Blackboard Economics e.g.

In this post on his blog, Arnold Kling links to a post from Daniel Little that says:

the idea that a properly functioning market economy will tend to reduce poverty and narrow the extremes of income inequality has been historically refuted — at least in the case of American capitalism.

Little provides supports this claim with two charts.

I think this is a good example of what Ronald Coase refers to as Blackboard Economics. That is, on paper, Little may be making a good point, but reality doesn’t support. Look out the window of real life and things are different.

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2 thoughts on “Blackboard Economics e.g.

  1. Mr. Little misses the entire point of capitalism. It’s purpose is not to guarantee wealth, but to create the framework and incentives for wealth to develop. Capitalism, in its simplest form, occurs when political institutions allow and support property rights and free trade. That “American capitalism” has had its problems is not a function of either strong property rights or unfettered free trade, but rather that our government has increasingly infringed on these two necessities of capitalism.

    Mr. Little rattles on about the evils of capitalism in not assuring wealth and equality of outcome for all, yet he offers no comparison to the alternative, which is some form of socialism. Mr. Little fails to address the truth that someone or something must determine who gets what. Either we create institutions that preclude the government from making these determinations and allow the market to decide or we give the this power to the government, i.e. to politicians.

    As Seth points out, we can simply look out the window at the failed socialist economies around the world and throughout history and realize that having politicians paln our economy and determine who gets what doesn’t work.

    In terms of the improvement of people’s well being (which is another way of saying the elimination of poverty), no other system has worked as well as capitalism and no other country has been as successful as America.

    Mr. Little castigates the capitalists (at least of the Chicago school) for viewing poverty “as a normal and fair result of the workings of market institutions: some people make large contributions and earn high income, and others make small or zero contributions and earn low income.” Those are what we call “incentive”, Mr. Little, and they matter. Perhaps you’ve noticed that in nations where people’s earnings are unrelated to their contributions – “from each according to his abilities, to each according to his needs” (Marx) – nobody produces much at all. But even in these countries, there is still a great disparity in income and wealth. Indeed, a much greater disparity than in the US. The difference is that there is essentially no middle class – just the small, wealthy political class and the impoverished masses. Among the mass of citizens, there is much greater income equality than in the US. Unfortunately, they are all equally impoverished.

    In regard to Mr. Little’s graphs: we have seen these same graphs trotted out by the entire cast and entourage of wanna-be socialists and socialist-lite types (a.k.a. liberals) and what they seem to lose sight of is that fact that because of capitalism, the guy in the bottom 20% in 1960 can be (and often is) the guy in the top 50% or top 20% in 1980. There is much more income mobility under capitalism than under the alternatives. Indeed, it’s been found that relatively few people remain in the top 10% on income earners for many years. Typically, they rise to the top strata, remain there for a short period, then drop back down and are replaced by others, including those form the bottom 10%, who – because of incentives – built a better mousetrap and replaced them. This does NOT happen when the political class decides who gets what as in such a system it’s one’s political connections and not one’s productivity that is rewarded.

  2. Pingback: Coase | Our Dinner Table

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