David R. Henderson  

The Top 0.1 Percent

What I'm Saying... Social Justice of the Gaps...

Paul Krugman has a post today linking to an article in the New York Times magazine about a wealthy man named Edward Conard. In the second line of his post, Krugman writes:

Because, you see, they don't spend all their wealth building homes as big as the Taj Mahal; some of it they invest in innovation.

I know it may sound shocking, but Krugman didn't quite do justice to Mr. Conard's point.

Here's the meat of the excellent article by Adam Davidson:

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don't know how the economy really works -- that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. "Most citizens are consumers, not investors," he told me during one of our long, occasionally contentious conversations. "They don't recognize the benefits to consumers that come from investment."

This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. Take computers, for example. A small number of innovators and investors may have earned disproportionate billions as the I.T. industry grew, but they got that money by competing to constantly improve their products and simultaneously lower prices. Their work has helped everyone get a lot more value. Cheap, improved computing helps us do our jobs more effectively and, often, earn more money. Countless other industries (travel, telecom, entertainment) use that computing power to lower their prices and enhance their products. This generally makes life more efficient and helps the economy grow.

The one thing that's off, given the point of the article, is Davidson's use of the word "disproportionate." Disproportionate to what? If the wealthy investors created value that's a multiple of their own reward, then the billions they earned are not disproportionate, unless they're disproportionately small, which I'm sure is not Davidson's point.

Fortunately, in the next paragraph, Davidson continues:

The idea that society benefits when investors compete successfully is pretty widely accepted. Dean Baker, a prominent progressive economist with the Center for Economic and Policy Research, says that most economists believe society often benefits from investments by the wealthy. Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. The Google founder Sergey Brin might be very rich, but the world is far richer than he is because of Google. Conard said Baker was undercounting the social benefits of investment. He looks, in particular, at agriculture, where, since the 1940s, the cost of food has steadily fallen because of a constant stream of innovations. While the businesses that profit from that innovation -- like seed companies and fast-food restaurants -- have made their owners rich, the average U.S. consumer has benefited far more. Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we're benefiting, proportionally, from it.

Exactly. Whether the right number is 5 or 20--and I have no idea which--it's pretty clearly a multiple.

My favorite part of the piece is this:

His book is filled with a lot of abstraction, so I asked him to show me how his ideas play out in the real world.

Conard picked up a soda can and pointed to the way the can's side bent inward at the top. "I worked with the company that makes the machine that tapers that can," he told me. That little taper allows manufacturers to make the same size can with a tiny bit less aluminum. "It saves a fraction of a penny on every can," he said. "There are a lot of soda cans in the world. That means the economy can produce more cans with the same amount of resources. It makes every American who buys a soda can a little bit richer because their paycheck buys more."

It reminded me of this passage from Ayn Rand's The Fountainhead. Gail Wynand and Howard Roark are talking:
"I was thinking of people who say that happiness is impossible on earth. Look how hard they all try to find some joy in life. Look how they struggle for it. Why should any living creature exist in pain? By what conceivable right can anyone demand that a human being exist for anything but his own joy? Every one of them wants it. Every part of him wants it. But they never find it. I wonder why. They whine and say they don't understand the meaning of life. There's a particular kind of people that I despise. Those who seek some sort of a higher purpose or 'universal goal,' who don't know what to live for, who moan that they must 'find themselves.' You hear it all around us. That seems to be the official bromide of our century. Every book you open. Every drooling self-­confession. It seems to be the noble thing to confess. I'd think it would be the most shameful one."

"Look, Gail." Roark got up, reached out, tore a thick branch off a tree, held it in both hands, one fist closed at each end; then, his wrists and knuckles tensed against the resistance, he bent the branch slowly into an arc. "Now I can make what I want of it: a bow, a spear, a cane, a railing. That's the meaning of life."

"Your strength?"

"Your work." He tossed the branch aside. "The material the earth offers you and what you make of it . .

Thanks to Jeff Scialabba of the Ayn Rand Institute for tracking down the passage after my vague description to him over the phone. It's in Part IV, Chapter 5.

NOTE: I watched the whole Ron Paul vs. Paul Krugman debate yesterday and found it more interesting than I expected. Ron Paul stumbled a lot, as I expected, but I was surprised at the weakness of some of Krugman's responses. I agree with some of what Tyler Cowen said, but I think Tyler missed some pretty important things. That will wait, though, until I go through it frame by frame and take notes.

COMMENTS (9 to date)
Glen Smith writes:

Thing about Krugman is that his economic proposals require speculators and a government that has to creates and supports welfare programs for the ultra-rich like it does (especially in the finance game). Of course, the problem is that at the same time, he's got to complain about them.

AngryKrugman writes:

Conrad, while making some good points, also sounds delusion. The story sort of touches on this at the end, but he completely disregards what people are most concerned about. People, I think, still admire those that achieve their wealth through risk-taking and innovation--Steve Jobs, Bill Gates, etc. What they don't like is rent-seeking.

I also don't understand why he admonishes lawyers, but not investment bankers and management consultants, who took a similar treadmill path to "safe" jobs out of school. What risks did Conrad take attending Harvard Business School?

Greg G writes:

My favorite part was when he said the crisis was just an old fashioned irrational bank run. Isn't that what the Enron defense was as well? Silly depositors didn't realize that they could have kept the thing going forever if the deposits had kept coming in. It's their fault.

Or there was this:
"Conard concedes that the banks made some mistakes, but the important thing now, he says, is to provide them even stronger government support. He advocates creating a new government program that guarantees to bail out the banks if they ever face another run. "

Seems like every time you hear someone gushing about how under appreciated risk takers are it turns out to be someone pretty well insulated from risk and good at transferring it to other people.

KLO writes:

Economists have puzzled over the relationship between inequality and growth for a long time. A common case study is that of South Korea and the Philippines, which in the early 1960s had a similar GDP per capita, population, and human development. The one major difference was the distribution of wealth, with the Philippines having a GINI coefficient 17 points higher than South Korea. A lot of economic models would predict that the Philippines, with its more unequal wealth distribution, would have higher net investment than South Korea and would experience correspondingly higher economic growth. This did not happen. Maybe inequality is not so great after all.

Saturos writes:

Ayn Rand also said this about the meaning of life, which I like even better.

But anyway, the argument in favor of wealth is fallacious. Sure, rich people invest. But that doesn't mean we benefit from them being rich. If that wealth were transferred to us (at no deadweight cost) wouldn't we be better off? You say that investment would fall. But if people choose to consume instead of invest, then those people are better off consuming. It's not clear that if the rich were expropriated (without DWL) and the proceeds divided evenly among the rest of us, then the fall in my gains from the total investment in the economy would outweigh the benefit of the cash transfer to me. I gain by the amount of the transfer; I lose by the amount of surplus from intertemporal exchange in capital goods that accrued to me from rich people's excess capital investment. It's unclear what the net effect would be. Remember the transfers are split between a much greater number of people, so the fall in saving and investment is not as much as you think.

Adrian writes:

Rich people good. no Rich people bad. This is a pointless red herring to what is truly a problem. Poverty and the lack of opportunity should worry all of us. Inequality is a fact of life, but poverty shouldn't be. Yes we should value liberty, but not to the point were we become selfish individualists.

B.B. writes:

Would it be so hard for the economist writers on this blog to draw some curves and show consumer surplus and producer surplus? That is all we are talking about here.

Someone invents a wonderful new "widget." He produces it and sells it. Further innovation and competition drive the price down. The producer gets rich (producer surplus) but the consumer benefits (consumer surplus) also.

In the long run, capital earns a competitive rate of return. The benefits to innovation accrue to consumers and workers.

Ordinary people see the rich and have a hard time understanding that point. Economists need to explain it.

Part of the problem is that many of the rich in this world get rich by rent-extraction and monopoly. Think of the Saudi royal family, African dictators, Carlos Slim in Mexico, or even the drug lords. Perhaps Warren Buffett belongs in this category when he buys preferred stock in "too big to fail" banks which got government bailouts. Firms getting rich with patent trolls are in this category.

We don't need to honor and respect the "rich." We need to honor and respect the innovators and creators.

Seth writes:

"...but I was surprised at the weakness of some of Krugman's responses."

I'm not sure why this surprises anyone.

anti-Krugman writes:

@KLO: A huge difference between South Korea and the Philippines is the level of corruption. Current Transparency International rankings put South Korea at 43 vs Philippines at 129. Trend evidence is harder to come by, but this paper arrives at the conclusion that the difference in corruption has been consistent.

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