In a blog post titled “Who is the prototypical rich person?” Greg Mankiw responds to a pretty bad New York Times op/ed by Emmanual Saez and Gabriel Zucman. I was waiting for someone to spot a pretty big error in Greg’s piece, but no one has. So I’ll point it out.
Greg wants to argue that it matters how one becomes rich. He and I agree that that really matters. But check out how he illustrates the point.
Greg writes:
Saez and Zucman seem to think that rich people are like Henry Potter, the conniving banker in It’s a Wonderful Life. Mr Potter makes his money dishonestly and uses it to control the instruments of the government to further enrich himself and impoverish the lives of those around him.Another kind of rich person is someone like Taylor Swift. She is fabulously wealthy (net worth > $300 million) but earned that wealth by enhancing the lives of others through great music. As far as I know, she does not have significant political clout.
I agree with Greg that Taylor Swift has earned wealth by enhancing the lives of others.
Where Greg gets it wrong is his comment about Henry Potter. Potter is conniving. But we have no evidence in the movie, other than his wrongly holding on to $8,000 that was not his, that “he makes his money dishonestly.” Potter provides a service: rental housing. There’s no evidence that he cheats his tenants. There’s also no evidence that he uses his money “to control the instruments of the government to further enrich himself and impoverish the lives of those around him.”
The people around him do better by dealing with George Bailey. That’s the nature of competition. But that’s a separate issue.
Why does Greg get it wrong. I think it’s because he makes the mistake of conflating how nice or pleasant someone is with whether the person came by his wealth honestly. That’s an important mistake. Of all the wealthy people who came by their wealth honestly, I expect that Greg and I would find a substantial number of them unsavory, although I think it would be under 25%.
For better or worse, to defend the rights of people to make wealth honestly, you will occasionally find yourself defending the rights of people you don’t like.
READER COMMENTS
Benjamin Cole
Jan 29 2019 at 7:44pm
There is third class of wealthy people.
Many people can become wealthy by exploiting an unfair system, even though they themselves are entirely earnest and honest.
A developer along the West Coast who moves to get a density exemption for his property, that is an exclusion from property zoning, can become very wealthy. Perhaps some defense contractors also fit into this category.
These are not bad people, in fact, they are productive people. They are playing the ball as it lays, so to speak. No lone property developer can unshackle West Coast property markets from property zoning.
But their wealth comes by colluding with government.
Benjamin Cole
Jan 29 2019 at 8:45pm
Another, related thought: Many businesses make money by colluding with government—-including foreign governments.
Of course, there was the famous Chiquita banana days, or the pre-Castro era in Cuba (and yes, Castro was arguably worse for his population than his predecessors).
But today, there is probably of bust of China’s President Xi inside the HQ of a GM, an Apple, a BlackRock , or Wal-Mart. Colluding with Beijing is central to making money on Sino operations. Certainly, it would be bad for shareholders (to which fiduciary obligations are owed) to get sideways to President XI and the Communist Party of China.
Interesting times.
Todd Moodey
Jan 29 2019 at 9:44pm
I understand and agree with your primary point, but Mankiw may simply be taking Potter’s theft of the money as representative of his general business conduct. While you’re correct in saying there’s no evidence that Potter cheats his tenants, that’s because the movie doesn’t in the first place present a lot of detail or evidence about his business practices.
David Henderson
Jan 30 2019 at 10:02am
There’s a reasonable chance you’re right. But usually, when you want to give a sharp contrast between two types of people, you give examples where the evidence is clear, not examples, where you have to jump to conclusions based on a small bit of evidence.
Jon Murphy
Jan 30 2019 at 12:09am
This reminds me of a conversation some friends and I were having tonight (nerd alert coming).
In the role-playing game Dungeons and Dragons, there are moral alignments one assigns to his character. One of them is “Lawful Good.” A lawful good person does his best to uphold a code of honor, do the right thing, and enforce justice. My character, a Dragonborn paladin, is one such character. I play him very gruff, rude, and generally unpleasant. Always insulting people and he is incredibly arrogant.
Long story short, while eating dinner, we were discussing alignments and how I play my character. I stated that lawful good doesn’t mean lawful nice. Insofar as player actions are concerned, my alignment (lawful good) only demands that my character uphold the law. It doesn’t say he has to be nice.
To bring this back to Mankiw, whether or not one earns an honest dollar does not necessarily depend on how nice he is. It might, but it doesn’t have to. All one needs to do to earn an honest dollar is to fulfill the rules of justice. Being pleasant is not one such rule.
john hare
Jan 30 2019 at 5:29am
I would add that under some conditions being nice is wrong. Employees that aren’t doing their jobs deserve strong doses of ‘not nice’ as they are harming their fellow employees, the customers, and the company. Being nice if they are faking hours, doing shoddy work by choice,or being dishonest among other things often requires strong medicine. Reprimanding and firing is sometimes being nice to the other employees, the customers, and the company.
Same with “professional renters”. Being nice to people that don’t pay, cause various legal problems, and vandalize the property is being cruel to the other renters as well as the company.
Cops being nice to violent criminals can be very not good.
There are many despicable people that will sling mud at all and sundry to achieve their ends. Trying to be nice to some is being not nice to the honest and industrious.
All of which is not to say that being a jerk has fundamental value.
Mark Z
Jan 30 2019 at 12:19am
I think to Saez and Zucman, ‘excessive’ wealth is in and of itself immoral. The charitable interpretation is that they are Singerian utilitarians who think utility increasing redistribution is morally necessary. The less charitable (and more likely) interpretation is that they just find large fortunes viscerally revolting and think it is worth it to make non-rich people worse off if they can make rich people even more worse off.
Of course, do non-rich people feel the same? If a rich person faces a dilemma where he must pay $X to a poor person, or $aX to the government, where a >= 1, but the poor person determines which option the rich person must take, how much above 1 the ‘a’ parameter has to go for the average rich person to prefer making the rich person lose aX – but the poor person gaining nothing himself – to prefer it to being paid X by the rich person? Let’s call that value a* Now, if we denote the ratio of the loss incurred to poor people by aggressive taxation of the rich to the loss incurred to rich people by said taxation, which I’ll call R, if R > 1/a*, then the taxation is still harmful to the poor even if we count poor people’s negative valuation of rich people’s wealth (how much utility they get from making rich people worse off) in our cost benefit analysis.
So, contrary to what some seem to believe, even treating ‘inequality’ as being an economic cost (essentially, factoring negative valuation of other people’s wealth into cost-benefit analysis) doesn’t necessarily justify policies meant to ‘correct’ inequality. For that to be justified people must negatively value others’ economic well-being by sufficiently more than they positively value their own. If the Saezes and Zucmans of the world are indifferent to this, then there’s little other conclusion to reach than that they are driven purely by visceral reactions rather than moral or rational considerations.
Alan Goldhammer
Jan 30 2019 at 8:35am
Question: do managers of private equity funds enhance the lives of others as they get rich?
IronSig
Jan 31 2019 at 7:40pm
Such folk enhance my life if my retirement savings genuinely grow. That doesn’t rule out a portion of private fund managers from being fools and trolls. However, the same possibility of incompetence/evil exists if I have a chowder-headed property manager for a rental building as my main savings/investment tool.
Thinking marginally, I’d feel less conflicted about withdrawing from a fund run by a moron than if I found out that my property manager was a fool
TMC
Jan 30 2019 at 8:44am
I find doctors follow this line of thinking. The brusk are usually more competent. I’m paying him for his medical knowledge, not for bedside manner.
shecky
Jan 30 2019 at 7:59pm
What a strange nitpick. The movie is already over two hours long, and wouldn’t be helped by fleshing out Potter any more than it does. Because we know from his last significant action that he’s fundamentally despicable, driving home his characterization up to that point that he’s at the very least a rather unpleasant and bitter man. What he does to ruin George Bailey’ life and seize upon the misfortune he creates is completely in character and not unexpected.
David Henderson
Jan 30 2019 at 10:38pm
You wrote:
Exactly. But the issue is whether he comes by his money by cheating tenants or by using government.
You wrote:
I agree, as I think I made pretty clear in my post.
It sounds as if you’re the one who’s nitpicking.
Todd Ramsey
Jan 31 2019 at 9:24am
A bit of a tangent, about a question about which I’m seeking insight:
Some businesses make money by helping society produce more from our available resources: for example, railroads, business software providers, cargo container manufacturers and distributors, etc.
Some businesses make money by helping people squander (for lack of a better term) the accumulated surplus: casinos and candy manufacturers come to mind.
Of course, most business combine both: Perrier water, Ferrari automobiles, and Rolex watches all help us produce more by enabling productive activity, but do so in a more costly way than tap water, Kias, and Timex.
The question: is it somehow more MORAL to earn money in a way that helps society make better use of its resources than to earn it by helping us squander our surplus?
Jon Murphy
Jan 31 2019 at 11:12am
The “squandering” is subjective. It’s no more or less productive than the other items you mentioned.
I love to gamble, especially roulette. It brings me pleasure, just like going to a baseball game brings me pleasure. When I gamble (which is rare these days), it is the best use of my time and money compared to other alternative uses. Now, you may disagree with my choice here, but you cannot objectively say it is squandering or less moral inherently than other activities.
It seems to me you’re making a distinction between leisure and work. That consumption of leisure activities, like gambling or candy, somehow contribute less than work activities, like manufacturing or IT. But leisure is a goal too. Indeed, it is the whole point: we work so we can play. While spending all one’s time on the “productive” activities you list above may help boost GDP, it does not necessarily translate into economic well-being (as the Soviets). After all, all work and no play makes Jack a dull boy.
David Henderson
Jan 31 2019 at 8:33pm
I’ve been away from my computer, but Jon Murphy handled it. The test of whether it’s valuable is whether people value it.
Todd Ramsey
Feb 1 2019 at 10:06am
I think you are missing the point. Railroads (for example) enable us to use our finite resources to create more surplus, which enables leisure activities like roulette.
Or perhaps I am missing the point. Is there a way roulette enables us to use our finite resources to create more surplus? If so, please explain.
I am completely on board with fulfilling consumer desire as a legitimate activity. It’s just that some activities (railroads) make other activities (casinos) possible: there are no casinos in a subsistence economy. Isn’t there at least a case to be made that the resource-saving activities are more moral than the resource-using activities?
Aside: I’m not against gambling or freedom of choice. More of a craps guy, though. Once you try craps, you never go back.
Jon Murphy
Feb 1 2019 at 11:05am
Yes. When I spend my scarce resources on gambling (or baseball or leisure or whatever), I am generating more surplus for me than other uses. One use is not better or worse than the other. They’re just different. And, just like too many resources (as defined by the marginal benefit being less than the marginal cost) can be devoted toward leisure, too many can be devoted to work as well.
Jon Murphy
Feb 1 2019 at 11:07am
I tried craps once. I didn’t really get it, people were getting upset, it was a whole thing. I know lots of people like it, but that experience soured me.
Sorry, I did not mean to imply you were
Bernard Strass
Feb 1 2019 at 2:27pm
If you have watched It’s a Wonderful Life (IaWL) as many times as I have, you may change your opinion about Mr. Potter. You see, I teach high school economics and I use IaWL as an end of semester wrap up assignment. Having listened over and over again to Mr. Potter and comments made about him, you begin to see him in a different light. I believe that he is, other than holding on to the Bailey Brother’s deposit money (by the way, it is safely in the bank’s possession since the bank is controlled by Potter), Potter is referred to simply as a determined businessman by others, including Peter Bailey, who put him on the Board of the building and loan company to keep him from complaining about how it was being run. He was an investor in the building and loan and believed that the Bailey brothers were making poor decisions regarding who to loan money to. Potter may have had a conflict of interest by also being an officer of the town bank and a shanty town landlord, but there were enough other Board members to keep the game fair. It may well have been Potter’s plan to own all of Bedford Falls, but it is pretty clear he was a patient man who waited until prices were at their lowest before he swooped in to buy up a controlling interest (i.e. during the bank run scene). There is further evidence of his political power when he instructs his secretary to tell the Congressman to call back, because he’s busy at the moment. It appears to me that Henry Potter made his money the old-fashioned way, he earned it.
Todd Ramsey
Feb 2 2019 at 11:10am
Jon Murphy, to be more precise, I should have said, “Once you have been at a winning craps table while understanding the game, you never go back”. The other phrasing seemed more clever; both are exaggerated for rhetorical purposes.
More seriously, without the resource-saving industries exemplified by railroads and cargo container manufacturers, casinos could not exist. Would it be possible to have an economy where everybody worked at a casino? It seems we would all starve without farmers (and the other people involved in getting our food to us).
I’m asking whether a resource-saving profession is more moral than a resource-squandering profession made possible by the former. I don’t know the answer, but it’s interesting to think about.
The resource-squandering profession DOES provide motivation for people to work harder in their resource-saving profession. Perhaps that is sufficient.
Jon Murphy
Feb 5 2019 at 12:17pm
(I hope you see this, Todd. My apologies for not responding sooner, as I did not see your response).
I got your meaning. I was being a little silly and teasing you in my response. I guess that didn’t translate. Sorry 🙂
Absolutely, 100% true. Opportunity cost and scarcity are things. But, just as one can have too many casinos, one can have too much ag (or manufacturing or whatever).
That’ll depend on how we want to define “moral.” I tend to use a Smithian virtue ethics approach. So long as people are earning an honest dollar, they are not necessarily more or less moral than anyone else. True, certain actions may be more praiseworthy (eg, if I used my excess time to help the poor rather than gamble), but it’s not necessarily immoral behavior.
Dan Jennings
Feb 6 2019 at 8:51pm
Nit-pick…….“ we would all starve if not for farmers “…. as our current structure of society is, this may be true. But, I’m thinking in terms of the evolution of a civilization, a society, had farming not occurred. Minus farming, society and civs would have developed differently. An order would be established on hunting and gathering(assuming farming include domesticating of animals for food). I assume large populations couldn’t be supported on merely hunting and gathering. But, a society, however relatively small it may be, would Survive.
Comments are closed.