Friday, November 28, 2014

Unjust Deserts

BERKELEY – The best review of Thomas Piketty’s Capital in the Twenty-First Century that I have read so far is the one published by my friend and frequent co-author Lawrence Summers in Michael Tomasky’s Democracy Journal. Go read the whole thing now.

Still here? You are, you say, unwilling to read 5,000 words? It would be time well spent, I assure you. But if you are still here, I will offer you neither a synopsis nor highlights, but rather a brief expansion of a very small and minor sidelight, an aside in Summers’s review about moral philosophy.

“There is plenty to criticize in existing corporate-governance arrangements,” Summers writes. “I think, however, that those like Piketty who dismiss the idea that productivity has anything to do with compensation should be given a little pause.” Why? “The executives who make the most money are not...running public companies” and “pack[ing] their boards with friends,” says Summers. Instead, they are “chosen by private equity firms to run the companies they control. This is not in any way to ethically justify inordinate compensation – only to raise a question about the economic forces that generate it.”

That last sentence points out that our moral-philosophical discussion of who deserves what has become entangled with the economics of the marginal productivity theory of income distribution in a fundamentally unhelpful way. Suppose that it really is the case that there are decision-makers who are willing to pay an absolute fortune to hire you in a genuinely arm’s-length transaction, not because you have given them favors in the past or because they expect favors from you in the future. That, Summers says, does not mean that you “earn” or “deserve” your fortune in any relevant sense.

If you win the lottery – and if the big prize that you receive is there to induce others to overestimate their chances and purchase lottery tickets and so enrich the lottery operator – do you “deserve” your winnings? You are happy to be paid, and the lottery operator is happy to pay you, but the others who purchased lottery tickets are not happy – or, perhaps, would not be happy if their best selves understood what their chances really were and how your winning is finely tuned to mislead them.

Do you have an obligation to spend your post-victory life telling everyone that what they really ought to do is put the money they spend on lottery tickets in an equity-heavy tax-favored retirement account, whereby, rather than paying the house for the privilege of gambling, they are in fact the house, earning 5% annually? Are you, like Coleridge’s Ancient Mariner, morally obliged to tell your story to all you come across?

I would say that you certainly are. And I would say that the same applies more generally to those generators of inequality that we economists call “tournaments.” It appears to be true that tournaments turn out to be good incentive mechanisms: offer a few big prizes and a lot of people will flock to try their luck. But, given human risk aversion, the only sensible reason to organize a tournament is that it imposes cognitive distortions on the typical entrant. You, the organizer, are harming them – that is, their best and most rational selves – by feeding them distortions; at the very least, you are aiding and abetting their self-harm (for they, like lottery participants, are making a free choice).

But there is more. Suppose that, somehow, you are paid your genuine marginal product to society. The fact that you are lucky enough to be in a position to extract your marginal product is a matter of, well, luck. Others are not so lucky. Others find that their bargaining power is limited – perhaps to what their standard of living would be if they moved to the Yukon and lived off the land. Do you deserve your luck? By definition, no: nobody deserves luck. And what do you owe those who would be in a position to get what they deserve if you had not been lucky enough to get there first?

And, of course, in what sense is it your doing that you live in the right environment to make you and your skills highly productive in today’s economy? How, exactly, did you choose to be born to the “right” parents? Why, in the end, are your favorable outcomes not the product of pure, undeserved luck?

We would have a much clearer discussion of issues of inequality and distribution if we would simply stick to considerations of human wellbeing and useful incentives. The rest is meritocratic ideology; and, as the reception of Piketty’s book suggests, that ideology may now have run its course.

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    1. CommentedEllie Kesselman

      I find this style of phrasing every sentence as a question to be rather condescending.

      Is the conclusion suggesting that we, the commoners, should not aspire to education, success and monetary wealth yet not question those among us who have achieved it? I'm missing something I guess, but this not Professor de Long's finer moments.

    2. CommentedG. A. Pakela

      If meritocracy is an ideology, how then do you explain your apparent success in your chosen field, success that most academic and government economists would die for? Our whole society is built upon voluntary exchange and what people are willing to pay for goods and services. While it may not be easy or even possible to measure the marginal productivity of say, and administrator, we certainly know how much it costs to procure that individual. Somehow I can't imagine leaving that decision up to Harry Reid.

    3. CommentedPaul Daley

      The problem here is that DeLong attributes inequality to the "tournament" structure of the economy, while Piketty attributes it to returns on capital that have consistently exceeded growth, producing a "patrimonial capitalism," The returns are delinked from merit in either case but Piketty presents far more evidence for his view. Moreover, Summers and DeLong imply that if you're dissatisfied with the results of one tournament all you need do is wait for the next role of the dice. Piketty presents a more "actionable" alternative that flows naturally from his research.

    4. CommentedDavid Beard

      I would echo the William Pu: Who deserves what? I do not see Mr. J. Bradford Delong questioning does he deserve an economics job at UC, nor does he question the financial gains of Mr. Piketty's book sales nor the substantial royalty stream enjoyed by Ms. Jessica Simpson from her apparel sales...who does truly deserve what?

    5. CommentedYoshimichi Moriyama

      I cannot judge Piketty's book as I do not have knowledge enough. but whether Piketty's book is perfect or has any flaws in it will be to a large extent irrelevant. Suppose our market is perfectly flat; everyone is equal in it, starting from the same place at the same time; the result at the finish line is that one per cent is wealthy and ninety-nine poor. Such a society will not be a good society and able to sustain itself in the long run.

      "All types of societies are limited by economic factors. Nineteenth century civilization alone was economic in a different and distinctive sense, for it chose to base itself on a motive only rarely acknowledged as valid in the history of human societies, and certainly never before raised to the level of a justification of action and behavior in every day life, namely gain. The self-regulating market system was uniquely derived from this principle (Karl Polanyi, The Great Transformation.)" Every society except our own has had rules and regulations which impinged on and hampered unlimited and unfettered
      economic activities. Focusing on greed is endangering our civilized way of life.

      Economics tells us what would be the least costly or most productive way of flying from Tokyo to New York. It tells us not to make stopovers at Honolulu and Mexico City. This part of economics is science. But it does not tell us why we should go to New York and not to Washington D.C. It does not tell us why we should not make stopovers if we wanted to.

    6. CommentedWilliam Pu

      "Who deserves what?"
      What your gunpoint will bear or what the "market" will bear is THE answer. Everything else is just talk.

      Global trade did not start after nations signed agreements. Global trade started with gunboat diplomacy. The "backlash"? W/o gunboat trades have been more fair. Well, pick your poison. Fair trade or isolation. But, gunboat has been replaced by drones. Effective or not? We'll see.

    7. CommentedMounik Lahiri

      Found it to be a very sketchy critique, ridden with logical fallacies on the construction of an absolutist definition of luck. The argument should just be very simple. Inequality that gives hope is an incentive for progress and inequality that kills hope is an incentive to remain in status quo and a barrier for upward social mobility. Institutions and individuals who govern and design them, by and large, need to understand therefore the limits of the ability of inequality to incentivise performance and how it does the reverse, in many a situation. Also philosophers and economists need to improve the understanding of inequality in clearly actionable terms rather than making complex arguments, with a dash of ethics and morality thrown in, for their own cognitive kicks.

    8. CommentedProcyon Mukherjee

      Sometimes the obvious is shrouded in the mysterious argument that the obscure would find wanting in rationality; that inequality of wealth has been brewing under our nose facilitated by all means by the systems and structures of the market forces is now being questioned by the same wisdom that made all the allowances that led to its thriving growth prospects.

      Should not the wisdom be diverted towards the bottom 90% and how their income could be raised? It need not be that the solutions prescribed by Piketty is the only consideration, he himself has been modest to say that his way of looking at the problem and the solution is just one of the many ways that existed, he wrote in response to FT, “The main message coming from my book is not that there should always be a deterministic trend toward ever rising inequality (I do not believe in this); the main message is that we need more democratic transparency about wealth dynamics, so that we are able to adjust our institutions and policies to whatever we observe.”

    9. CommentedJohn Stevens

      Dear Prof. DeLong,
      I fully agree with your insights about Mr. Picketty's book contributing to raising the debate on moral philosophy and meritocracy. "Capital in the 21st Century" is indeed triggering global debates on a number of conveniently forgotten issues. Of all the reviews I have read so far about Picketty's master piece, Lawrence Summers is a indeed must. I would include here Robert Shiller's (which is available in this site) and a brilliant post written by Manuel Gomes Samuel linking high labor income concentration to office and factory automation (available at:

    10. CommentedGerry Hofman

      Delong is obviously keen that no limits will be imposed to the levels of wealth that one can achieve, ever. His argument that the wealthy are simply'lucky' but should not be judged on that, because nobody deserves to be 'lucky', sounds rather hollow. The fact that wealth is worshipped like a god in this society does not mean that it's right for the system to be set up to compel everybody to gamble to get somewhere in life. In a just system there would be limits to wealth and limits to poverty, but this social order can and will not impose such limits. The idea that the ideology of wealth has run its course is just pathetic. This story is certain not to end here, and you may yet have your 'just dessert' served up to you.

    11. CommentedCris Perdue

      To put it in another way, how about emphasizing values and vision for our world and human relationships in discussions about economics and inequality?

        CommentedZsolt Hermann

        Thank you for your refreshing comment, I fully agree with you.

        Most of the times it seems we are completely lost in the jungle of markets, GPDs, yearly growth figures, completely forgetting we are human beings after all not primarily producers and consumers.

        This whole discussion about economics, inequality, growth, financial institutions is useless in itself.
        We have completely lost sight of the purpose of our lives and the intention we should be acting with.

        A human being is not born in order to continuously gain possession, to gain profit, to measure one's worth in material wealth or in one's dominion above others. Production and consumption should be simply providing our necessities for a comfortable and natural human life.

        Human beings are social creatures and our contentment, health has to be measures in the quantity and quality of human interconnections we build with each other, and in with what intention we create those connections.

        Europe is one of the best examples of the misunderstanding, they on paper created a Union, an interconnection but only in order to facilitate markets and financial flows, in order to gather even more profit. And as a result it fails since the intention was wrong.

        And the ruthlessly competitive business mentality, the success at the expense of others brings wars, social inequality and global crisis, not to mention the depletion of human and natural resources.

        Without the right connections, without the right intention behind those connections, without mutually cooperating with each other humanity has simply no right to evolve further, we have no future.

        Our crisis is much deeper than a "simple economical or financial crisis".
        We are in a "human crisis", and the only solution is to return to the values that make us human.