Families and percentiles

by Russ Roberts on April 25, 2008

in Inequality

As I have written here before, looking at slices of the population over time is a very misleading indicator of what happens to particular families over time, particularly when family composition is changing. Arnold Kling makes the same point and does it superbly:

In his new book Unequal Democracy, Larry Bartels writes (p.7),

families at the 20th percentile experienced declining real incomes in 20 of the 58 years…by comparison, families at the 95th percentile have experienced only one decline of 3% or more in their real incomes since 1951.

I have a nit to pick, which is that Census department percentiles are not families. 

Suppose that we start out with 20 families, and the 4th-lowest family (the 20th percentile) has an income of $10,000, while the 3rd family has an income of $9500. Next year, suppose that everyone’s family income rises by 2 percent, but we add a new family at the bottom of the income distribution, with an income of $6000. As a result, the new 20th percentile is now somewhere between the income of the original 3rd family (now the 4th family out of 21) and the original 4th family (now the 5th family). The income of the 20th percentile goes down, even though the income of every family has gone up.

Next, consider what happens when you have millions of families, and you add lots of new families each year. Because new families (immigrants and young families) tend to join the income escalator at the bottom, it should be no surprise that the bottom percentile shows declines more frequently than the top percentile.

I do not want to succumb to disconfirmation bias, which is the tendency to find one thing wrong with something you disagree with and then dismiss the whole idea. But I have a hard time buying into stories about income inequality that look at the behavior of census percentiles over time. At the very least, the author ought to be clear that movements in census percentiles are not the same as movements in families. Bartels is the opposite of clear on that point.

Another issue that people raise with Census data is that the basic unit is the household. If a household breaks into two households, due to divorce, average household income plunges by 50 percent, even though nobody’s income has changed. Trends in household income tend to look worse than trends in income per person.

Arnold has it exactly right. To get an idea of the magnitudes, here are some numbers:

Here’s what has happened to the number of households in the US:

2000   105 million
1990   93 million
1980   81 million
1970   63 million
1960   53 million

So between 1960 and 2000, the number of households has doubled. What happened to population over that same period?  Again from the Census:

2000   282 million
1990   250 million
1980   228 million
1970   205 million
1960   181 million

The average American household has gotten a lot smaller:

2000   2.7
1990   2.7
1980   2.8
1970   3.2
1960   3.4

Why did this happen?  The obvious answer is that people are having fewer children.  That would lower average household size.  But that is not much of the story.  The real story is a change in the composition of families due to an explosion in divorce in the 60s and 70s.  Here’s a breakdown of the proportion of total families headed by women:

Year     Single Mothers   Single Woman w/o kids      Total

2000      12.1%                     17.2%                            29.3%
1990      11.7%                     16.8%                            28.5%
1980      10.8%                     15.4%                            26.2%
1970        8.7%                     12.4%                            21.1%
1960        8.4%                       9.8%                            18.2%

So over the last half-century, the number of households has increased at a much faster rate than the number of people, mainly because of divorce. That totally contaminates the comparison of percentiles over time and makes it appear that people are falling behind or standing still when in, fact, particular families are seeing their standard of living rise. Arnold calls a nitpick. I call it a massive structural flaw.

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{ 49 comments }

John V April 25, 2008 at 3:28 pm

Thanks,

Blogged.

I agree wholeheartedly.

Matt April 25, 2008 at 3:41 pm

People are making tools, not babies. Let's make the artificial womb tool.

anomdebus April 25, 2008 at 3:46 pm

Matt,
But that's all we need people for, makin' babies. So, if we eliminate the need for people, we don't need babies. QED.

spencer April 25, 2008 at 4:32 pm

I'll make the same comment here that I made at Arnolds.

Census publishes data based on both households and families

Bartels is writing about families, not about households.

The family data does not have the same problem as the household data — at least not to the same extent.

If you are going to criticize Bartel, criticize something he actually did rather then putting words in his mouth..

spencer April 25, 2008 at 4:44 pm

Moreover, you are completely correct that people age so the current family headed by a 40 year old is not the same family as one headed by a 40 year old ten years ago.Moreover, income tends to grow as people age so that the average 40 year old makes more then the average 30 year old.

If we had a normal population structure that would not really matter. But because of the baby boomers passing through the demographic structure over the past few decades the population and labor force has been aging.
I calculate that this factor alone should have generated a five percentage point increase in real mean average weekly wages since 1980. Depending on how you deflate the data this aging of the labor force would have accounted from 50% to over 100% of the gains in real mean incomes since 1980.

So you are right that you are not comparing the same families in 2000 as you were in 1980. But this actually leads to the opposite conclusion then you are implying, in that the aging of the population means the weak growth in average incomes is actually worse then the published data suggests.

Kevin S. April 25, 2008 at 4:54 pm

I suspect people waiting longer to get married has a significant role in this trend. After all, if we are going to agree that a large percentage of young people are in the bottom quintile, having a larger population of young single people would further exaggerate growth of low-income households.

Ramiro April 25, 2008 at 5:50 pm

I find the same issue with unemployment and inflation basket measures, both in the US and abroad. It seems that statistics have not caught up to changes in society.

What you are saying Russ, is that the household measurement is analogous to using a 1950s inflation basket base.

Russ Roberts April 25, 2008 at 5:57 pm

Spencer,

Your aging point is relevant. The household/family distinction is not. The increase in the divorce rate means that the growth rate in families is much greater than the increase in population over some of those decades. That makes measuring inequality close to meaningless for implying what happens to particular families.

Ironman April 25, 2008 at 6:26 pm

For those who want to see how the distribution of income has changed over time, you need to stop grouping incomes into households and/or families because they're fundamentally irrelevant to any meaningful discussion on the topic.

If a household or family has three incomes coming in (say, both parents work and so does their teenager), why would it be a problem that the government must deal with if the combined income involved falls into the Top 1% of households or families in the U.S.? Why on earth is comparing that household's/family's income to that of Russ' example of a single woman without kids in any way meaningful to any discussion of how income is distributed in the U.S.?

The reason why it's meaningless is because the last time I checked, the paychecks for salaries and wages are issued to specific individuals who have actually done something to earn them. They're not made out to the Bartels' household. The boss doesn't make them out to the spencer family. The only way you can compare the distribution of income over time that has any real meaning to how incomes are actually distributed (through paychecks) is by tracking it at the individual level at which they accumulate.

Speaking of which, here's the conclusion to the series we did for comparing the changes between 1995 and 2005 (see the full series through the links at the bottom.)

Hope this helps!

Jay April 25, 2008 at 8:35 pm

Spencer: Interesting argument about income that I like to bring up a lot. All the mindless drones that believe in correlation proves causation (i.e. incomes rose faster during the Clinton administration and then slowed there after therefore Clinton caused faster wage growth) get angry(since they are basically religious zealots) when I point out that during the Clinton admin the baby boomers were entering their peak earning years (the percentile distribution rose from about 9% to 16% depending on the exact ages you use) and in 2000 leveled off.

Mesa Econoguy April 26, 2008 at 1:45 am

I still love this one:

Movin On Up

Martin Brock April 26, 2008 at 2:42 am

Yes, household statistics can be misleading. Household size has fallen due to divorce and other factors. People can divide into smaller households as they become richer, not poorer. I've made this point for years in precisely this context.

That said, Russ quotes a long section of Kling's critique of Bartels and addresses only the last paragraph. In Kling's simple example, when adding the $6000 family, the 95th percentile would also fall and probably fall more, because income rises faster as we move up the distribution, i.e. the difference between the 90th percentile and the 95th percentile is greater than the difference between the 20th percentile and the 25th percentile. Kling makes his point about the behavior of the 20th percentile without ever mentioning the fact that his "argument" applies to every percentile and applies to higher percentiles even more so, not that the argument is very persuasive at all.

Kling writes:

Because new families (immigrants and young families) tend to join the income escalator at the bottom, it should be no surprise that the bottom percentile shows declines more frequently than the top percentile.

No. I'm completely surprised that he draws this conclusion. I have no idea what he means here. Adding people at the bottom pushes everyone up relative to the bottom and thus lowers every measured percentile, not only the bottom percentiles. All else being equal, I expect a particular percentile near the top to fall more, not less, than a percentile near the bottom.

My problem with analyses of these data is just what Kling acknowledges (while being guilty of it). The arguments are almost always highly selective. Both Kling and Russ in this case tell us that we can't conclude from household statistics what some analysts claim. The statistics don't imply that increased output from increased productivity is not distributed widely but is consumed overwhelmingly by relatively few people with authority over incomes in organizations.

Let's call this hypothesis the Power Hypothesis. The Power Hypothesis says that Power in some sense is responsible for increasing inequality in the U.S. People deciding who is paid what always pay themselves the most, and the ability of relatively few people to exercise this authority has increased as productivity has increased, and as a consequence, relatively few people consume a highly disproportionate share of the increasing output.

That's the hypothesis. It's not the truth. It's a hypothesis, and we want to test it. Maybe the hypothesis should be true. Maybe we want this situation for some reason. Maybe a few highly educated people are responsible for the productivity growth, and it couldn't happen without them, and they're the ones claiming the lion's share of the fruits. That's irrelevant. We only want to test the hypothesis.

Kling and Russ are right about the particular statistical arguments they address. The trouble is: their rebuttals of these arguments do not contradict the hypothesis. All I know after reading Kling is that Bartels hasn't tested the hypothesis effectively. I do not know that the hypothesis is false. I know no more about the truth or falsehood of the hypothesis than when I started.

The Census Bureau publishes income data on individuals and also publishes many other statistics relevant to "wage stagnation" and "social mobility". We've discussed the statistics on individual male income in the forums, because these statistics are relevant to the debunking of conclusions based on household statistics and also address to some extent the affect of increased female entry into the monetized labor force. This discussion has never yet filtered up to the "top" of the blog. I see many rebuttals of flawed household data, but the rebuttals do not counter these data with other data that might address some of the flaws in the household data, even though other data exist, even though we've discussed other data in the forum already.

Why is that?

Here's what I want to avoid. My opponent in a debate says "X implies Y". I counter with "X does not imply Y", and based on this argument, I claim "not Y".

Martin Brock April 26, 2008 at 3:58 am

Spencer,

Do older people earn higher incomes because they become more productive or because they become more entitled or a bit of both?

I don't really believe that Queen Elizabeth lives in Buckingham Palace and the rest because she "produces" more than most people. I believe she's entitled to live in Buckingham Palace regardless of anything she produces.

I'll sometimes call welfare beneficiaries "queens", because they are like Elizabeth, and she thus is like them. The difference is that I think a welfare mother sometimes should be entitled to some assistance, while I generally oppose the Queen's entitlement to live in Buckingham Palace. If Elizabeth were laboring to raise children that the state later will tax without owing Elizabeth a f*cking dime, I'd think Elizabeth entitled to something too.

Entitlements matter. Entitlements exist in the U.S. too, and they certainly are not limited to welfare mothers, and they are not limited to people receiving tax revenue directly, and they are not limited to "the poor", not remotely. In the entitlements game, welfare mothers and "the poor" are a rounding error. Relatively wealthy people are the beneficiaries of entitlement overwhelmingly, and we can accumulate entitlements as we grow older.

I suppose it's a bit of both. We're allegedly classical liberals in this forum, so why don't we discuss entitlements? Why do we instead frequently deny the role of entitlements in income distribution? If the answer is "both" (and I know it is), how can we possibly expect to understand the answer without acknowledging both?

What if the aging of the baby boom, from this point forward, does not raise productivity but does increase entitlement to consume (or raises the former less than the latter)? What happens when entitlement to consume rises faster than production? Isn't this what the Social Security debate is all about?

Inflation in the seventies arguably was demographic, because we needed to integrate many new factors of production (the baby boomers as young workers) into the economy, so we needed lots of credit for this purpose, but we didn't get the new productivity overnight.

The next round of inflation is potentially more troubling, because I'm not sure we're really extending credit to integrate new factors that will ultimately produce commensurately. That's the real question. I'm not interested in the popular "conservative v. liberal" debate. I can get that anywhere.

Jay April 26, 2008 at 9:51 am

Off topic, but I read this and almost fell out my seat laughing at the absurdity of the claim. From some nut at the L.A. Times on toll roads in L.A…..

"The worst thing about this ill-considered decision to allocate freedom of movement according to income is that it represents local public policy made for the worst of all possible reasons — simply because there's federal money available to do it."

http://www.latimes.com/news/opinion/la-oe-rutten26apr26,0,4968177.column

spencer April 26, 2008 at 3:13 pm

Martin Brock — my point about the aging of the population causing average income to go up was based on wage and salary income. Based on that data the top income is in the 45-54 age bracket and is based on earned income. Consequently I am talking about is income going up with productivity in the workplace among employed people. It has nothing to do with transfer payments like Queen Elizabeth.

Larry M. Bartels April 26, 2008 at 3:52 pm

Yes, the structure of families (and households) has changed over time. Is that "a massive structural flaw" in an analysis of year-to-year income growth under Democratic and Republican presidents? Not really.

For one thing, very similar trends in inequality appear when one focuses on changing incomes of specific individuals. (Kopczuk, Saez, and Song make this point in a 2007 working paper using social security earnings data.)

More importantly for my purposes, families are not suddenly appearing or splintering when partisan control of the White House shifts from one party to the other and back again. Thus, the partisan differences in patterns of income growth documented in my book persist (indeed, look slightly larger) after controlling for changes in family structure and workforce participation, immigration, and a variety of other social and economic factors, and/or after allowing for linear or non-linear trends in inequality due to technological change and other unmeasured factors.

Patrick Fitzsimmons April 26, 2008 at 4:26 pm

In the past 5 years, real income has stagnated for married, white non-hispanic families:

http://www.census.gov/hhes/www/income/histinc/f07n.html

That busts both the argument that the stagnation is related to divorce or that its related to immigration.

If anyone else has access to the same data set going back to 1970, I'd like to see it.

Patrick Fitzsimmons April 26, 2008 at 4:51 pm

More form the census data:

Between 1987 and 2005, income in non-adjusted dollars increased by 10% for all families and 18% for "White, non-hispanic, married couple families".

So it does appear some of the income effect is caused by divorce and immigration.

On the other hand, hours worked per working age person has increased by 15% since 1970. So the income gain can be partially attributed, not to the benefits of increased productivity, but due to simply putting in more hours at the salt mines. Workers satisfaction is also going down.

Another thing to note is that the CPI does not move monolithically. The cost of basic necessities – food, housing, health care, transportation, and education – have increased far more than the luxuries, such as TVs, CD players, cell phones, or granite counter tops.

The result is that we have far more "stuff" because "stuff" is so amazingly cheap. But we also feel financially stressed, because it is actually harder now to pay for the basic necessities than it was in 1970.

Also, you have to take in account the years of education required to achieve a certain level of income. If my income has gone up 10%, but it now requires five more years of schooling that cost $200,000, the net effect of my welfare is negative. The rise of legally required education credentials for employment in almost all economic sectors ( construction, healthcare, engineering, teaching etc.) is something that is rarely talked about but has a devastating impact on our financial well being.

http://www.census.gov/hhes/www/income/histinc/incfamdet.html
http://www.census.gov/hhes/www/income/histinc/f07ar.html

kebko April 26, 2008 at 6:32 pm

"If my income has gone up 10%, but it now requires five more years of schooling that cost $200,000.."

I don't think people trying to move up from the bottom quintile are getting 5 year degrees with $40,000/year tuition. They are doing 2-4 year degrees with tuition of a few thousand dollars. The lack of income for a full time student is the most relevant cost during that time, and that cost actually shows up in the data. So, extra education that leads to a more productive life would actually show up in the data as a rising inequality. The truth is that it is inequality within the individual years of a person's life. So, by investing in your life to make it better, you would skew these statistics in a way makes inequality look greater.

Patrick Fitzsimmons April 26, 2008 at 7:22 pm

Kekbo-

If a the census bureau counts a college student as part of the parents household, but a 20 year old worker as an independent household, than a movement towards going to college would make median income increase ( it would decrease the number of households that were low wage earning 20 year olds).

Anyway, my point was that in 1950, earning median income did not require a college degree. In 2006, it does. Thus we need to subtract the amortized cost of the education
from reported income to get the net gain.

In business, you do not care about revenues, you care about profits. If you increase by revenue by increasing employee training, you have to subtract the cost of training from the increase in revenue to get your profits. The same applies to measuring increased personal income.

FreedomLover April 26, 2008 at 7:59 pm

Honestly, outside of inflation how do salaries rise without promotions? How can people expect promotions based on seniority alone and not performance? Those days are LONG over! You have to show performance, it's "what have you done for me lately" business.

FreedomLover April 26, 2008 at 8:03 pm

Patrick Fitzsimmons:

Upgrades like granite counter tops are not "amazingly cheap". I don't know where you got that from. That's why we're in this housing crisis – people bought WAY too much house then they could afford.

Patrick Fitzsimmons April 26, 2008 at 9:13 pm

Granite counter tops were a bad example.

Appliances though – refridgerators, microwaves, etc have gotten much cheaper relative to median income.

FreedomLover April 26, 2008 at 11:26 pm

Patrick – you haven't seen high end stainless microwaves and refrigerators? They can cost like 5x a generic version. That's what's populating McMansions.

Martin Brock April 27, 2008 at 3:17 am

Consequently I am talking about is income going up with productivity in the workplace among employed people. It has nothing to do with transfer payments like Queen Elizabeth.

Right. Let me clarify. Queen Elizabeth is an archetype of entitlement. I don't mean to imply all entitlement is exactly like the Queen's entitlement, but I do suggest that some income labeled "salary" could be attributable more to this thing I label "entitlement" than to productivity.

The President of the United States receives a salary for example. All Federal employees receive a salary, and no market transaction measures the utility of their salaries. Rather, Congress passes a Bill, and the President executes it by sending orders down an authoritarian hierarchy until someone nearer the bottom of this hierarchy realizes an entitlement to offer someone a salary. Someone accepting this salary then is entitled to the salary. Right?

The point is that no free market exchange takes place in this transaction, because this exchange requires two market participants. If we assume that Congress and the President and the others are "market participants", the whole idea of a "market sector" seems meaningless to me. If state spending is "in the market", then the Soviet Union was a market economy, and we don't ordinarily describe the Soviet Union this way.

I suppose income is not all about productivity, not even income labeled "wage and salary". Why suppose so? It seems obvious to me that many factors other than productivity, in a market economic sense, contribute to people's entitlement to income.

Sectors of the U.S. economy directed by most central authorities grew rapidly over the last decade. Millions of people earned wages and salaries in the process, but I'm not convinced that anything meaningfully called "productivity" was involved. I think it very possible that some of these people earning wages and salaries practically destroyed productivity. How could their incomes measure productivity?

Gamut April 27, 2008 at 8:23 am

Patrick,

It's rather selective of you to insist one subtract tuition from income and leave out every other expense incurred while raising a child. What if I were to argue that cable television and access to the internet are major contributors to creativity and productivity? Do we then subtract the cable bill during ones childhood from their future earnings? I don't think it makes sense to subtract consumption from future income — it's a choosers game, and if you do it for today's workers, then you have to find a way to do it for yesterday's. Maybe it wasn't university that helped back then, but what if it was that family cottage they helped build?

I could make the argument, having gone through it, that one of the most valuable aspects of university is the social networks that it creates — do we then subtract the sporting club memberships that lead to the same effect? Make-up? Clothing? All of these contribute in some small way.

LowcountryJoe April 27, 2008 at 10:03 am

The point is that no free market exchange takes place in this transaction, because this exchange requires two market participants.

I'm glad you wrote this, Martin. It seems that anyone who feels horrible about the state of income inequality in the United State [the "s" intentionally dropped] could just freely get out their checkbook and cut a check to a lower-20 quintile of their choice.

Question for the group: where are all these free-market altruist anyway? Because it sure isn't altruism when you prefer to use other people's money to accomplish the same goal.

Martin Brock April 27, 2008 at 10:15 am

It's rather selective of you to insist one subtract tuition from income and leave out every other expense incurred while raising a child.

Most of the other expenses you list are not a difference between the 50s and the present. Patrick selected a college education specifically because he claims it's required to earn the median income today and wasn't required in the fifties. I understand his point, but most people today don't have four year degrees, not even most people in their thirties, so median income can't require a four year degree. Some four year degrees probably aren't as valuable as they once were.

You make an interesting point though. The net has profound consequences for education. The consequences are potentially negative as well as positive, but I expect positive consequences on balance. The public net is an indispensable resource in my work now, and if I were still in school, I'm sure I'd use it as a resource frequently. It's not obvious which expenses most contribute to future productivity. I'm not at all convinced that formal education is most responsible for it.

vidyohs April 27, 2008 at 12:17 pm

Freedomlover,

"Honestly, outside of inflation how do salaries rise without promotions?"

Government service, civilian and military, has a system of ranking, GS-1 to GS18 for civil service, E-1 to O-6 (I believe) for military; also within each grade is a stepped level of pay that allows an individual to be given a pay raise for performance or longevity without being promoted in grade. Thus, for instance, an E-6 with tens years of service will make more than an E-6 with 6 years of service.

Many large firms follow that system to a very close degree. I know that Shell does for sure, and I suspect without knowing for certain that many others do as well.

vidyohs April 27, 2008 at 12:26 pm

Martin,

In spite of LCJ's approval, this is absolute bullshit.

"The point is that no free market exchange takes place in this transaction, because this exchange requires two market participants."

Not two market participants? Jesus, are you blind, or just still spouting your tape recorded scriptures?

Even if an "employee" is useless and only occupies a chair at a desk, he is still a market selling his time.

One market, the employer, buys the time of the second market, the employee. No entitlement there, as long as the employee shows up it is just buy and sell.

If the employer (market #1 (buyer)) feels as if the employee (market #2(seller)) is not giving full value then he is free to sever relations with market #2 and find a new provider (market).

Martin Brock April 27, 2008 at 1:16 pm

In spite of LCJ's approval, this is absolute bullshit.

No, your identification of the state with "the market" is Orwellian bullshit. If the state is a "market participant", then we could nationalize all industry and still have a "market economy". When the state hires, it's not exchanging value for value. It's commanding resources. Of course, it can make attractive offers. It decides what it wants to do and then commands the resources to make any offer required to do it. So what? This fact changes nothing.

Even if an "employee" is useless and only occupies a chair at a desk, he is still a market selling his time.

The "employee" is not the issue. The "employer" is the issue.

One market, the employer, buys the time of the second market, the employee. No entitlement there, as long as the employee shows up it is just buy and sell.

Complete rubbish. We aren't discussing "one market, the employer" here. We're discussing a state with coercive power deciding that it wants to do something and commanding whatever resources are necessary to do it.

vidyohs April 27, 2008 at 2:54 pm

Martin martin martinduck,

To be a market it doesn't matter where the money comes from to be a buyer-market, the seller certainly doesn't care as long as the medium of exchange is something he can take to another market and use it to become a buyer-market.

To see your explanation as anything other than bullshit one would have to accept that what was given to the seller-market is worthless.

It is stupid to the point of muirpidity to believe that because the money is stolen that the government can't be a market.

Someday you'll turn off that tape deck and come out with something that reveals original thinking, but I won't hold my breath.

When I sell my time to a court reporting firm and do a contract, I could care less where they got the money from; so please, don't try to tell me that the court reporting firm isn't a market just because they cheated a lawyer to get the money to pay me. After all their options are many as to what to do with the ill gotten gains they used on my, they could hide it in their mattress and not be a market ever at all. They could go to the street and throw it into the air as an act of charity to the homeless nearby. That they choose to purchase my time makes them a market, just as the government becomes a market when it purchases anything.

Martinduck, you have been well taught by some narrow minded people and you have recorded an impressive amount of data, but most of it is wrong when you take it to the street.

FreedomLover April 27, 2008 at 6:41 pm

I think everything regarding business in this country is messed up. It's not fair that you have CEOs making $50 million for ripping off companies left and right, leaving 10K employees holding the bag(layoffs). The government should step in and run these corporations better.

FreedomLover April 27, 2008 at 6:43 pm

If the employer (market #1 (buyer)) feels as if the employee (market #2(seller)) is not giving full value then he is free to sever relations with market #2 and find a new provider (market).

Posted by: vidyohs | Apr 27, 2008 12:26:33 PM

But too often that doesn't happen due to mismanagement. What does Hayek have to say about chronically bad management interfering with the free market?

Gil April 27, 2008 at 9:57 pm

So vidyohs you don't have any problems buying, say, a Blu-Ray player from some creepy weirdo in a dark alley either? It's not your problem where he got the player from?

Matt April 28, 2008 at 1:41 am

Russ Roberts says:

"For those who want to see how the distribution of income has changed over time.."

Russ is very smart, and I want to stop here and slightly change his formulation.

It is wealth, not dollars, though I know what he meant. Wealth is income over time.

The wealth distribution is the fundamental characteristic equation for economists, there is no other. All economic theory must be derived from and account for the distribution of income over time.

Stop for a moment and remind ourselves that wealth is, by definition, transactions*value/time,
or wealth has the property of momentum in physics.

Sorry to be so "Paul Sameulson" about this, but if your write the equations for the finance industry you use different value units than if you write the same equations for the shoelace industry.

It is a common problem for economists to understand that when they study one industry, they are converting to units used in the finance industry. The finance industry, when it is operating normally, covers the most of the economy because we all use money, and money becomes a useful unit.

In times of recession, the finance industry recoils a bit, and it does not cover as much of the whole economy, hence its units of value will be less accurate.

Martin Brock April 28, 2008 at 2:31 am

To be a market it doesn't matter where the money comes from to be a buyer-market …

Utter nonsense. It matters that the state is not a profitable organization, that it doesn't organize factors voluntarily to add value. It is on the contrary the center of an authoritarian command economy. I'm not an anarchist, but I won't play Orwellian rhetorical games to confuse the forcible organization of the state with market organization whenever it suits my political purposes. We can't minimize the state to maximize the market if we won't even acknowledge where the state ends and the market begins. If you receive your money from the state, you are within the state, not without it. A variety of people trading freely with you and also with each other may be more nearly without the state, but their freedom and a free market requires more than buyers and sellers. The Soviet Union had buyers and sellers. Fascist Italy had buyers and sellers.

vidyohs April 28, 2008 at 8:40 am

Freedomlover,

"But too often that doesn't happen due to mismanagement. What does Hayek have to say about chronically bad management interfering with the free market?

Posted by: FreedomLover | Apr 27, 2008 6:43:25 PM"

It's not your problem unles you are one of the two parties mentioned. You have the option to not do business with either.

vidyohs April 28, 2008 at 8:47 am

Matt,

Do you suppose Russ is smart enough to have said what he intended to say?

"For those who want to see how the distribution of income has changed over time.."
Russ is very smart, and I want to stop here and slightly change his formulation.
It is wealth, not dollars, though I know what he meant. Wealth is income over time."
Posted by: Matt | Apr 28, 2008 1:41:00 AM

vidyohs April 28, 2008 at 8:52 am

Martinduck,

"A variety of people trading freely with you and also with each other may be more nearly without the state//Is this in some sort of code? It is muirduckious in construction//, but their freedom and a free market requires more than buyers and sellers."

The Soviet Union had buyers and sellers. Fascist Italy had buyers and sellers.//my point exactly. Thank you.//
Posted by: Martin Brock | Apr 28, 2008 2:31:56 AM"

FreedomLover April 28, 2008 at 2:50 pm

vidyohs:

But mismanagement hurts society by causing layoffs.

Tom Walsh April 28, 2008 at 4:46 pm

I believe the standard of living causes people to believe that the low end of society should be doing the lousy jobs. A lot of people choose the job path they take or came here to find the best opportunity for them because there was not one present for them where they come from. A lot of these jobs that are done that people call lousy are what makes their homes look nice inside and out, pick up the trash off the streets to keep them clean. If those workers just said I'm done, we'd have a lot of work on our hands. Also if you were poor wouldn't you want to be poor in the United States society anyway?

vidyohs April 28, 2008 at 4:51 pm

Freedomlover,

All mismanagement? All of society? or, just the parties affected?

Mismanagement just might create opportunities for better managers with the resultant long term good for society.

Not my problem either way, I am not one of the parties affected by mismanagement nor likely to be, unless I make my own bad decisions.

LowcountryJoe April 29, 2008 at 6:17 am

I think everything regarding business in this country is messed up. It's not fair that you have CEOs making $50 million for ripping off companies left and right, leaving 10K employees holding the bag(layoffs). The government should step in and run these corporations better.

I think the government should step in and remove your alias; it is clearly fraudulent and causes harm and confusion within our blogging society. /sarc

vidyohs April 29, 2008 at 8:04 pm

Gilduck,

Are all people who sell in dark alleys creepy weirdos, or do creepy weirdos only sell in dark alleys? And, why do they sell blu-Ray players.

"So vidyohs you don't have any problems buying, say, a Blu-Ray player from some creepy weirdo in a dark alley either? It's not your problem where he got the player from?
Posted by: Gil | Apr 27, 2008 9:57:36 PM"

If I can go into the local Wholefoods Market and buy anything from a real multiple metal pierced, tatooed, mohawk haired, leftwing looney, and flamboyant gay wierdo such as they employ, and do so in broad daylight why would I quibble at buying from an ordinary creepy weirdo in a dark alley? In the day and age of leftwing looneies, what is a creepy weirdo anyway?

Do you understand Gilduck, my little teacup Chihuahua, that it is exactly those transactions you ask me about that kept the people in the Soviet Union, China, Cuba, et. al., fed during lock down communism. And, I pray to God that as this country grows increasingly regulated and restricted that more and more people find more and more dark alleys as the answer. Just hoping that in spite of the evidence that there are still people beside me with balls to do it in a dark alley.

Gil April 29, 2008 at 11:51 pm

Martin's point went way over your head vidyohs? **whoosh!**

vidyohs April 30, 2008 at 7:17 am

Gilduck,

No, if Martin had a valid point I would not have put finger to keyboard. Martin's problem is the same as yours or any statist and that is he can only see things through a statist's eyes. In other words he is capable of seeing the wall but not the individual bricks, therefore can't comprehend that the wall was built piece by piece of individual units.

Martin has never shown the ability to understand it is the individual who is the "invisible hand" and it is the individual who is a "market", and for a market to function it matters not what the medium of exchange is nor how one party gets that medium of exchange to give to the other. If both parties are satisfied with the transaction then that transaction has been exposed to market evaluation and approved.

Statist like yourself, muirduck, and martinduck can't understand that a market is not a place, a group, or an official function; a marketplace happens when two markets meet to exchange goods or services, wherever that may be, and that transaction is always judged for true market value and done so instantly by the two exchanging parties.

Mari April 30, 2008 at 10:40 am

You don't need a dark alley. If you happen to be in the right place the sketchy guy/gal could be walking down the street with one of those granny carts and give some BS story about how he needs to sell some hot Blue-ray to support his 5 kids. Then there was the time a crackhead tried to sell me a cell phone for $5-$10 on the corner of a busy street. You people have funny ideas about how the underground economy operates. No dark alleys needed.
So the market is everywhere, it's on the street corner, on Ebay, in Wal-Mart, and really do you ask where the ebay seller got those thing-a-magigs from? Not often.

Gil April 30, 2008 at 11:00 am

Well I s'pose you're not fussed about Mercantilism vidyohs? Perhaps others could correct me but my definition of Mercantilism is when private operators have no qualms about force&fraud if it's profitable for them. Heaven forbid but in Australia if you bought stolen goods even in good faith the goods are going to get confiscated and returned to their rightful owner. But of course living in a nation which also happens to be part of the New World would be problematic – a lot of people are trading in the aftermath of a great deal of force&fraud to create the modern New World. But then I'm sure a good lawyer would be able relabel any and all 'initial force' as mere 'reliatory force'.

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