A draft paper by Economist Greg Mankiw was recently released, boldly titled “Defending the One Percent“. According to Wikipedia Greg Mankiw is a professor of economics at Harvard, and the “32nd most widely cited economist in the world today.” He also served as Chairman of the Council of Economic Advisers under George W. Bush, and was presidential candidate Mitt Romey’s economic adviser. Learning that, the title makes a little more sense. Whether it’s divine right or some farcical aquatic ceremony involving a lady in a lake and a sword, those who’ve accumulated (or been given) vast stores of wealth and power have felt at least somewhat compelled to justify themselves to the multitudes who have little of those things. Hence a piece like this from Mankiw.
It’s a pretty short, breezy read, beginning with a thought experiment involving a perfectly equitable society that becomes topsey turvey due to a hypothetical, Jobs like genius who offers an awesome product that everyone buys, thus accumulating an equilibrium smashing amount of wealth. Thus the paper is kicked off with a question about what, if anything, should be done about this inequality.
Though about those people buying the awesome new genius product, there is a sentence thrown in there that stood out to me:
The transaction is a voluntary exchange, so it must make both the buyer
and the seller better off.
I have read a fair amount of economic commentary, but admit that I haven’t actually read much “economics”, i.e. the august prose turned out by trained and respected economists. So I was a little surprised by the popping off of such an assured statement…especially when, as far as I can tell, it doesn’t really add anything to his argument anyway. Is this really how economists write, and think? Because I’m pretty sure I know what “voluntary” means, and I’m quite sure I know what “must” means, so if that sentence is written in English, I’m certain it’s just not true.
So it was an odd introduction to the ‘economese’ language for me. The meat of the paper addresses the question of where the great gains made in the last 40 years or so by the one percent have come from. And the gains have been great. Mankiw, citing figures tabulated form tax returns, states that the share of income earned by the top one percent rose from 7.7 percent to 17..4 percent from 1971 to 2010. For the top .01 percent it has risen from 0.5 percent to 3.3 percent from 1973 to 2010.
But why? Mankiw addresses two possibilites: successful rent seeking by the elite (essentially gaming the system), and the elite simply growing that much more productive. Manikow opts for the essentially Galtian explanation that the advance of technology creates outsized rewards for those with the proper education and talent. It’s the iron law of the market that provides the unique, irreplaceable geniuses with their increasingly large piece of the pie, as Mankiw puts it: “rising inequality if about supply and demand.”. A piece at the The Economist provides a good takedown of the entire paper, but of this idea in particular:
But now let’s imagine that just before these geniuses are able to bring their creations into the world, they die. No iPod, no Harry Potter, no Jaws. What happens then?
Here’s what happens then. Instead of Apple dominating the market for MP3 players in the early 2000s, Sony and Samsung do; a little later, when smartphones come along, the battle for mobile operating ecosystems revolves around BlackBerry, Samsung/Google and Nokia/Microsoft. Instead of Harry Potter, some other children’s fantasy book becomes the dominant franchise of the 2000s. And instead of “Jaws”, some other movie becomes the first immense blockbuster of the 1970s, and a different brilliant director’s career is launched. All of the money that was spent over the past few decades to make Mr Jobs, Ms Rowling and Mr Spielberg immensely wealthy would instead have gone to three other hard-working creative geniuses, of which the world has no shortage. There would be just as much inequality as there is now.
So why does Mr Mankiw pick three figures from the entertainment and computer industries, where everyone knows the “superstar” phenomenon is strongest? Because if he used examples from other industries, it would be even more difficult to convince the reader that the immense rewards being reaped by those at the top had anything to do with their unique contributions to the economy. Last year the highest-paid chief executive in the country, at $131m, was a guy named John Hammergren, who runs a medical and pharmaceuticals business called McKesson. If he hadn’t been running McKesson, some other guy would have been. If Michael Vascitelli ($64m) hadn’t been running Vornado Realty Trust, somebody else would have. Perhaps those other guys wouldn’t have been as good at their jobs; in that case, these firms would have lost market share to competitors. So what?
As marginally less interesting or less convenient as the world would perhaps be if it were missing the warm glow of our creative and business geniuses, it would not spin off its axis and hurdle into the sun. As unsatisfying as the fact may be, none of us are indispensable, culturally, spiritually, or economically. Our world doesn’t rest on any individual’s shoulders. Atlas was, is, and will certainly continue to be a myth, a childish Ayn Rand fantasy beloved by those stuck in a permanent state of emotional adolescence. If all the CEOs of all the Fortune 500 companies, or hell, even all of the C level executives were to be blinked out of existence, would civilization collapse? Or would things hum along pretty much as before? Is that hypothetical really that difficult to answer? If things would hum along as before, is that answer important to how we think about the trajectory of income distribution these last 40 years?
Mankiw concludes that “the most natural explanation of high CEO pay is that the value of a good CEO is extraordinarily high.” Because while high CEO pay at publicly help companies boards may be too cozy with CEOs, but “A private equity group with a controlling interest in a firm does not face the alleged principal-agent problem between shareholders and boards, and yet these closely-held firms also pay their CEOs handsomely.” There are no possible “market imperfections” to be found there, so if a CEO is paid highly, by definition his outsized productivity earned his pay.
It’s not surprising that the global financial meltdown and attendant bailouts, under whose shadow we still labor, go largely unmentioned. That story is one long, brutal, messy, and ongoing guantlet of “market imperfections”. There isn’t much at all said about the finance industry except to point out the incredible skills needed by those who perform the critical function of allocating capital, per Mankiw “It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to this activity.” He only begrudgingly mentions that “On the other hand, some of what occurs in financial firms does smack of rent seeking”. But he only goes on to mention high frequency trading as a possible rent seeking activity engaged in by the finance sector. Leaving one to wonder about Mankiw’s powers of recall and imagination. Oh, and he uses the word ‘desideratum’…I’m not sure if that’s an economist thing or just a Mankiw thing.
After reading this stuff, it’s easy to see the utility, the enormous practical and ideological heavy lifting that the conception of the natural and immaculately efficacious “free market” does for justifying whatever the elite can accumulate for themselves. Andrew Sullivan titles a post on the paper “Is Meritocracy Moral?“, which, of course, assumes a meritocracy, assumes that the top is getting what they have earned, which is actually the question at hand. Sullivan responds to Jonathan Chait in the post: “I sure can see the innate moral intuition in thinking that a talented person deserves to keep the fruits of her talent, even if it is beyond Chait’s imagination.” So this is just a problem of the talented simply being so much more talented than they used to be, sucking up so much more of the money…if they hadn’t earned it the market wouldn’t have given it to them, right? Because like the Lady of the Lake, her arm clad in the purest shimmering samite, held aloft Excalibur to Arthur, signifying him King, the invisible hand of the market is distributing increasingly large amounts of cash to the increasingly productive elite. What else could possibly explain it?