The Top 1%

by Russ Roberts on October 7, 2011

in Financial Markets, Gambling with Other's $, Inequality

Robert Lieberman, a political scientist at Columbia University writes in Foreign Affairs:

The U.S. economy appears to be coming apart at the seams. Unemployment remains at nearly ten percent, the highest level in almost 30 years; foreclosures have forced millions of Americans out of their homes; and real incomes have fallen faster and further than at any time since the Great Depression. Many of those laid off fear that the jobs they have lost — the secure, often unionized, industrial jobs that provided wealth, security, and opportunity — will never return. They are probably right.

And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else’s income went down.

I’m not sure where he gets that statistic from. In the Census data (here, Table F-3, ) scroll down for the numbers in 2010 dollars, corrected for inflation) this is the mean income for the top 5%:

2010 Dollars
2010 14,991 37,066 60,363 91,991 187,395 313,298
2009 15,541 37,657 60,896 92,464 192,614 330,388
2008 16,107 38,607 62,361 93,326 192,809 331,064
2007 16,896 40,279 64,612 96,618 196,146 332,943
2006 16,804 39,762 63,245 95,589 202,641 358,700
2005 16,492 39,243 62,797 93,921 196,891 344,699

 

The first five columns are the various quintiles. The last column is the mean income of the top 5%. This is family income. Maybe Lieberman has it for individuals. But for families, the richest 5% have seen their income fall on average for the last four years. Much or maybe all of that is the people at the very top taking a hit, pulling down the mean. We don’t know, but I’d like to see Lieberman justify the figure. Or maybe he means the share going to the top 5%. Lieberman continues:

This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

This is what the political scientists Jacob Hacker and Paul Pierson call the “winner-take-all economy.” It is not a picture of a healthy society. Such a level of economic inequality, not seen in the United States since the eve of the Great Depression, bespeaks a political economy in which the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class. Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan. It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.

The death of Steve Jobs is a useful reminder of the fact that much wealth is not winner-take-all but winner makes everybody better off. Steve Jobs’s estate is estimated to be something between $6 billion and $7 billion. About 2/3 of that is Disney stock he received when Disney acquired Pixar. The rest if Apple stock. This is clearly a fraction, maybe a small fraction of the wealth Jobs created for the rest of us.Yes, he made a lot of money. But he made it by making the rest of us better off. He didn’t take it from us. He shared it with us.

One reason that the top 1% only earned 8% of the income in the 1960′s vs. 20% now is that our economy has changed in ways that are good for all of us. I pause here to mention the obvious–the bottom 99% can be better off with a smaller share of the pie if the pie is getting sufficiently bigger which is what has happened over the last 50 years. But the top 1% gets a bigger share not because they are hoarding more of the pie. The top 1% gets a bigger share because the opportunity to create a lot of wealth for everyone has changed.

Think of it this way. The IBM Selectric was a wonderful improvement in the typewriter market. The people who created it and ran IBM made a lot of money from that improvement. And that’s nice. But improving the personal computer makes you a lot richer now than it did then. It creates more wealth. So the most creative people in technology today (Brin, Jobs, Page, Gates, Zuckerberg) make a lot more money than they did in 1960. That’s good.

Here is another way to see it. I often point out that the top 1% is not a club with a fixed number of people. There is considerable movement in and out of the different parts of the income distribution. But the fact is that once you are in the top 1%, if you fall out, you often don’t fall far. But there is a more important aspect of it not being the same people. Think of it this way. A great NBA player today earns a lot more than a great NBA player of 30 years ago. Magic Johnson, at the peak of his career made a little over $3 million dollars, annually, plus some endorsement money. LeBron James makes over $15 million and a lot more money from endorsements. Why? Because basketball, via technology and expanded wealth around the world, is a more popular sport than it was in the 1980s. That’s good. That’s why Lebron James captures a bigger share. He makes more people happy and they have more money to spend on basketball than people did in Magic Johnson’s day.

The top 1% are different people and the share that goes to the most talented people at the top has grown.

But not everyone in the top 1% earns their money as Steve Jobs did and LeBron James does by making other people’s lives better. As I have said many times, and will continue to say, the financial sector has made lots of money for executives in that sector because of government policies bailing out creditor which allows leverage to grow artificially large. That in turn, makes it easier for investment banks to profit and justifies large salaries for executives. That in turn, ratchets up earnings of people in related fields–hedge fund managers and even professors of economics who must be paid more now to keep them in academia and away from Wall Street.

Some of those gains to the financial sector are literally zero sum–bonuses paid for with my money and yours.

If we stop bailing out creditors–socializing the losses of the financial sector–the top 1% numbers will become “healthier.”

If we fail to distinguish between ill-begotten gains and those gains that enrich all of us, we are headed down a very dangerous path.

 

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{ 140 comments }

John V October 7, 2011 at 10:50 am

“And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer.”

Sigh. Lazy thinking. It goes to show you that no amount education or expertise in a given field makes one a better clear and critical thinker in a general sense…particularly when it comes to socio-economic issues.

Even if his stat was true or somewhat accurate, the way he thinks about this issue and processes information is sadly lacking. He points to the top 1% and lazily uses that to insinuate what he wants to think. The top 1% is a very, very large group compared to the people he is thinking about. It includes pro athletes, top level education administrators at prestigious institutions, entrepreneurs, successful businessmen of all brick and mortar and white collar trades…accountants, doctors, real estate brokers, plumbers, AC repairmen and masons included. I know quite a few.

Why not just blame all the people who live in the NYC Metro area? It’s just about as silly and inaccurate.

Mikenshmirtz October 7, 2011 at 11:26 am

Beyond that, who cares if the rich do get richer? It’s an obvious outcome of economic fluctuation. Whether the economy goes up or goes down, as long as it’s moving the smarter asset owners are always going to profit. Their ability to do so, in general, should be celebrated.

Dimo Kyosev October 9, 2011 at 3:14 am

The main problems with concentration of wealth is that the wealth is averting the market. The wealth possesses the means and the incentive to do it. The financial industry was able to make the government bail its mistakes because it has grown too powerful. If the top 1% controls too much of the wealth (power) it will change the rules in its favor. If the rules are favoring the concentration of wealth it will make the economy inefficient as small businesses are always more efficient if put in the same environment as the big ones. If the economy is inefficient all are suffering. Hence the concentration of wealth is in general bad.

Stone Glasgow October 9, 2011 at 3:21 am

The solution is not to avoid the concentration of wealth. Corruption is the problem, not the concentration of wealth. Would you recommend taking everything from Apple Computer, for fear that they may some day try to bribe officials into bailing them out? They are, after all, one of the world’s biggest companies, and are sitting on one of the world’s largest stockpiles of cash.

Stone Glasgow October 7, 2011 at 10:44 pm

Good point. Ranting about the top 1% getting richer is like being very upset that the average income for NYC grew faster than the average income in Des Moines.

morganovich October 7, 2011 at 10:51 am

russ-

that seems like a bit of a mischaracterization of the financial sector. the “bail out” was loans. they were paid back, with interest. take out freddie and fannie (2 government atrocities) and TARP has been a profit center and made money for the treasury even with the big losses from the auto companies.

by your logic, a payday loan is a bailout. you are a bit short, you borrow money, you pay it back with interest. that is not a bailout.

one of the proper roles of a central bank is to act as lender of last resort. liquidity is always possible in any sort of fractional reserve banking. it is not the same as insolvency.

such lending should be at interest to make it unattractive, but without it, fractional reserve banking and the entire system of modern finance is impossible.

TARP was not socialization of risk in the end, it was (ex F+F) a source of socialized gain.

if you got a mortgage from a bank and paid it back plus interest, that would be called “good lending”. how is TARP for the banks and investment banks any different?

SweetLiberty October 7, 2011 at 11:14 am

TARP incentivizes a moral hazard. If you know that you can just get bailed out regardless of how poor or unsustainable the investments you make are, then you have no incentive to make more prudent investments. You assume because financial institutions paid back the money and seem to be on firm footing today, they won’t turn around and need another bailout tomorrow for unsound decisions they are making presently. Capitalism can only work when prudent risks are rewarded and imprudent risks are punished through market failure.

If you want to look at this simply as a loan paid back with interest, then why was government required to bail out the financial institutions at all? Certainly, if other individual investors thought the risk was worth it and the payoff was high enough, they would have seen the diminished stock prices as an opportunity to buy. But because these institutions did such a deplorable job and took unfounded risk, private investors gave them a vote of “no confidence”. What you don’t see as a result of the bailout is the rise of healthier institutions run far more prudently – institutions which are aware that if they fail, they won’t be getting a loan hand out from unwilling tax payers.

Montani Semper Liberi October 7, 2011 at 11:18 am

This narrative has been totally debunked. The banks were getting loans from the Fed at near 0% then using the money to buy treasuries that paid out at some higher rate. It was basically a stream of free money that they used to “pay back” TARP.

Anotherphil October 7, 2011 at 1:03 pm

Not completely free-it debased the currency, through unjustified expansion and put tinder in the inflation firebox. In short, a perfect Washington operation-specific and conspicuous benefits to an alert, aware and cohesive constituency with invisible costs to a completely unaware public.

anthonyl October 9, 2011 at 1:09 pm

I heard that the Fed is actually paying interest on money banks have borrowed FROM THE FED!

Mark October 7, 2011 at 11:27 am

morganovich,

My understanding of the Fed’s traditional role as lender of last resort is that it will occasionally intervene in the Fed Funds market to provide short term lending to Fed member banks (commercial banks) when there are liquidity problems in the market. The Fed making hundreds of billions of dollars of long-term loans (or open ended loans) seems to me to be unprecedented. I suppose you could say that all of the institutions that borrowed from the Fed were commercial banks, but many of them were investment banks that had just recently switch over to being commercial banks because of their precarious positions.

Throughout the 2000′s there was something referred to as the “Greenspan Put’, meaning that the Fed wouldn’t allow any major banks to fail. Don’t you think that this created a very bad incentive for people to lend to these banks without worrying about being repaid? This is exactly what happened: banks balance sheets ballooned as they were able to borrow huge sums of money. Lenders were more than willing since there was no risk (“Hey, the government will bail us out.”)

I don’t understand how anyone can defend TARP, whether you believe the money was paid back or not. For me it’s a moral issue. Will the Fed loan me a few billion dollars if I show up at their doorsteps? If the Left is so worried about the unfair distribution of wealth, a good place to start rectifying this is to stop the government interventions and crony capitalism.

Anotherphil October 7, 2011 at 1:06 pm

“I don’t understand how anyone can defend TARP, whether you believe the money was paid back or not. For me it’s a moral issue.”

(Raccous Applause) Amen, brother. There are no ex post facto utilitarian justifications to theft or special treatmrent.

morganovich October 7, 2011 at 1:42 pm

mark-

that was the original tarp plan: the lend, at interest, against assets. paulson’s plan was shot down by pelosi and reid etc who demanded equity infusions so that they could use it to protect insolvent firms like freddy and fannie and the automakers.

i wholeheartedly agree that was a better plan.

but this moral hazard argument is bogus. that’s what interest is for. it’s a loan, not a bailout. ideally, it’s an asset backed loan to aid the illiquid but not the insolvent. such borrowing must be secured and costly to avoid moral hazard. that is exactly what a central bank is supposed to be for.

think about it. if you have fractional reserve banking, even perfectly solid firms can be illiuid for a time.

you take in $100 in deposits. you lend out $95. even if every single loan you make is good, what do you do if depositors want $10?

you have plenty of assets to cover it, but t timing mismatch. you can’t call in a 30 year mortgage to cover withdrawals.

if the whole system locks up, there is no interbank market.

that’s where you NEED a lender of last resort.

not to have one leads to horrific bank runs and collapses at the drop of a hat. study the history of england for excellent lessons in this.

the trick is to make tapping such a facility costly so prevent banks from wanting to use it.

i’m stunned you guys cannot see this.

tarp’s issues were all political. and it still worked. it made money on the banks. risk capital was rewarded, and banks paid for the privilege of the lending.

worth noting is that many institutions (like JPM) were forced to take money they didn’t want and to pay interest on it.

if you want the really egregious aspect of tarp, that’s what it was.

morganovich October 7, 2011 at 2:26 pm

mark-

“Throughout the 2000′s there was something referred to as the “Greenspan Put’, meaning that the Fed wouldn’t allow any major banks to fail.”

that’s not what the greenspan put referred to.

the greenspan put referred to his incredibly accomodative monetary policy to prop up asset markets, particularly the stock market.

every time the market took a big hit, he’d slash rates to re-inflate it, taking risk out of equity investing. his most egregious application of that dogma came after the 2000 .com bust, and played a significant role in inflating the real estate bubble.

Observer October 7, 2011 at 9:35 pm

Anotherphil

There are no ex post facto utilitarian justifications to theft or special treatment.

sure there are–necessity is the mother of invention.

it could be worse—we could have not done TARP

Observer October 7, 2011 at 9:33 pm

Mark say, “For me it’s a moral issue.”

What a cop-out. Growup and look at yourself honestly, in the mirror, once.

We, as a society, culture, people, gov’t didn’t pay attention to what was going on and we have caused ourselves trillions of dollars in damage. All of us are going to have to pay more taxes and work longer than we ever thought. Now, let’s get on with it.

Dave M. October 7, 2011 at 11:51 am

Not mention that the Fed started paying a token interest amount on the deposits financial institutions are required to deposit by statute. And then the left complains that the stingy banks are hording all their new TARP funds. Not quite. Free money by depositing TARP funds at the Fed versus the risk of the open economy? Again, GOVERNMENT is the problem. But that’s lost on them.

Russ Roberts October 7, 2011 at 12:10 pm

I wasn’t talking about TARP. I was talking about the nearly systematic bailout of creditors over the last three decades. Continental Illinois’s creditors, Mexico’s creditors, Bear Stearns creditors (and I think much of the S and L resolution though I don’t know as much about it) all received 100 cents on the dollar. I will try to write another post to make this clearer.

Anotherphil October 7, 2011 at 1:07 pm

Is it just banks? What about the Penn Central/Northeast Railroads and CONrail (although arguably, the ICC caused that debacle) and Chrysler.

Anotherphil October 7, 2011 at 1:09 pm

Clarification: The FIRST Chrysler bailout.

Observer October 7, 2011 at 9:41 pm

Russ

You are absolutely right—its those free markets at work, protecting the Rich (who happen to be the creditors)

They are earned their money. Ask everyone here, ask yourself.

The S & L situation—only insured depositors were paid—no S&Ls were too big to fail. The hit there were all the Texas banks given to NationsBank for nothing

Scott Murphy October 7, 2011 at 10:03 pm

How can a Free Market protect the rich, that is just cronyism.

anthonyl October 9, 2011 at 1:21 pm

Free markets can never bail out anyone. That’s why we have government and the Fed. To bail bad business people out of loss situations. That’ s the opposite of free market!

Jim October 7, 2011 at 4:09 pm

I fundamentally disagree with morganovich’s view of TARP. It is anything but a profit center.

TARP is a major cause of the current stagnation since it prevented repricing of Balance Sheets. We will have no recovery until asset prices clear. Meanwhile associated FED policy is a clear wealth transfer to banks.

And yes, it is that simple. For more detail:

http://www.chrismartenson.com/page/transcript-david-stockman-blame-fed

kyle8 October 7, 2011 at 6:21 pm

correct, If you cannot have destruction, then there can be no cycle of creative destruction. People need the right to fail.

kyle8 October 7, 2011 at 6:20 pm

by the way none of the money which went to the auto companies has been paid back, not one dime. There were payments made, but by slight of hand they were paid with money borrowed from another government agency.

morganovich October 7, 2011 at 10:52 am

that third paragraph should read “illiquidity is always possible”.

SweetLiberty October 7, 2011 at 10:57 am

Well said, Russ.

John V October 7, 2011 at 11:04 am

That passage you quote makes me think of the sharp difference between lucid left of center economists and left of center professors of other disciplines.

While the left of center economist will bemoan many of the same things that his comrades of other disciplines will, he at least understands enough about the true causal anatomy of economic reality to consider ideas like “skills gap” and “value-added” before falling into the trap of seeing the world through the cartoonish lenses of people like Lieberman….at when they are speaking seriously and not writing polemics for popular masses in the NYT. :P

John V October 7, 2011 at 11:07 am

lat sentence should read:

at LEAST when speaking seriously….

kyle8 October 7, 2011 at 6:23 pm

When was the last time you ever heard a left wing economist speaking anything but trash?

Ike October 7, 2011 at 11:22 am

No… by definition, “we” ARE the 100%.

Observer October 7, 2011 at 11:29 am

Russ

Let me get his straight:

My income should stagnate or fall because I can see LaBron James on cable TV

Sorry, I could see Bill Russell on free TV—a far better player at a much lower cost.

James income has gone up because he is a member of a union (Russell wasn’t)

The flaw in this argument is that we have earlier break troughs of greater value. If Jobs is worth his billions, what was Dr. Salk worth for curing Polio?

By your kind of reckoning he and his estate should own half the world, to say nothing the the people who brought us penicillin and antibiotics.

Beyond that, since the $$$ don’t matter (its the experience for the other 99%—type writer v computer) why do the $$$ matter so much to the Rich. Accordingly to you, if we tax them back down to 8 or 9%, like us, their experience won’t change

And, last, what about all the really really bad stuff that comes from stagnate life and falling incomes.

In such, this “piece” is nothing but propaganda

Fred October 7, 2011 at 11:36 am

I pause here to mention the obvious–the bottom 99% can be better off with a smaller share of the pie if the pie is getting sufficiently bigger which is what has happened over the last 50 years.

Monopoly is a board game published by Parker Brother that does not resemble reality.

Observer October 7, 2011 at 11:47 am

Fred

You are sick. Why is it so important to you that the 99% get a smaller share of the pie.

By the way, because of returns of efficiency, the better off the bottom 99% is over time the greater the pie.

Ken October 7, 2011 at 11:53 am

Why is it so important to you that the 99% get a smaller share of the pie.

It’s not. What’s important is for you to recognize that it’s better to get 80% of $14T, than 95% of $1.5T.

Regards,
Ken

Michael October 7, 2011 at 12:01 pm

What 99%? The people out there comprise fewer than 10%.

Fred October 7, 2011 at 12:01 pm

One reason that the top 1% only earned 8% of the income in the 1960′s vs. 20% now is that our economy has changed in ways that are good for all of us.

Would you rather have 80% or $1000 or 92% of $500?

I’m a thinking you’d rather have 92% of $500 if it meant that top 1% not getting 20% of $1000.

vikingvista October 7, 2011 at 2:44 pm

If everyone who ever lived in this country had the same annual income of $50K for each year of their 80 year lives, everyone living precisely to age 80, except that at age 50, each person had a $1 million windfall, what do you think the income distribution statistics would look like? Where is the inequality?

The ability to take a one time windfall, so that you can work less later, is desirable for any of us. A widening income distribution can mean greater equality and greater prosperity for all.

Dan J October 8, 2011 at 12:26 am

And prices would reflect ‘everyone’ having the same income. Can’t make cheeseburgers for $.99 to $3.99 paying the grill guy, fry guy, sandwich maker, register person, sweeper, prep person, and managers 50k.

vikingvista October 8, 2011 at 4:49 pm

Of course. But the point is that income distribution statistics are not what most people think they are. They might be, if instead people compared each individual’s distribution of his own income over his lifetime with the lifetime distribution of others.

But of course it would remain just as irrelevant.

Dan J October 9, 2011 at 6:16 am

These academic discussions are not well received by most people. Only in these forums, outside of a college grounds, will people engage for very long.

vikingvista October 9, 2011 at 7:30 pm

What you are saying, is that most people parrot claims without understanding them, and without any concern about whether or not what they say makes any sense. Pehaps.

kyle8 October 7, 2011 at 6:30 pm

what returns of efficiency are you talking about? The amount of wealth the wealthy have and the amount of wealth the poorest quintile have is a constantly changing relativistic number. It is basically meaningless unless you are an envious brainwashed socialist.

The most important number is average buying power. Not just income, but how much that income can earn. By that measure all groups are better off during the last 20+ years although that number went down during the recent recession.

If the very rich gain a larger share of that newly created wealth, then it is because they are the ones who created it, and under our tax system they will pay the lions share of taxes. Sorry, if you are just filled with hate, class warfare, envy and jealousy, You don’t get to decide what a person earns.

What a sad way to go through life.

Observer October 7, 2011 at 10:02 pm

kyle8

what efficiencies—

oh, simple things like people not going to ERs but instead going to doctors, fewer police, social workers, firemen, judges, jails, better healthier workers (better diets, health care), better decisions by those workers at work (there is lots of evidence that poorer people don’t perform at work because of the stress of the rest of their lives, etc.). I would go on but you would think it is all liberal trash. It really is pretty simple. It is self evident that someone with a good diet, health care, safe place to live, little hassle in getting to work (Did you ever ask yourself why Google has its own bus system to get workers to Google?) will be a better employee than someone without any of this attributes.

Don’t give me that tripe BS about they have TVs and what not. That is just projection. Google workers have TVs but Google still has a bus system for them.

You asked what inefficiencies, I just gave you a start.

You fail to understand that I am totally opposed to giving people checks, even the “retired.” I except the young and feeble. I think that we should guarantee everyone a job and make every job into one that makes the workers life full to the end. I really believe people need to work. The idle rich result in the idle poor–we need neither

Dan J October 9, 2011 at 6:11 am

Sorry. I have not been as engaged with the writings, lately. I have been taking this forums type of commentary into direct discussions with others and have been getting the ‘eyes glazed over’ look. I Don’t think it is my incoherency, but my lack of keeping things simpler.
Your discussions are often a bit advanced and I must stay engaged and work a little harder to participate. With co-workers, friends, and family I sound like I am speaking a foreign language and my turn to speak has been filled with Econ jargon and long winded expressions in an attempt to fully articulate my position without leaving room for assumptions and misinterpretations.

Dan J October 9, 2011 at 6:17 am

Meant for VV at 4:49PM post.

vikingvista October 9, 2011 at 7:34 pm

At some point the ideas don’t lend themselves to verbal conversations. A person has to motivated to read and think through things on his own.

Russ Roberts October 7, 2011 at 12:13 pm

I don’t know anything about your income.

Income for almost all levels of income has been rising steadily in the United States since 1960 and 1970 and 1980 and 1990. Not since 2000–we’re in a really bad recession.

If you follow the same people over time, you see it clearly in the data even though inflation is overstated which understates income growth.

There are many ways to cherry-pick the data to tell a different story–leave out benefits for example and only look at money income. Or use a really bad measure of inflation. But most of us get ahead over time.

morganovich October 7, 2011 at 2:35 pm

inflation is overstated?

i would bet that you cannot provide a single tangible piece of proof on that.

as someone who read the boskin report cover to cover, i can tell you it is all subjective assumption and bad economics. sure, substitution works if you believe that all demand is supply side driven, but that is nothing like the case.

if the atkins diet increases demand for bacon and reduces the demand for pasta (as really happened) then the price of bacon rises, and pasta drops. trying to use substitution for cheaper over more expensive not only masks this, but makes adjustment in the wrong direction.

greenspan/boskin would have us believe that all demand is driven by price as opposed to price being affected by shifts in demand, an absurd assumption. their quality adjustments are worse. not only are they utterly subjective and prone to assumption bias, but they are all positive and assume that every product gets better, none worse, which is clearly not true as anyone who has flown coach for 20 years can tell you.

inflation is understated, not overstated. this has flowed through to the GDP deflator as well. why do you think the two recessions sinec the 1992 CPI change have had such long readjustment periods for employment?

it’s because we have made them definitionally shorter by using a low GDP deflator. using pre 1992 methodology, these recessions were much longer and deeper.

Russ Roberts October 7, 2011 at 3:48 pm

Read the Bils paper on quality and manufacturing. The BLS can’t handle quality improvements very well. The faster the economy improves the more inflation is overstated.

kyle8 October 7, 2011 at 6:36 pm

I am not an academic, and have not read the papers you cite, but I can tell you that what you say is hard to believe because when you look at the number of manhours worked at average income for the purchase of comparable units over time, then it is obvious that inflation is overstated in the last 30 years.

Don recently had a post on this.

JoshINHB October 8, 2011 at 4:46 pm

That is only true for factory manufactured goods. Using the increased quality and decreasing relative price of those products to prove a lower inflation rate is foolish because those trends are and inherent part of factory manufacturing. Simply put, those good will always improve in quality and decrease in price over time.

If you look at non manufactured goods and services, like food, healthcare, education, housing and personal services the inflation trend has been much higher since 1971.

I really don’t understand why a libertarian like Mr Roberts feels compelled to argue that that inflation trend is illusory. Especially when it coincides with a vast expansion of government intervention in the economy.

Dan J October 9, 2011 at 6:35 am

Anecdotal evidence…. Warning…. Anecdotal evidence…..

Detroit suburbia

One block of 32 bungalow homes

Income levels of $16,000 a year to $60,000 a year.

Produced about 25 kids.

None making less than $25,000 a yr today. Half making over $60,000 a yr. 6 of which are over $80,000.
I am one of three siblings who are all making over $40,000. (not much, but all doing better than parents)
Parent made $15,000 – $18,000 per year over entire time under their roof.

Point? All are doing as well as parents or better. And we all have more gizmos, toys, techs, luxuries than did our parents.

I, absolutely, do think that this one neighborhood block is
representative of most of the US from the ’70s to the present.

Seth October 7, 2011 at 1:11 pm

“James income has gone up because he is a member of a union (Russell wasn’t)”

I’m sure that’s it. So, the guys on minor league teams should just form a union to make their incomes go up rather than try to make it on a pro team.

Anotherphil October 7, 2011 at 1:14 pm

Idiot-modern athletes benefit from free agency and the end of reserve clauses plus GOVERNMENT FINANCIAL SUBSIDIZATION OF STADIA/ARENAS. -unions don’t benefit Lebron James-everybody can see the guy’s exceptional talent.

Bill Russell plied his trade in chucks and snowy black and white TV. You are a living color dullard who should be chucked into the snow.

Observer October 7, 2011 at 10:03 pm

who bargained for and got free agency?

idiot

Economiser October 7, 2011 at 2:39 pm

Kobe Bryant is getting paid millions to go play in Italy during the NBA lockout. How does that possibly comport with your argument that “unions” are causing higher sports salaries??

Observer October 7, 2011 at 10:04 pm

if unions don’t result in higher wages, then why have the owners locked Kobe and the rest of the players out.

Oh, management wants to raise their wages

idiot

Greg Webb October 9, 2011 at 12:45 am

No. If Kobe were a poor basketball player, his would not be employed by the NBA no matter what the union said. Kobe makes so much, no because of the union, but because his skills win games, which sells tickets, television rights, merchandise sales, etc. It is the cash flow resulting from Kobe’s skill that permits him to make so much. The union is irrelevant.

anthonyl October 11, 2011 at 12:25 pm

Money matters too.

ettubloge October 7, 2011 at 11:30 am

Which brings us to the “99%ers”. The very policies or politicians they favor brought us the bail-outs and stimuli that benefit the “1%ers”. However, their programs were proposed and initated with stated goals of helping the little people. The results of those programs include AAA-rated tranches loaded with sub-prime mortgages, bloated government budgets, empty pension portfolios, 5th Amendment Solyndras, and so on.

The free market may harm some of the 99%ers by getting them off the masters/PHD gravy trains but more of them would be working in careers with the unfortunate need to shave (except on Fridays).

House of Cards October 7, 2011 at 11:43 am

Steve Jobs was motivated by discovery and invention, just like Edison, more than becoming fabulously rich. Most of his wealth resides in stock that won’t do him a bit of good now because he is dead. His wife will get to decide what to do if anything with his fortune. She is entitled to that money because the laws of inheritance say she is. Big fat deal. She hit the lottery because society is libertarian and sick.

Ownership in stock often proves little other than that you had good financial advisers, luck, and of course the right parents. This is the aristocracy of Britain which the U.S. pretended to overthrow, but of course, adopted it lot, stock and barrel. We have the Trumps, the Rockefellers, the Hiltons, the Milken family trust (of insider trading fame), the Johnsons of Johnson & Johnson, and now the Jobs family trust.

Massive wealth does not of necessity confer much: Not decency, not honesty, not integrity, not being cultured (NB: Paris Hilton), etc.

Speaking of Johnson and Johnson, here is a case in point of how low a billionaire who inherited a lot of stock can go:

http://www.ktla.com/news/landing/ktla-billionaire-sc-johnson-molestation,0,3295787.story

We will see if his money can get him off with a slap on the wrist.

House of Cards October 7, 2011 at 12:35 pm

I made a mistake. The alleged molester is a member of the SC Johnson & Sons family business, not Johnson and Johnson.

Dan H October 7, 2011 at 12:44 pm

“This is the aristocracy of Britain which the U.S. pretended to overthrow, but of course, adopted it lot, stock and barrel.”

False. Most of the generational wealth accumulated and passed down by old British aristocracies was wealth that was taken by force by thugs known as feudal lords or “nobles”. There was also an entrenched class system whereby only certain people could own property. This is not the case in America. The patriarchs of families Rockefeller, Hilton, Carnegie, as well as Steve Jobs built there fortunes by creating something of value that people voluntary exchanged money for.

nailheadtom October 7, 2011 at 1:03 pm

Maybe you should review your British history. Many, probably most, of the feudal lords and “nobles” and their families have disappeared from history, replaced by Puritan merchant princes and other economic and social mountaineers.

House of Cards October 7, 2011 at 1:22 pm

When librarians use the word “force,” always to oppose something they don’t like, I know that they are bots spouting Randian nonsense. Try not to use that word for one day; you won’t be able to because you are programmed to use it. I say that when inherited billions is evil force against the hard working, because those who inherit this money don’t ever have to work, EVER!

Ken October 7, 2011 at 1:35 pm

Do librarians always spout Randian nonsense? I’ve always thought librarians were quiet people who asked others to be quiet if they got too loud, but were always helpful in finding books on the topic in which you were interested.

Regards,
Ken

morganovich October 7, 2011 at 2:38 pm

house-

when guys like you stop trying to use coercive force on us while calling it “collective good”, we’ll happily stop complaining about it, but you’re going to have to go first.

Dan H October 7, 2011 at 2:40 pm

Actually, the word “force” is a very old word that predates Ayn Rand. The Founders used that word as a synonym for government, BECAUSE THAT’S WHAT GOVERNMENT IS!

“Government is not reason, it is not eloquence — it is force”
Sounds like Rand, right? No, that’s George Washington.

Josh S October 7, 2011 at 3:29 pm

George Washington was just a tool of the corporations.

Josh S October 7, 2011 at 3:28 pm

Try to describe how the government is able to do anything without using the language of force.

Observer October 7, 2011 at 10:13 pm

Josh

Gov’t can offer lots of incentives, like guarantying your loans.

As to your point about force, the answer is the gov’t has use force if is decides to do such. But we all already knew that. We all already knew that Gov’t can do bad. So what. Without gov’t in about 20 hours we would be like Mexico with trucks dropping off 35 dead people in the middle of the interstate highway, every 10 minutes. So grow up and help us figure out how to best deal with what we cannot live without

Dan H October 7, 2011 at 10:18 pm

Government by definition is force. If you don’t do something the government tells you to do, what happens?

SMV October 7, 2011 at 12:55 pm

So it would have been ok for Mr. Jobs to spend his money on consumption or give it to strangers, but not to leave it to his wife or children? How does that make sense?

If he earned the money by making others better off, then he has a right to spend the money.

Observer October 7, 2011 at 10:15 pm

SMV

idiot

the purpose of the estate tax, and it is an excellent one, is to prevent concentration of power and wealth in a ruling class elite

you should agree with it, since you complain so often about the elite

Ken October 8, 2011 at 12:47 am

O,

The purpose of the death tax is to line the pockets of grasping politicians and their crony friends.

Regards,
Ken

mcwop October 7, 2011 at 2:18 pm

Yes the federal government should take all of Jobs’ estate so that 60% of that money can be used for the military. Or, we can give it to most US citizens equally (I will exclude the millionaires) which will amount to about $25 per person.

kyle8 October 7, 2011 at 6:38 pm

It must be sad to go through life bitter, mean spirited, and motivated by jealousy, envy, humorlessness, and with your mind filled with hate and left wing invective.

hwinva October 7, 2011 at 11:44 am

On your final paragaphs — the effort undertaken for the sake of “fairness” or “balance” to differentiate between those with ill-begotten (but not illegal) gains from those with non-ill-begotten gains, ends in one or more of (a) tears (b) the guillotine or (c) a terribly complicated and consumer-welfare-destroying tax and regulatory scheme. It’s a very slippery slope. After all, not to speak ill of the dead, but it is at least plausible that some of Steve Jobs’s fortune was also zero-sum, the result of some sort of not-illegal-but-predatory behavior by his company. LeBron James is a beneficiary of the cartel-like aspects of professional sports, which allow his talents to be highlighted and marketed (I understand it is argued that other aspects of the cartel depress his earning power, but I hope you get my point).

It would be better to focus more on bad-acting institutions, and on the processes by which such institutions were able to do the various nefarious things you are concerned with.

Will October 7, 2011 at 11:45 am

“whose misadventures brought about the financial meltdown, got richer.”

Personal Responsibility is dead. People want to blame someone for their troubles and it is always easy to blame a minority (especially 1% of everyone). We should also blame everyone who bought a house they could not afford, even without loosing their jobs. I accept responsibility that I bought a house in 2008 that was over priced. I really liked the house and thought I would be their at least 5 years. Things changed, life happened. I moved across the state and had to sell the house at $20,000 less than I paid for it just to get out from under the house. I should never have bought, I should have rented. That was my fault and I don’t blame my mortgage company, my real estate agent (who I bought and sold the house with), the new guy who got a great deal on the house, or anyone else who made money from the deal. I had nothing to do with the economy crashing, but I chose to make a stupid purchase even knowing it was stupid when I signed the papers and that was no one’s fault but my own, especially not someone in charge of freddie or fannie or on wall street. Its time everyone except responsibility for their actions and if your situation is bad, take responsibility to make it better yourself. Blaming anyone else will get you nowhere.

Darren October 7, 2011 at 12:03 pm

There are many people who aren’t very smart and consistently make bad decisions. Remember that half the population are of below average intelligence. It is incumbent on those with more intelligence to protect them from their bad decisions. Ideally, this would mean removing the any opportunity to made those decisions to begin with. Barring that, someone will have to make their decisions for them.

Will October 7, 2011 at 12:28 pm

There is a big difference between incapable of understanding difficult issues and functioning with basic life skills (which probably does not require anywhere near average intelligence? Whose fault is it that half the population is in capable of simple decisions like balancing a check book? I guess they all attended public schools without gaining basic skills such as 1 + 1 = 2, which is required to balance a check book.

Also, So we should give half the population a free pass because they are not as “intelligent” as the other half and should be given government hand outs while not accept any responsibility for their lives.

“It is incumbent on those with more intelligence to protect them from their bad decisions. Ideally, this would mean removing any opportunity to make those decisions to begin with.” Is that the government’s job? If so encouraging them to be home owners was a big mistake and it would be a lot easier and better if the government stepped in and locked them all up in prison where they get 3 hot and a cot and don’t have to make any decisions in their lives.

SMV October 7, 2011 at 12:59 pm

Please supply your address. I will be over shortly to manage your affairs and make decisions for you.

nailheadtom October 7, 2011 at 1:14 pm

In the land of the free and the home of the brave, everybody is supposed to be able to make their own decisions and then live with the results. That’s what freedom is. If you’re opposed to that you’re opposed to freedom. Your comment is one of the most nonsensical to ever disgrace this screen.

Fred October 7, 2011 at 2:20 pm

His comment looked to me like sarcasm. At least I hope it was.

Dan H October 7, 2011 at 2:48 pm

“Remember that half the population are of below average intelligence.”

Umm, if it were a perfect bell curve, then sure. Half the population is below the median would be a more accurate statement. I’m probably just being picky.

kyle8 October 7, 2011 at 6:40 pm

I suppose you would like to nominate your self as “help the dummies” Czar right?

Your assumption that the average person cannot take care of themselves or make their own decisions is sad, sick, and twisted. you are a would be tyrant of the worse sort.

Observer October 7, 2011 at 10:17 pm

Will

We need a lot more people on this blog to take responsibility

I have signed a lease or two that hurt.

Darren October 7, 2011 at 11:51 am

I tend to think of entertainers. Top entertainers (movie actors, singers, etc.) 50 years ago made nowhere near what top entertainers do today. At the same time, I suspect this wealth is a little more concentrated relative to 50 years ago. (I have no idea if this is actually true.) I think much has to do with the necessity to compete with others (globalization) that would not have been necessary in a more local market. Big fish in little ponds getting tossed into big ponds.

Brian October 7, 2011 at 12:06 pm

You can understand the ire of the “Wall Street Protesters” given that we bailed out the banks, and somehow the common person doesn’t get bailed out.

Dr. Roberts has made a point about distinguishing a historical pattern of “creditor bail out”, here and in econtalk, as a central theme to the cause of the financial crisis, which i find compelling.

but given this, how are the common people NOT supposed to be upset that their woes are not addressed in a similar fashion?

I think people would accept the argument that the functioning of the financial sector is critical for all of our lives, but that is all. Seeing the “fat cats” earn bonuses when these institutions fail strikes many as not fair.

Fred October 7, 2011 at 12:11 pm

You can understand the ire of the “Wall Street Protesters” given that we bailed out the banks, and somehow the common person doesn’t get bailed out.

If they’re mad that the banks got bailed out, shouldn’t they be protesting the folks who did the bailing?

Russ Roberts October 7, 2011 at 12:15 pm

LIKE!

Michael October 7, 2011 at 12:20 pm

+1

John V October 7, 2011 at 12:20 pm

Something often overlooked to which they never have a good answer.

Will October 7, 2011 at 12:30 pm

I saw something recently that some of the banks who did not want bailouts were forced to take them, don’t remember where I saw this, but even more of a reason the anger is misdirected.

Dan H October 7, 2011 at 12:32 pm

Will,

You’re right. It happened to a few big banks as well as dozens of regional banks. My company – JP Morgan – declined bailout money but was forced to accept it.

Don Boudreaux October 7, 2011 at 12:33 pm

Yep. One such bank was BB&T.

SweetLiberty October 7, 2011 at 12:52 pm

Forcing banks to take bailout money just shows the extent of government sickness.

Slappy McFee October 7, 2011 at 1:28 pm

TCF and USBank amongst that list. As well as the bank my wife works for.

vikingvista October 7, 2011 at 2:51 pm

Statements from CEOs of a couple of large banks, who were present in the notorious Paulson meeting, were that Paulson told everyone there that they “WOULD” sign the bailout contracts.

The large bank bailouts, whether any of them wanted it or not, were not voluntary. I wish someone at the meeting would’ve risked legal action by not signing and going public, but perhaps I should be satisfied that a couple of them at least broke the silence.

Methinks1776 October 7, 2011 at 12:30 pm

Yessssss.

Let’s not forget that Hammering Stammering Hank also forced healthy banks like Wells to take TARP.

Will October 7, 2011 at 12:31 pm

And the political pressure on Ford to stop airing the bailout commercial.

SweetLiberty October 7, 2011 at 12:50 pm

Spot on, Fred. But the Robin Hood ideology of the left insists that if just the right people were in charge…

PKSully October 7, 2011 at 1:06 pm

To their credit, they are camped in front of the Federal Reserve in Chicago and not the Board of Trade which is right across the street.

Observer October 7, 2011 at 10:21 pm

woes are not addressed in a similar fashion

the mistake that conservatives make is that they think progressives don’t know how badly Obama has governed.

conservatives keep making all these false charges (socialism, yak yak yak)

That is not the issue with Obama. He made horrible tactical choices–wrong people, wrong choices on Congress, wrong issues to push, all tactical

What republicans don’t understand is that people can recover, easily, from tactical mistakes

Dan H October 7, 2011 at 10:22 pm

Will you PLEASE stop saying the word “conservatives”…. this isn’t a conservative blog.

Observer October 7, 2011 at 10:25 pm

yes it is

you defend the status quo and the rich and powerful in society

you all worship Ayn Rand and view 99% of us human parasites

that makes you conservative

Dan H October 7, 2011 at 10:32 pm

“you defend the status quo”
Can you read?! Half of this blog is a lament of the current state of affairs. We’re against bailouts and we want crony capitalism to end.

anthonyl October 9, 2011 at 7:28 pm

Nobody here defends the rich. Except muirgeo and yourself but it isn’t your intention. Keep reading and learning. I was a libtard once too. Look up private property on this site and some writings of Austrian economists. I’m not as convincing as these guys. Walter Block is crazy but fun to listen to.

Observer October 7, 2011 at 10:43 pm

Dan H

The primary driver of our current state of affairs are income inequality, tax cuts for the rich, etc. etc. etc.

We are where we are because of the Rich. They has set the rules of the game. Yet the primary purpose of this blog is to defend their position. Look at the the idiots here who don’t like the estate tax. That is one of the primary tools for attacking the status quo. That is its purpose, to end concentration of power in private hands. I could go on for pages. The truth hurts. Live with it

Dan H October 7, 2011 at 10:47 pm

“We are where we are because of the Rich”

If by this you mean we now have smartphones, tablet PCs, flat panel HDTVs, and access to high speed internet almost anywhere (all of these things affordable to a single person making about $25k per year) then I agree. Things are WAY worse right now than they were 10 years ago when none of this stuff was either affordable (if even available).

Dan H October 7, 2011 at 11:11 pm

In 2002, I bought a laptop for $880, or $1060.10 in today’s dollars.

With that money today I could buy the following all of the following products:

(prices are from Walmart.com)
16 GB iPad 2 $499.99
Acer AO722-BZ Laptop $298.00 (with about 5x the power of my 2002 laptop)
32″ Sceptre flat panel LCD HDTV $249.98

Slappy McFee October 7, 2011 at 12:47 pm

The RICH — A minority it’s ok to hate

*unless you count fatties, cuz mocking them is still socially acceptable

Anotherphil October 7, 2011 at 12:55 pm

I frequently become frustrated with Economists for their inability to produce some orthodoxy on fundamental matters (i.e., to have permanently disposed of Keynesianism, Socialism and Marxism as the ruminations of crackpots-the way chemists treat alchemy, even within the profession, let alone among the general public). I also lament their inability to treat adherents of these misbegotten and misanthropic doctrines as malfeasants or atavists. I worry about their myopic misadventures in attempting subordinate all other concerns to economic principles in the analysis of social problems that require multiple perspectives.
However, “political scientists” are to grand theft auto as economists are to petty theft in this regard. “Political Scientists” are animist votaries dancing with emotional abandon around some primitive pyre, free to substitute prejudice for judgment because their dark art is nondisciplinary, rather than interdisciplinary (once you get past the classification of political structures and parliamentary systems). At least economists have to learn the rudiments, the laws of supply and demand and marginal effects before they forget them and sell their credentials to pen specious and invidious screeds in the old grey lady while wearing a tin-foil hat (of course, Krugman, who else?) .
Worse, I suspect many “political scientists” are wanna-be lawyers who couldn’t get past the LSAT, law school or the drudgery of an associate’s preoccupation with billable hours or the afflictions to conscience that accompany the practice of law but are still statophiles.
This is a perfect example of their craft, disjointed and nonsensical, guided only by primitive biases masquerading as insight, unabated by any conscience or caution that one might be exceeding the bounds of their expertise and opining on matters that the author is so clearly and completely unqualified to analyze or comment upon.
How then do we deal with people such as this, who have the means and platform to foist their drivel on a public that lacks the slightest skepticism about such drivel (or who lap it up like cats at a saucer of cream, the way muirbot or obserbot have gorged itself on this stuff) that is nothing but a tug at the ever-present human frailty of envy in order to empower the ever-present kleptocrats and aspirants to unrestrained power. How do you battle willful invincible ignorance?
A final thought: What does domestic income distribution have to do with “foreign affairs”?

Price B October 7, 2011 at 5:39 pm

This was incredibly persuasive. You’ve changed my life.

Observer October 7, 2011 at 10:54 pm

Anotherphil

You should read Charlie Munger (on incentive caused bias and man with a hammer syndrome) and John Kay on Economics, but you won’t read.

Here is a link to Kay. He explains what is wrong with Economics (and why Keynes is right)

http://ineteconomics.org/sites/inet.civicactions.net/files/kay-john-state-of-economics-v11.pdf

If you truly have judgment you would understand why Keynes was correct. You will also learn that Keynes said or wrote nothing like what his enemies said he did and that all the attacks are him are by special interests promoting their own narrow selves.

He believed, as do I, that gov’t should run surpluses and pay off debt. That’s right, we should tax the rich to pay off debt.

But you will never read or consider

Economic Freedom October 7, 2011 at 11:55 pm

If you truly have judgment you would understand why Keynes was correct.

Do you still beat your wife?

Economic Freedom October 7, 2011 at 11:53 pm

C’mon, don’t be shy. Tell us how you really feel.

sdfsdf October 7, 2011 at 2:28 pm

“If we fail to distinguish between ill-begotten gains and those gains that enrich all of us, we are headed down a very dangerous path.”

It’s too late.

Chris October 7, 2011 at 2:44 pm

I just wanted to point out a potential flaw. Steve Jobs and Lebron James have made their money in part through subsidization as well. IP protections ostensibly benefited Apple and stadium subsidies ostensibly benefit the participants of sporting organizations. People are subsidized all over the place. Some people are subsidized in proportion to what they put into the system. Some people take more; some less. Since you presumably would like a completely free market and acknowledge that the one we have is far from the “ideal”, I think it’s important to maintain a little hesitancy in saying these guys over here “earned” their money, but these other guys over there didn’t.

Dan H October 7, 2011 at 2:55 pm

Actually, I believe that most NBA arenas weren’t built with subsidies. I’ll have to double check that. But substitute LeBron James for Alex Rodriguez or Peyton Manning, and you’d be 100% correct as almost all MLB and NFL stadiums that exist today were built with public money.

Observer October 7, 2011 at 10:22 pm

Chris

What you say makes too much sense

Economic Freedom October 7, 2011 at 11:12 pm

IP laws prevent someone from taking Steve Jobs’ iPhone, putting his own name on it, and selling it to the public, thus gaining revenue that would have gone to Jobs, the actual owner/inventor. They don’t make anyone in the public actually buy an iPhone; ergo, whatever profits Jobs earned, are entirely due to his efforts regarding his product. Proof? Lots and lots of inventors have patents and plenty of IP protection and get zero profits because no one buys their product.

I see the anarcho-capitalist wingnut contingent is out in full force lately. Must be a full moon or something.

Dain (Mupetblast) October 8, 2011 at 3:10 am

“IP laws prevent someone from taking Steve Jobs’ iPhone, putting his own name on it, and selling it to the public.”

True, if someone thought they were buying a Steve Jobs iPad but they weren’t, that’s fraud. Oh, and if someone actually stole Steve Jobs’ own iPad from his car dashboard, that’s theft.

“They don’t make anyone in the public actually buy an iPhone.”

And embargoes don’t actually make anyone buy a product from any particular country not targeted by the embargo. But we’d still consider than an unfair state granted privilege.

“Lots and lots of inventors have patents and plenty of IP protection and get zero profits because no one buys their product.”

And some companies receive subsidies but go belly up, while others get none and succeed. Again, this doesn’t make subsidies ok.

Economic Freedom October 8, 2011 at 8:46 am

True, if someone thought they were buying a Steve Jobs iPad but they weren’t, that’s fraud. Oh, and if someone actually stole Steve Jobs’ own iPad from his car dashboard, that’s theft.

If someone imitates a Steve Jobs iPad and sells it as his own iPad, that’s also theft — theft of profits that would have gone to Steve Jobs — obtained by means of fraud.

And embargoes don’t actually make anyone buy a product from any particular country not targeted by the embargo. But we’d still consider than an unfair state granted privilege.

A hypothetical embargo that could precisely locate only fraudulently imitated Steve Jobs iPads, imitated by the “In Bad Faith” company for example, and bearing an “In Bad Faith” logo, would not be unfair, and would not be granting Steve Jobs an unfair privilege granted by the state. That’s actually the purpose of a patent: to act as an individual embargo against imitation of an individual invention. Actual trade embargoes, however, are unfair because they are not implemented to discourage imitation; they are implemented to prevent any sort of competition against domestic competition, even competition from unique and original products.

“Preventing imitation” and “preventing competition” are two completely different things. That you don’t recognize this basic difference effectively destroys your argument.

And some companies receive subsidies but go belly up, while others get none and succeed. Again, this doesn’t make subsidies ok.

And the fact that government subsidies are not OK doesn’t mean that any sort of state-granted privilege, such as patents and copyrights, are not OK. Unless, of course, one is an anarcho-capitalist, or a “polyarchist”, or whatever the new, hip term is, and simply despises any sort of state action on the basis that it’s state action.

As Richard Epstein admirably explains in the video below, a patent grants monopoly privilege to the patent holder over a certain duration of time for the purpose of allowing the patent holder to earn entrepreneurial profit (revenue that is higher than his marginal costs + interest) for longer than he otherwise would by preventing competitors from imitating the product; it doesn’t prevent competitors from using other, non-imitation methods of competition — such as inventing something original. The patentee doesn’t receive any revenue in the form of tax money, so the analogy to a government subsidy is incorrect and absurd. Unlike the recipient of a subsidy, the patentee is not someone who is “politically favored” by a government agency that wants to develop a particular industry as part of some larger political agenda; he is someone who must simply prove to an officer at the patent office that his invention — which can be anything — incorporates an “original step” compared to previous inventions, and is not merely an obvious rearrangement of the “prior art.” So, again, this bears no relation to a government subsidy.

http://newmedia.ufm.edu/gsm/index.php/Epsteinintellectualproperty

Intellectual Property for the Technological Age
Richard A. Epstein



Milton Friedman Auditorium

Universidad Francisco Marroquín

Guatemala, November 6, 2006

Martin Brock October 8, 2011 at 10:57 am

First, Steve Jobs did not invent the iPad. He was the CEO of a corporation that employed many people contributing to the development of the iPad.

Over a decade ago, I bought my first mp3 player with a capacity much greater than a single CD’s worth of music, because it had a hard drive rather than the solid state memories which had much lower capacity at the time. It was the first version of the Nomad Jukebox, a product of Creative corporation, a Singaporean company, released in 2000.

I was thrilled. The Jukebox was the best gadget I had owned since my first Sony Walkman in the early eighties, and I loved it. I praised it profusely at Amazon.com, even speculating on the fortunes of Creative.

One clever respondent in Amazon’s comments section told me that Creative was an also ran, little company and would never dominate the market for mp3 players of this kind, because a more established player would soon appear and take the market, and this more established player’s name would become synonymous with the product category, and little Creative would be forgotten.

This guy was sure he had smacked down my naive enthusiasm for Creative, but the established player he told me to watch wasn’t Apple. It was Sony. The guy had never heard of the iPod, and neither had I, because it hadn’t hit the market yet.

I was a fan of digital music players before Apple produced one. I’ve never owned an Apple player. I was loyal to creative Creative for a while, but since multi-gigabyte, solid state memories became cheap, I’ve bought Samsung and Sandisk devices.

Aaron October 11, 2011 at 5:41 pm

Should the inventors of the printing press (or actually their descendants) be taking a cut of everything published today? At some point, we have to say enough is enough and treat these inventions as public goods.

It seems to me that the inventor should only receive enough to create an incentive for further invention to enrich society.

I_am_a_lead_pencil October 7, 2011 at 3:03 pm

Russ said:

“That’s why Lebron James captures a bigger share. He makes more people happy and they have more money to spend on basketball than people did in Magic Johnson’s day.”

Yes, but he does drive on roads and such…and this alone requires him to “pay it forward” even more (into government coffers of course) for the next generation.

Economic Freedom October 7, 2011 at 10:34 pm

http://www.businessweek.com/magazine/eric-schmidt-on-steve-jobs-10062011.html

Something seems to be wrong with the formatting in the “Thank you, Steve” thread (midway through a post by Stone Glasgow, everything is in italics) so I’m posting the above link to this thread.

It’s a very moving statement about Steve Jobs by Eric Schmidt, CEO of Google.

Stone Glasgow October 8, 2011 at 12:44 am

Good article. Thanks for posting it.

Martin Brock October 8, 2011 at 9:44 am

This is clearly a fraction, maybe a small fraction of the wealth Jobs created for the rest of us.

So it’s not enough that Steve Jobs gets credit for the contributions of thousands of nameless, faceless Apple employees serving beneath him in the corporate collective. Now, he also gets credit for the marginal value of my contribution if I use an Apple computer to make the contribution. I’ve never been a Mac guy, so maybe the value of software I’ve developed for VMS and Unix and Windows machines really is my contribution.

Why not credit Charles Babbage or Alan Turing or John von Neumann or even Steve Wozniak with the wonders of the Apple corporation instead? Because they are less celebrated, and they aren’t the Big Story at the moment? Do others contribute less, or do you know less about their contributions?

I don’t know who is really most responsible for the Mac or the iPod, because I don’t know the thousands of people who contributed to these products, but I can attribute it all to one man at the top of an organization making the organizations least specific decisions. In other words, I can think just like a central planner. I can pretend knowledge I don’t have.

Jobs deserves plenty of credit for his contributions, and I do not speak ill of the dead by pointing out that he was not actually godlike in his Herculean productivity, only the governor of and spokesman for an uncommonly productive organization. I wish Steve Jobs the best eternity still has to offer, but I’m a libertarian and an individualist, and heroic leader worship just isn’t my thing.

Economic Freedom October 9, 2011 at 8:09 pm

Brock, you’re a Crock.

Why not credit Charles Babbage or Alan Turing or John von Neumann or even Steve Wozniak with the wonders of the Apple corporation instead?

Because the marginal-satisfaction contributions of Babbage, Turing, vonNeumann, and (I would add) Claude Shannon, while real, have been diluted by all other computing devices, at all other times that make use of their achievements. The marginal-satisfaction value is equal to the LOWEST-valued preference by a consumer, NOT the one that is “most significant” from some standard other than economic — the standard of “intellectual history” or “scientific importance” for example. Water is very important biologically, but if you have a quadrillion gallons of it at your disposal, the marginal satisfaction to a consumer from one glass is very low, and hardly worth getting excited about — despite its great biological importance. Shannon Information Theory is a very important advance in applied mathematics, especially in communications engineering; but since it is applied in the engineering of practically everything today — telephone networks, CDs, DVDs, mobile phones, computers, high-definition television, video games, etc., its marginal satisfaction in yet one more application — Apple products — to a consumer of Apple products, is very low. Since you clearly don’t understand this, it means you don’t understand the concept of marginal utility.

And although I don’t think you’re perceptive enough to grasp the fact, I’ll say that your question is as revealing of your overall ignorance of certain facts of basic economics as Elizabeth Warren’s recent statement, essentially amounting to, Hey, Jobs didn’t do it by himself! He had help from the guy who first invented steel, as well as from the first tool-making hominids a million years ago! How come they don’t get equal credit? UNFAIR! THIS IS JUST MINDLESS HERO WORSHIP!!

Because they are less celebrated, and they aren’t the Big Story at the moment? Do others contribute less, or do you know less about their contributions?

When Heifetz got a standing ovation for a brilliant performance, only an envious cultural illiterate like you would complain that people should also be applauding Mr. Stradivarius (because Heifetz couldn’t have done it without him), and Mr. Edison (for providing the incandescent lighting on the stage). In other words, you and Elizabeth Warren really only display an ugly form of Envy (“Heifetz didn’t do it alone, so why should only he get the standing ovation!”)

Ooooops! Did I say “envious cultural illiterate”? Sorry. I meant “libertarian.”

Martin Brock October 10, 2011 at 9:09 am

Because the marginal-satisfaction contributions of …

You’re right, of course. That’s precisely my point. I’m responding to “This is clearly a fraction, maybe a small fraction of the wealth Jobs created for the rest of us.” My question is rhetorical, and it’s a question, not an assertion. You confuse the two.

Hey, Jobs didn’t do it by himself! He had help from the guy who first invented steel, …

But that’s not my point. That’s your straw man’s point. My point is that many designers, electric engineers and software developers at Apple created the iPod, not only or even primarily Steve Jobs. Alan Turing obviously didn’t create the iPod either. Attributing the iPod to Alan Turing would be incredibly naive, because this attribution ignores the contributions of Steve Jobs, among many others. Again, that’s precisely my point.

UNFAIR! THIS IS JUST MINDLESS HERO WORSHIP!!

I don’t know what “fair” means, so I avoid the term, but “small fraction of the wealth Jobs created for the rest of us” is hero worship. The assertion is meaningless. How much of the wealth that didn’t end up in Jobs’ estate is he supposed to have created, precisely?

Did I say “envious cultural illiterate”?

Your straw man is an envious cultural illiterate, because you construct a false choice between envy and hero worship. I neither envy nor worship Steve Jobs. I commend him for the contributions he actually made. He listened to people who knew more than him about technological possibilities, and he said “I like the sound of that” when discussing digital music for example, and he risked capital he was entitled to organize to pursue a vision of digital music that emerged from the many creative factors at Apple, and he and his follow Apple employees delivered digital music options that consumers valued.

That’s all very commendable, but it doesn’t make Steve Jobs the creator of digital music, and it certainly doesn’t make him the creator of value that I add by using digital music technology, even Apple technology. Jobs didn’t create Pixar technology either, and he didn’t create Mac technology. He contributed to the commercial success of these technologies, and I give him all credit he is due for these contributions.

I was a user and huge fan of digital music before Apple ever marketed a device, and I’ve never used an Apple device, so I can’t agree that Steve Jobs deserves a lot of credit for this innovation. He just didn’t create this value for me as a matter of historical fact.

anthonyl October 9, 2011 at 1:01 pm

The occupation of Wall Street should move to Washinghton. There protesters will find congress, whose members can be educated on the dangers of bailouts and central planning of the economy. Congress can then take these lessons and put them into place. Many of the bills they will pass will not be popular or politically profitable for them but the economy will recover and prosperity will return and congress will be credited with saving the world economy by leading it to sound policies. Now what are those policies?

Itchy October 9, 2011 at 8:27 pm

Ha, they are not there protesting Wall Street bailouts and corporate greed. They are there protesting the fact that they didn’t get a bail out.

Itchy October 9, 2011 at 8:24 pm

“Some of those gains to the financial sector are literally zero sum–bonuses paid for with my money and yours.

If we stop bailing out creditors–socializing the losses of the financial sector–the top 1% numbers will become “healthier.”

If we fail to distinguish between ill-begotten gains and those gains that enrich all of us, we are headed down a very dangerous path.”

The best part of that is the bailed out banks got to buy assets that should have been liquidated … they are now too bigger to fail. – Awesome

Martin Brock October 10, 2011 at 9:51 am

Here’s a dystopian vision for Russ Roberts to consider. In this dystopia, creative people like Russ have little opportunity to work independently. Russ may contribute to a story titled “The Invisible Heart”, but he may not be its sole author. A corporation owns the right to the economic romance genre or to more specific, discrete plot devices that Russ needs to construct his economic romance, so if he wants to create “The Invisible Heart”, Russ must either negotiate with officers of this corporation or join the corporation as an employee.

If Russ joins the corporation as an employee, he may write part of the story, say the first half, but he may not write all of it. The corporation won’t risk all of the book’s profitability on one factor of production, because Russ might die in a car crash or something. Furthermore, other corporate factors have ideas about the book meriting consideration, so the corporation creates managerial authorities and committees of these authorities to consider various ideas and then to decide precisely how the story will be written.

So Russ writes half of the story, and a committee then reviews this half of the story and makes various changes before assigning the project to a second writer for the second half which is similarly reviewed and altered accordingly. Finally, a book containing the story is published, but Russ’ name does not appear on the cover or even over the story. The name of the corporation appears on the book, and the corporation’s CEO possibly gets some credit on the back cover..

For various reasons that we could discuss, this dystopian model is how the software development business works for the most part. The movie business is similar for similar reasons, but final credits typically name many contributors to a movie, at least. You don’t even find a list of this sort on the package containing your iPod, because it’s just not customary in the industry.

Now, think about Howard Roark.

Martin Brock October 10, 2011 at 12:04 pm

Before someone lists all of the sins of Howard Roark, I don’t worship his heroism either, but I do understand some of his pathos.

Chuckarama October 10, 2011 at 5:19 pm

When I hear the 99% vs 1% chants, it is at best a reference to the President’s proposed “Buffet Rule”, at worst, traditional class warfare. I’m going to assume, giving them the benefit of the doubt in the face of the simple mathematics and easily obtained data, that it’s the so called “Buffet Rule” they want implemented. My real beef with the “Buffet Rule” proposal is the inevitable mission creep. The income tax was originally sold to the American people on the promise that it would only be levied on the rich. Then the Alternate Minimum Tax (AMT) was sold to us on the promise that it also was only for the rich. How does the saying go? “Fool me once, shame on you. Fool me twice, shame on me.” What happens the third time round?

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