14
Jan
11

Scratching the surface of “who gets rich, and why?”

One of Blunt Object‘s longest-standing hobby-horses is the Just World Hypothesis: the notion that people get and have got what they deserve.  While this notion is absurdly false on an individual level, it performs just well enough on an aggregate level — if we’re able conveniently to ignore outliers like the 2004 Indian Ocean tsunami, and ignoring inconvenient data is a task at which H. Sap. sap. excels — to keep us coming back.  Thus, this paragraph from Matt G’s blog

The old saw is that, if all the money in the country were distributed evenly among all the people here, within 5 years it would basically have been re-distributed to the same people who have it now. Call me a pessimist, but I actually suspect (without any real (non-anecdotal) evidence) that this is true.

— has been quietly smouldering at the back of my attention span for a good three weeks now.  I happen to agree with Matt G about it, at least in aggregate and up to statistical noise.  That said, I rather doubt that it has much to do with most people’s notions of a just world.

If you listen to starry-eyed anarchocapitalists like… well, me, a perfect-world free market with trivially small transaction costs and other simplifying assumptions that’ll never ever happen would channel money to individuals who provide goods and services that lots of other individuals want. (Don’t expect us to come anywhere close to this in the next century or three.)  That’s a pretty good first approximation of a just world, and of course it’s not something I just came up with:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.
Adam Smith

Getting (and staying) rich — maybe it’d be better to say “getting (and keeping) what you want out of life”, but that’s a digression for another time — is a matter of arranging to turn circumstances to your own interest.  A misanthropic butcher who does his job well because he imagines himself carving and filleting his customers will, all other things being equal, make more money than his philanthropic* but hopelessly inept competitor.

Further to this point, Greg Mankiw writes about IQ, heritability, and affluence:

According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son’s income with respect to father’s income is about 0.5 in the United States.  How do you interpret this fact?

[…]

But what strikes me about that 0.5 number is not how large it is but how small it is.  As I understand it, that 0.5 estimate is roughly the correlation between father and son income.  That means that the fraction of variance of son’s income explained by father’s income–that is, R-squared–is only 0.25.  This last number is sometimes called the “heritability” of a characteristic.

By contrast, the heritability of IQ is usually estimated to be much larger than that.  At least some of the heritability of income must come not from inequality of opportunity but from the genetic transmission of talent.  […]

The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income.  And that would be true even if equality of opportunity were perfect.

It’s hard to argue with the notion that at least partially heritable characteristics — intelligence, drive, and so on — factor heavily in who gets rich and who doesn’t.  Mankiw’s point is that rich parents have rich kids not because the latter have an unfair advantage of upbringing, but because they have an “unfair” advantage of genetics.

(I am fucking well not claiming that there’s a “rich gene” or anything of the sort, and I’m also not claiming that growing up in a rich family can’t possibly help you get rich yourself.  Genetic potential is all well and good, but the vast majority of people who use it — or the lack of it — as a crutch don’t work hard enough to get anywhere near their genetic potential.  Again, that’s a rant for another time.)

So people get (and stay) rich by taking advantage of circumstance, and they do so at least in part by taking advantage of their own talents… or at least those which translate into stuff other people want.  Andrew Sullivan comments:

I think what Mankiw is driving at is that great wealth is not necessarily unjust, that it can represent simply greater talent or hard work or innovation – and that this should be celebrated, not regarded as inherently suspicious. On all those counts I’m with him. The problem is that the market doesn’t measure justice, it measures how successfully someone supplies a demand. And I’m loath to conflate entirely that kind of success with some kind of “justice”.

This is where people like me start to get all jumpy in our seats and try to argue that what we really need to do is make markets more open and transparent and remove opportunities for people to get rich by gaming the system — regulatory capture and rent-seeking — and blah blah blah anarchocapitalism blah.  Well, sort of.  Even if we do all that, gospodin, we still have two problems preventing “rich” and “deserving” from aligning: chance and shortsightedness.

“Chance” is pretty obvious.  I’ve postulated that people get rich by taking advantage of circumstance; circumstance is determined at least in part by arbitrary chance.  If, for example, Warren or TJIC were to find a winning lotto ticket on the sidewalk, I don’t doubt that they’d sink much of their winnings into their businesses and get on with the process of creating value.  Without that windfall, they’re still doing pretty well, but not seasteading-on-a-carrier well.

“Shortsightedness” is going to get pretty emotionally loaded as soon as I bring up finance (there it goes!), but hear me out a little.  People get rich by what computing-science types call, appropriately enough, a greedy method — they make the best move they can based on incomplete, local information (pretty much by definition; global information is only available in perfect-economy daydreams).  Sometimes this means sinking money into the Mississippi Company; sometimes it means creating peculiar new investment vehicles to leverage the flow of money between house-flippers in Nevada.

On this latter topic, Scott Sumner valiantly attempts to defend (or at least explain) the high salaries in finance:

As long as we have an economy that is increasingly dominated by “idea companies,” where the idea is really, really hard to discover and really easy to implement once discovered, finance will earn huge gains.  […]

Right now, those who develop new ideas are being highly rewarded.  More importantly, those who spot good ideas developed by others, and allocate capital to implement those ideas, are also highly rewarded.  Get used to finance earning obscene profits, it isn’t going away.

Investment bankers, Sumner argues, get rich by directing capital to the places where it’s most needed profitable.  As with the housing bubble, this profitability may turn out to be a distressingly short-term affair.  That’s what I mean by shortsightedness: simply the fact that nobody’s information is perfect.  (And if your information is too good, we call it “insider trading” and send you to prison.  Because that’s “unfair”.)

All of this disjointed rambling comes back to Matt G’s point — even assuming as level a playing field as we’re ever likely to get, there’s plenty of reason to expect that we’d end up with just as unequal a distribution of wealth as we have now.

——

* Huh; I just noticed that “misanthropic” and “philanthropic” aren’t as antonymic as etymology would lead you to expect.  I guess human-loving translates narrowly to charity?  When did that happen?

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1 Response to “Scratching the surface of “who gets rich, and why?””


  1. January 14, 2011 at 15:31

    I enjoy hearing the horror on the Left when describing the billions of dollars that brokers and bankers make. No horror on the billions that politicians spend.

    How do the brokers and bankers get their money? People seek them out and give them their money.

    How do polticians get their money? Seek people out and take it from them.

    Have they noticed a significant difference in these processes?
    .


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