In school, we learned that America was the greatest country in the world because anybody, if they worked hard enough, could be a success. We learned that anything is possible if you put your mind to it. There is no aristocracy in America, no class of ruling elites. All of us are created equal. This bold idea inspired the creation of our nation, but we seem to be losing touch with it.
I think we're losing touch with it largely because we hear all the bad stories, and few of the good ones. How many times have you heard about a greedy CEO who ruthlessly hurt others in a grab for money and power? How many times have you heard about politicians selling their souls in corrupt backroom deals? How many times have you heard about workaholics that strain their personal relationships but still never seem to get ahead?
Now compare that with how many times you've heard about someone who did the right thing and was rewarded for it. I bet you can't think of as many examples. As a society we are undergoing a dramatic shift in assumptions: for the first time in the American experiment, we no longer praise success - we are suspicious of it.
To illustrate the point, let me share an experience I recently had. I have been volunteering for Rick Snyder's campaign for governor of Michigan. It is likely that you haven't heard of Rick Snyder, and for a good reason: he's not a politician. He is a venture capitalist specializing in health technology from Ann Arbor, and before that (in the 90's) he was COO and President of Gateway Computers. The opposition's instinct was to label Rick an "out of touch millionaire CEO, trying to buy the office." I guess if you take things at face value, the smear sounds reasonable enough, but it doesn't tell you anything about Rick's history. If you knew Rick, you would know that nothing could be further from the truth. In fact, Rick had a modest upbringing in Battle Creek, worked for less than 2$ an hour in high school, and to top it off he paid his way through the University of Michigan and worked tirelessly to earn his undergrad, MBA, and JD by the time he was 23. From there he had a successful career through hard work and doing the right thing. Now, regardless of your views on the substance of Rick Snyder's campaign, I think we should be praising the guy for his work ethic - not blasting him for his success.
But this isn't about Rick Snyder's campaign - that was just a recent example that I wanted to share. This is about our recent suspicion of success. I'm not sure if the old version of the American Dream can ever come back, because I don't think it was really complete. I think we need to update the American Dream.
For our generation, the American Dream is about being successful and using our success to do good in the world. We should be unashamed of living comfortably, but we should also strive to use our wealth to build a better world. The concept of social entrepreneurship is really useful here: our generation sees no conflict between making money and doing good. The old way of thinking is based off the notion that there is a limited amount of wealth in the world, and that anyone who is a success grabbed more than their fair share. Our new (and true) way of thinking is based off the notion that wealth is dynamic and we can grow the pie for everybody. I am no economist, but it is pretty plain to see that people are on average better off today than they were 2,000 years ago. (At the bottom I attached a google books thing that lets you see a graph showing growth in total human wealth over time from the great book The Origin of Wealth)
There are still great disparities, but we need to realize the fundamental truth that the pie is not fixed, and we should not be skeptical of success, but we should encourage it. Why? Because we know that people that are successful are innovators, and they create wealth that rises all boats.
Wednesday, July 22, 2009
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I don't believe the question is: "Has the overall pool of wealth declined in the United States. This is because almosta ll data says 'no'; avg. real income has gone from $6k (1929) to $30k (2003). The problem is the strain caused by the fact that the distribution of wealth--particularly new wealth--is going to a relatively small portion of the US population in terms of the overall workforce; the real growth in income for the overwhelmimg majority of Americans has been somewhat modest compared to the wealthiest, making data markers such as per capita income poor ones because it doesnt denote this disparity and is highly skewed. This then also means that, opportunity usually being a product of wealth, those with more wealth will--on average--have greater opportunity (e.g. education) than those with less wealth across the board. Furthermore, we can see the wealth (and in turn opportunity) disparity conotinuing to increase which causes frustration and socio-political stresses, the fairness of this aside. Somewhat illustrated here:
ReplyDeletehttp://www.jchs.harvard.edu/publications/markets/w07-1.pdf
It has then become that the United States remains the land of opportunity...if you can pay.
Thanks so much for the informed comment - you have a really good point. Income inequality is a big deal, regardless of your political or economic philosophy, because when you have too much of it everything shuts down and society degenerates into a tyranny. So it is impossible to just scoff at income inequality, like a lot of conservatives these days I think are prone to do.
ReplyDeleteHowever, just because we can all agree that income inequality in the extreme is bad doesn't mean much. The real question is: what, if anything, is to be done? I think minimum wage laws only get you so far. Henry Hazlitt explains this much better than I ever could here: http://jim.com/econ/chap19p1.html
I'm not sure what you mean when you say that the United States remains the land of opportunity if you can pay.
Obviously this is true in the literal sense. Everyone must pay at least something in order to have the opportunities of America. We must pay taxes, spend our time here, etc...
The real trick is to not think of wealth solely in terms of money. We all have a certain amount of time and effort at our disposal, that no one can take away unless we are enslaved. It is up to us to spend it however we choose. To me, it is most moral and fair to spend your wealth (time, money, effort) working towards something you care about. We should adopt this stance, rather than the stance of the previous generation that says: "something is wrong, let's ask government to fix it for us."
I know this did not exactly address your point, and you are probably frustrated at this point after reading this excessively long reply, but I am no economist or policy wonk. I really am more interested in political philosophy and my post was meant to be about encouraging people to pursue what they love and to not feel guilty, but to help out of a Tocquevillian-style self interest properly understood.
I hope this clears things up a bit. Do you have a blog or anything that I can check out? I am always looking for intelligent opposing perspectives such as yours.
Glad to see you've joined the blogosphere (and the fact that I'm using that term so casually does indeed mean I have one of my own- ocalachiropractic.com)!
ReplyDeleteGood first post- this is one of the driving philosophies of how my practice is run. We don't live in a zero sum world, but many businesses seem to operate this way. I'm all for expanding the pie, rather than trying to step on the competition's throat fighting over the same pie.
See you in Denver!
First of all, thank you for replying to my earlier post—particularly at the lengths that you did. I do not have a blog or anything of that nature to speak of but, just to make things simpler, you can call me Jack and I will sign everything accordingly so you know who is writing particular posts and you have someone to refer to in posts.
ReplyDelete1. Government in the Economy
If I understand your argument correctly, you are essentially saying that government should remain relatively uninvolved in the market, if at all. I believer we can both agree that extreme government intervention (e.g. Soviet Union), as a systemic model, is both inefficient and detracts from the social welfare of a country. At the same time, a completely laissez-faire approach is also undesirable given problems concerning externalities that cannot be fully accounted for by the market (Adam Smith actually speaks to this fact briefly in “An Inquiry into the Nature and Causes of the Wealth of Nations”).
The reason there is government intervention is in an effort to avoid such issues as the running of American banks in the late 1920’s (i.e. FDIC) and the near collapse of the entire financial market most recently (mostly due to high risk investments/loans coupled with too much leverage—high ratio of debt to assets, particularly liquid). Furthermore—and admittedly so—economic models assume (in the interests of much needed simplicity) that all actors in the market (firms and households) are rational. As we well know, this is often not the case. Thus, regulation is needed. Think of the market as a giant bowling alley, representing the free market; the government is the bumper mechanism meant to keep people from running their ball (investments, companies, etc.) into the gutter. Within those limitations, agents and actors are free to carry out business as they choose.
2. Labor
ReplyDeleteHenry Hazlitt (I assume is the libertarian thinker and economist, now dead), vis-à-vis the link you posted has a fair point. In a market economy labor is both a commodity and an input for production. In fact, depending on the particular industry, it is quite possibly the largest input factor (cost of production) for a company (given wage/salary, regular skill training and ongoing benefits). The salary of an assembly line worker can range from $27K - $60K+/yr.). The bell curve lands somewhere in the low/mid $40K range. That seems somewhat unreasonable given that the average income for someone with a BA was around $35K in 2001 ($43K adjusted for 2008 at 3% annually), a Masters comes in at $53K (2008, and the median household income is just over $50K as of last year. Including the sort of benefit packages for employees and their families, much of unskilled labor (particularly in manufacturing) is ‘making some serious bank’. This has made entire industries severely uncompetitive and also given a poor incentive mechanism for attaining a secondary degree as a skilled laborer/professional.
You can find a lot of that data here:
http://nces.ed.gov/programs/digest/d03/tables/dt387.asp
http://www.census.gov/Press-Release/www/releases/archives/income_wealth/012528.html
But these are more contracted, rather than government mandated, wage/salary minimums, yet they still severely distort the cost of production (by making the cost of labor both higher on average and more of a fixed/sunk cost rather than variable—less market, S/D oriented). As well, it decreases the overall welfare and PPP of consumers by forcing them to pay more for the a product that should cost less, making them effectively poorer for it (given negative affect on PPP)
Alright, that was part one. Government mandated minimum wage laws are not necessarily bad as a concept. There should be a wage floor set in order to protect workers from the sort of abuse we saw during the more formative years of the industrial revolutions of the United States and Western Europe. One might further argue that this minimum be adjusted for inflation annually so it maintains value (i.e. a 1970 dollar does not buy as much as a 2009 dollar). BUT, the government and American society must be deeply conscious of the unintended affect(s) of wages increases like this. This pertains to inflation and the CPI (often indicators of each other), in particular. Companies affected by increases in the minimum wage—particularly the large ones phased in over the past couple of years—need to take steps to reduce costs in other ways or otherwise recoup their losses. This can be done in a number of ways, including laying off workers. Employees are usually hired with a certain pay scale/allocation in mind. If this suddenly increased beyond what the company can or is willing to budget then labor cuts occur. A company with 10 workers may suddenly cut down. The workers who remain only marginally benefit while society bears increased unemployment, both drawing on government resources and eliminating a consumer (or at least reducing the rate of consumption) which in turn hurts companies who rely on the business of these sorts of folks. This scenario is somewhat extreme, but you get the idea.
ReplyDeleteThe CPI and inflation. Companies will—depending on the il/elasticity of a product—force the consumer to make up the difference. A number of things happen here. Both the average wage and the average price of goods/services increase at the same time. In different industries this will work differently. If demand is elastic then wages will likely rise faster than the price of goods (the company absorbing the difference), in which case the welfare of employees increases, the welfare of producers decreases and that of consumers stays mostly even, depending. If demand is inelastic then the consumer absorbs the difference and price rises faster than wages, in which case both consumer and employee lose and producer remains the same, if they are lucky. Essentially, marked wage increases and increases that go beyond normal inflation adjustment cause inflation at a greater rate and tend to decrease the overall welfare of an entire country, including the workers it was meant to benefit. (this sort of thing is happening with GPA inflation in universities)
Ok, that’s enough of that.
3. Wealth and Opportunity
ReplyDeleteI definitely agree that wealth should not be strictly understood in monetary terms, but it doesn’t make that variable any less significant either. All economies, at their core, are knowledge economies. That is to say they are grounded in their ability (or inability) to produce new and greater amounts of knowledge in order to become/remain competitive as such knowledge results in innovation, etc. Thus every economy is a knowledge economy. ‘Knowledge and the Wealth of Nations: A Story of Economic Discovery” by David Warsh is actually a great read if you want to learn more about this.
Now to address the line “The United States remains the land of opportunity if you can pay.” This is not to be taken as an ideological jab but a commentary on the problem with the distribution of wealth in the United States and its effects. This is not about power to the people, fighting “The Man”, Globalization (well, incidentally I suppose) or any other stereotypical Leftist axe grinding. It’s about societal welfare, and the economic growth and prosperity of an entire nation.
Assume the previous paragraph is true and let’s use that as the basis for my argument. The production of knowledge is key as it drives innovation. Now, within the market, there are really two types of companies; small businesses (small, inefficient in producing en masse, and those entities most likely to introduce new ideas to the market) and big companies (very large companies, like GE, that produce efficiently en masse, have large operating budgets but tend to be far more formulaic, aka the colloquial use of the term ‘corporate’). In this system small business are what bring the bulk of innovative ideas and large businesses make them competitive (this is not the same as profitable). BUT, this requires that there is free/easy entry and exit of agents and actors from the market place. When this is the case, such a system operates rather smoothly. However, when there is a high—or even prohibitive—cost associated with entering the market then small businesses—unable to afford the risk (bear in mind a very high percentage of new businesses fail), then would-be small businesses enter the market in far smaller numbers, and new/innovative ideas and the knowledge that goes with it is greatly diminished. Links can be seen world-wide between the innovative capacity of a country and the ease with which entities can enter/exit the market. Such is the case with wealth and opportunity.
Opportunity comes in many forms, but the most recognized is education. Public school systems, on average, are inferior to private schools and, among public schools, those in more affluent areas are, on average, superior to those in less affluent (i.e. Orange County schools vs. Detroit public schools). Now, this isn’t to say that the book on Opportunity has been written, bound and sold for every individual on the basis of absolute opportunity. Wealth also includes natural assets (intellect/ability), among others. But we continue to see, across the board, that those with greater monetary wealth have access to better education and related opportunities (i.e. study abroad) that make them more competitive coming out of high school and entering college (should they choose/can afford to attend) and so on and so forth. So, with the high concentration of wealth coupled with marked and continuing increases in tuition and the like, it is becoming prohibitive for many talented and innovative individuals to enter this proverbial market (yes, financial aid, loans and scholarships are available, but they are both limited and carry continuing increasing opportunity costs that also bring into question whether or not it is worth it in a cost/benefit analysis).
ReplyDeleteThis is not to say that those with the means of gaining these sorts of opportunities lack ability and innovation, but this situation greatly diminishes the pool from which a society draws its talent and subsequent competitive edge in increasingly globalized and competitive market place. In sum, I am arguing that the marked disparity in wealth distribution is affecting all the inputs necessary for a innovative and competitive knowledge based economy both in the long and short term, as we have already begun to see the affects of this problem. This is why countries like Singapore are beating us across the board in all the STEM (Science, Technology, Engineering and Mathematics) areas and are competitively sharper than us. The pure inertial mass and the lasting effects of old ideas are what are keeping us afloat today, however this cannot and will not last. We need to address the issue of wealth and opportunity in this country in a meaningful way. One might then say that I must be arguing for substantial government intervention on behalf of these interests. Perhaps I am. But this is not Socialism. It’s economics.
Alright, lecture is over; class dismissed. This took me approximately two hours to write; I’m going to bed! Lol P.S. sorry for having to submit so many posts.
I think that you are probably right about a lot of the claims and conclusions you make. I don't know enough to really make a lot of substantive arguments right away, but I've read it a couple times and it has really challenged me to think about a lot of my assumptions, which I enjoy doing.
ReplyDeleteAt the end of the day, I think one thing that has to be a part of the solution is to lose the suspicion of wealth and success, our assumption that anyone who has money must be a Gordon Gekko type villain.
This is something that happens on a personal level, not a policy level. I think there are two economic modes that someone can operate in: offensive mode and defensive mode.
This may be unjustified in many cases, but I associate the defensive mode with unions. They are afraid of someone taking away what they have.
In reality, all business is offense. You earn, you take risks, you create, you innovate. When you do this and you are successful, and you make money, you aren't by default taking something away from someone else.
I am examining the cultural side of the question and you are more focused on the economic side, but I think we agree about a lot of things, if not everything.
Thanks again for the long, thoughtful comment. I'm pretty bad at economics, and I'm flattered to get such a response.
Hope to hear from you more in the future