The Bigger Problem With Mankiw's Plan to Give Everything to the One Percent

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Friday, 21 June 2013 04:26

Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.

While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.

The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.

Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.

Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.

Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.

Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)

The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?

How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.

In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings' work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.

Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.

In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn't see anything wrong with the resulting inequality.

 

Note: You can find further ruminations on this issue here.