I do not doubt that Dean of the Tucker Foundation Scott Brown is a compassionate man with noble intentions. In this age of promiscuous liberalism, an individual like him who relentlessly upholds a principle is rare. However, good intentions are often powerless -- in fact, perilous -- when they are misguided, because actions that follow such intentions can contradict them. In writing economically unsound critiques of the state of the U.S. income distribution, Brown is subjecting himself to such a contradiction.
In his latest piece, "Social Class Justification" [The Dartmouth, April 1], Brown presents evidence that points to the main reason for growing inequality, which, to him, is pro-growth policy. But behind this conclusion lies a confusion of the correlation between income disparity and slow growth for a causality, as he fails to understand the mechanism by which such disparity could result in slow growth.
The most widely-accepted explanation for this correlation is that growth is hampered by rent-seeking activities -- or activities that redistribute and destroy wealth -- such as lobbying, bribery and lawyering. One obstacle to poor nations' growth is rent-seeking by people who stand to lose from economic liberalization, without which economies cannot take off. These nations often encounter intense rent-seeking because the wide income distributions they inherit from their pre-market systems of the past have solidified the places of the rich and powerful -- usually, landowners, as well as friends and relatives of political leaders -- who always prefer the status quo of inhumane inequality. The pervasiveness of this obstacle in the third world explains why high degrees of income disparity correspond to low growth rates.
Consistent with this argument is the evidence from postwar Japan, a country that experienced explosive growth following the Second World War, which obliterated its capital and land stock. A number of economists have noted that without the erosion of landowners' political power, and thus rent-seeking capacity, due to war-time destruction of land, critical land reforms in the late 1940s that freed the peasants would not have occurred. Without such reforms that drove millions of workers into infant growth sectors, Japan's extraordinary development might never have materialized. Validating this analysis are studies by economist Dani Rodrik. He convincingly shows that the equitable income distributions of the Asian economies have spurred fast growth largely by facilitating the formation of strong political institutions that inhibit rent-seeking.
Therefore, a widening income distribution per se does not portend an ominous end for the U.S. What needs our attention, instead, is the level of rent-seeking. On this front, Americans score well; they possess one of the most transparent political institutions, effectively containing corruption. True, the proliferation of lawyers and government expansion in recent years are worrisome trends, but such increases have been tempered by the dynamics of technology enterprises that generate economic value.
If America's commitment to laissez-faire, which has been instrumental in the rise of the U.S. as a leading innovator, is crippled, we would face serious repercussions. As numerous studies have evinced, in a market economy, one's wage reflects one's productivity, which only technological growth can enhance. The result of benighted government interventions that distort the relationship between wages and productivity -- a proposal Brown advances -- is disturbing. We only need to look at France or Germany, where high wages that regulations prop up drive away investments, creating unemployment rates of well over 10 percent and perpetually stagnant economies. Research has also shown that slow growth, not fast growth, causes rent-seeking, contrary to Brown's assertion; while Silicon Valley firms have virtually no presence in Washington, mature industries like steel and automobiles carry out extensive and well-organized lobbying.
Brown correctly argues that the economic value of a few more million dollars to CEOs who are already worth several hundred million dollars is negligible. However, the principal motivator of fanatic entrepreneurs' pursuits for money is their desire for recognition. In search of glory, they need to demonstrate their superiority over other market players with their financial prowess. And Joseph Schumpeter realized long ago, a system that plentifully rewards such recognition-gaining efforts fosters the engine of productivity growth. After all, if the returns to technological innovations had been mediocre, would proud, ruthless entrepreneurial beasts like Carnegie, Ford and Rockefeller ever have benefited humanity with their lasting economic contributions? I doubt it.
Economics is the most rigorous of all the social sciences, and, naturally, the issues it addresses require serious thinking. Yet, many seem to believe they have answers to challenging issues of which even economists who have studied them throughout their lives have little understanding. As the head of an organization that purportedly exists for social causes, Brown needs to become a better student of economics, so he can productively channel his energy into action for the betterment of society. Otherwise, he is only enforcing the stereotype that social activists are good-hearted people without intellectual rigor.
