money on the Newark schools. Wasting money on pet projects isn’t foreign to the billionaire set. Outside their areas of expertise they aren’t especially equipped. Their foundations often seem to be employment programs for their own class and the causes aren’t necessarily the way most of us would spend the money. It’s not entirely clear that the money stays in the economy either (they love sending it to overseas charities) and is often tied up in their ideologies. We are a long way from domestic spending on public goods like in the robber baron age.
If they want to reinvest in their area of expertise they can. “Nobody ever paid that rate” is said about high marginal rates in the 50s. The reason is you could reinvest.
If the money would go to gov beauracrats then maybe that is worse. But if it goes towards reducing middle class taxes it’s good.
The middle class deserves its income too. It got it through voluntary means. Why can’t they get a tax cut.
If we are debating whether windfall gains should be confiscated simply because they are large, then no, that is dangerous. But we can question the laws that we set for things like corporate governance, IP, etc… and wonder whether they serve the broader social interest or not.
I have no problem believing that Lebron James can attract 1000 times more basketball fans to a stadium than I can.
A progressive will say something like, “But why can he do that? Because he was born lucky, with the potential to be Lebron James. Sure, he works really hard at it, but not really any harder than plenty of other less fortunate people work, who weren’t lucky enough to be born with that kind of potential. Why should it be so sacrosanct that someone born insanely lucky is absolutely entitled to 100% of whatever he can get? It seems terrifically unfair and unjust to allocate wealth according to the luck and privilege of one’s condition (or location) of birth. If we redistributed 90% of what Lebron James makes to his less lucky compatriots, then he’s still far richer than practically anyone else, and if we insist that all the rich pitch in accordingly, then his rank in the monetary status structure is unchanged. Even the prices of the positional goods rich people bid up will adjust downward accordingly. Why should his incentive or motivation change then? Yeah, maybe there really is a Laffer Curve maximum way out there that would start to bite, but it’s much closer to 100% than where we are now.”
Methinks you are being the “devil’s advocate,” or the “liberal’s advocate.”
This argument also presumes that LeBron James has no useful idea of what to do with his windfall, and we make no special presumption that he should figure it out. Instead, the articulate intellectuals nominate themselves as qualified to re-allocate the money, because they are really smart and have good ideas of what a better allocation of wealth would look like.
(Digression: pretty soon you end up with something like the Ford Foundation or the MacArthur Foundation.)
Personally, I think Taylor Swift has too much money and some of it should be given to a foundation to reward James McMurtry and keep him composing and performing. The market speaks otherwise. I’m glad he’s not just painting houses or tending bar.
Offhand, I can come up with two responses to your challenge: one moral and one practical. First, the moral: Who has the right to steal what Lebron James has earned? Do we really want to live in a society that rewards envy? Do we want to live by the commandment: “Thou shalt not have goods thy neighbors covet”?
The practical response is that not only does the market reward people according to what they produce, but in doing so it is channeling resources to those best able to use them to benefit the public. I’m not sure I can come up with a practical argument for Mr. James in particular, but I can make one for, say, Steve Jobs. The more resources a Steve Jobs gets, the better able he is to produce more products that improve lives.
I do hope that everyone discussing this is familiar with the discussion of sports stars in Nozick’s _Anarchy, State, Utopia_. Summary: assume that society begins with everyone having the same amount of money. Soon, before you know it, voluntary exchange has resulted in Wilt Chamberlin having millions of dollars because others are willing to pay to watch him.
One reality is the average person concern of ‘income inequality’ goes up in eras of falling wages and decreases in eras of increasing wages. It is no surprise that Occupy Wall Street happened in 2010 when real wages were falling quite a bit. (If you include the impact of health benefit decreasing 06 – 12 the impact is greater.)
1) So in 1920s, early 1960s, and late 1990s there was less concern of income inequality but those eras can not last forever.
2) Judging by the economics today, the majority of Americans have had slow increase in wages and job stability since 2012 but most economics there is a group of citizens that still struggle. (Say 1980 minority inner cities or modern Rust Belt.)
3) One issue of libertarian economist is Megan Mcardle saying ‘Capitalism at its purest was the United States between 1929 – 1932 when competeing at their hardest in our history. It is just hard to capitalism is working when unemployment is going up to 25%.
Re: your observation, “teaching behavioral economics might be counterproductive in getting students to overcome their behavioral meta-economics.” That’s a deep insight.
Re: the excerpt from Pascal Boyer’s book. Casual observation suggests that people do wrap their heads around the idea that some individuals are orders of magnitude more productive than the average Joe. Star entrepreneurs (Steve Jobs), star athletes (Johan Cruyff), star songwriters (Lennon/McCartney) come to mind. People are skeptical or mystified when the connection between extraordinary compensation and individual productivity is indirect, opaque, clubby, rentier, and so on.
Moreover, many people who can’t abide billionaires reason (perhaps roughly correctly) that ‘good billionaires’—the ones whose productivity is evident, or who are truly productive—would do their thing anyway, even if marginal tax rates were greatly increased. The thought is that visionary entrepreneurs, phenomenal athletes, talented artists, and perhaps even exceptional executives are inwardly driven to excel and to create and to coordinate. Similarly, many who can’t abide billionaires reason that if exceptionally productive individuals are driven perchance by a desire for high status, it’s still possible for them to keep score after substantial redistribution, when there will be fair inequality.
The fundamental quarrel with markets in “behavioral meta-economics” isn’t about whether some individuals are orders of magnitude more productive than the rest of us in modern market societies. It’s about mistrust of (1) the profit motive (wrong intentions), (3) opacity of complex market mechanisms (few people know or really swallow Adam Smith on markets), and (3) clubbiness at the top.
PS: Re: how hard it is for even the best students to get past behavioral meta-economics. See Deidre McCloskey’s classic short essay: “The Natural,” Eastern Economic Review 18(2) (Spring 1992): 237-239.
Here is the URL of Deirdre McCloskey’s essay, which I mentioned in my previous comment: http://www.deirdremccloskey.com/docs/graham/natural.pdf
I would pick camping as an example of tribal instinct in modern society. Old relics of tribals re-emerge often in religion or recreation. Much of our economy is still stone age, bricks and sticks.
A question. Does natural selection dimish in capacity over the ages? Why would modern man be less or more out of sorts than tribal man? We presume that natural selection slowed.
I do not think so, I think we are in a temporary bubble due to one thing, the discovery of the electron and how to manipulate it. Ben Franklin to Steve Hawkings was and is a very unusual period for a biological species.
The technology simply outpaced natural selection for 250 years, and counting. Even the most unselected of our species could learn to adapt fast enough as the electron improved its utility for us. I think we got Moore’s law, and I think this happens to every intelligent biology at some point, as if the discovery of the electron was kind of builtin to the universe, a theoretical result of entropy never dropping, the result is AI based electron control.