Economists and Occupy Wall Street

Here is a snippet from The Confiscation of Economic Prosperity, which seems relevant today.

In Praise of Inequality?

Conservative economists typically attribute the poverty of the poor to natural market forces; the less fortunate do not deserve to earn more than what they can earn in the market.  If the poor want more income, they should just work harder or smarter.  Government policies to reduce income inequality or to help the poor to enjoy a larger portion of society’s wealth and income are confidently denounced as destructive, at least according to this ideology.

Conservative economists conveniently ignore the perverse political and social influences that reinforce inequality.  Questions of race, class, or gender do not enter into their discussion of inequality.  Nor do many economists acknowledge that the forces that maintain inequality limit the potentially valuable contributions of those held back down by inequality.

This ideological predisposition makes economists extremely critical of any thought of redistribution of wealth or income.  Consider the words of Nobel Laureate Robert Lucas.  After noting the differential growth rates among countries, he writes: “Is there some action a government of India could take that would lead the Indian Economy to grow like Indonesia’s or Egypt’s? …  The consequences for human welfare involved in questions like these are simply staggering:  Once one starts to think about them it is hard to think of anything else” (Lucas 1988, p. 5).

Not only was Lucas willing not to think of anything else, he wanted others to do likewise:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.  In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India.  The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother.  This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken.  But of the vast increase in the well‑being of hundreds of millions of people that has occurred in the 200‑year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor.  The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.  [Lucas 2003]

According to this theory, markets appropriately reward the rich and powerful because of their superior productivity.  Consequently, they deserve every bit of what they earn.  Supposedly, the best cure for poverty is to allow natural economic forces to follow their course.  These economists are unapologetic about their stance.  For example, when Finis Welch, who gave his prestigious Richard T. Ely lecture at the 1999 meeting of the American Economic Association, he provocatively titled his talk, “In Defense of Inequality.”  There, Welch proclaimed:

I believe inequality is an economic “good” that has received too much bad press ….  Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued ….  Increasing dispersion can offer increased opportunities for specialization and increased opportunities to mesh skills and activities.  [Welch 1999, pp. 1 and 15]

Ludwig von Mises, an Austrian economist and one of the leading icons of libertarian economics, went even further than Welch, proclaiming: “Inequality of wealth and incomes is the cause of the masses’ well‑being, not the cause of anybody’s distress.  Where there is a ‘lower degree of inequality’, there is necessarily a lower standard of living of the masses” (von Mises 1955).

Does inequality really get too much bad press, as Finis Welch suggests?

3 comments so far

  1. Alex on

    These snippets are certainly unsettling. In fact, the IT boom in India has provided jobs for the educated and provided opportunities for self-employment for the not-so-educated; the latter are termed as unorganised labour. One of the reasons which enable IT workers to save a significant portion of their income is because of the cheap commodities (mainly, ‘fast’ food of various kinds) is owing to the hard work of these ‘unroganised labour’. Perhaps, mainstream economists think that the existence of a large pool of unroganised labour benefits the organised labour. The trickle down is negligible when compared with the widening inequality this arrangement results in.

  2. aftertheperiod on

    I believe inequality gets too much bad press. It is often used as an argument against capitalism. I feel inequality is only the natural occurrence of any market. Productive members receive more benefits. Unproductive or less productive members receive less benefit. This natural occurrence is how society progresses, ideas are generated and success is rewarded.

  3. mcarson on

    to aftertheperiod:

    Many people believe as you do. Look to the structures of society, read Dean Baker. You may begin to see ways that the ‘less productive’ are held back, and the ‘more productive’ benefit from others labors, as well as their own. There is a subtle tilt in America, and it’s getting worse. For example, finance was 13% of the economic profits, it’s raised to over 40%. That money was taken from those who worked and distributed to those who ran banks and investments. The increased ‘profit’ didn’t benefit society as a whole, there was no chance for most to be ‘more productive’. Most began to pay higher fees, not only in bank and credit charges, but in invisible charges like credit card ‘swipe’ fees. A working mom whose income is supplemented by food stamps should not be contributing $200 a year in higher prices through ‘swipe fees’ to the airline miles of a stockbroker. That is not progress, or rewarding work or industry. It’s robbery, and it should bother people. You can find many examples of this if you look. For all the glory of american drug manufacturers, a huge amount of their ‘research’ is studies about what color or name a pill should have, how much to spend in doctor junkets and conventions. The patent system protects them, but they use that protection in a way that doesn’t really benefit, and because the government enforces their monopoly people are either impoverished or dead. Hard work should be rewarded, and it is. Invisible shackles should be unlocked, and it takes research and wisdom to see them.

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