Contribution of the Rich to the Economy

Paul Krugman had an interesting post a couple of years ago about the claims of the rich to contribute a unique, valuable something to the economy.  (He calls it jobcreation.)  He pointed out that if we assume that the rich get paid every penny of their contribution to output, then the rich confer no net benefit on the rest of us.  All the value they create gets paid back out to them.  So causing them to work less in response to taxes won’t make the rest of us worse off.

Krugman suggests that the fact that labor gets paid its marginal product in textbook competitive markets makes the notion that the rich might get back all the value they create seem reasonable.  Maybe I’m missing something (possibly because I haven’t read the optimal tax literature that Krugman is thinking about here), but I think the rule that being paid your marginal product results in your being paid the value of your services holds only if demand is perfectly elastic.  Otherwise, the rich get their producer surplus and the rest of us get a consumer surplus.  The rich don’t get paid the full value of what they create.  And if they work less, some of the surplus to consumers disappears.  Of course, this doesn’t mean that the rest of us are net losers if the rich work less.  Krugman has a nice monopsony take on the situation that makes clear that the nonrich can come out ahead.    They lose some surplus due to reduction of production by the rich, but they make up for that by paying the rich a lot less for the output that the rich continue to contribute.

If we do away with the assumption that the rich get paid the value that they create in textbook competitive markets, then I think the wrongness of the job creators argument actually becomes clearer.  In a world in which demand is not perfectly elastic, the rich and non rich split the surplus created by the rich.   And that’s exactly what you want.  You want production to make everyone better off.  If the productive activities of the rich were to benefit only the rich, then society shouldn’t care at all about the contributions of the rich, let alone reward them.  Suppose a great entrepreneur produces a doohickey that is worth $5000 to you.  If she charges you $5000 for it, then your net gain from it is precisely zero.  You might buy the thing, but you’d have to give up so many other comforts to pay for it that your life wouldn’t actually be any better than if the thing had never been invented in the first place.  When we think of the rich as contributing to society, we’re definitely not thinking about this scenario.  We’re assuming that the rich sell what they create for less than its value, otherwise they wouldn’t be creating any value for the rest of us to speak of.

What this means is that when the rich say that they deserve more pay because they contribute more than the rest of us to society, they’re actually just asking to reduce their net contribution to society!  Herein lies the wrongness of their argument.

But doesn’t that prove too much?  Why not pay the rich nothing in order to maximize their contribution?  The answer is that what should determine pay is not the level of contribution but the cost.  To maximize the contribution of the rich to society you need to pay them the minimum amount necessary to induce them to work at a level that maximizes that contribution, which is to say, you need to pay what it costs the rich to produce at that level.  It’s cost that should matter for pay, and not contribution.

If our great entrepreneur could have made $1000 doing something other than producing the doohickey, then you’d want to pay her just enough to induce her to produce the doohickey instead — say, $1001.  You pay the entrepreneur that amount and she makes you a doohickey that you value at $5000.  The entrepreneur has contributed $3999 of value to you.  And she’s contributed $1 of value to herself (her income less her opportunity cost).  Everyone is better off.    And the entrepreneur will do the work.

There’s an additional element to the argument of the rich that I think deserves more scrutiny and criticism.  When the rich argue that they should get paid more, they tend to refer to the uniqueness of their contribution.  They have skills that no one else has.  I think that we have to understand this appeal to uniqueness to be an argument that the rich deserve monopoly power and have a right to exercise it.

Suppose that the competitive market for doohickeys results in a market price of $1001, causing our entrepreneur to control a piddly $1 of the $4000 surplus she has created through her herculean efforts.  She can live with that in the sense that it’s still enough to keep her in the market.  But she’s created so much more value for others and it just seems unfair to her not to control more of it.  What to do?  Well, she’s unique, which means that she doesn’t have to tolerate competitive pricing.  She can raise her price and not worry that you will buy from someone else at a lower price.  So she can charge $4000 or $4999 and you’ll just have to buy at that level.  And in this way our entrepreneur will end up getting what she wants, which is to be paid the full value of her contribution to society.  And, as we saw above, she will thereby eliminate her effective contribution to society.

When a CEO tells you that he deserves his high pay because no one else can fill his shoes, he’s saying that it’s just for him to use his monopoly power to extract all the surplus from the market.  And when he uses this argument to argue against having to pay more taxes, he is saying that the government should not be permitted to interfere with his monopoly power.


Atlanta Botanical Garden

If you are going to put monumental plant sculptures in the botanical garden they ought to be made entirely of plants.  That includes the skeleton.  It might take 50 years to raise a tree to look like a cobra and grow appropriate plants upon it in a symbiotic mix.  But so much the more for wonder.

And the sculptures themselves should not be stereotyped representations of gorillas and frogs and such.  They should be beautiful and original.   Imaginary Worlds is disappointing: unremarkable sculptures papered over with plants.

(Note: I don’t prefer topiary; pruning a bush to look like a squirrel is just as superficial an art as wallpapering a squirrel statue with herbs.)

And if you’re going to give me Arcimboldo’s vegetables portraits in the flesh, they’d better be made with real vegetables.  Anything else is a monument to disappointment.

I’d much rather not have these tasteless distractions in what is an otherwise wonderful garden.

I do, though, like the Chihuly.


Prima Facie Evidence of Monopolization

Does anyone think Apple’s $147 billion cash horde is a reward that was required to induce Steve Jobs to create the iPhone?  It’s obviously not necessary to cover other costs.

Monopoly profit is by definition profit that’s not necessary to induce production.  When a firm generates a large cash horde, it’s because it doesn’t know what to do with the money.  Which means: it doesn’t need the money!

In a world in which antitrust were taken seriously, a cash horde of $147 billion would be prima facie evidence of illegal monopolization.

And the government would force Apple to rebate it to consumers.

Update (11/12/14): Krugman is on the case.


A Buck Is Just Another Ration Card

The price system, like queuing, is just another way of rationing access to resources.  And it’s perfectly reasonable for the government to prefer to impose a queuing system over a price system in certain circumstances.  For example, if you don’t want the rich to take all of a fixed resource.

So it’s perfectly reasonable for San Francisco to prefer that parking spaces go to the lucky, persistent, or fleet, rather than to the highest willingness to pay.

And perfectly reasonable too for San Francisco to put a stop to attempts to circumvent its preferred rationing system.  Attempts like this.



Stevinus's wind chariot for Prince Maurice of Orange.
Via Wikipedia, Stevinus’s wind chariot for Prince Maurice of Orange.

Preferences and Incentives

Our voluntary service he requires,
Not our necessitated, such with him
Finds no acceptance, nor can find, for how
Can hearts, not free, be tri’d whether they serve
Willing or no, who will but what they must
By Destiny, and can no other choose?

Paradise Lost : V : 529-34.

Why is it so important that obedience be voluntary and not necessitated?  After all, if the point is obedience, either will do.  The problem with necessitated obedience seems to be that it is fragile.

Voluntary obedience means obedience that isn’t compelled by external circumstances.  I clean your home because I love cleaning homes or love you or think it’s my duty.  You’ll stop me cleaning your home when you kill me.  This contrasts with necessitated obedience.  If you take all my money and then offer me a buck to clean your home then I’ll do it because otherwise I’ll die.  But if you don’t create a situation in which I have no alternative but to clean your home, I won’t do it.

Voluntary obedience is choice in the sense of preference alteration.  Necessitated obedience is choice in the face of static preferences.  Voluntary obedience is when you make your own preferences, necessitated obedience is when your preferences make you.

Basic economics can’t really distinguish between voluntary and necessitated obedience because it tends to treat preferences as static.  So it only admits of the existence of necessitated obedience.  In economics, the only way you’ll clean my house is if you’re forced to choose between doing that and starving.

Let’s look at another example.  Suppose you have the following game.

A's payoff / B's payoff B Cooperates B Betrays
A COOPERATES 5 / 5 0 / 8
A BETRAYS 8 / 0 4 / 4

Cooperation is efficient in the sense that the sum of the payoffs to parties A and B is the greatest when both try to cooperate. The trouble is that neither will want to cooperate.  For each, the payoff of betrayal exceeds the payoff of cooperation both when the other cooperates (5 > 4) and when the other does not (4 > 0).

Economics typically solves this problem through redistribution.  Suppose the penalty for betrayal is that you must pay 4 to the other party.  Now the game looks like this.

A's payoff / B's payoff B Cooperates B Betrays
A COOPERATES 5 / 5 4 / 4
A BETRAYS 4 / 4 4 / 4

Both parties have a chance to end up better off if they cooperate, so now they will both cooperate.

Both parties behave well, but they do so only because redistribution compels them to behave well.  If the redistribution that compels good behavior is removed, then they will regress back to their old noncooperative behavior.  In this sense their good behavior is necessitated and therefore fragile.  It is a world in which each party bides her time, waiting for the moment when the system will break down and betrayal can again produce a windfall.

Suppose that instead of redistributing payoffs, you were to change the preferences of the parties such that betrayal ceased to have any value to the parties.  They value 8 in betrayal as 0 and 4 in betrayal as 0 too.

Now the game looks like this.

A's payoff / B's payoff B Cooperates B Betrays
A COOPERATES 5 / 5 0 / 0
A BETRAYS 0 / 0 0 / 0

Now both stand to gain only through cooperation, so both will cooperate.  The difference here is that no amount of redistribution can compel the parties to prefer betrayal.  They are no longer mercenaries, blowing with the prevailing wind.

If your goal is to create an enduring commitment to cooperation, you want this second scenario, because it is immune to changes in the power of government to create felicitous incentives.  You want to change preferences, not incentives.  Only in this way can you ensure that Abdiel

Among innumerable false, unmov’d,
Unshak’n, unseduc’d, unterrifi’d
His Loyalty he kept, his Love, his Zeal;
Nor number, nor example with him wrought
To swerve from truth, or change his constant mind
Though single.

V : 898-903

For the economist, changing the betrayal payoffs to 0 makes the problem trivial, because the problem, for economists, is always how to achieve efficiency in the face of static preferences.  Rewriting preferences to make things work is cheating.  But of course rewriting preferences in real life is not as easy as zeroing betrayal payoffs in a matrix.  It was the major project of the pre-modern world; and remains a major project of the modern business world (though more in service of getting consumers to tolerate betrayal than of procuring universal cooperation).

It is no wonder that voluntary fidelity was elevated to divine command in the pre-modern world, where government was too weak to  redistribute wealth.   Where incentives could not be manipulated reliably, cooperation leading to an improvement in the fortunes of the group as a whole could be achieved only by manipulating preferences.

. . . unjust thou say’st
Flatly unjust, to bind with Laws the free,
And equal over equals to let Reign,
One over all with unsucceeded power.
. . .
Yet by experience taught we know how good,
And of our good, and of our dignity
How provident he is, how far from thought
To make us less, bent rather to exalt,
Our happy state under one Head more near

V : 818-21, 826-31

In many older cultures, the aggressive anticipation of needs is the signature of commitment, loyalty, and friendship.  You find that friends expend a great deal of energy giving you help you didn’t ask or pay for.  This behavior expresses felicitous preferences.  Your friends are showing you that they want to do these things, not that they must do them.




Natural Machines

“Machines — as in contraptions made with wire and metal and stuff — are not natural.  Sure, animals are like these machines in that they have nerves that connect things and bones and other mechanical parts.  But animals are really chemical contraptions; they’re not anything like the computers and cars that humans make.  That’s why animals are natural but computers and cars aren’t natural!”

But nature’s chemical machines have made her wire and metal machines.


Public Platforms


Modernity and Control

Sometimes I wonder whether humanity has made itself better off by choosing industrialization.  Are we really happier living long lives?  Was life more meaningful when expectancy was 30 but you had nature and love and tragedy?

But then I think that this expresses a characteristic modern conceit: that modernity is something we chose.  That it’s somehow less natural than the jungle that once hemmed us in.

The aluminum and plastic boarding tube in which I wait while queued to board my flight hems me in the way the jungle might have hemmed me in a thousand years ago.  I did not choose that it should arise and I certainly cannot stop it (as environmentalists have learned, bitterly).  I may think it’s a good thing and prefer it fervently, but that does not give me leave to ascribe my agency to it.

What sets modern culture so far apart from ancient culture is the conceit of control.  It’s so seductive: we produce our own environment!  But we do not control ourselves.

Yes, industrialization takes hard work and planning.  And that feels like control.  But think of it this way.  The history of the modern world is strewn with the carcasses of countries that didn’t industrialize and were stomped on by industrialized countries as a result (think China in the time of Empress Cixi).  Industrialization creates an arms race that makes industrialization indispensable.  North Korea might want in a sense little or no industrialization, but it still has to have enough to get nuclear weapons, otherwise it has no hope to persist.  Industrialization is power, and power is unavoidable.

Anyway, at some point, the conceit will wear off and we will relate to the forest of machines the way we used to relate to the forest primeval.



Backwardness of law

Doctrine and Predictability of Result

“[D]octrine was in a shambles and predictability of result at a minimum.” Dukeminier, Property, 7th, at 1073, quoting 57 Or. L. Rev. 203, 209.

One encounters the assumption of a connection between clear doctrine and predictability everywhere.  But has it been proved, or studied?  It doesn’t seem intuitive.  We don’t read White House press releases to predict what the President is going to do.  We read newspaper articles and works of political science that are based on many more sources.  So why would we suppose that a clear statement from a court press release (that is, a judicial opinion) is a useful predictor of anything?

Predictability would seem to have to do with information about the judiciary qua institution, who’s in it, the forces acting upon them, the views of peers, the media, the subtle pressure of interest groups, zeitgeist, the judges’ ambitions and fears, the way daddy treated them during adolescence, and the like, not merely the judiciary’s own self-serving statements about how it will behave in future.

And the same goes with people, too, doesn’t it?  You’re always the last to know when you’re  in love.