Quotation of the Day…

by Don Boudreaux on August 15, 2017

in Inequality, Seen and Unseen

… is from page 131 of my colleague Dick Wagner’s insightful 2016 book, Politics as a Peculiar Business (link added):

Consider a variation on Henry Fawcett’s (1871) tale of Robinson and Smith.  Each started at the same point in life in similar occupations earning similar amounts of income.  Robinson spent all of his income, with a good part of that going to amusement.  Smith saved part of his income, and put a good part of the remainder into personal improvement.  As the years passed, Smith advanced into higher-paying positions while Robinson stayed pretty much where he started.  The incomes of the two diverged increasingly as the years passed.  If the two were compared after, say, 30 years, Smith could well be judged to be wealthy and thus taxed to support Robinson, who was poor.  Yet the difference between the two is only a reflection of the different choices they made over the preceding years.  Robinson could have been less of a spendthrift and saved more in preceding years, as did Smith.  Alternatively, Robinson might have been more energetic in his job and hence received similar advancements to what Smith received.  However these comparative histories might have unfolded, an observation of comparative income positions in one particular year provides no information about how those people came to hold those positions.

DBx: To understand the details of “the” income or “the” wealth “distribution” requires knowledge of the choices made, through the decades, by the individuals who comprise the population over which the analyst decides to calculate such a “distribution.”  This understanding requires also knowledge of the differences, material and non-material, in each individual’s starting point.  It requires also knowledge of the institutional settings within which the individuals chose and acted – settings that might differ in important ways from one individual to another.  (For example: Perhaps Smith lives in a jurisdiction that taxes capital gains at a lower rate than capital gains are taxed in the jurisdiction in which Robinson lives.)  Knowledge is also required of any changes in these institutional details.  And this list of what must be known to truly understand and explain “the” income or “the” wealth “distribution” only scratches the surface.

To grasp the significance of such real-world personal and institutional facts in determining “the” income or “the” wealth “distribution” is to realize that attempts to explain this “distribution” as being the result of a handful of aggregate forces that act on people in the mass but are not traceable to their countless individual choices – aggregate forces as perhaps might be described by the accounting artifact, r>g, that is central to Thomas Piketty’s narrative – are specious.


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