“Incentives to produce” are incentives to rig the game
That’s obvious, right? But let’s belabor the point.
All too often in discussions about the vast dispersion of circumstance we call “inequality”, people concede a kind of trade-off. Yes, reducing rewards to those at the top of the wealth/income distribution might blunt their incentives to produce. But the cost of that might be offset by utilitarian benefits of transfers to the less well off, or by greater prosperity engendered by MPC effects on aggregate demand, or by whatever.
That’s all well and good as far as it goes. But at current margins, I suspect (with Paul Krugman) there is no tradeoff. There might be a tradeoff in measured GDP, but GDP happily tallies economic coercion and rent-capture along with genuinely productive activity. Suppose that a comic-book evil pharmaceutical company secretly unleashes a disfiguring virus for which — miracle of miracles! — it has an expensive, patented treatment. After the pandemic, consumers would have a choice: tolerate an odiferous oozing eczema (but remain otherwise healthy and productive!), or pay for the treatment. GDP would likely rise! In macroeconmic terms, this kind of thing is an example of the “broken window fallacy“. Causing a disease and then expensively treating it does not in fact make the world richer. But it may well inspire economic activity — the mass production of a new drug, visits to doctors, extra hours people choose to work in order to afford the treatment, etc. In aggregate, we work harder just to stay in place. But the distributional effects of the operation are very real. The extra personal income enjoyed by the conspirators spends nicely.
In real life, it’s not so common for comic-book villains to release icky pathogens and then charge for a cure. But it is very common for doctors to restrict entry into their profession and to act politically to inflate the cost of their services. Goaded by “incentives to produce”, participants in the financial industry do a lot of “innovating” that amounts to finding ways of skimming invisible or unexpected fees from people, or persuading customers to bear underappreciated and undercompensated risks, or maximizing the value to them (and costs to others) of guarantees implicitly or explicitly provided by the state. Nearly every industry hires lobbyists to carve out favorable loopholes and subsidies and regulatory schemes at everyone else’s expense. Tech firms make a business model of invasive surveillance and selling information about people who are their users but not their customers. Patent trolls send extortion letters to users and creators of new technology. Politicians “revolve” out of government into perfectly legal, extravagantly compensated sinecures in the private sector, and then often back into government. Senior members of the military become “private sector entrepreneurs”, garnering contracts from friends and former colleagues in a burgeoning defense and intelligence industry, often for work that used to be performed more cheaply internally. Executives collude with friendly boards who rely upon transparently idiotic consulting practices to extract huge salaries. Some of these things contribute to measured GDP, to “growth”, but their effect on the actual well-being of those outside their industries is, um, questionable.
This stuff isn’t marginal, nor should we expect it to be. In fact, we should expect the prevalence of rent capture (or worse) as a source of economic profit to increase with technological progress. Why? Because, absent chicanery, technology increases the ease of production and the efficiency of distribution. As Schumpeter pointed out, the source of profit in real-life capitalism is the fact that monopoly power is ubiquitous because of natural barriers to competition. The corner store has a monopoly on the convenience of its neighbors, and so can capture some of the surplus that might otherwise be bid away to customers by competitors. On-demand delivery drones would eliminate that monopoly. Yet the corner store industry might lobby to prevent residential rooftop deliveries, in which case it is no longer exploiting a natural inefficiency but capturing a rent. In business school, students are taught that a successful business has a “moat” that makes it difficult for competitors to bid away ones margins. Technological progress renders moats that derive from nature harder to come by. Instead, successful businesses — and successful people (since under capitalism, a human is just a small business) — must rely increasingly on moats that result from social and political arrangements. We choose to grant monopoly rights to “creators” in the form of intellectual property and to expand their scope. We choose to limit the taxi business to medallion holders. We choose to prevent Indian doctors from competing in American hospitals, even though airplanes have eliminated locals’ natural monopoly. We choose to hire from the Ivy League. The distribution of profits is determined by social choices rather than by natural scarcities.
None of this is to say that any particular such choice is “wrong”. The static inefficiency inherent in patent monopolies at least under some circumstances may be overcome by the incentives to invent they yield. Minimum wage laws are restraints on competition that I enthusiastically support precisely because of to whom the “rents” are directed. Maybe sending a gigantic, very random fountain of money to producers of health-care inputs via an inscrutable hodge-podge of public and private payers really is the best way to ensure our cancers are cured before we are diagnosed with them. Who knows?
But the distribution of affluence is less and less a matter of direct attachment to production, and more and more a function of winning social games and political contests that determine to whom the fruits of production will be allocated. There’s no conspiracy in that. Nor is it an answer to say “capital” now determines who enjoys wealth. As technology improves, capital goods become mere commodities like everything else. Financial capital, whatever it is, is not an input into any material production process. It is a construct and artifact of a huge and ever-changing array of social and legal institutions. “Human capital”, “social capital”, and “organizational capital” are things we impute ex-post to winners of distributional contests as explanations of observed returns. They do not straightforwardly exist in the world.
“Inequality” — high dispersion of outcome — creates a strong incentives to be on the side of winners. There are some circumstances where being on the side of winners means making an outsize contribution to economic production. There are other circumstances where winning means aligning oneself with coalitions capable of winning legal and political contests that may be orthogonal to, or much worse than orthogonal to, any contribution to production. The two strategies don’t preclude one another. Perhaps outsize rewards are shared between those who make unusual contributions to production and those who participate in politically potent guilds. But, at best, increased dispersion increases the incentive to engage in both sorts of behavior. Incentives to produce are also incentives to contest for rents. And at any given time, for any given person, one may be an easier or more reliable means of gaining outsize rewards than the other.
Suppose, reasonably I think, that ceteris paribus humans prefer to “be good”. That is, we prefer to do work that is productive and engage in behavior that is ethical. Suppose, also reasonably, that a well ordered society depends upon people sometimes making choices opposed to their material interests on ethical or other grounds. Then it is obvious how inequality might be costly. Instead of talking about “incentives to” (produce, extract rents, whatever), we might describe outcome dispersion as a tax on refraining from mercenary behavior. If the difference between economic winners and losers is modest, people of ordinary virtue might refrain from participating in activities they consider corrupt, might even be willing to “blow the whistle”, because the cost of doing so is outweighed by their preference for behaving well. But as outcome dispersion grows, absenting oneself from or even opposing activities that would be personally remunerative but socially undesirable becomes too costly. The required sacrifice eventually overcomes a ceteris paribus preference for virtue. Preventing the misbehavior of large coalitions is a collective action problem. An isolated malcontent or whistleblower is likely to be evicted from the coalition without meaningfully improving behavior, if others choose to “circle the wagon”. Outcome dispersion both increases the costs to individuals of engaging in pro-social behavior, and diminishes the likelihood that bearing those costs will be fruitful, since others will have strong incentives not to follow.
Wouldn’t it be odd to live in a country where, say, bankers individually acknowledge that their industry often behaves destructively, where insiders perceptively describe the conditions that create incentives for people to take bad risks or fleece “muppets“, but continue to work in those places and do nothing about it? Wouldn’t it be odd to live in a country where doctors privately apologize for the way their services are “priced“, but nevertheless take home their paychecks and pay AMA dues? Or in a country where economics instructors teach agency costs using textbook pricing as a case study, during a course for which students are required to purchase a $180 textbook?
I don’t mean to criticize anyone in particular. (I used to be the economics instructor.) In all of these cases, there really isn’t anything any one individual can do to remedy the bad practices. Making a big issue of them would lead to useless excommunication. Instead we shrug ironically. In our society, an ironic attitude is a token of sophistication (a telling word, which once meant corruption but now implies competence). An ironic attitude towards collective ethics is adaptive. It helps basically decent individuals participate in coalitions that ruthlessly contend for rents. But perhaps we’d have a better society if, rather than turning our ethical discomfort into an object of aesthetic consideration, lots of us worked straightforwardly to remedy it. And perhaps more of us would do so if the risk of losing our place were not so terrible. Ethical behavior is endogenous. “Inequality” renders it costly.
Update History:
- 29-Mar-2014, 6:00 p.m. PDT: Struck near duplicate: “…treatment, etc.
GDP rises!In aggregate…”; “hodge-podge of public and privateinstitutionspayers“ - 23-Sep-2015, 3:40 a.m. PDT: A bunch of small edits: “participants in the financial industry do a lot of ‘innovating’ that amounts to finding ways of skimming invisible or unexpected fees from people, or persuading
themcustomers to bear underappreciated and undercompensated risks, or maximizing the value to them”; “asan explanationexplanations of observed returns”; “agency costswith case study ofusing textbook pricing as a case study“; “for which studentswereare required”.
“…reducing rewards to those at the top of the wealth/income distribution might blunt their incentives to produce.”
It helps to place this in a framework of what they are producing. Are they working with random resources which might not gain further production without additional societal incentive? Or have they gained supremacy within finite resource structure such as our extremely limited time use. True, it’s hard to think of aggregate time this way when so much valuable time potential today is simply wasted or otherwise lost, but consider. There are people in this world who are much, much smarter then me. Hence, their time value is appropriated in ways that I can’t rely on the use of my own time, to compensate them for product which may in fact be necessary for my survival.
That in turn makes me not only “irresponsible”, but I become an element which could further weaken my community. Here’s the problem. The valuable doctor makes a convincing moral argument for his time value. But he has already taken advantage of many random resource quantities in the economy, to fill the holes of lost value that he has created in others by his superior value. See, the good doctor also negated the time value (in aggregate) of many people such as myself, who as a result over time become “irresponsible” and further weaken their community.
This is why I ask for the right to use time as an portal of equal entry for knowledge use, so that we can all assist one another instead of having to stand in line for the doctor. Time use is the only chance at equality that any of us have. No, we’re not all equally smart or talented. But there is no way to bring balance back to society if we are not all allowed to use our time equally to help one another.
March 28th, 2014 at 11:35 am PDT
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Just picking out one (tangential or cruxial?) bit from all the good stuff here:
“Financial capital, whatever it is, is not an input into any material production process.”
Thank you very much for that. Piketty has me thinking very hard about this again. Real + financial capital = total capital. But hey: financial “capital” is claims, at some remove(s), on real capital. ?? The Homogeneous Lump of Capital fallacy?
He addresses this only is one passing paragraph in the context of “public” capital on p. 124, far removed from his definition of capital on p. 46.
Would love to see SRW’s mind brought to bear on that “whatever it is” question…
March 28th, 2014 at 11:53 am PDT
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Thank you for this brilliant post.
March 28th, 2014 at 1:00 pm PDT
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Nice. Best thing I’ve read all week.
March 28th, 2014 at 1:14 pm PDT
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I think you misunderstand the game.
Money is a claim on the traded part of the economy, and has meaning only as a claim on other people. It is the most formal of a variety of mechanisms that assign physical well being to people. If you think that money is the only mechanism, or that redistributing it will somehow even out the real status or real outcomes of citizen’s lives, your thinking is too narrow. Government may well change the distribution of “outcomes”, but what it mostly does it change which group of people manipulate which set of rules to hold the most status.
And finally, in your world in which bankers admit they are not special and doctors admit that pricing is bizarre, will taxi drivers admit they are not special? Will politicians their fundamentally manipulative nature? Will voters suddenly see the error of voting always for low taxes and high spending on themselves? Will citizens suddenly decide that the vast collection of structures that keep the US very unequal with the rest of the world, imposing a variety of rents on the entire world, are at least morally questionable?
Then that is also a fantasy land where pigs fly.
March 28th, 2014 at 9:20 pm PDT
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Steve Roth @2, I’m totally with you on your “Homogeneous Lump of Capital fallacy” idea.
I’ve wondered whether an analogy can be drawn between financial capital and the pheromones that bees or ants use to organize their colonies. An insect colony collapses if the insects lack pheromones and likewise we need financial capital to organize human society at a scale larger than a small tribe. Financial capital can be created with the stroke of a pen (or a scratch on a tally stick) -it is a purely social construct. If we screw up our system of financial capital then human talents, machines and natural resources will not provide what they otherwise could. A nation of people teleported with no possessions to an uninhabited planet could draw up financial capital to help direct each other to create a new civilization from scratch. After WWII the new Deutsche Marks initially were just handed out to every German along with ration cards -every person got 60DM and the economy got its “financial capital”. Financial capital both allows people to direct each other to provide what everyone wants but also potentially empowers people to cause other people to sit idle on the sidelines even when they have the will and capability to contribute or to force people to slave away doing pointless “bullshit jobs”. It is all about distribution -if it is all commanded by a handful of people then perhaps that is like political power being commanded by a handful -most people’s needs and wants will be overlooked. I think the most tragic failing of financial capital comes from the fact that it can be “stored” even though it is basically a claim over human and machine time and time of course can not be “stored”. If a bee managed to store up pheromones as a way to claim more honey once the flowers were over and lots of the bees did that rather than storing honey -then they would really be more like us.
March 29th, 2014 at 6:36 am PDT
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Bryan said: “Money is a claim on the traded part of the economy, and has meaning only as a claim on other people. It is the most formal of a variety of mechanisms that assign physical well being to people…”
Yes. To take it further, money is one of the mechanisms for mobilizing and directing human time, effort and attention. That power to mobilize and direct others is the source, the only source, of wealth.
Money is a nice, anonymous way of doing this, preventing some of the bad side effects of other methods like overt slavery, war and conquest, totalitarian rule, and so on. The possession of big piles of money looks neutral, whereas other methods of using other people for your own benefit are unmistakable. But the “sharp end of the stick” is still there, it is merely distanced and made less immediate.
Another result of a very unequal society is that violence of the guard professions (police, security guards, and so on) will become more intense and less rational as the gradient they patrol becomes steeper. Thus, even though crime rates in the US have fallen steadily for decades, prisons have proliferated and encounters with police by innocent people can increasingly lead to injury or death.
Noni
http://tea-analysis.blogspot.ca trying to analyze economics purely in terms of human time, energy and attention. As economists say, “It’s complex.”
March 29th, 2014 at 7:03 am PDT
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PS of course, it follows that if money is a lever to direct the efforts of others, than a steeply unequal society will consist of a majority of people whose seed stock of personal energy is not even available to themselves. Rather, it is directed via a system that values or devalues them and their personal preferences and holds their lives and their families as impersonal hostages.
No wonder we see outbursts of aggression and self-harm in such a society, and no wonder those outbursts seem senseless. Putting a finger on the exact clump of mud that’s pulling you down when you’re in a patch of quicksand isn’t possible, so flailing about is one sensible, though fruitless, response.
Noni
March 29th, 2014 at 7:16 am PDT
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SRW, you say “In fact, we should expect the prevalence of rent capture (or worse) as a source of economic profit to increase with technological progress.”
-Is it possible that “rent capture (or worse)” increases not so much directly with technological progress but rather with accumulation of financial capital? If financial capital becomes an ever greater multiple of everything real there is to buy, then perhaps that induces more of the chicanery you describe? If our financial system were set up in such a way that what made sense financially aligned with what would make sense if money were ignored, then we would have a good system -if it doesn’t, then we get chicanery. Accumulation of financial capital has entailed the financial system constructing a financial system designed for the self interest of the financial system. That’s what makes it dysfunctional.
March 29th, 2014 at 7:52 am PDT
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Perhaps part of the political impetus towards facilitating rent capture is due to competition between nations. If the USA say didn’t have massive rent capture in the US health care system, then perhaps health care providers would be less of a draw for capital inflows from sovereign wealth funds and the like. So having a seemingly awful system means that the Abu Dhabi and Norwegian sovereign wealth funds buy shares in US health care provider companies and so it is the USA that gets the currency strength to buy stuff that most of the rest of the world can’t afford. Likewise in the UK with our rent extracting utility companies and banks. Perhaps that’s partly why we seem to get a better economy (nationally but not globally) when its run to ensure that business can “make money” rather than merely provide real goods and services efficiently.
March 29th, 2014 at 8:58 am PDT
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And yet, life has never been better than it is now. Humanity has never been better than it is now.
Maybe tech has tech has made rent seeking rise in importance relative to real production in determining the distribution of rewards. But the total size of those rewards has been growing exponentially for centuries. Exponentially. For centuries. Is a 15th century farmer less dependent on coalition politics for his livelihood than we are today? If you measure the rewards in dollars, maybe he is, after you average in billionaires. If you measure the rewards in life, happiness, and log-dollars, there’s no question. He’s way more reliant on politics than us.
I’m not saying you’re wrong, I’m saying, “cheer up”.
PS: If you want to talk about distributional justice, you should talk about Open Borders. The borders issue is a whale, and the stuff you’re talking about is plankton.
March 29th, 2014 at 1:53 pm PDT
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To Stone:
I think you’ve identified the key element in the whole process in Waldman’s excellent discussion:
“Financial capital, whatever it is, is not an input into any material production process.”
Yet the rise of financialization in the last 40 years has been the catalyst of the rent seeking and international arbitrage. I keep returning to Minsky’s financial instability hypothesis, and wondering how that analysis could gain traction in our current environment. I think it was the post-war stability that lured policymakers to let Big Finance out of the constraints imposed as a result of the Great Depression. Due to the failure of policymakers to truly reimpose (or redesign) a constraint on finance in response to the Great Recession, it is as Waldman put it: “there really isn’t anything any one individual can do to remedy the bad practices.” Moreover, I’d also offer that the power of Big Finance has overwhelmed any attempt on the part of any popular or elite set of factions to constrain it.
As to “what to do about it,” I’m at a loss to describe a set of actions, other than to further analyze the current dysfunctional market system, and seek a point around which to gather a populist effort. I think inequality might be such an issue, but at present I still see a set of abstractions on one side versus the realities of individual survival in our current economic environment.
March 29th, 2014 at 3:25 pm PDT
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Hmm it appears like your website ate my first comment (it was extremely long) so I guess
I’ll just sum it up what I submitted and say, I’m thoroughly enjoying your blog.
I as well am an aspiring blog blogger but I’m still new to
everything. Do you have any points for novice blog writers?
I’d really appreciate it.
March 29th, 2014 at 3:57 pm PDT
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Lawrence D’Anna, I don’t think there is much room for complacency. Apparently more people starved in 2009 than ever before: http://www.fao.org/news/story/en/item/20568/icode/
Like you, I’d also love to hear Steve’s view on Open Borders. Personally I think it is a deeply misguided idea. As things stand, I fear it would make poor countries poorer and further undermine the bargaining power of workers versus owners. To my mind if rich countries weren’t trying so hard to increase inequality between countries, then there would not be hoards of people needing to migrate to get a decent living. The current closed borders are a symptom of the purposefully imposed gross inequality between countries. eg: http://library.uniteddiversity.coop/Money_and_Economics/confessions_of_an_economic_hitman.pdf
I’ve had a go posting my doubts about the Open Borders idea
http://directeconomicdemocracy.wordpress.com/2013/08/02/more-on-open-borders/
March 29th, 2014 at 4:33 pm PDT
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Charlie Baker @12, The drum I’m always beating when it comes to “what to do about it”, is to replace current taxes with a tax on gross assets. Then financial capital would only get concocted to the extent that it actually helped to serve the real economy. To my mind such a tax change would also align financial incentives with the underlying reality that every unused hour of machine or human time is permanently lost -financial power would need to be constantly put to productive use in order to pay such a tax.
March 29th, 2014 at 4:42 pm PDT
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The formating of the text renders it absolutely illegible.
The text would deserve a better presentation.
March 29th, 2014 at 6:02 pm PDT
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Stone: population has also been growing exponentially, though at a slower rate than production. More people did X in recent years than ever before for almost any value of X.
As for open borders being “deeply misguided”, you could not be more wrong. Rich countries are not trying to keep poor countries poor. That is a ridiculous, paranoid conspiracy theory. They are trying, halfheartedly and ineffectually, to help them to develop. The biggest issue of distributional justice today is the fact that billions of people are stuck, imprisoned in dysfunctional countries that make it impossible for them to reach their economic potential.
March 29th, 2014 at 11:31 pm PDT
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Have you seen this? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=662242
Makes very similar points, but at the level of the firm rather than the economy as a whole.
March 29th, 2014 at 11:59 pm PDT
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Piketty has me thinking very hard about this again. Real + financial capital = total capital. But hey: financial “capital” is claims, at some remove(s), on real capital. ?? The Homogeneous Lump of Capital fallacy?
Yes, I think this is the big flaw in Piketty’s argument.
March 30th, 2014 at 12:01 am PDT
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Part of the problem is that lobbying has such high returns. Charlie Keating spent $1.3M on senators and ripped the taxpayer off for roughly 2,000 times that sum. So here’s a wild idea: make it perfectly legal to buy votes … from the voters, retail. Anybody who wanted to raid the treasury would have to pay for that privilege, and in a competitive market they would have to pay through the nose.
Oh, wait, that has been tried. In Venezuela.
Still and all, my heart says that if political and financial power are going to be interchangeable, neither should be attainable without the people having their say. Reminds me of the reason why (most) churches are glad to be insulated from the government … these days. Yup, there was a time when kings held their thrones by divine right. Until 1649, to be precise.
March 30th, 2014 at 12:05 am PDT
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Right on. One point captures a thought I’ve had about slavery. We sometimes say, you have to judge a man–James Madison, say–based on the morality of his time. What we really should do is imagine that morality is unchanged and that, like ourselves, James Madison was a good person. Now, what would it take for a good person like you or I to own slaves and to not free them in our will? And to think about what it would cost: our livelihood, and the well being of our widow. And to understand that faced with that choice, the cost will be too much, and the good person will do the wrong thing.
March 30th, 2014 at 12:51 am PDT
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Lawrence D’Anna @17 “Rich countries are not trying to keep poor countries poor.”
The primary aim may not be to keep poor countries poor but rather to ensure that we maintain our advantage. Nevertheless that boils down to the same thing. Rich countries put up trade barriers and subsidies to ensure that domestic agriculture is supported. That has the primary aim of supporting rents and values for farm land BUT the consequence is impoverishing poor countries. Rich countries do everything they can to entice capital flight from poor countries to financial centers in rich countries. That has the primary aim of giving us strong currencies so that we are the ones that can afford the oil BUT the consequence is to devastate the economies of poor countries. Supporting leaders of poor countries who take on debts denominated in USD is the most insidious tactic of all. Poor countries (just like any other countries) can only prosper if they only borrow in their own currency. The cycle of USD denominated debt and austerity guts the economies of poor countries. It ensures that real commodities flow from poor countries to the developed world and nothing but electronic account statements flows in the other direction.
March 30th, 2014 at 2:54 am PDT
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[…] “Incentives to produce” are incentives to rig the game Interfluidity […]
March 30th, 2014 at 6:56 am PDT
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http://www.corporatecrimereporter.com/realityignored04022011.htm
“The Chicago School began with the view that in order to have a properly functioning free market, the government must drastically curtail the ability of businesses to build and maintain concentrated economic power,” writes Kenneth Davidson in his new book Reality Ignored: How Milton Friedman and Chicago Economics Undermined American Institutions and Endangered the Global Economy (2011). “Early incarnations advocated forbidding corporations to retain their earnings or to purchase other businesses. The explicit fear was that the disproportionate power of big businesses would distort commercial markets and corrupt political freedoms.”
That sounds more like Ralph Nader than the Chicago School.
“It was Henry Simons and Aaron Director,” Davidson told Corporate Crime Reporter in an interview last night.”
Henry Simons owns the field of Limited Government and Equality. Hawtrey and Coase call him Utopian, while Michael Oakeshott and Herb Stein have much more positive printed views of him. It is not that he is Utopian, but the fact that he is not a lackey to the Fooling Class, who will still be wealthy under his proposals, but not illiberally so, that he is called Utopian. I like Hawtrey and Coase, but they need to step outside and smell the stench ( I know Hawtrey is dead, thanks. ).
March 30th, 2014 at 11:53 am PDT
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Brilliant post, as usual.
I would have three remarks :
1) It is much easier to go for the “ethical” path when one has not yet accumulated liabilities (financial or societal) that deeply constrain choices. It is at that time than the “fear of loosing one’s place” is at its lowest. This window of opportunity should be located at the end of formal studies, but is progressively shrunk to nothing thanks to student loans (for young doctors, certainly a bigger issue than AMA checks), unaffordable housing and ever increasing unfunded liabilities at the sovereign level . At forty-something like the author of this blog, and, I guess, most of its readers, it is a bit too late…
2) If, as I believe, more ethical behavior flows from lower liabilities, or liabilities that are easier to default from (such as equity financing), the main solution of the problem you describe in this post is deleveraging. Yes, GDP will come down as a result, but as you mention, most of the GDP that would disappear is of the “broken window” sort.
3) It is interesting that you think that a 180$ textbook is overpriced, considering that a good textbook gives 80 to 100% of the useful knowledge one acquires in University until graduation (and indeed MOOC can be viewed as fancy interactive textbooks). What is really overpriced is the accreditation process, usually combined with forced selling of hosteling and catering business !
March 30th, 2014 at 11:28 pm PDT
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Steve,
A nice post, few remarks:
I disagree with your “humans prefer to be good”. That’s a wishful thinking on part of the humans. I’d say “most humans want to see themselves as good”. Now it gets interesting, because “to see yourself as good” very much depends on the background of the scene, unlike “to be good”, which is much less context sensitive. Hence people in Nazi Germany could see themeselves as good and yet do things which we now don’t understand. Human mind is first and foremost concerned with its survival, which most often things getting on with whatever society they are part of (that doesn’t mean there are no exceptions, but they are exceptions). If humans do have one infinitely large capability, it’s the capability to rationalise their past decisions.
A second remark on the “production”. Humans (and not just them) follow the path of least resistance and effort. It’s much more effort to spend your life inventing a new thing that most likely will fail than to spend your time lobbying for a legal, meta advantage (even more so if you lobby smart, so if someone else does succeed with their invetion you still manage to get the most of the gains). Our laws are only as good as the people who enforce them, and as a result, changing that to get an advantage will be always easier than doing anything else. Incidentally, this also has its “Minsky” moment, i.e. we actually manage to enforce the laws efficiently for a while (for whatever reason), which weakens our alertness and ability to do so in the future until we get another critis, which again will make us more alert and hopefully efficient (if we survive).
March 31st, 2014 at 5:37 am PDT
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“But the distribution of affluence is less and less a matter of direct attachment to production, and more and more a function of winning social games and political contests that determine to whom the fruits of production will be allocated.”
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Is that a light bulb I see? Because in other words, the larger and more powerful government becomes (despite “common-good” intentions) the less rewards are determined by anything related to productivity, merit or market forces.
By the way, doctors generally don’t set prices for their services, the government sets the pace with Medicare and insurance companies base off of that. It is illegal to undercut Medicare.
It’s OK –and good- for an individual to look up and criticize (at least that’s what all the smart-set bumper stickers said when Bush was president) and there’s no shame in being an infidel in respect to the Church of Crony. One good habit to adopt might be to refrain from reflexively agreeing that the answer to every problem is even more government. Another might be to do what you can to discourage the next generation from discarding their souls and the better aspects of their human nature in favor of ironic sensibilities:
“He had some measure of the infuriating trait that causes a young man to be a nonconformist for its own sake and found that the surest way to shock most people, in those days, was to believe that some kinds of behavior were bad and others good, and that it was reasonable to live one’s life accordingly.”
― Neal Stephenson, The Diamond Age
March 31st, 2014 at 10:32 am PDT
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Wow!
I love this post. I never really thought about it, but you are right, Mafias arise in very unequal societies. Where winning is everything, it crowds out playing the game.
But there is another side of this – what does being “very productive” actually mean in a very unequal society. Doesn’t it just mean producing extraordinary entertainment for the sated and ignoring the unpaying needs of the masses?
April 1st, 2014 at 5:13 pm PDT
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For the past 6 years I have worked in aspirational retail, aka fine wine. Most definitely the rich are being subsidized by the young, poor, badly organized and socially mal-adjusted. This is proven by how credit and debit cards are processed. At a minimum a retailer must account for the average processing charge administered by a few giant payment networks. Online is controlled by Authorize.net and the world of swiped cards is dominated by Chase Paymentech and Wells Fargo. These networks (with ineffectual federal regulation) charge a dizzying number of ‘rates’ dependent on the type of card used, and to a much lesser extent the amount of the transaction. So, a Visa Signature Business Card takes a higher percentage of a sale than a standard Visa credit card or Visa debit card (ok, I’m over simplifying but there are more than 50 different ‘rates’). The better your credit, the more rewards your card gives you. The worse your credit, the less rewards your card gives you. All those miles or 1.5% cash rebates Alec Baldwin and Samuel Jackson promise you on TV are being paid for by the poor. So much for Hollywood progressives.
April 7th, 2014 at 2:38 pm PDT
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Financial capital derives its value via maturity transformation (i.e., recombination of real, physical capital that has different maturities and risk) – it is the additional value created by ‘deepening’ the real capital with such abstractions.
Of course SRW has already written on the social need for false confidence in this transformation, etc.
April 8th, 2014 at 8:06 pm PDT
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Fresh from reading an article in HBR from June 2013 called “Transient Advantage” by Columbia Prof Rita Gunther McGrath. I wonder if her business school thinking has insights for Econ, I came back to this post.
She argues that “moats” are a thing of the past in most industries, like you do. She suggests that the answer is a series of transient advantages that are short lived but profitable instead of one big moat. The hurdle is basically two fold: the inertia of large successful enterprises and the fact that the creative people who develop new advantages are not the same set of people who run “mature” companies.
Is there a dynamic where the less creative people see rent seeking as the only option for continued profits where a more nimble organization which hasn’t alienated all the start-up/ramp-up employees is able to see and develop other more productive advantages?
April 9th, 2014 at 12:37 pm PDT
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