"Then, in my late teens, I started to learn economics. I started to understand that the vast majority of income in a relatively free society is earned. It's true that a small number of wealthy people did get their money by fraud or dishonesty. More common, especially in societies with lots of government controls, were people who got wealthy by using political pull. But I started to see that the typical high-income person in a relatively free society gets his or her income the old-fashioned way--by earning it." -- David HendersonI suppose it is good that some economists are willing to expose themselves, or their teachers, as incompetent. Economists refusing to teach theories that collapsed half a century ago, except as history, would be better. Even if markets were perfectly competitive, marginal productivity would not be a theory of income distribution. In neoclassical economics, properly understood, no sense can be attached to the claim that the rich earn their income. But, of course, markets are not perfectly competitive in the United States. The ever increasing income and wealth being seized by the top quintile, or 10%, or 1%, or 0.1%, etc. is the result of the exercise of political power.
Noah Smith, who probably thinks of himself as a liberal opposing "libertarians" (that is, propertarians), is not much better. In his discussion, he fails to mention any empirical facts about the increasing and astonishing unequal distribution of income in the United States. He fails to discuss whether or not gross inequalities in the distribution of income and wealth is consistent with the smooth expanded reproduction of a capitalist economy. And he fails to discuss whether having an income distribution in the United States that has not been matched since the 1920s might have something to do with current recessionary conditions. Instead, he writes about feelings. As far as feelings go, the vast majority of Americans should be angrier. "Let fury have the hour, anger can be power/D'you know that you can use it?"
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Libertarians like to believe exchanges take place in a vacuum between two knowledgeable and rational parties with equal amounts of power who can't influence each other.
In reality, pretax income distribution is heavily affected by power, biases, luck, but most importantly by how government policy is defined. This is what makes the 'intervening hand of the state' idea complete nonsense.
Furthermore, has Henderson never heard of the concept of economic rent? Does he honestly think current FIRE industry 'profits' are 'earned'?
Once upon a time, Austrian and neoclassical economists, when faced with moral/ethical criticism, would oppose that their views were "value-free" or "positive". By this it was meant that said views somehow reflected reality, objectively grasped and logically analysed by them.
In these views, self-interest, even greed, were innately human and ultimately conducive to the greater good.
In other words: hard-nosed philosophical and intellectual sophistication versus mere bleeding-hearts' sentimentality.
Nowadays things have changed: envy is inexplicably differentiated from greed and self-interest and evaluated as morally inferior (!?). Thus, people may remain inherently self-interested and greedy, as long as they are not envious.
And instead of "value-free", "positive" theories, we are offered homey, corny little morality tales, plus the advise: "count your blessings".
So, workers whose labour is stolen and consumers who are swindled need to count their blessings; but, when it comes to paying taxes, the thieves who steal and defraud them do not need to count theirs.
And they all were happy for ever after! Isn't it cute?
Most mainstream economists, I think, do not get the consequence for their theory that real wages do not follow labor productivity since the early 1970s. I think this is the result of the way graduate courses are taught. It's manufactured ignorance, in a sense.
@MatÃas
"Most mainstream economists, I think, do not get the consequence..."
Ordinarily, that is a reasonable assumption. After all, normal, ordinary people do make honest mistakes.
However, there must be a point somewhere where the negative to acknowledge a mistake leads one to conclude that either one is not dealing with "normal, ordinary people" or that the mistake is not "honest".
The precise location of that point is not clear, one could object.
At one hand, a fiendishly complicated problem could elude the best minds for a long time. This would give more room for doubt: it would push the "point" further away.
At the other hand, an esoteric but relatively easy question, of little practical relevance, could evade solution because nobody really cares about solving it. This also pushes the "point" further away, obviously.
My contention here is that we are not dealing with a fiendishly complicated and intractable problem and that this problem has enormous practical relevance and requires urgent solution.
Thus, it's not reasonable to assume "normalcy" and "honesty" forever.
The problem is conflation of the function (net in-place liquidation value of assets) with the derivative (income, capital gains, value added, sales, etc.).
The result of this conflation is a brain-dead discourse in political economy.
OF COURSE people who have vast property rights should pay more for the existence of the entity that upholds those property rights — just as they should pay more for property insurance.
OF COURSE people who make X dollars a year should have zero tax burden as a result of those CHANGES in their net in-place liquidation value of assets.
That creation of wealth is taxed rather than possession of wealth is precisely what is wrong with the tax base. Taxing creation rather than possession is precisely backwards from the fundamental standpoint of proper statecraft.
When you create something you are not costing society anything. When you possess something you are: the cost of defending your right to possess that thing.
It’s that simple.
Every piece of wealth, be it gold, land or a corner grocery store, in society is, to degrees varying with their “monopoly” status as property rights, made more valuable by such systemic benefits of easily reproducible innovation. Land is special to economic theorists, particularly to Georgists, because it is the classic case of a fixed asset that everyone needs but which “they’re not making any more of”—hence containing a large degree of monopolistic value.
Of course, invention comes in many guises—not just putting together a better mechanical contraption—and those inventions, be they ways of doing business or ways of organizing communities or some scientific discovery that clarifies our relationship with nature, also increase the value of properties with which they are distantly related.
A solution and one that sometimes seems near to being realized in various places around the world at various times in history, is to collect the portion of value that rains down upon all properties within civilization from innovators—value which can be called “economic rent”—and instead of allocating it according to sophistry of politicians, lawyers, academics and storytellers, simply divide it up evenly amongst all people. This solution does not, of course, completely solve the problem, but it does at least prevent the horrendous genocide of creation seen during the last decades where a small number of third-rate inventors are grotesquely rewarded with monopoly profits and held up as an example of how well-compensated innovators are, so that the rest, including first-rate inventors, can have their wealth, hence potential children, confiscated by parasites.
The quantification of economic rent is pretty simple—it is the “no brainer” profit stream expected from an asset. Banks routinely estimate this when giving out loans when they assess the collateral value of the borrower’s assets. This is generally done by taking what is called the “liquidation value” (more precisely, the “orderly liquidation value in place”) of an asset and applying the “risk free interest rate” to that value. Liquidation value of an asset is the value that virtually anyone could get from it if they were handed title to the asset and told to go sell it in a reasonable period of time. The “risk free interest rate” is usually the rate of return guaranteed by the government when you loan it money for short periods of time.
These mechanisms operate in the “civil” environment—an environment characterized by governments—an environment capable of supporting high value assets we typically associate with “cities” (which shares its linguistic root with “civil”). However, if we are to be rational about the interests of the individuals entering into an agreement to establish and maintain “civilization” it must be admitted that they would not wish to turn over to it that which they, themselves, possess by virtue of existing as human animals—the ability to defend their homes, families, tools and small-holding of land, fishing rights or other natural resource with which they can support their reproduction. If they were to turn over such individual sovereignty they would become in essence slaves to civilization. Hence in a free society, it makes sense to leave in the hands of individuals that portion of economic rent accruing to them by virtue of their subsistence properties—again, for emphasis (since this seems to be the point where I lose the most people’s reading comprehension) we are talking about some amount of assets sufficient to be equivalent to the ownership of a small family farm and all of its equipment.
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