Bryan Caplan  

Cochrane's Questions About Inequality

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The Punchline of Labor Market ... Arnold Kling on "Sumnernomics"...
Just finished the forthcoming Inequality and Economic Policy: Essays in Honor of Gary Becker, edited by Tom Church, Chris Miller, and John Taylor.  For me, the highlight was John Cochrane on inequality.  Highlights from the highlight:
More puzzling, why are critics on the left so focused on the 1% in the US, when by many measures we live in an era of great leveling?

Earnings inequality between men and women has narrowed drastically, as Kevin Murphy reminded us. Inequality across countries, and thus across people around the globe, has also been shrinking dramatically even as income inequality within advanced countries has risen. One billion Chinese were rescued from totalitarian misery, and a billion Indians sort-of-rescued from British-style license-Raj socialism. These are wonderful events for human progress as well as, incidentally, for global inequality. Sure, these countries have many political and economic problems left, but the "its' all getting worse" story just aint' so...

Look at Versailles. Nobody, not even Bill Gates, lives like Marie Antoinette. And nobody in the US lives like her peasants. In 1960, Mao Tse-Tung waved his hand and 20 millions died. In 1935, Joseph Stalin did the same. Neither reported a lot of income to tax authorities for economists to measure "inequality." It is preposterous to claim that, even the citizens of Ferguson Mo., with all their problems and injustices, are less equal now than they were in 1950. Or 1850.

Why does it matter at all to a vegetable picker in Fresno, or an unemployed teenager on the south side of Chicago, whether 10 or 100 hedge fund managers in Greenwich have private jets? How do they even know how many hedge fund managers fly private? They have hard lives, and a lot of problems. But just what problem does top 1% inequality really represent to them?
A striking tension:
I've been reading Piketty, Saez, Krugman, Stiglitz, the New York Times editorial pages to find the answers. They all recognize that inequality per se is not a persuasive problem, so they must convince us that inequality causes some other social or economic ill.

Here's one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote
As income inequality increased before the crisis, less affluent households took on more and more debt to keep up--or, in this case, catch up--with the Joneses....
In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes
a well-documented lifestyle effect--people outside the top 1 percent increasingly live beyond their means....trickle-down behaviorism
Aha! Our vegetable picker in Fresno hears that the number of hedge fund managers in Greenwich with private jets has doubled. So, he goes out and buys a pickup truck he can't afford. Therefore, Stiglitz is telling us, we must quash inequality with confiscatory wealth taxation... in order to encourage thrift in the lower classes?

If this argument held any water, wouldn't banning "Keeping up with the Kardashians" be far more effective? (Or, better, rap music videos!) If the problem is truly overspending by low income Americans, can we not think of more directed solutions? For example, might we not want to remove the enormous taxation of savings that they face through social programs?

Another example. The S&P report moved on to a new story: Inequality is a problem because rich people save too much of their money, and poor people don't. So, by transferring money from rich to poor, we can increase overall consumption and escape "secular stagnation."

I see. Now the problem is too much saving, not too much consumption. We need to forcibly transfer wealth from the rich to the poor in order to overcome our deep problem of national thriftiness.

I may be bludgeoning the obvious, but let's point out just a few ways this is incoherent. If Keynesian "spending" and "aggregate demand" are the problems behind low long-run growth rates - and that's a big if - standard Keynesian answers are a lot easier solutions than confiscatory wealth taxation and redistribution. Which is why standard Keynesians argued for monetary and fiscal policies, not confiscatory anti-inequality taxation, until the latter became politically popular.

In a series of recent blog posts, (see coverage here) Paul Krugman offers evidence that people vastly underestimate how wealthy the rich are, bemoans how they live separate lives -- my fry cook has, in fact, no idea of their lifestyle -- and argues for confiscatory taxation to eliminate the "externality" of their excessive consumption.  Well, I'm glad logical consistency isn't holding back these arguments.
Some wise cynicism in the spirit of Gordon Tullock:
The most common argument is that we have to reduce income inequality to avoid political instability. If we don't redistribute the wealth, the poor will rise up and take it. As a cause-and effect claim about human affairs, this is dubious amateur political science, one that would look especially amateurish to the political scientists and historians at this Hoover Institution on War, Revolution and Peace. Maybe the poor should rise up and overthrow the rich, but they never have. Inequality was pretty bad on Thomas Jefferson's farm. But he started a revolution, not his slaves.
P.S. When I die, I hope the conference volume in my honor is half as good as this one!




COMMENTS (46 to date)
E. Harding writes:

There's no way "20 millions died" under Stalin, unless you count WW II, much of which was under Hitler. And the southern Soviet famine was in 1932-1933, not 1935. Though it's true 1935-1938 was the height of the Soviet purges, these didn't kill more than a million.

jon writes:

Cochrane ignores the most important problem with income inequality - concentrated wealth means concentrated power. Two academics, Gilens and Page, recently published an article that found the following:

  • Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or MajoritarianPluralism.


You can read the whole thing
here

Pajser writes:

Inequality is bad from utilitarian reasons. Ten meters longer yacht adds little utility to the owner; if same resources are spent on poor people, total utility would increase. I think every economist should understand that, and advocate more egalitarian systems. Except if they have good reason against it. I do not know such reasons. It is true that today, inequalities are smaller than in the past. But, it does not seem as good reason not to improve further.

(More exactly, it is not about strict equality, it is about distribution 'to everyone according to his needs.' Egalitarianism is close enough.)

Jesse C writes:

Pajser - I work hard for my personal version of the extra ten feet of a yacht. My version isn't a yacht, but it's enough that I'm in the target range for egalitarian leveling. But I work a lot in exchange for what I get. Egalitarian measures will just make me work less. I think about trading some (effort+money) for (leasure-money) frequently. I made a trade down in money a few years ago, in fact. I definitely work less hard than I would if I had lower taxes.

Most people trade their efforts on the margin. Unless you're in a sweatshop, if you monkey with prices/wages, you're monkeying with productivity. It's a supply/demand thing, and I suspect that's one reason why not every economist would advocate your "egalitarian" systems.

Also, I'm guessing most economists view property rights, etc, as a part of the equation. You can't just handwave through the notion that a third party has a claim on the goods/services traded by two consenting private parties. But that's what we have with most of our taxes, and most "egalitarian" improvements amount to increasing that third-party claim. This is possibly a factor for some economists.

Pajser writes:

Jesse C, you are right. Completely egalitarian (or according to needs) distribution would dis-incentivize enough that even Marx advocated only gradual move toward that. However, the effect is not so strong to justify complete dismissal of more egalitarian distributions. In extreme examples, (say, society impoverished so much that average worker produces only 120% of subsistence) egalitarian distribution saves the lives where market distribution cannot.

The preference for unrestricted private property is constant for libertarians. Even some leftists value "economic freedom." However, the economists I occasionally read (not many) regularly engage in utilitarian calculations. It is demand of the profession. Very small mental jump is needed to see inequality as a resource for increase of total utility through equalization - and that economists should search for the way to use it efficiently.

philemon writes:

@pajser

Your argument is sound only given the truth of the premise that the lost to *total* utility that results from taking $X from Mr. Rich is smaller than the gain to *total* utility that results from giving $Y to Mr. Poor. This involves an assumption about inter-personal comparisons, and that requires an argument.

Yes, the marginal dollar might mean a lot less *to Mr. Rich* that it would *to Mr. Poor*. But that's different from the premise you need.

Another thing. If there is a society where the "average" (is that mean or median?) worker produces only 120% of subsistence (I'm assuming that this is measured in absolute rather than relative terms?), you have a deeper problem than mere inequality--you are dealing with a society that is basically very poor, period. On the other hand, if the main reason why it is this way is that even though the per capital output is actually very high, some very powerful dictator is confiscating most of it for his own cabal, then again, economic inequality is really only the symptom of the real problem.

Let me be open about my own bias here. I'm not against redistribution or concerns about equality. Beyond dealing with *absolute* poverty, I even get the point that what makes for respectability is also partly a comparative thing--when most people around you have a certain level of wealth, it really sucks to have much less, even if what what you do have is many times more than people who were considered poor in some other context. But if this is the concern, then like Cochrane, I also find it strange to worry about what the 1% have--they are not the natural point of comparison. It's the *visible lot* of your immediate neighbors and people you might see everyday around you--people whose lives might plausibly intersect with yours--that matters for the comparison.

Shane L writes:

I thought the point about consumption and inequality was that it "cascades" down, with millionaires copying billionaires and so on down the chain. Each level of income looks at the layer above them, which they probably see in their daily lives in work or community, and aspire towards that. The poor needn't know about the purchases of the billionaires, only the purchases of the lower middle class or something - those above them in income who they see in their daily lives.


Curiously Robert Franks thought, if I understand correctly, that the problem was excessive, debt-funded, consumption among the poor. More saving would be a good thing.

David Jacobs writes:

Are the authors wrong to worry about inequality as a possible contributing factor?

http://www.pnas.org/content/early/2015/10/29/1518393112.full.pdf

Floccina writes:

I hear Bernie Sanders bemoan inequality and then promise the middle class free college and health insurance. It seems to me he is selling a very simple promise, that is: The rich have a lot of money, if you elect me I will take some of it from them and give it to you.

Floccina writes:

@pajser if Government takes Bill Gates' money they will target it at the median voter which means mostly at the USA middle class. If Gates keeps it he will target much of it at the really poor of the world.

Mike S. writes:

@philemon @pjaser @Jessie C

Exactly. In fact, I'd hypothesize that redistribution and the general focus on equality disincentives the poor as well, further lowering overall utility. If I'm a cashier at Walmart and I see the wealthy, including the hereditarily wealthy, lauded by politicians and the media, given special treatment in many things, allowed to keep nearly all of their money, and generally treated like minor gods, I'll likely think to myself, "Wow, I'd like to work harder to maybe give my children or grandchildren a shot at this some day."

But if I'm that hypothetical Walmart cashier and see the wealthy being denigrated by politicians and in the media, paying high taxes, being targeted by prosecutors who don't want to give them "special treatment," and the like, I may just not bother as much at the margins.

Seth writes:

"Inequality is bad from utilitarian reasons. Ten meters longer yacht adds little utility to the owner; if same resources are spent on poor people, total utility would increase."

Except the knowledge problem.

Greg G writes:

Great post Bryan. As someone who stands well to the left of your average commenter, I do worry about the pernicious effects of increasing inequality in America. But I also worry that the most likely reactions to that might just make things worse for everybody. I read your blog in an attempt to address my own confirmation bias. You certainly did not disappoint today. You convinced me to buy the book.

Jon Murphy writes:

I think the "why" of inequality is far more important that the "how much."

Why does inequality exist? Is it because someone invented a new product or process and improved the lives of millions? Than that is "good" inequality. Is it because someone is corrupt or stole? Then that is "bad" inequality.

The problem with many methods of addressing inequality is that it doesn't distinguish the good from the bad. Confiscatory taxes take from the good and the bad alike.

Jon Murphy writes:

@jon: If the problem (or danger) is the wealthy getting powerful by using government, then it seems to me the solution would be to reduce the power of government, not increase it.

Zeke5123 writes:

To further Philemon's point, Pajser failed to consider the deadweight lost in applying the tax, collecting the tax, administrating the wealth transfer.

More damning, Pajser fails to consider that the disutility of having money taken from you is not commensurate with the utility achieved by the same person spending that money. See the endowment effect.

To my knowledge, the following hasn't been studied, but there may be some disutility in receiving transfer payments (e.g. guilt associated with living off of the largesse of others). So, even though the consumption of the transfer payment might create greater utility when consumed by a poor person compared to rich person, it doesn't follow that the transfer itself is maximizing net utility.

When you add in interpersonal comparisons of utility, deadweight costs of administrating a transfer system, disutility created by seizing transfers and the potential disutility created by giving transfers, then it is far from obvious that transfer payments from the rich to the poor maximizes utility.

Roger Sweeny writes:

Income inequality is a big problem because college professors and NYT writers are really pissed that hedge fund managers make more than they do.

Edogg writes:

These excerpts don't impress me.
The massive improvement in living standards for the world's poorest is more significant than almost any other issue. But Cochrane and Caplan still think it's worthwhile to discuss the Affordable Care Act, the Dodd Frank Act, education subsidies in the United States, and labor market regulation in the United States. Similarly, it's hard to see how patent reform or eliminating the mortgage interest deduction will impact a single hypothetical vegetable picker in Fresno. I'm not persuaded about the secondary economic consequences of inequality but he oversimplified the arguments in order to find a contradiction. And "banning rap videos" is an obviously stupid suggestion.

Chris Wegener writes:

I am always amused at the "missing the point" that goes on here in the comments.

The issue, by and large, is that capital has been able to break the bargain with labor much to their personal benefit. Much of the current levels of inequality do not arise from super successful entrepreneurs making huge sums of money which would be fine as the example of Bill Gates.

The current levels of inequality come from the failure of corporations to pass along the value of increased productivity as wages to employees

Productivity and hourly wages

The increase in rent seeking from corporations and wealthy individuals through manipulation of the political process as mentioned by @jon.

Many of the posters here fall into the common fallacy that if they are the individuals that will suffer if taxes and social benefits are increased. They clearly have bought into the fiction that the poor are victims of their own laziness.

You should stop for a moment and realize that far and away most current policies successfully distribute wealth upward rather than down and they themselves are being scammed.

Upward Wealth Distribution

Jon Murphy writes:

@Chris,

Your argument is largely a debunked myth. By looking only at wages, you're missing about half the pie. Total compensation is better to look at.

Robert Schadler writes:

INCOME inequality is primarily relevant for the bourgeois and middle classes. WEALTH and ACCESS are two other obvious aspects to overall economic well-being. Steve Jobs was, famously, paid only $1 a year. The children of Warren Buffett may not have ownership of anything; nor do they need to earn an income.
Likewise, the poor may have little in terms of income or wealth; depending on the "safety net" (i.e. access to economic goods thru food stamps, rent coupons, etc) determines their overall status.
ONLY by using all THREE indicators, it seems to me, can anything sensible be discerned. And yet that then becomes very complicated.
Finally, concern about INEQUALITY is almost entirely separate from concern about the poor. Doubling the income-wealth-access of the poor may or may not affect inequality. That cannot be known until we also know how the rest of society is doing. If everyone doubles, inequality is the same, but the poor are much better off.

JLV writes:

Cochrane is a master at restating his priors. This is just a long example of that.

E. Harding writes:

Chris, there was no bargain. There was supply and demand. Even at the peak, only about a third of workers were unionized and that ended when firms began to understand they had more options.

"Much of the current levels of inequality do not arise from super successful entrepreneurs making huge sums of money which would be fine as the example of Bill Gates."

-Actually, they do. Superstar effects are another manifestation of the post-1980 increasing inequality. And how do you measure rent-seeking? How can you determine it was less in 1960? And why should firms pass along productivity increases, anyway? And, in any case, the pay/productivity graph is taken ridiculously out of context and does not account even for different deflators. Why not link to the full analysis it's in? This is certainly not helpful to the conversation in this thread.


"Many of the posters here fall into the common fallacy that if they are the individuals that will suffer if taxes and social benefits are increased."

-I won't suffer in the short-term. But will America suffer in the long term?

"They clearly have bought into the fiction that the poor are victims of their own laziness"

-Most U.S. poor don't work. They are largely either taking care of children, retired, disabled, or students. And yes, a good number of poor really are victims of their laziness.

And a lot of the people losing their bargaining power are quite high-paid. CPI-adjusted average hourly earnings have been doing much better than CPI-adjusted labor compensation per worker.

ThomasH writes:

I think the reason for increased concern for inequality within rich countries notwithstanding the improvement vis a vis Ancien Regime France and Mao's China is that "dog bites man" is not news.

We expect Capitalism to make everyone in the world middle class and for that middle to rise nicely. Growth is good for everyone. Trade liberalization makes us all richer. If China does become richer, there is something seriously wrong with the factor price equalization theorem.

When some of the expectations turn out not to be true, people are surprised. And the people who have not kept up are naturally a bit miffed. Hence the resonance of the news about the falling life expectancy of low education middle age whites.

Greg G writes:

I thought the most impressive part of this post was when he pointed out that, if you are sincerely worried about inequality, you will have to confront the fact that a lot of the increasing inequality in American family incomes is the result of decreasing inequality between the sexes and throughout the world.

As women realize economic equality they tend to pair off with males of similar incomes and this dramatically increases the differences in family income patterns.

And as globalization increases, low skilled American workers face a lot more competitive pressures.

More opportunity for poor people in other countries and women in this country have been good things but, as always in economics, there are tradeoffs and unintended consequences.

I did think that the argument that the poor are mostly unaware of or uninterested in how the rich live was very weak. Our culture, media and advertising are totally saturated with images of the rich and famous and their celebrated lifestyles. The poor and lower middle class are reminded they are falling behind every time they turn on the TV or pick up a magazine.

jon writes:

"@jon: If the problem (or danger) is the wealthy getting powerful by using government, then it seems to me the solution would be to reduce the power of government, not increase it."

Because unrestrained wealth would have less power?

The wealthy use government to gain power because they have to.

philemon writes:

@Shane L, @Greg

"The poor needn't know about the purchases of the billionaires, only the purchases of the lower middle class or something - those above them in income who they see in their daily lives." (Shane)

"I did think that the argument that the poor are mostly unaware of or uninterested in how the rich live was very weak. Our culture, media and advertising are totally saturated with images of the rich and famous and their celebrated lifestyles. The poor and lower middle class are reminded they are falling behind every time they turn on the TV or pick up a magazine." (Greg)

The point is not: I don't know about how the 1% lives--I might know quite a lot thanks to the media. Or at least I might think I know quite a lot, thanks to the media. And the fact that said media exists suggests that there is demand for the vicarious look at the lives of rich people (it could well be manufactured demand too, but let's leave that aside). So there must be some sort of interest in the lives of the rich on the part of the poor.

But that's not quite the same as saying that the lives of the 1%'ers matter either subjectively or objectively as the relevant reference class for thinking about whether I am "falling behind"--as opposed to "I wish I have that sort of wealth" or "I aspire to that sort of wealth".

When most of the people around me have switched to smart phones and I am still left with my dumb phone, I might feel like I'm "falling behind". But I shrug my shoulders when I hear about some 1%'er showing off his diamond encrusted iPhone. Or when I watch the antics of a 0.1%'er who doesn't bother with a phone at all because he has a personal assistant who follows him around on a private helicopter--he might as well be from another planet.

The point is that when I try to take seriously the idea that what counts as respectability is partly a relative thing, I am naturally led to the conclusion that for most people, the relevant reference class has to be, unsurprisingly, most other people, rather than the very special few. All the more so if there is a big gap in lifestyle between the 1% and the rest.

Jon Murphy writes:
The wealthy use government to gain power because they have to.

And why do they have to?

philemon writes:

@jon

"Because unrestrained wealth would have less power? The wealthy use government to gain power because they have to."

Why do they "have to". Could it be because... government is powerful enough to confiscate their wealth?

If government is going to squeeze my industry, then I, as the wealthy owner of a large company, have every incentive to be in the game of buying myself some government.

jon writes:

@Jon Murphy and @philemon

You both ignored the first half of my post - that unrestrained wealth would be even more powerful. Are either of you suggesting that it wouldn't?

As to why they have to: government, at least theoretically, represents us. The wealthy must co-opt it (as the study I cited suggests they have done quite successfully) if they want to maintain control.

jon writes:

More opportunity for poor people in other countries and women in this country have been good things but, as always in economics, there are tradeoffs and unintended consequences.

And as always in America, the burden of those trade-offs and unintended consequences fall largely on the poor, and the benefits go mostly to the wealthiest.

Effem writes:

This seems to me a political issue. And via that lens, the wealthy should be in favor of MORE redistribution. We live in a democracy. A majority of voters could choose to radically change the status quo (which by default, works well for the rich). Why roll the dice?

Whether it is accurate or not, greater numbers of people feel like "have nots." It is a dangerous game for the wealthy to fight this. Better to embrace it, throw some bankers in jail, make some very-PR-friendly redistribution effort, preserve the status quo, and continue to amass wealth.

philemon writes:

@jon

"As to why they have to: government, at least theoretically, represents us. The wealthy must co-opt it (as the study I cited suggests they have done quite successfully) if they want to maintain control."

The study says that "that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy".

It also says this:

"It turns out, in fact, that the preferences of average citizens are positively and fairly highly correlated, across issues, with the preferences of economic elites (refer to
table 2). Rather often, average citizens and affluent citizens (our proxy for economic elites) want the same things from government." (p. 570).

Looking at Table 2 on p. 571, the more interesting thing is how well the economic elite reflects the preferences of the average citizen (0.78), compared to mass public interest groups (0.12) and business interest groups (0.10).

If this is what is meant by "control" by the economic elite, i.e., the wealthy, I'm not sure it is a complete disaster--from the point of view the rest of us. Unrestrained wealth may be powerful; but it's not clear yet that that has resulted in a big problem--given the study you quoted.

In contrast, the mass public interest and business interest groups, look a lot worse. They are classic examples of how a smaller sectional interest seeks to advance their own interest against the preferences of the majority by buying themselves some government--not just because they are wealthy, but because the structure of government makes it possible for them to do so.

jon writes:

the more interesting thing is how well the economic elite reflects the preferences of the average citizen (0.78)
Two points:

First, from the article itself -

  • We know that interest groups and policy makers themselves often devote considerable effort to shaping opinion. If they are successful, this might help explain the high correlation we find between elite and mass preferences

Second, whether (0.78) is encouraging or not depends a lot on what the (0.22) is all about. Take the TPP as an example. This is not very popular among the general population, but the elites like it so both major parties support it. This is will have a much bigger impact on our lives than whether the elites agree with the public on displaying the confederate flag on license plates.

Jon Murphy writes:
You both ignored the first half of my post - that unrestrained wealth would be even more powerful. Are either of you suggesting that it wouldn't?

I am not suggesting anything. I'm telling you they wouldn't. How could they be without government? Every example you've given is of the wealthy using government for power. How could a wealthy person, without government, control me without my consent?

Greg G writes:

Jon Murphy,

"Without government" police protection and judicial processes would be for sale to the highest bidder. So unrestrained wealth would be the main source of power. And power always corrupts to some degree - most of all when it doesn't have to compete with other sources of power and is "unrestrained."

Now I know you will be eager to point out that markets themselves are an important form of restraint and they are. But there is no historical evidence that markets will evolve and operate optimally without governments that have established the rule of law that provide a way for those dissatisfied with the system to peacefully influence the process.

Jon Murphy writes:

Greg,

I appreciate your point, and I agree. I am no anarchist. But I am not proposing anarchy. What I am asking is how, by limiting government, that would allow the rich to become powerful. How can Bill Gates et al use their money to control me absent of buying government? That is the crux of jon's argument. He takes it for granted, but I do not.

Greg G writes:

Jon Murphy,

You want to frame this as an argument between people who want to limit government and those who don't. Where are these people who argue in favor of unlimited government? I have never met any of them. Everyone wants to limit government in different ways.

As Oliver Wendall Holmes said "A Constitution is not intended to embody a particular economic theory . . . It is made for people of fundamentally differing views."

Self described libertarians are a small percentage of the population and even among them there is a quite spectacular variety of ways they want to limit government. I have encountered self-described libertarians who are anarchists and ones who proudly voted for George W. Bush twice.

If you want to minimize violence and coercion the method you use to decide controversial issues will matter a lot more than the details of the decisions. As I recall you favor a Milton Friedman style guaranteed income with whatever amount of income redistribution that entails. I'm not sure exactly what arguments you use to draw the line where you want to draw it on that. Whatever they are, you will find that other people use those same arguments to draw the line on government intervention in a different place than you do. You can't avoid judgment calls on these kinds of issues.

Rick Hull writes:

Honestly, the new frontier for the left should be friendship inequality. The count and value of friendships should have much more effect on human well-being than mere filthy lucre.

The 1% should be forced to defriend so there are more friends for the miserable.

Jon Murphy writes:

Greg,

I'm trying to get an answer to two questions:

1) How can the wealthy exert power over me without the state?

and

2) If the problem is the wealthy buying government power, how will increasing government power solve the issue?

The first is central to jon's argument, but he has yet to demonstrate its validity (he seems to take it as self-evident). The second is central to jon's solution.

I'm not questioning limited gov't vs. unlimited government. I'm questioning the logic of expanding government power to curb government power abuse.

Greg G writes:

Jon Murphy,

Without the state, the wealthy could exert power over you by controlling the resources you need to live.

I expect you will want to argue that free markets would prevent that but I would remind you that we haven't ever seen the evolution and survival of those kind of free markets in the absence of the state and we have no real reason to think such a thing is possible without the state.

We have seen many historical periods, like the Middle Ages where the wealthy used their power to dominate the poor in the absence of effective central government.

But your second question is more relevant since, because you are not an anarchist, we are not really talking about a situation "without the state."

Increasing government power will not "solve" THE problem of the wealthy buying government power. There are many problems and government power certainly will not solve them all.

It may solve some though, like making possible the provision of that minimum income that you favor. The poor complain that the wealthy have too much control of government due to the influence of their money. The wealthy complain that the poor outnumber them and have too much control of government power for that reason. I am from the school that tends to think that the fairest compromises are the one that leave both sides complaining.

You don't expand government power to curb government power abuse. You do it to solve some other problem. For example, if you provide a minimum income, some number of people will take advantage of the government power necessary for that to cheat the system. If you expand government power to provide a military defense some number of people will take advantage of that and abuse their power. You didn't favor providing a military defense because you thought there wouldn't be abuses. You did it because you thought the trade offs were worth it.

Jon Murphy writes:
We have seen many historical periods, like the Middle Ages where the wealthy used their power to dominate the poor in the absence of effective central government.

I must heartily disagree Greg. Feudalism/monarchy most certainly is an example of an effective central government.

Greg G writes:

Jon Murphy,

You are right about the late Middle Ages when kings became very powerful. But in the early Middle Ages power was very decentralized and monarchies were quite weak. Just because you have a monarchy in name doesn't necessarily make it an effective central government.

The local nobility evolved in most cases from local strongmen who were almost always the wealthiest people in their area. These local nobles were pretty much able to do as they pleased unless they ran afoul of other nobles. There was plenty of redistribution of wealth but the redistribution was upward from the peasants to the nobility with a little bit being passed on to the king who was expected to co-ordinate military defense (or aggression) against outsiders.

The wealthy used their power to dominate the poor. The real power was very much decentralized to the local level for quite a few centuries despite nominal allegiance to the king.

Look at almost any part of the world today where there are failed states and no effective central government and you will see economic resources being dominated by local warlords. You will not see the evolution of free market economies in these places.

jon writes:

1) How can the wealthy exert power over me without the state?

Is your question about a world with no state or one with a smaller state? If it's the former, then I think Greg G has answered that well. But you said you were not an anarchist, so I will assume you mean a smaller state. But surely even the smallest state would still control national defense, immigration and international trade. So there, three examples. As I mentioned above, these are the types of issues that have a far greater impact on our lives than just about anything.

2) If the problem is the wealthy buying government power, how will increasing government power solve the issue?

Because we are decreasing the concentration of power. If the wealthy use their money to control government, and we reduce that wealth, how will that not solve the issue?

Fred Anderson writes:

This is somewhat a change of subject;
An argument that inequality may be needed for prosperity.

I am not trained as an economist, so this very probably can be improved by the criticisms of those who have such skills.

But isn't the wealth of societies bounded by their productivity?
(You can't consume what hasn't been produced by someone. And even if it's not yourself, aren't you constrained in trading to providing something to your trading partner that you did produce that they consider to be of equal or greater value?)

Thus to consume more, workers & societies must produce more. This calls for work harder, work smarter, and/or use a tool. Work harder seems counter-productive if the objective was an easier lifestyle. Great innovations in management, such as the assembly line or the computer, seem fairly rare. That leaves "use a tool" (= increase capital inputs).

Last I looked (about five years ago) the average American worker was working with $334,000 of capital (buildings, equipment, inventories, company investments in training, etc.). (Misc. odd fact; a modern garbage truck costs ~$250,000.) If the workers had to provide their own "tools", most of us would be unemployed.

At this rate, a small business of 15 employees would need someone who could pop for $5,000,000 to finance the enterprise. This is a spare $5 million you won't have need of for the next 5, 10, maybe 20 years. And given the failure rates of small business, it should be $5 million you can "afford" to lose (or at least, that you can survive losing).

Such a person would have to be far wealthier than I am (and, I suspect, a lot wealthier than most of the readers here).

Isn't there a risk that "leveling the playing field" may sharply curtail the availability of investment capital / "tools" for the workers / productive tools that justify the workers' high wages?

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