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George Orwell, Call Your Office

Wednesday, August 8, 2012

Intellectuals, especially in the social sciences, have a nasty habit of thinking that, 'This is the way the world should be, therefore this is the way the world can be.'

Sometimes the mind just boggles.

The Atlantic has an article this month with the title “Americans Want to Live in a Much More Equal Country (They Just Don’t Realize It).” I am always curious when intellectuals announce that the people (who in the American constitutional system serve as the sovereign power) don’t know what’s good for them (What’s the Matter with Kansas?) or don’t even know what they want.

Implicit in all of these revelations, of course, is the firmest, if never directly expressed, belief of the Left: That the average person is too stupid to run his own life, let alone make public policy decisions. Those few, those happy few, that band of liberal intellectuals, must do that for them.

The author of the Atlantic article, Dan Ariely—a professor of psychology and behavioral economics at Duke—divided the American population into quintiles according to wealth. He then asked a representative sample of more than 5,000 Americans to guess how the country’s wealth was distributed amongst these quintiles.

He doesn’t say exactly how he determined the population’s wealth. Are the hundreds of billions of dollars in union and government pension funds that will fund the retirement of millions of blue-collar and government workers considered an asset of those workers? I’d guess not. Does this money greatly improve their standard of living? You bet, just like a trust fund improves the standard of living of some rich man’s grandson. But let that go.

As long as no one lacks the wherewithal for a decent standard of living, is a very unequal division of wealth necessarily a bad thing?

It turns out that the overwhelming majority of the sample population thought the distribution of wealth was much more equal than in fact it is. The average guess was that 9 percent of the country’s private wealth belonged to the bottom 40 percent and that 59 percent of it belonged to the top 20 percent. According to the author, it is in fact 0.3 percent of American privately held wealth that belongs to the bottom 40 and 84 percent that belongs to the top 20. But, again, without some insight into the methodology, these figures are impossible to evaluate. They are simply declared ex cathedra.

Ariely then asked people in the sample population to pick an ideal distribution of wealth among the quintiles. The average of their choices was much more egalitarian than is the American reality. The average proposed distribution was 11 percent for the poorest quintile and 32 percent for the richest.

The rest of the article is devoted to a discussion of how best to get to that preferred distribution.

A few points:

1) As long as no one lacks the wherewithal for a decent standard of living, is a very unequal division of wealth necessarily a bad thing and a more evenly distributed pattern of wealth necessarily a good thing? Professor Ariely blithely begs this fundamental question.

2) American society is notoriously fluid. Rising from a log cabin to the presidency is American folklore. It is also American reality. The majority of the Forbes 400 created their own fortunes.

But there is not an inkling here that individuals often transition through different quintiles during their lives. Someone might start off in the top quintile, living with his affluent parents. Then he graduates from college, gets an entry-level job and a studio apartment in a crummy part of town, and bam! He’s in the bottom quintile. He works hard, gets ahead, saves some money, and he’s in the next-to-bottom quintile. He marries a woman with a good job and moves up another. His parents help with the down payment on a house and 20 years later, once the mortgage is paid off, he’s in the next quintile. His father dies, leaves him a million dollars, and he’s in the top quintile. Then the market goes to hell, his net worth declines drastically, and, as a result, he drops down a notch or two. And so on.

Instead, there is an unmistakable implication in the article that the various quintiles are self-perpetuating, with the proletariat at the bottom leading lives of quiet desperation and a few fat cats at the top lighting cigars with hundred-dollar bills. That might have been true in the 1840s when Marx began writing (although the early 19th century was also a time of many new fortunes). It sure isn’t true in today’s America, where a bright idea for an iPad app can make you rich practically overnight (just ask the guy who invented Angry Birds) and talent is far more valued than ancestors.

3) How on earth are 5,500 people chosen from all walks of life—from janitor to rocket scientist—supposed to have the faintest idea what the ideal distribution of wealth should be in today’s rapidly changing economy? These people are picking numbers out of the air and saying, “Oh, that seems right.” Is it? Professor Ariely simply assumes that it is.

The idea that something as fundamental as the distribution of wealth can be radically altered in a democracy without disastrous side effects is an intellectual fantasy.

4) Shouldn’t we have some real idea as to what the ideal distribution actually is—if that’s even knowable—before we march the country off willy-nilly toward some arbitrary distribution chosen by a bunch of people in a random sample? The average of 5,000 guesses is an excellent way to produce an accurate estimate of the number of jelly beans in a big jar. It is a disastrously dumb way to determine the parameters of a vast social engineering project.

An even worse way to determine these parameters, of course, would be to have the choice made by a group of professors sitting around the faculty lounge and grumbling about the people who aren’t as bright as they are but who are worth tons more money.

5) Might deliberately trying to achieve a particular distribution of wealth—through taxation or other means—have terrible and utterly unanticipated real-world consequences?  Neither I nor Professor Ariely nor anyone else has the faintest idea.

The American economy is a vast, hugely complex, and dynamic system, filled with individuals who are pursuing their self-interests whether the denizens of the faculty lounge (who are pursuing theirs) like it or not. It is beyond intellectually presumptuous to think that we understand the totality of the effects of a fundamental change in the economy.

6) In a highly dynamic system, such as a modern economy, when you pin down one number, requiring it not to move, all the other numbers will begin to behave differently, often in pernicious ways. Consider price controls. A price is the point in a free market where supply and demand balance. If the government requires that the price of a commodity not change in response to changes in supply and demand (such as with rent controls and minimum wage laws), one of two things will immediately begin to happen.

If the fixed price is set below the market price, scarcity will result. There is no current shortage of caviar. But set the price at $10 a pound, and there will be lines outside every gourmet shop in the country. And no caviar.

Set the price above the market price, however, and you will get an instant glut. Minimum wages for unskilled labor have produced armies of unemployed teenagers whom no one wants to hire at the legal price. So, if wealth must be distributed according to a set formula, heaven only knows what other numbers will promptly go out of whack. And, of course, the people whose wealth is scheduled to be redistributed are going to do what they can to prevent that. In a democracy, that will be a lot.

7) Major new technology produces new and larger fortunes than those known before. This, ineluctably, produces a more unequal distribution of wealth.

It happened with the steam engine. Benjamin Disraeli coined the word “millionaire” in 1826 to describe the new fortunes that were based on factories, not land. It happened with the railroads, with petroleum, and with the automobile, too.

The American economy is a vast, hugely complex, and dynamic system, filled with individuals who are pursuing their self-interests whether the denizens of the faculty lounge (who are pursuing theirs) like it or not.

And it is happening now with the most profound technological development at least since the steam engine—or perhaps ever—the microprocessor. The microprocessor is creating new fortunes (Microsoft, Amazon, Wal-Mart, Dell, Google, Bloomberg, Apple, Facebook, etc.) that are of unprecedented size. This is skewing the distribution of wealth sharply toward the top quintile. But no one is a dime poorer because Bill Gates and Michael Bloomberg are billions richer. Their wealth was created by the dynamic economic enterprises they brought into being, not transferred from others.

The only way to prevent the increase in wealth inequality brought about by major new technology would be to prevent the creation of new fortunes that new technology makes possible. The country would be mad, utterly mad, to try to do that. These fortunes came into being only because millions of people flocked to buy the new products, use the new services, and shop in the new stores. No new fortunes, no new products, services, or stores.

What do you prefer: An America with a very uneven distribution of wealth and an unending stream of new products and services that make life better for everyone, or an oversized North Korea?

The idea that something as fundamental as the distribution of wealth can be radically altered in a democracy without disastrous side effects is an intellectual fantasy. Prohibition, a far simpler social engineering project than fundamentally redistributing wealth, didn’t get rid of demon rum, it gave us Al Capone. And the people who wanted to drink kept right on doing so.

Intellectuals, especially in the social sciences, have a nasty habit of thinking that, “This is the way the world should be, therefore this is the way the world can be.”  This is what leads them to come up with so many ideas that are, in George Orwell’s phrase, “so stupid that only intellectuals believe them.”

John Steele Gordon has written several books on business and financial history, the latest of which is the revised edition of Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt.

FURTHER READING:  Gordon also writes “What’s in a Name?” “‘A Sympathiser with the Poor’: Charles Dickens at 200,” and “Long Live the Queen!” Bruce D. Meyer and James X. Sullivan study “The Material Well-Being of the Poor and Middle Class Since 1980.” Kevin A. Hassett and Aparna Mathur contribute “A New Measure of Consumption Inequality.” Arthur C. Brooks reports "True Fairness Means Rewarding Merit, Not Spreading the Wealth."  

Image by Dianna Ingram / Bergman Group

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