Are you interested in income inequality and its consequences? You might want to read James Galbraith’s Inequality and Instability, which is the product of decades of research. Or you might read Wilkinson and Pickett’s The Spirit Level, the now classic study that crunches an unprecedented amount of numbers and has stood up to a barrage of attempted refutations.
Alternatively, you could read Gregory Mankiw’s innovative forthcoming article, ‘Defending the One Percent’. Mankiw’s conclusion is different from that of the people who actually spend their lives studying inequality. They think extreme income inequality is socially and economically damaging. He thinks it’s fine. What is innovative is his method. While they remain in the tired old paradigm of collecting and analyzing data, he tries out a new methodology, which is to sit down without any data, think about inequality for a minute or two, form an opinion, and then write it down.
He also develops a new form of argument, which I call the Circle of Hell. The Circle of Hell is a circular argument, but of a very special kind. Say I want to prove that all cats eat grass. A Circle of Hell argument will look like this:
Premise 1: All cats eat grass.
Premise 2: Jane is in Mexico.
Premise 3: What if we fired all the warheads at the moon?
Premise 4: Hi! I’m Roger.
Premise 5: Roger is as Roger does.
Premise 6:Do you know where your children are?
Premise 7: Are you sure you know where your children are?
Premise 8: Some quarks are bosons, bitch!
Premise 9: Do not dog the apple machines.
Premise 10: Quango safaris in the Munstopher movies. Or not?
Premise 11: Wibelsi gcnzm itysa kgiq fhei ncnei ado qpetuvas.
Conclusion: Therefore, all cats eat grass.
Like any circular argument, the conclusion is one of the premises. But in this case there’s so much disturbing nonsense in the way that you soon forget about that first, question-begging premise. The premises become so nightmarishly weird that soon you don’t know what’s happening anymore. You’re just confused and you want your mum. When you get to the conclusion you’re so relieved to see something vaguely familiar and intelligible that you run up and embrace it with all your might.
Here’s how it works in Mankiw’s paper. Like most economists, he doesn’t begin with a description of reality. Rather, he starts in an imaginary world. In this one, by coincidence, free exchange has distributed all resources equally. Then the fun begins:
…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.
He then claims that ‘ this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades.’ Here’s how:
Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it.
Now ask yourself: if that’s what Professor Mankiw meant, why did he bother with the ‘extreme and stylized’ presentation in the thought experiment? Why not just start with the above paragraph? Since the only point he wants to make is that incomes at the top grow faster than other incomes due to entrepreneurship, why not just say that? What role is the weird model playing? In fact it doesn’t make logical sense, as this blog points out, to combine a world of perfect competition and efficiency with one in which there are entrepreneur-heros. Moreover, the description is so nonsensical it’s disturbing. It’s like listening to somebody trying to describe a dream:
…then Steve Jobs was there with a iPod, except it wasn’t really Steve Jobs… it was, like, J.K. Rowling and Steven Spielberg and Steve Jobs all at the same time, and then, like, everybody gave him/her money, and then we were all really happy…
Weird? Yes. Creepy? Yes. Confusing? Quite deliberately. But informative? Not exactly.
I know that economists like to start out with unrealistic models, but that’s in order to simplify things. Assume perfect competition, because it’s simpler to model. Model an economy consisting of only one person, because a model with lots of people would be impossibly complex. In some circumstances, it’s a perfectly sensible way to go about things. But how is Professor Mankiw’s Pan’s Labyrinth of nightmarish abstraction simpler than just starting with the facts (as he sees them)?
It’s not. The ‘thought experiment’ is not there to simplify things. It’s not there to show you anything, not even ‘in an extreme and stylized way’. It’s there because the whole paper is a Circle of Hell argument. It describes the real world via a weird analogy because if it described the real world directly you might question the accuracy of the description. Instead it assaults your sensibilities with a creepy model. In the mentally vulnerable place the whole pageant throws you into, the Professor can make you forget everything, including the fact that he’s started by assuming his own conclusion.
And he has. If a series of exchanges occur, each of which must make everyone involved in it better off, then it’s pretty much a foregone conclusion that the exchanges improve the lot of society. And if those same exchanges increase inequality, then it must be the case that inequality, arrived at in that way, makes everyone better off. I’m not the first to claim that the argument is circular. Look here, here, or here. But those people aren’t giving Professor Mankiw his due as an innovator. His argument is no ordinary circle; it’s a Circle of Hell. It starts by assuming what it ends by concluding. But in between the real magic happens. In between is such an unfathomable ocean of bollocks it’s like drowning in a testicular deluge. You come out sputtering, traumatized, and confused enough to accept anything.
Try this little puzzle. Imagine a world in which there are vampires, octagon-men, and lots of incarnations of pi. The incarnations of pi eat the octagon-men when the vampires don’t eat the incarnations of pi, but the octagon-men eat the incarnations of pi when the vampires eat the incarnations of pi. When the octagon-men are being eaten they paw the air and scream your name at the sky, which turns blood red in sympathy. But when the octagon-men eat the vampires the incarnations of pi reproduce at a faster rate. When the incarnations of pi reproduce, however, they grow wings. Then their faces burn like they sun and they fly behind your eyelids to haunt your dreams. Also, Professor Mankiw is making up nonsense, the vampires eat two times as fast as the octagon-men, and you must live in this world for pi times one thousand years.
This thought experiment captures, in an extreme and stylized way, the reality that Professor Mankiw is making up nonsense. There is no reason to believe that inequality is the price we must pay for innovation or efficiency. There is no reason to assume that it is the product of efficiency rather than of inefficiency. There is no reason to ignore its catastrophic social and economic effects, revealed by the two books I mentioned above. But maybe the implied bargain is that if we give him his way Professor Mankiw and other economists like him will stop assaulting us all with this firehose of bullshit. Maybe they’re just seeing how long we can hold out.