Tuesday, June 25, 2013

A More Detailed Critique Of Mankiw's Defense Of The Top 1%

Dean Baker, Paul Krugman and others have commented on Mankiw's defense of the top 1%.  Jonathon Chait provides a more thorough attack on the heart of Mankiw's defense.  Mankiw is not very good as moral philosopher, and rising inequality is essentially a moral problem.  Economists pretend to ignore moral questions.  They claim that economics is a science, and that they are not in the business of making moral judgements.  On the other hand, they make extensive use of the concept of utility.  We are supposed to be utility maximizing atoms and the economy is made of up of atoms that are in the process of maximizing their utility.  The free market enables each atom to engage in activities that maximize the total utility available in the economy.  Consequently, utilitarian principles have played an important role in the history of economics.  They have often been used to justify economic policies such as progressive taxation and income redistribution.  The basic premise is that a dollar taken from a wealthy individual, and redistributed to a poor person, provides more utility to the poor person than the utility lost by the wealthy person.  Mankiw makes a weak attack on utilitarianism, and he ends his defense of the top 1% by reminding economists that they should avoid corrupting their science with utilitarian theory.

Mankiw does poor job of attacking utility theory, but he is more comfortable invoking one of the basic assumptions of microeconomics.  He assumes that the labor market is efficient, and that it would be inefficient to redistribute income from productive individuals to those who are less productive.  That assumption allows him to claim that CEO compensation, which has risen dramatically in the US compared with other industrial nations,  is not the result of a corrupted governance system.  The income pyramid is build on a foundation of productivity.  Interference in the operation of the labor market would make the economy less productive.

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