Amateur Political Philosophy

Noted conservative economist and former Romney advisor Greg Mankiw has just written an article with the unabashedly conservative title “In Defense of the One Percent”. The pile-on has already begun, with an excellent takedown at the Economist American Politics blog, and good pieces as well at the left-leaning CEPR and Unlearning Economics.

Mankiw defends the rich because he believes they have brought us value commensurate with their wealth. This is the essence of conservative neoclassical economics: markets allocate value the way that value should be allocated. There are theoretical exceptions to this rule, of course, like rent seeking or other market failures, but real conservatives remain “unconvinced” that such exceptions are to be found in the real world.

Mankiw prefers the idea that markets can still work as intended (optimally allocating resources) without being entirely “fair”: insufficient high-skill workers and “superstar” gains can drive inequality even in perfect labor markets. Mankiw is sympathetic to these arguments because they allow him to claim that everything is working as intended: there’s nothing to see here, the markets are working, please move along.

But wait a minute.

What Mankiw would have us see as the natural structure of the market, thus a “natural” unfairness, is no such thing. The blogs linked to above have made two important points about how these economic structures are created. First, David Rosnick at CEPR and Unlearning Economics both argue that the wealth Mankiw describes, far from being the natural outcome of a free market, is built on “government interference in a free market”—“interference” in such forms as patent protection, property rights, and public science research. This government action is actually crucial for private market success, so if those markets are not flourishing we should have little compunction about redistributing the gains from them.

Mankiw does attempt a weak response to these arguments by asking, how much really did the government help? The 25-33% that the rich pay in taxes sounds like plenty of recompense to him. But the question is silly: if the public (through government) facilitates the existence of the market itself (e.g. by creating GPS that smartphones can then use) then what percentage of that market is the public entitled to? The point is that there is no way to value the public contribution, and the marginal cost (e.g. taxation) to users should be whatever is both fair and optimal.

Second, the Economist makes the excellent point that unequal results are far more a function of the structure of the economy than of any individual’s general-welfare-improving prowess. This is true of both traditional superstar industries like entertainment and sports as well as newer ones like law or CEOs. We do not have some fantasy economy where everyone makes the same amount of money, we have an economy where equally smart people do equally demanding jobs and get paid enormously disparate amounts. This is not simply rent seeking—it’s a combination of social forces, market failures, luck, and plenty of other factors.

The real question is whether we would be able to design a system where the 1 percent (really it’s the 0.1 percent we are talking about) get a smaller share and economic growth does not suffer. And the answer is an unqualified yes—through smarter, more deliberate growth policies, maintaining competitiveness, and yes, more redistribution.

We need to stop looking at our economy as some incomprehensibly optimal system, that maybe, if we’re careful enough, we can adjust afterward if we don’t like the results. Instead, we need to understand that the economy is something that we, through our political and economic and social actions, have created and continue to create. It’s fine to question whether our outcomes are optimal—this is the essence of economics, in a way—but we become trapped if we remain shackled to a rigid ideological system that prevents our ability to refine, recreate, or even understand the economic system that we have created.

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About the author

Ben Miller is ITIF’s Economic Growth Policy Analyst, specializing in the connection between technology, innovation, and everything else in the macroeconomy.