Well, three observations I guess because I want to preface this by saying that unlike many of Don's posts I think the vast majority of this is just fine, and it's really just Econ 101 - there's nothing especially libertarian or otherwise unsavory about it.
But there are two other points I'd like to make.
First, when Don says that Bill Gates got his wealth by being creative and giving people what they want and not by making people poorer, I think he is giving too short shrift to issues of bargaining over surplus. In undifferentiated markets perhaps that's OK. When you're dealing with people of Gates's caliber I think that's less appropriate. We as economists talk about distribution in a lot of ways. A popular way of explaining distribution is marginalism, which is appealing because marginalism is what two rational people would do if they had reasonable objectives they were pursuing. That's fine and dandy for a whole lot of things. But even without getting into any Marxian stuff at all, we also talk in terms of bargaining over surpluses. This is the framework that a lot of labor market and household models use, and I assume elsewhere in economics. If agents bargain over the surplus they create together some agent could have more bargaining power than another, and you can very reasonably think in terms of taking surplus from someone - making them poorer by virtue of the fact that you are capturing surplus that they had claim to as well but did not have the bargaining power to obtain.
We shouldn't be afraid to admit this may happen, and we shouldn't be afraid to put away silly phrases like "well nobody put a gun to his head so..." etc. You don't become some anti-market leftist if you admit that bargaining over surplus happens.
Second, towards the end of his post he makes a lot of assumptions about the relationship between distribution and growth. His claims are very dicey. There is obviously a lot of interest in questions of distribution, but most of this work as it relates to growth in mainstream economics comes on the supply side, typically as it relates to human capital. I understand there's an institutional literature too. But Don is thinking on the demand side and as far as I'm aware the only people to treat distribution and the demand-side of growth really seriously are Post Keynesian economists. And in Post Keynesian models and empirics, this relationship is a lot more ambiguous than Don imagines it to be. It all depends on the behavior of the investment function, its responsiveness to profits, expectations, leverage, and whether the super-rich are really entrepreneurial or serving in more of a rentier capacity. The consumption function is usually in the background in these models, which shouldn't be especially surprising.
I would frame these points of departure from Don's main thrust as being a case of where he takes an Econ 101 sounding platitude and runs with it, but it doesn't quite work.
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I guess that the best analogous situation of what you're describing here (for the laymen, anyway) is the case of House Advantage.
ReplyDelete(please understand that while I don't say this without contemplation, that I also don't follow the models that you do)
I must ask, what is the unit or measure used in these models to distinguish between a good and a bad?
Sure, I suppose you could think of that as bargaining power although it's a different sort of social interaction/division of surplus.
DeleteBasically what I'm saying is we make a lot of marginal assumptions, but largely because it's a clean and intuitive way to divide a surplus. There's absolutely no reason why surpluses have to be divided that way, and in some situations in real life we'd absolutely expect people to throw their weight around when they can and depart from marginal assumptions. Day in and day out I'm comfortable with marginalism. When we're talking about the richest men in the world, though, I think you have to think about bargaining power.
I'm not sure I understand your concluding question, sorry. We are talking in terms of utility, if that's what you mean, although all the usual caveats apply to that. Don is speaking of utility as if it were more "real" than most economists usually consider it, but I think for the exercise he's engaging in it gets the point across fine.
Daniel: "Second, towards the end of his post he makes a lot of assumptions about the relationship between distribution and growth. His claims are very dicey"
ReplyDeleteDon: "And this fact does mean, therefore, that taking money from Gates and giving it to other Americans will – if these Americans spend all or most of this transfer on consumption goods – reduce the productivity of the economy. It will diminish the economy’s capacity to produce material goods and services over time. Over time, it will make all of us less able to consume. (The only way to avoid this outcome is if Americans who receive the money ‘transferred’ from Gates invest these funds as wisely and as prudently as Gates invests these funds. Such an outcome is conceivable, but to the extent that such an outcome is even conceivable, it means that the people who get the transferred funds are not desperately poor; they are not in need of having their consumption augmented.)"
This is just a classical point about investment, he's talking about the supply side. If more wealth is invested rather than being consumed then society is richer in the future. I don't see the problem with it. The obvious rejoiner is that welfare for some groups is a form of investment, though I would dispute that in general.
If he's talking about the volume of investment he's talking about the demand side.
DeleteObviously that has long run supply side consequences, but I'm not disputing the idea that investment increases the productive capacity of the economy here. I'm disputing his claims about the relationship between distribution and investment (or if not disputing at least suggesting it's more ambiguous than he lets on).
re: "I don't see the problem with it."
There is no problem with the sentence immediately preceding this one. The question at issue is what are the consequences for investment of different distributions of income and wealth.
re: "The obvious rejoiner is that welfare for some groups is a form of investment, though I would dispute that in general."
I don't understand how welfare is a form of investment.
"If he's talking about the volume of investment he's talking about the demand side."
DeleteI think I see what you mean now. I'm assuming that if there's an increased demand for investment then they'll be an increased supply of investment goods. So, if Microsoft spend more on computers then there will be more computers overall.
My order is:
* More rich people or richer rich people.
* Those people invest more of their wealth than others.
* More investment goods are made to furnish the demand.
* Social capital is larger later on.
Are you saying that investment supply may be quite inelastic overall? So when the rich spend more on investment simply becomes more expensive? Or correspondingly that consumer goods supply is quite inelastic so if the less rich spend more on consumer goods they simply rise in price.
"I don't understand how welfare is a form of investment."
It can be argued that it is. Vocational courses for example are investments in human capital. Dole that's enough for people to live on means people don't have to beg, etc, and retain more human capital.
re: "I'm assuming that if there's an increased demand for investment then they'll be an increased supply of investment goods."
DeleteYa, and on that step I have no disagreement.
Rich people don't always plow their money back into innovative activity. Investment demand responds to profits and expectations and under certain conditions a more equal distribution of income (or I suppose wealth... this post is confused by the fact that we have distributional and stock/flow issues in the mix).
Post-Keynesians refer to this as profit-led or wage-led growth (it's a class-based model - so workers, entrepreneurs, and rentiers). If the economy is wage-led more equal income distributions lead to higher growth than less equal distributions. Empirically it's a mixed back and openness of the economy to trade has a big impact on which any given economy is (open economy effects tend to push economies towards being profit-led).
So you disagree with me here: "* Those people invest more of their wealth than others."
DeleteWhat you're saying is that if the returns on investment are low then the rich will spend their income on yachts and Ferraris rather than investing it. If it were handed to some lower class then they would invest more of it. I'm sceptical about that, though it could happen.
I haven't read that Post-Keynesian work that you refer to. But, from reading Post-Keynesian work before I found two things I disagreed with that are relevant here. Firstly, they seem to have an odd view of the "barreness" of money, they see to forget that in a fractional-reserve banking system loans sit behind bank balances. Secondly, there's the investment multiplier, which we've argued about before.
I wouldn't say I disagree - I'd say it's ambiguous.
DeleteI'm not saying the low income workers would invest more of it - I'm saying an economy with a more even income distribution would have more robust demand which entrepreneurs respond to. A low-demand economy is one where the rich spend on yachts or speculating in financial markets rather than investing.
I find the first concern you have a little funny - I would think PKs would be less guilty of that - although they can be weirdly sticklers for the direction of causality when it comes to fractional reserve (this is the whole endogenous money issue) - but I wouldn't say they forget it. But I might be misunderstanding your criticism on that point.
"A low-demand economy is one where the rich spend on yachts or speculating in financial markets rather than investing."
DeleteWe agree that Investment is preferable to spending on luxury consumption. I'm not sure that Yachts are a great example since they last quite a long time, so they're almost durable consumer goods. Speculating on the financial market is another matter though. If speculation causes a lot of trades which require lots of bureaucracy then that's a waste. If speculation leads to very irrational prices and misdirection of capital, then that's a waste. But, switching from one type of stock to another isn't itself a waste. If I own shares, for example, then the capital of those companies is still being utilised even if I buy and sell often. The same is generally true of bank-balances. If I hold a balance of £10000 then that amount is on-loan to somebody and is probably being invested in a business or in durable consumer goods like houses.
Who is he arguing with? Name one elected official in America who has proposed a wealth tax (as opposed to an income tax).
ReplyDeleteI could take issue with the rest of it, but I'm really bored with him.
Don often tilts at windmills or assumes people are saying outrageous things when they're not.
DeleteIf it's directed at someone specific, that can be aggravating.
If it's a more general pronunciation, often you get some good thoughts out of the exercise - like this post.
Sure, but he just seems so angry all the time. I wonder if he's going to have an aneurysm. If you're going to have an aneurysm, at least have it because you're mad about real people saying real things.
DeleteAnd regarding the content of his post, forget about whether Bill Gates got rich because of IP law; what about sheer dumb luck? I imagine that had he been born in say the 8th century AD he would have met the same fate as many a scrawny, nearsighted introvert probably did in the 8th century AD, which was violent death in incomprehensible conflict. If he'd been born in the 6th or 14th centuries AD, he probably would have died of plague! Instead he was born into a society at the exact moment when that society was prepared to put an extremely high value on his particular skills and inclinations.
Also, his parents were quite wealthy and he grew up really privileged. FWIW.
Plus, doesn't Don know that his points about the declining marginal utility of wealth and income are extremely common arguments in favor of redistribution? If Bill Gates wouldn't miss half his fortune or his income, isn't that a really good argument for taxing some of it to give to people who are on the economic margins? OR a really good reason to build or renovate public infrastructure, like, say, the ports at which Windows-based computers arrive? Or the roads on which they are shipped? Etc etc.
Look, there are really some pretty good arguments on both sides of "how much should rich people be taxed" regarding social justice, incentives, capital formation, and so on and so on, and reasonable people think the answers to these questions are fuzzy, situation, and probably at the margins rather than the extremes. But Don has built the strawest of men, and decided that, in order to defeat it, he must become even strawier. It doesn't really grapple with the actual hard questions of policy.
http://xkcd.com/1318/
ReplyDeleteWhat, cause I had a thought on his post?
DeleteYou're trying too hard.
Please recover your sense of humor, Daniel.
DeleteOK, if you reply to a criticism that you're being overly fussy about something with that you're really missing the point!
DeleteSpeaking of economic inequality, Dr. Daniel P. Kuehn...do you plan on acquiring a copy of Capital in the Twenty-First Century by Thomas Piketty?
ReplyDeletehttp://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/067443000X/
Daniel Kuehn wrote:
ReplyDelete...there's nothing especially libertarian or otherwise unsavory about it.
Next time you pontificate about the definition of "libertarian" that my folk use, let this help you: Actual libertarians don't consider libertarianism to be unsavory.
"If agents bargain over the surplus they create together some agent could have more bargaining power than another, and you can very reasonably think in terms of taking surplus from someone - making them poorer by virtue of the fact that you are capturing surplus that they had claim to as well but did not have the bargaining power to obtain."
ReplyDeleteThat's a really weird way of putting it. Before the bargaining and the transaction, there is no surplus. Everybody is richer after the transaction. It seems to me you are dissociating the transaction from the bargaining. But that doesn't make much sense since the bargaining is what defines the terms of the transaction. So there is no surplus that anybody had claim to prior to the bargaining. Prior to bargaining, there was no surplus.
The difference in bargaining power comes from a difference in the supply and demand of employers and workers. It is an incarnation of the market pricing, not a separate system. Condemning differences in bargaining power therefore does make you an anti-market leftist.
ReplyDelete