David R. Henderson  

How I Fought Envy, Part 3

PRINT
The Fiscal Outlook for U.S. St... The Efficient, Egalitarian, Li...

Here's the third installment (for the first two, see here and here) in how I have fought my envy over the years (taken from The Joy of Freedom: An Economist's Odyssey.)

The third thing that helps me when I feel envious is to realize that the language of economics has set me up, along with many others, to feel envious. Pick up any basic economics textbook and you'll probably find a section on the distribution of income. The distribution of income is simply a statistical measure of how many people earn or receive various amounts of income. However, people, including many economists, often mistakenly talk as if society is "distributing" income and people are passively receiving it. When I think of someone distributing income, I imagine a truck backing up to a crowd of people, the tailgate coming down, and someone on the truck throwing out wads of dollar bills. If you think someone is just handing out money, then the most natural thing in the world is to think that everyone should get the same amount and that it's unfair if they don't.

I have news for people who think that society is distributing income: No one is distributing. In a free society, we earn our income. [DRH note: I should have pointed out that some income is inherited.] Society didn't wake up one morning and decide that Michael Jordan deserved $10 million for playing basketball and $30 million for advertising consumer products. Instead, Michael Jordan woke every morning for more than 15 years with a fierce determination to stay in tremendous physical shape, to practice for hours a day, often with weights on his arms and legs, and to be the awesome athlete that he was. And millions of basketball fans and buyers of consumer products didn't "distribute" to Mr. Jordan. Instead they decided, one by one, to spend a little more time watching Jordan on TV, or to spend a few pennies or dollars more for products that he advertised. That's how his income was determined: not by society distributing, but by Jordan earning.

So, whenever you hear that the top 20 percent receive 45 percent of all income or that the top 5 percent receive 20 percent of all income, remember what that really means. It means that the top 20 percent produced 45 percent of all output and that the top 5 percent produced 20 percent of all output. Also, the connection between the number of family members producing and the income they generate is a major factor in the inequality of family income. An average household in the top fifth has about 2.5 times as many workers as an average household in the bottom fifth. The bottom fifth includes many single mothers, a lot of them on welfare. The top fifth includes a high number of two-earner married couples along with, presumably, some working teenagers or young adults.

You might think I exaggerate when I say that the word "distribution" misleads people into thinking that someone is distributing. But if people aren't misled, then why, when we talk about government taking from some and giving to others, do we use the word redistribution? If no one is distributing in the first place, then such government measures should simply be called distribution. Where does the "re" in redistribution come from? It must come from the mistaken assumption that someone distributed wealth in the first place. Of course, the idea that someone is distributing is ludicrous. But our language makes many of us think that way, with highly destructive consequences.

Fortunately, there is a lot of clear thinking on this issue, especially by people who have not received a lot of formal education and therefore have not been corrupted by what almost all American universities teach. One incident in particular was one of the first things that made me want to move to the United States. While running for the Democratic presidential nomination in 1972, George McGovern proposed a 100 percent tax--complete confiscation--on all inheritances over $500,000 (about $2.5 million in year 2001 dollars). Gordon L. Weil, one of McGovern's advisors who favored the plan, later wrote,

McGovern was completely comfortable with the admittedly radical proposal, because we all shared the belief that most people had a strong bias against great concentrations of inherited wealth. The proposals would directly affect only a handful of people.

But the good Democratic citizens of New Hampshire, from whom McGovern was seeking votes, were not at all comfortable with the proposal. Weil writes,
I remember sitting one day in the Lafayette Club in Nashua with a group of workmen who opposed the idea of a confiscatory inheritance tax. Although none of them stood to be penalized by it, they argued that it was unfair to take away all that a man had received. McGovern was receiving similar reactions in the plants we visited and believed that all men nourished the hope of receiving a large inheritance or of winning a lottery.

Notice that McGovern assumed that these workers held out unrealistic hopes of "winning a lottery," instead of believing that what they said upset them really was what upset them, namely that they simply found McGovern's confiscatory tax unfair.


Comments and Sharing





COMMENTS (20 to date)
Dan Hill writes:

This post is making a very profound point best summarised in the sentence:

"I have news for people who think that society is distributing income: No one is distributing. In a free society, we earn our income"

It makes me want to read the book. Which appears to be out of print. Can't you a least get your publisher to release it on Kindle?

Philo writes:

"However, people, including many economists, often mistakenly talk as if society is 'distributing' income and people are passively receiving it."

Treating collective entities such as "society," or "the nation," as purposive agents--as if they were individual people--is in part merely a harmless metaphorical extension of the concept of agency. And it is well to recognize that my income, while it is certainly influenced by my own actions, is also influenced by the actions of other people; therefore, in receiving it I am *partly passive* (though also *partly active*). Furthermore, treating society as an agent, it is correct to say that my income is entirely due to the "action" of society.

The error would come in thinking of me as entirely passive, since my income is entirely determined by an agent distinct from me (namely, society); this would be to ignore the fact that *I am a part of society*, and thus that I am (partly) *active* in this "action," as in many of the "actions," of society.

Thus extending the concept of agency metaphorically is undoubtedly risky, and leads to confusion. But it is so natural and, within limits, useful that we should reconcile ourselves to it, while guarding ourselves against the confusions it tends to engender.

mark writes:

Dude I generally agree with you and like your writing but you lost me. The Chicago Bulls(your example)paid Michael Jordan 10 million dollars a year to, I assume, win championships. He did that often but I never saw a precise statistical breakdown of how much he contributed to those championships. Heck maybe he wasn't paid enough but are you implying that criticism of his salary is wrong because the Bulls were obviously 100 percent correct with the amount they were paying him? For you to go to the sports world to make your analogy is strange because the internet is full of people who think various athletes are overpaid and are quite happy to use statistics to argue that athlete x isn't generating any wealth or wins for their team regardless of what they get paid. I'm actually more interested in CEO salaries which seem particularly exorbitant when you consider how many of these companies don't even have the money to pay a dividend to their shareholders. Perhaps, I am confused on your point but I assume much conpensation is based on potential and not actual production.

John Jenkins writes:

Michael Jordan was not overpaid because he could have instantly, but for NBA rules, gone to another team and made more money.

People who make claims that athletes are overpaid based on production are making a claim of value, but it's just as easy to argue that the better value player is underpaid.

Ultimately, no one who freely negotiated his salary with his employer is overpaid because both sides agreed to it without coercion.

Tom West writes:

the top 5 percent produced 20 percent of all output

One problem is that we're quickly finding out that there's more wealth to be earned by "gaming the system" than there is by producing goods and services that actually improve welfare as a whole.

Example: high-frequency trading - when one of the best ways to make money is to finesse stock trading to grab the microsecond arbitrage opportunities that would have gone to the actual purchasers or sellers, it's hard to see how this is over-all welfare improving.

It was easier to combat envy in the general populace, when we looked at "captains of industry" that produced things people or businesses wanted. But that was a time when *how* you earned your wealth was perhaps as important, if not more, that how much wealth you had.

Of course, gaming the government is a well-known tactic, but the base problem remains: A lot of people feel that the link between income and value provided is broken.

Clay writes:

I said it before: you are fighting resentment not envy. I don't think you know what envy means.

aez writes:

So "redistribution" (both the word and the exercise) is an attempt to deny reality.

Mike Moffatt writes:

" In a free society, we earn our income."

Given how a large time of the posts on this blog highlight ways that the United States has significant limits on freedom (e.g. Bryan Caplan's excellent post on immigration), is this not equivalent to starting an argument with "Since we know the sky is green..."?

Mike Moffatt writes:

Or to put it in more concrete terms, are people who are receiving, say, mohair subsidies "earning" their income?

Mike Moffatt writes:

Or to put it a third way, using your example, how much would have Michael Jordan earned had federal, states and local governments not subsidized arenas on an absolutely massive scale?

David R. Henderson writes:

@Mike Moffat,
All good points and that's precisely why I prefaced it with "In a free society." If people resent Jordan because of the subsidies to arenas, that's fine, although, I bet Jordan would have made almost as much with zero subsidies. Or if people resent farmers because of ag subsidies, that's fine too. But I was talking about people like my father who objected to people making more than they did.

Daniel writes:

Can you honestly say that, before you learned economics, you honestly thought that someone was just handing out money? Do you know anyone who literally thinks that?

Yes, people have look at particular other people and feel that they got their money too easily (see: Paris Hilton). But I'd be surprised to find anyone over the age of 10 that thinks that money is just handed out, and flabbergasted to find that the reason he thinks that is because of the choice of words used by economists.

Generally, when I read something that seems really off, especially by a writer I respect, my reaction is to try to make what they said make sense, but your use of the word "redistribute" as proof made that all but impossible. All the use to the word redistribution shows is that there was a prior distribution, which is pretty much mandated for there to even be a tax.

David R. Henderson writes:

@Daniel,
No, I didn't think that. Nor did I say I did. Reread my piece.

Matt Flipago writes:

I can't say I understand where you are coming form.

""You might think I exaggerate when I say that the word "distribution" misleads people into thinking that someone is distributing. But if people aren't misled, then why, when we talk about government taking from some and giving to others, do we use the word redistribution?""

We use the distribution to describe the list of the values recorded in a sample. Probability, cumulative, and frequency distribution, distribution of exam scores, distribution of people across land, mineral in earth, all use the use the word distribution. Saying that the word distribution is connected to someone distributing the income is ignore almost every other use of the word distribution.

We use the word redistribution, because we already have a distribution to begin with. Distribution X to Distribution Y. To distribute the wealth is to hand it out, to redistribute could mean to hand it again, or simply find a new distribution.

Either way, your lack of mentioning other uses of distribution is too discomforting to agree with you.

Tom West writes:

I think the two other problems that engenders envy or resentment are

(1) People often feel that income should be commensurate with effort. Sure the Boss has works hard, but 50 times as hard?

(2) If we're not careful, we can find ourselves talking about income being tied to providing value, when of course what we really mean is *monetary* value.

Providing a service to the indigent may have personal value to the recipient, but it has no monetary value. Likewise, providing a slight service to a very wealthy customer may not have a great social value, but may indeed be very lucrative.

If we are not careful to make it clear that it's monetary value, not personal or social value that's important to income, then there's the danger of people feeling that certain incomes aren't properly earned, which leads to resentment.

I think it behooves us to remind people of the second term in the equation:

income = value of service X ability and willingness of customer to pay

This is often missed by young people and it should be emphasized: if income is important, work in an industry that's making a lot of money, work for a company that's successful, and find customers who are wealthy. Often those factors are more important than the actual service you provide.

Daniel writes:

I think what I'm having a hard time understanding is exactly what you think others think when economists use the word "distribution". The main place in your article where you discuss this is when you say...

"However, people, including many economists, often mistakenly talk as if society is "distributing" income and people are passively receiving it. When I think of someone distributing income, I imagine a truck backing up to a crowd of people, the tailgate coming down, and someone on the truck throwing out wads of dollar bills. If you think someone is just handing out money, then the most natural thing in the world is to think that everyone should get the same amount and that it's unfair if they don't."

You point out that economists use the term "distribution", then what you think of when you hear the term "distribution" and then you speak of the hypothetical of when others believe that money is just handed out. The paragraphs after that are a good defense of the idea that money is earned, not distributed. But then you come in again with...

"You might think I exaggerate when I say that the word "distribution" misleads people into thinking that someone is distributing. But if people aren't misled, then why, when we talk about government taking from some and giving to others, do we use the word redistribution?"

Leaving aside your used of the term "redistribute" to prove that people think money is "distributed" (i.e., handed out), a point already dealt with in my earlier post and by Matt, your disclaimer left me believing that, no, this wasn't an exaggeration, you really do think that other people think that money is just handed out.

I guess I'll leave this post alone and try to understand as you saying that when you stopped focussing on what others had and started thinking of it as what they had earned, you became less jealous.

I'm sure you receive enough attacks, and I don't want to sound like just another attacker. However, I do think that you wrote a genuinely confusing post this time.

David R. Henderson writes:

@Daniel,
I do appreciate your tone and I certainly didn't take your comment as an attack. The key word in my sentence was "imagine." I thought that would make it clear to my readers that I was trying to picture what the actual method of distributing would look like. It's partly a generational thing too. My guess is that you're younger than me: I remember the Hearst family, as part of a deal with the SLA in about 1974, handing out food of a truck as part of an agreement to get Patty back.

Daniel writes:

OK.

It is embarrassing how often one misunderstood word clouds everything.

And thanks for responding (again). I'm generally more inclined to comment on your articles than on Dr. Caplan's or Kling's, because, well, they don't seem to respond as much.

And I guess this thread is old enough that no one is coming here any more, so no one will be around to accuse me of sucking up: The Joy of Freedom really was an awesome book.

Balen writes:

Dear Dr Henderson,

Thank you for this article (3 parts), I enjoyed reading it.

jva writes:

There is still that generation around that grew up hearing stories that hard work and decency is a value in itself and it will pay off. But don't worry, that is not for long. It will soon be replaced by today's teenagers that will see it as self-evident that you have to be well connected to get ahead of the pack and hard work only gets you so far. When that comes to pass, the general level of envy in population will fall because people will no longer have unreasonable expectations that hard work pays.

[edited for crude language--Econlib Ed.]

Comments for this entry have been closed
Return to top