Occasional reflections on Life, the World, and Mathematics

Chris Bertram at Crooked Timber has pointed to this paper by esteemed Harvard economist N. Gregory Mankiw, in which he raises the temperature on the tired old “taxation is theft” thesis. In Bertram’s pithy summary, “Taxing the 1 per cent would be like the state forcibly ripping out their spare internal organs!” This just shows how easy it is to get people to accept almost any moral argument once you frame it to appeal to their squeamishness.

As mathematicians know well, from an inconsistent logical system any proposition may be derived, and human moral calculus is nothing if not inconsistent. Here we see that you can make a perfectly coherent-sounding argument for why taxation is in principle just like forcing people to give up their second kidney to someone who needs it, and that obviously seems wrong, when the alternative might be a situation where people literally need to part with their second kidney in order to eat, or to obtain needed medical treatment for their children.

But I’m interested in another feature of this essay. Mankiw sets the stage as follows:

Imagine a society with perfect economic equality. Perhaps out of sheer coincidence, the supply and demand for different types of labor happen to produce an equilibrium in which everyone earns exactly the same income. […] The society enjoys not only perfect equality but also perfect efficiency.

Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J.K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. When the entrepreneur’s product is introduced, everyone in society wants to buy it. They each part with, say, $100. The transaction is a voluntary exchange, so it must make both the buyer and the seller better off. But because there are many buyers and only one seller, the distribution of economic well-being is now vastly unequal. The new product makes the entrepreneur much richer than everyone else.

The society now faces a new set of questions: How should the entrepreneurial disturbance in this formerly egalitarian outcome alter public policy?

The sharp-eyed reader may be wondering, why are these people paying $100 to J.K. Rowling for a pile of paper with printing on it? Why didn’t someone take the first copy, reprint it, and sell copies for $5? Oh yes, because there’s copyright, and the strong arm of the state willing to use force to prevent you from printing certain words on the page. Without that implicit threat of violence, Ms. Rowling’s creation would be worth very little. So what does she owe us in return? A thank-you card? The cost of enforcing her copyright? Or maybe just some constraint on how much of the potential profit she should be allowed to retain, from the monopoly position that wouldn’t exist without the effort and investment of many other people, both living and of prior generations.

The fact that this guy is considered one of the top minds in economics today is sobering…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Tag Cloud

%d bloggers like this: