Hoisted from teh Internet from Two Years Ago: Inequality: The 1% Need Better Defenders

M.S.: Inequality: The 1 percent needs better defenders: “Perhaps [it was] John Kenneth Galbraith… [who] said that the way to debate…

…Milton Friedman was to wait for him to say “Let us assume…” and then immediately interrupt and say “No, let’s not assume that.” (Via Clay Shirky, via Dan Davies.) I thought of this quip on Saturday while reading a draft paper by Gregory Mankiw entitled “Defending the 1 Percent”. Mr Mankiw begins with a thought experiment:
“Imagine a society with perfect economic equality…Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J.K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies.” Everyone wants to buy the entrepreneur’s product, which results in a hugely unequal distribution of income. Should the government shift to a progressive tax system to reduce the inequality?”
Obviously Mr Mankiw discovers that the answer is “no”…. But you don’t even need to say “No, let’s not assume that” to see what’s wrong with this analogy, because Mr Mankiw has done a strange job of selecting his John Galt figures. Let’s go along with Mr Mankiw’s thought experiment: Steve Jobs, J.K. Rowling and Steven Spielberg are about to create their staggeringly popular products, which will increase inequality because everyone wants to buy them. 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?…. Instead of Apple… Sony and Samsung… BlackBerry, Samsung/Google and Nokia/Microsoft. Instead of Harry Potter, some other children’s fantasy book… some other movie…. His own choices of hero-entrepreneurs… only Steve Jobs plausibly had an irreducible, unique effect on material culture and the structure of an industry. Mr Spielberg and Ms Rowling are acclaimed artists, but their startling wealth and prominence are entirely due to the increasing power of network effects in mass culture…. 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? The social purpose of high executive pay is to create incentives for hard work to maximise profit. But these guys are being paid double what their predecessors were making in the 1980s, which was not exactly a period known for its stodgy egalitarianism. Are we seeing startlingly better corporate performance today than we were back then? Is there greater productive innovation in, say, medical technology or commercial real estate? Is our economy growing faster? Are general standards of living rising faster? No, no, no and no. What public interest is served by the fact that these CEOs, as a class, are earning a multiple of what their predecessors did a generation ago?…
To avoid accusations that I’m just picking out an ill-thought-out analogy while ignoring Mr Mankiw’s main thrust, I’ll add a few more points…

Originally published at www.bradford-delong.com.