« On economics education | Main | Egalitarianism in the lab »

April 30, 2014

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

SIS

J.K Rowling or Cristiano Ronaldo both earned their wealth by doing things that demostrably provide enjoyment to individuals, and their achievements are easy to understand. What benefit Dick Fuld or Bob Diamond have provided to the rest of us as a whole is opaque at best. Additionally, individuals like Fuld and Diamond utilize their status to try to mold policy behind the scenes via lobbying and influence buying, something that as far as we have seen individuals like Rowling or Ronaldo don't do, probably exactly because they owe their wealth directly to the services they provide the public as opposed to the structure of the corporate and financial system.

Ed

An interesting argument I heard put forward was that successful economies with well-functioning markets may naturally reduce inequality, but it doesn't follow that the opposite is true, ie. by targeting inequality (through the tax system) you may improve the Gini score, but reduce the rate of start-ups, damage innovation and productivity, and even reduce GDP growth per capita. Do you think there's anything in this?

Luis Enrique

Another freemarketeer point is: "economics is not a zero sum game". Which is fine as far as it goes, which to my mind is not terribly far.

There's plenty of zero sum in the economy, particularly when it comes to distributing the surplus (to cite a recent post of yours). We have a state of affairs with a few people consuming 1000 apples and many others consuming 1 apple. Are we supposed to believe that the 1000 apples are the incentive required for the few to produce (at minimum) 1000 apples that would otherwise not exist? No way Jose. Thems our apples they are eating.

never mind inequality being a symptom of malfunctioning markets, I object to inequality because I think in the main the few have more because the rest have less.

Tim Almond

But you're assuming that the opposite must be proven, that those on "the right" need to show it's not a functioning market despite there being no evidence.

The right thing to do is to use as much information that we have to make the decision. Right now, we don't have a market review.

But we have a number of energy companies competing for people's business. We get new entrants into the market And we have no evidence of collusion. To me, that looks on the surface like a functioning market.

Phil Beesley

"But we have a number of energy companies competing for people's business. We get new entrants into the market And we have no evidence of collusion. To me, that looks on the surface like a functioning market."

We have new companies selling energy to consumers, which is one part of the chain. Another part of the chain comprises companies that create energy on a large scale -- power for a city. My guess is that there are increasing numbers of retail sellers and not many new volume creators.

Cost reductions may emerge -- from billing and customer service, but less so by transit or thermodynamics which are outside control of the retailers. It is a guessing match to pick a retailer, unless you have the time to check prices every three months. Which is incredibly boring, possibly fruitless, and explains why few people bother.

Until a company can make lots of energy cheaply (genuinely cheaply, without subsidy, with regard to externals), the energy cost problem remains unresolved.

RobG

J.K Rowling or Cristiano Ronaldo's wealth is largely (or almost entirely in the case of JKR) due to state-enforced IP rights. You may think their ability to entertain people means they deserve a reasonable salary, but to do they deserve the enormous wealth they have? The scale of their fortune is due to political decisions by the state about IP rights. For example, the government could decide to enforce IP rights only up to an author earning £100,000 per book. I suspect she'd still write for that.

From Arse To Elbow

@Ed, inequality is an issue of distribution, not of production.

There is no evidence that innovation, productivity or startups positively correlate with inequality. High Gini score countries are often the "resource cursed", while low score countries include traditionally innovative economies such as Germany and Sweden.

Innovation is typically the product of human curiosity (and cultural norms that value it) plus institutional opportunity, not financial incentives or marginal calculation. Silicon Valley owed more to Haight-Ashbury and DoD money than it did to Reagan's tax-breaks.

Thornton Hall

Based on the below, which you wrote just the other day, I'm still trying to figure out how every single economist who does mathematical modeling first and empirical observation second is not begging every question:

Most interesting facts in the social sciences are local and particular.

Phil Beesley

@RobG: "For example, the government could decide to enforce IP rights only up to an author earning £100,000 per book. I suspect she'd [ref to JK Rowling] still write for that."

£100,000 per annum, per volume, rights in UK, rights in USA and worldwide, or etc?

My guess is that Rowling writes because she likes to write. She would not have started otherwise. When she dolls up for the cameras, she needs a good friend.

Nick Rowe

Chris: "What this misses is that many of us dislike inequality not because we envy the mega-rich but because it is (sometimes) a symptom of malfunctioning markets - that, as Scott says, "the system is rigged.""

Which economy would have more inequality: a pure meritocracy; or a pure rent-seeking economy? The answer is not obvious.

Suppose individuals differ by "merit" and by "rent-seeking ability". And suppose economies differ by the weights they place on merit vs rent-seeking ability in determining the distribution of income. If the distribution of merit had a higher variance than the distribution of rent-seeking ability, then a more unequal society would be a symptom of meritocracy. And vice versa if merit had a smaller variance than rent-seeking ability. It could go either way.

(Or do I also need to consider the covariance between merit and rent-seeking ability? Someone with better stats than me can figure that one out!)

Phil Beesley

@Nick Rowe: "Or do I also need to consider the covariance between merit and rent-seeking ability?"

It is sufficient to conclude that you are a smart arse.

Roderick T. Long

But JK Rowling's wealth depends in large part on copyrights, which are arguably a monopolistic/protectionist interference with free markets.

ChrisA

Chris
I guess if I understand you correctly, you don't dislike inequality per se. In fact you do support inequality resulting from a "real" free market, just not inequality resulting from a "distorted" free market. And you claim that what we have is a mix of genuine free markets (such as for JK Rowling's earnings) where people are genuinely earning their wealth and some distorted free markets, such as the banking game, where there is rent seeking due to implicit government guarantees thanks to the "too big to fail" problem.

If I have accurately characterized your view I can't understand how you come to the conclusion that as parts of the market are f**ked up due to Government meddling, this can be fixed by having even more Government meddling. It seem like the answer is less Government meddling in markets, not more. Then we can be sure that any inequalities we see are the "good" kind and not the rent seeking kind.

Luis Enrique

Nick,

I think it matters what you consider "merit" to consist of, when it comes to inequality.

Do we agree that if we are in a zero sum world, then if people with "merit" are rich at the expense of the poor, that would be a legitimate reason to object to inequality?

An alternative is that "merit" actually means productivity, or the ability to increase the size of the economic pie by at least as much as the individual receives as income. Even then we may still object to inequality - we may prefer that the productive rich leave more on the table for everyone else and take less themselves - but at least in that world the rich are not rich at our expense.

If by merit we mean productivity, then I think your the idea that it's not obvious which distribution has the greater variance is less plausible. Or at least I find it very hard to believe that top executive pay rewards a contribution to the economic pie (i.e. the gulf between rich and poor results from an underlying distribution of productivity). I think it merely reflects a few having the power to secure a larger slice of the pie.

on that note, when you talk about the distribution of rent seeking ability, I think it might be important to recognise that rent seeking ability is mostly not a characteristic of individuals but a characteristic of jobs and market structure.

Here your point about the covariance of merit and rent seeking could be important. It may be that those with merit is some sense other than productivity tend to secure top jobs with the ability to capture the surplus. For example you may need to be very smart and hard working to get a top job, without that meaning that the reward for getting the job reflects your contribution to the economic pie. I am sure the individuals that King Henry VIII granted dukedoms to had merits, but not in any sense that would mitigate concerns about inequality.

aragon

Intellectual Property is often let off the hook, which is regulatory capture, as others have pointed out above.

Mega-corporations like Microsoft, Oracle etc. are the product of the copyright monopoly (also network effects etc.)

FATE points out that innovation is more correlated with access to leisure and resources than rewards.

And the concerns about rent rather than productivity result from free markets trend to oligopoly, as rents are preferable to
are preferable to competition.

Growth-Share matrix.
https://en.wikipedia.org/wiki/Growth%E2%80%93share_matrix

"As BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

* stars whose high share and high growth assure the future;
* cash cows that supply funds for that future growth; and
* question marks to be converted into stars with the added funds.

Regulation (and other strategies) is used to defend cash cows and extract monopoly rents.

Of course Government can exacerbate this through regulatory capture (copyright), or counteract the tendency through anti-trust.

Of course finance is just straight forward looting of the economy.

Ed Miliband is just to weak in his solutions due to poor a comprehension to play the anti-trust card.

Martin S

"What Tim's doing here is - literally - begging the question."

Is it possible to *literally* beg the question?

SamB

Well, technically, we are "...more relaxed about J.K Rowling or Cristiano Ronaldo's wealth than about Dick Fuld's or Bob Diamond's..." only because the first pair seem more likeable.

In neither case is the wealth in question the product of a "free market" allocation as both copyright laws and media rights are a product of government policy.

Ben

A free market should not have patent protection, copy right or company limited liability. All these are the result of govenment "meddling" so why do we not hear cries to remove them? It is because they only want laws for their own advantage.

The comments to this entry are closed.

Why S&M?

Blog powered by Typepad