Economist Paul Krugman recently decried "zombie economics," policies advocated by "free-market fundamentalists [who] have been wrong about everything yet now dominate the political scene more thoroughly than ever." I share his chagrin, but suggest that the problem is that Krugman was wrong to also assert that "economics is not a morality play." In fact, I believe that defeating the zombie-like resilience of laissez faire capitalism will require directly refuting the moral belief in the inherent fairness of free market outcomes.
Consider a recent suggestion by Harvard economist Greg Mankiw, former Chairman of George W. Bush's Council of Economic Advisors, that tax policy should be based on a "Just Deserts Theory" under which "people should get what they deserve." This principle, a restatement of Equity Theory, proposed by psychologist John Adams in 1963 to explain how people evaluated distributional fairness, has long played a central role in tax debates, and is one that I, like many liberals, heartily endorse. Indeed, I think that widespread support for free markets is based more on belief in their inherent morality than on belief that they promote economic growth, potentially explaining the religious fervor of free-market fundamentalists defending their faith despite the considerable counter-evidence provided by recent events.
Mankiw concisely summarizes the theory underlying the ethical argument for market capitalism: "under a standard set of assumptions... the factors of production [i.e., workers] are paid the value of their marginal product... One might easily conclude that, under these idealized conditions, each person receives his just deserts." Mankiw's long-standing opposition to higher taxes on the wealthy suggests that he thinks these conditions usually pertain in the real world, too.
Consider me skeptical. The list of "standard assumptions" open to question is long, but two are particularly problematic (Northwestern economist Jonathan Weinstein has critiqued several others). First, how can we be sure that marginal productivity is the same as social contribution? A safe cracker in a criminal gang may indeed receive loot equal to his marginal productivity, but this doesn't mean that he is creating social wealth. Thus, financial industry profits accounted for over 40 percent of all corporate profits in 2004-5, but does anyone seriously contend that Wall Street created (rather than redistributed) 40 percent of wealth during that period?
The second problem is one that Mankiw himself acknowledges when he comments that the dramatic growth in income at the very top of the economic pyramid might be thought of as a lottery, with a few lucky winners reaping the lion's share of rewards. As economists Robert Frank and Philip Cook point out in their book The Winner Take All Society, technological change and ever-larger markets have caused small differences in ability, effort or luck to translate into large differences in income. Economic theory says that such "tournament rewards" create an incentive for individuals to exert maximal effort, consistent with just deserts as long as you don't mind that "losers" get much less despite trying nearly (or just) as hard. But theory also says that tournament rewards create an incentive for people to sabotage the efforts of others and to take on as much risk as possible. Given the role that excess risk played in Wall Street's meltdown, this is hardly a ringing endorsement for the fairness (or efficiency) of free market outcomes.
So Mankiw's "easy" conclusion that markets deliver just deserts depends critically on his own moral intuition about what is just. Given humanity's well-known ability to convince ourselves that what is in our own self-interest is fair, it is hardly surprising that wealthy conservatives like Mankiw would believe that free market capitalism delivers fair outcomes. But it is noteworthy that in one real-world situation with tournament rewards -- lotteries -- society typically imposes taxes in excess of 50 percent, since winners pay regular income taxes on earnings already halved by the governmental sponsor's share of the pot.
Moreover, a large body of laboratory research investigating moral intuitions regarding the division of a pool of money has demonstrated the powerful appeal of an equal split, a preference consistent with anthropological evidence that hunter-gatherer groups are remarkably and consistently egalitarian. While a handful of studies have demonstrated that preferences for equality in the laboratory are (slightly) reduced when subjects have to earn the money at stake, this involves experimenters (who provide the money in the first place) making it clear that they consider the earner to have made a commensurate contribution in the laboratory setting.
So, sure, people like just deserts when there is compelling evidence that they are indeed just. But the egalitarianism of hunter-gatherers, whose groups undoubtedly included considerable and obvious variation in individual abilities, suggests that the standard of proof for justifying inequality can be quite high.
I therefore think it likely that conservative icon Joe the Plumber favors lower taxes not simply because his own personal experience suggests that smarter and harder-working plumbers (granted, he isn't actually a plumber) tend to provide better services and to have proportionately higher incomes as a result, but also because authorities like Mankiw assert that a complicated mathematical theory says that this intuition is true throughout the economic system. To be sure, populist Joe might claim to disdain elite theory, but as Keynes once observed, "practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."
Thus, Tea Party advocates sustain their belief in the market's fairness by blaming the government for bailing out Wall Street and interfering with the market's ethical magic, explaining why their initial targets were Republicans who supported the bailout (like Mankiw). Meanwhile, Democrats have completely failed to link higher taxes on the wealthy to populist anger at those who prospered while driving the economy into a ditch. To regain the initiative, I believe, progressives must directly challenge the claim that unfettered markets create just deserts. This won't be easy. Free market fundamentalists have the advantage of a simple message -- ending bailouts will deliver just deserts -- and of nearly limitless funds from rich folks who benefited from the bailout but are happy to claim that it should never happen again.
Let me therefore suggest one way to start: replace the estate tax with an inheritance tax. Republicans use the term "death" tax to imply that society is confiscating a lifetime of just deserts wealth. But if taxes are to be based on Mankiw's proposal that those "who contribute more to society deserve a higher income that reflects those greater contributions," then inheritors who have contributed nothing themselves should pay substantially higher rates (full disclosure: I am myself an inheritor).
I believe a debate about inheritance taxes will allow us to distinguish two arguments that appear similar but are critically different. The claim that people should get their just deserts is tricky to implement, but offers a valid moral principle to guide public debate. But the closely related argument that government should "keep its hands off my money" represents pure selfishness by people who refuse to acknowledge that public goods like education and defense are essential for the creation and protection of private wealth. Progressives have to make clear that the attempt to eliminate taxes on inheritors suggests that conservatives believe that all-you-can-eat socialism is fine for the rich as long as there is just-deserts capitalism for everyone else.
Regarding this:
"First, how can we be sure that marginal productivity is the same as social contribution? A safe cracker in a criminal gang may indeed receive loot equal to his marginal productivity, but this doesn't mean that he is creating social wealth. Thus, financial industry profits accounted for over 40 percent of all corporate profits in 2004-5, but does anyone seriously contend that Wall Street created (rather than redistributed) 40 percent of wealth during that period?"
Someone who opens a casino is also not contributing to society, but a non-dogmatic government does not concern itself with that. If someone wants to freely patronize a business and hand over their wealth to them in exchange for a socially unbeneficial service, that is their right, and the earned wealth is the right of that un-beneficial business owner to keep.
The difference between statists and libertarians is that the former believe the ends justify the means, and the latter believe individuals should be free.
The latter is the moral ideology according to any coherent conception of morality.
"The difference between statists and libertariaÂns is that the former aim for a fair result, and the latter believe any result is just as long as all actors were free."
Secondly, the above article is looking at markets in the context of moral intuitions about "just deserts". The perfect examples are pro athletes. People constantly complain that their rewards are far out of proportion with their contribution to society. From a pure market perspective there's no problem, but this sort of result shows how markets can acheive results that confound our moral compass.
Now taxes are necessary for all societies, but the point I'm making is that the statist ideology doesn't just tax a minimum amount necessary to keep you safe from crime and war, and to provide public goods that otherwise you could not have (e.g. roads, tap water and sewage). They actually impose taxes because they think that their personal moral belief that one group should give to another should be forced on to people through mandate.
----People constantly complain that their rewards are far out of proportion with their contributiÂon to society. From a pure market perspectivÂe there's no problem, but this sort of result shows how markets can acheive results that confound our moral compass.----
You again misunderstand the libertarian position because you're struck in the statist paradigm. It's not that pro-athletes making lots of money is 'fair' or 'good', it's that they are earning it legitimately and therefore others have no right to take their money from them by force (through government or otherwise).
The system of capitalism we have could remain intact, but the amount of wealth a person could acquire in total would have a fixed upper limit. We would establish means by which excessive earnings beyond this cap would be used, perhaps allowing the recipient to channel some of the excess into general funds addressing scientific research, public education, urban rehabilitation, fighting poverty or ennvironmental protection. Some sort of grand ceremony could be held each year honoring those who contributed the most to these overflow funds, rewarding them with prestige, and perhaps having a national monument where the top donors each year get permanently inscribed in an honor roll.
Some sort of basic algorithm could be used to define the cap. Maybe the cap is 100 million in total net worth, maybe the cap starts there and then goes down 1 percent annually, ending at 50 million, or maybe 20 million (80 years later). The point is that we can find a different way to define success that focuses on providing wealth for all, instead of taking away wealth from all.
It's time we chose better values for our culture than simple greed.
Basics:
Take care of oneself. Get educated/ re-educated with changing skills needed in the workplace.
Be responsible for our first-degree relatives; and
Provide social support and care for second-degree relatives.
First degree: Children, parents, grandparents and siblings.
Second degree: Uncles, aunts, first-cousins, in-laws.
In surveys, about 90% of Americans want to die in the security, comfort and warmth of their own home; surrounded by family and friends. In reality, only 20% get their wishes (+/- hospice). About 45% die in hospitals and 35% die in nursing homes.
Reason: Uncaring Children!
Statistics would change dramatically if bills for non-medical care was paid by patient and/or children, instead of society as rising healthcare costs, taxes or federal debt to be paid by the grandchildren.
Third of total healthcare costs (2 Trillion dollars) is spent in caring for the last few months of life; 20% on treating preventable illnesses (by quit smoking, diet, exercise and prevent obesity). The 'wasted' 1 Trillion is added to cost of goods and services, given our employer-based healthcare insurance system.
Human civilizations flourished and progressed over 5000+ years all over the world. Prior to that, since humans evolved; and even prior to that, in animal species; i.e. social duties and responsibilities are in our genes.
Over two generations, some want improvement; with responsibility-free and mobile society; govt responsible for any short-comings and yet-to-be-born citizens paying the bills.
The moral system you seem to be upholding is one of agrarian collectivist society. There were large families, extended even to local non-relatives. Localities were essentially "socialist."
Such a system is incompatible with modern post-industrial capitalism where labor must be flexible and mobile and where the nuclear family is all most people have.
Then add an inheritance tax as suggested by the author.
No more "death tax" - capital gains is a tax everyone pays and understands.
And the new "lottery" tax on inheritors seems fair to everyone.
Of course exempt the first $5 million so we do not affect those family farms and small business.
The total tax take should double under the above - I am sure the rich and corporate and GOP will endorse the idea.
For starters, the right wing argument feeds the liberal argument. When I suggest higher marginal tax rates for obscene income, I usually hear, "Great! Then they'll take their money and go somewhere else!"
That confession is acceptance of blackmail, but not the point. The people aren't likely spending all that income - it's getting invested in wall street... which is clearly investing widely in other countries. So the point is, 'THEY ALREADY ARE - so they sit in the luxury of our standard of living, milking a depleting economic base as much as is possible.'
If they are draining from our economy, then they are clearly NOT contributing constructively (i.e. NOT doing the mythical rich person thing - "create jobs") and should be taxed heavily.
And the point isn't to "punish" - another popular yet nonsensical argument in its own right. Fact is we have massive debt and it has to be paid. The rich have no pain and no real world pressures. Their income continues to explode while the rest of us are contracting. The only fair and responsible thing for the rich to do for the country that has given them the opportunity to grow fat is to go back to tax rates that encouraged long term performance over 'smash and grab economics.'
And if the rich don't like it, they can move to Mozambique and start amassing their fortunes again.
So you want these bureaucrats to decide how much I am worth rather than the free market? I know the market has problem in some of the non-linear distributions ranging from minor league ball players to top pros, wall street bankers relative to small town bankers, top lawyers to local public defenders and even has problems the other way where top scientists and engineers don't earn nearly the differential in their productivity and creativity. I am willing to live with that relative to having some bureaucrat make the decisions.
Unless the progressives attack the public choice issues, they have no alternative that works with any justice. In this case, the government bureaucracy will always consider its self interest before the interest of the citizens.
What does “public choice issues” mean in the libertarian lexicon? I’ve probably run into this before, but not by this name.
Shouldn't the bequeathing individual be the determinant of worthiness?
“►DECENTRALÂÂÂIÂZE THE FED: The creation of independenÂÂÂÂt state banks like the state of North Dakota has as suggested by HP blogger Ellen Brown. It would operate counter cyclical to the business cycle and invests to improve a state's productiviÂÂÂÂty during the bad times. This would solve “shovel-reÂÂÂÂady” issues because it would have a draw full of plans to implement based on the highest ROI to a state. It would also take care of the retraining issues because it would know what skills are needed to complete a particular project. Allowing a state's citizens to buy into a state pension using their 401k on a periodic basis would also eliminate the highs and lows of investing and help ease the demographiÂÂÂÂc strain on the pension system. All of these things would return money gambled with by Wall Street to be invested in states during the bad times.
â–şDE-FUND WALL STREET: I don't want my retirement money through tax policy to be sent to Wall Street and gambled with or invested in India or China! I want to be able to invest it back into my community, where it will allow my small business to grow and those of my neighbors. The ROI on my 401k should be Investment = ROI on investment + less taxes paid + increased business opportunitÂÂÂÂies, and this only happens when we reinvest into our communitieÂÂÂÂs.