Too close for comfort?

Posted: 9 April 2012 in Uncategorized
Tags: , , , , ,

Clearly, Greg Mankiw is discomfited by the claim that his approach to economics smacks of social Darwinism.

Jonathan Chait is the one who first made the claim, which he later defended. According to Chait, the “the main guiding principle” of social Darwinism is

a defense of the free market as a moral arbiter, rather than merely a tool for creating wealth. Just as natural selection allows better-adapted species to thrive and poorly adapted ones to die out, the free market rewards talent and hard work and punishes laziness or lack of talent, in a perfect or near-perfect way.

And that’s exactly what Mankiw argues in the paper [pdf] Chait cites, and which Mankiw suggests Chait and others read in full.

So, I did. First, Mankiw argues that “people should get what they deserve,” that is, “A person who contributes more to society deserves a higher income that reflects those greater contributions.” And, Mankiw argues, capitalism does exactly that.

Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources. But we economists often say that there is nothing particularly equitable about that equilibrium. Perhaps we are too hasty in reaching that judgment. After all, it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.

Mankiw, however, also recognizes that the “real world differs from a classical competitive economy free of market imperfections.” Therefore, there is room for progressive taxation within his Just Deserts world. But, and here’s the kicker, progressive taxation (and, long with it, the financing of government programs) only make sense if the value of government services increases along with income. In other words, the rich should only be forced to pay higher taxes to the extent they benefit from the “public good.”

What about transfer payments to the poor? These can be justified along similar lines. As long as people care about others to some degree, antipoverty programs are a type of public good. . .That is, under this view, the government provides for the poor not simply because their marginal utility is high but because we have interdependent utility functions. Put differently, we would all like to alleviate poverty. But because we would prefer to have someone else pick up the tab, private charity can’t do the job. Government-run antipoverty programs solve the free-rider problem among the altruistic well-to-do.

What this means is that, if the rich believe that alleviating poverty is a public good from which they benefit, they should be willing to pay higher taxes to support transfer payments to the poor.

Either way, it’s survival of the fittest.

  1. Magpie says:

    Some time ago I presented the following scenario: imagine a guy who bought Apple Inc. shares some 10-12 years ago.

    Ever since, the market price of Apple shares has more than doubled; therefore, this guy has seen his original investment more than double. Not to mention dividends per share, which are his share of the profits Apple appropriated.

    But this guy did not assemble a single computer or mobile phone in his life. He did not write a single line of the software code making these machines work. He never designed a single machine, or even a logo. Apple Inc. workers (or those poor devils enslaved by Foxconn) did all these things.

    What did our Apple shareholder do to earn his fortune? Nothing. If he was not born, that wouldn’t change Apple’s profitability. If he sold his shares, nothing would change.

    I am sure some people would argue that the guy was really smart. A true sharemarket visionary. He’s being rewarded for being smart. Maybe, although I’d say there’s a good chance that was just a fluke.

    But whether he was smart or just lucky, it’s irrelevant. People don’t get paid for being pretty, or good, or wise. Neither are they paid for being smart. People get paid for contributing to a business’ success.

    The Apple industrial designers, programmers, and assembly line workers, they contribute with their effort. They earned their pay. Maybe one could accept that the managers doing whatever managers actually do (other than sexually harassing their female staff, that is) contribute.

    But, what the fuck did the shareholder contribute? If the guy bought shares in the secondary market, he did not even contribute capital, for Christ’s sake! He did not earn anything.

    And yet, he is sucking the wealth produced by Apple workers. This is our “smart” investors’ fitness: the ability to suck blood undetected.

    And, let me be clear: Apple is a stand in for each and every business. Each and everyone of them is the same.

    So, what is Prof. Mankiw’s contribution to society? The useless nonsense contained in his books?

  2. Scott M. says:

    Yes sir! Despite what some people say about Social Security, it is the Stock Market that is the true ponzi scheme!

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