Bryan Caplan  

Confucius and Cato

The Kool-Aid Factor... Wesley Mouch Award...
The latest issue of Cato Unbound, with lead essay by editor Will Wilkinson, reminds me of my favorite Confucius quote:
If a state is governed by the principles of reason, poverty and misery are subjects of shame; if a state is not governed by the principles of reason, riches and honors are subjects of shame.
Or as Will writes:
If the story boils down to a change in the tax code and a shift in social norms about compensation, then we'll need to dig deeper. Was the change in the tax code wrong? Ill-motivated?  A solution to some other problem with unforeseen consequences? Did the old norms of remunerative moderation collapse under the weight of Ayn Rand novels? Or what?

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CJ Smith writes:

The story boils down to two wrongs trying to make a right.

When the theory of remunerative moderation runs into the reality of contemporary capitalism, everything goes askew. Compensation relative to performance isn't the primary criteria in determining top management and executive pay and perq models. If it was, you'd see a plethora of top executives taking pay cuts relative when their companies performance suffers. Instead, at best, you see stable compensation packages - and usually, increasing compensation. Developing financial tools to institutionalize poor management - the poison pill. Using corporate assets to defend against non-frivolous shareholder derivative suits. In other words, focusing their cost-benefit analyses on the short-term and the small class of top-level executives/managers instead of the long-term and their companies' and all of the companies' stakeholders.

Seeing this "wrong," government creates another wrong by turning to one of their favorite political tools - tinkering with the tax code to "punish the bad" and "protect the middle class." As I hope we all agree, from an economic standpoint, trying to use the tax code as a social policy tool is probably one of the dumbest ideas to come down the pike in history. But even discounting this position for the purpose of argument, government makes exactly the same fundamental error as contemporary business executives - tax legislation the too narrowly focuses on "punishing" a small class of people in the short-term (wiht little or no commensurate gain by the companies' other stakeholders) over attempting to create a win-win situation for all the stakeholders. (Note the use of the term stakeholders as opposed to shareholders).

My question is - once we allow ad hoc or ad hominum value judgments to come into play in macroeconomic theory, can we really engage in applied economics in any reasonable manner?

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