Thursday, September 1, 2011

Jeff Miron on capitalism and income distribution

The 2nd myth is that capitalism generates an unfair distribution of income. What true capitalism does is rewards people who are productive, people who work a lot of hours, people who have a lot of talent, people who come up with good ideas, they get big rewards.  People who don’t do those things get less.”

So says Harvard economics professor Jeff Miron in his three myths of capitalism.  Without a great deal of elaboration and qualification this statement is unlikely to convince anyone not already convinced.  Left alone it probably hurts the case of capitalism just like any other weak argument.

First, if you look at businesses it isn’t clear that profitability is aligned with the values of a society, to the extent we can ascribe values to a society.  For instance gaming and pornography are or have been lucrative businesses.  The social stigma attached to both probably helps their profitability in that it keeps out competition. 

In investment services it isn’t clear that the benefit of making the markets more efficient by closing small price discrepancies is worth the enormous profits and divergence of skilled manpower that has gone into this field.  Moreover, the people who could most critically benefit from having a skilled financial advisor can’t afford it, whereas those who already have a great deal of money have access to the best advice thereby accentuating differences in wealth.

For individuals the statement is even more dubious.  Consider sports where statistics provide at least something approaching objective measures of performance. Prof. Miron will have a tough time convincing White Sox fans that capitalism is in tune with performance when Adam Dunn in the first year of a four year contract that will pay him $56 million is on pace to have the lowest batting average of anyone who ever had enough at bats to qualify for the batting title (he’s hitting .163 with 157 strikeouts out of 368 at bats). 

In truth, as only who works outside of academia will notice, there is considerable luck involved in how much money you make.  How the company performs, how your area is perceived within the firm, how well your boss does and how well he or she supports you are at least as important as hard work and talent.  You can be an exceptional employee and if you are on the wrong side of an acquisition you’re likely to find yourself out of a job.

I would assume Mr. Miron would accept most of these objections, so what is he saying?  I believe his point should be understood by thinking of a normal distribution or the bell curve, that is with the bulk of the population in the middle and smaller numbers at the extremes.  Capitalism distributes income in something like a normal distribution when you look at businesses and individuals.  The majority will earn about what they are worth, with lesser numbers being either lucky or unlucky all the way to the extremes.  Attempts to equalize income aren't fair since they deny these differences.

But it is important not to oversell capitalism as I believe Prof. Miron does in this clip.  The “cure” for whatever unfairness exists in the distribution of income may well be worse than the disease.  And it should be kept in mind that the benefits of capitalism are largely derivative, that the chief argument for capitalism is that it is the only system consistent with a truly free people.  If Krushchev’s boast that communism would bury the West economically had come to pass it wouldn’t make it a better political system than ours.  What needs to be made more consistently is not an economic argument for capitalism but an argument for it that doesn’t rely on its material benefits.  And one that recognizes that life is indeed unfair.

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