Asymmetrical Information

Interresant li'l piece in the latest W magazine about nouveau riche eurotrash and the lavishly extravagant marathon parties with which they forever struggle to keep up with the Joneses.

Personally, I respect the nouveau riche a lot more than the Rockefellars. How dare those nerds make products people want! HOW! DARE! THEY!

"Did Nina Munk look at the table accompanying her article yesterday?"

I once wrote to the author of an article, about inaccuracies in the accompanying table (which I considered part of the article and assumed was from the same author). I didn't specifically say "in the box", and the author thought I was crazy, saying that what I claimed wasn't in the article. The impression I got is that the accompanying side boxes are added separately, afterwards, and the author of the article typically never sees them.

Ms. Munk apparently didn't forsee that her claims would be undermined by some inconveniently accurate details.

Consumption is consumption. It does not matter for the overall economy if a good is consumed by a billionaire or a poor person.

Actually, the critical point in economics is that billionaires do not consume their wealth, rather they invest it.

The economic argument for income inequality is that it encourages savings and investment, not consumption.

But over the last quarter century of rising income inequality in the US personal savings rate has fallen from 14% to zero. Moreover, the share of nonresidential fixed investment produced by households, partnerships and sole propietors has also fallen about five percentage points.

I hardly consider Gates' presence a sign of stagnation, given that he made the money himself and still works at running his business. Indeed, what's striking about the names rattled off here is how many of them still work (and, for that matter, work at the businesses that made them so rich) - I'd have retired by now on a fraction of the kind of money Gates can make in a good ten minutes on Wall Street.

Wake me when the list is dominated by Rockefellerish layabouts.

Of course, after reading about the generic cigarettes guy, I have to ask: did he make his money by being an entrepeneur, or just by being on the outside of a government-run price-fixing cartel? (Not that the two are mutually inconsistent; one could argue that there's even a moral imperative to undercut government-run cartels).

Ah, the good old days, when gangsters were on the Forbes 400!

"Michael, we're bigger than US Steel".

"The economic argument for income inequality is that it encourages savings and investment, not consumption."

No, the economic argument for allowing income inequality is that it's part of the solution to the principal/agent problem between the individual and society. Our government tells people that if they create wealth, they'll be allowed to keep a cut (since income tax rates are below 100%). Wealth has to be created. Other than a few natural resources, wealth isn't just lying around. It takes hard work and initiative and risk-taking to create, and why should people go to all that trouble and risk if they're not going to be allowed to keep some proportion of their contribution?

Look at communism, the ultimate effort to end income inequality. By ruling out "the carrot" (economic rewards for the creation of wealth), it's forced to rely heavily on the stick - constant, excessive monitoring ('big brother is watching') and horrible punishments (sending the whole family to re-education camps). To get rid of income inequality, society must be brutally repressive and, by most people's definition, massively unfair, since there's no longer any connection between effort and reward. Even with horrendous repression to try to force people to contribute, the economy will gradually degrade. Zero income inequality means poverty for everyone, because there's insufficient wealth creation.

The whole debate about "we need more savings", "no, we need more consumption" is silly. To be more wealthy, we need to create more wealth, which means we need incentives.

This doesn't rule out helping the poor, and I'm not saying that our system is perfect. We have to constantly fine-tune the system to encourage people to acquire wealth by creating it rather than by taking it from others, and still there will be some luck (and cheating) involved. But punishing the rich purely because they're rich hurts everyone, in the end.

Spencer, I'm not sure what you are getting at, but my point is simple - conspicuous consumption by the wealthy acts directly to redistribute wealth. More so than savings, but again, that isn't germaine to the post.

Hence the quotation.

I know plenty of people with less substantial inherited wealth who have used it to support a very flexible career in the arts, academia or just idleness. It generally doesn't last for more than a generation or two. A good read on this subject is The Big House by George Howe Colt.

Name a big company that's been around for more than 40 years. Track down the descendants and see if the money still exists. Check out this list for four or five such names.

It seems obvious to me. All those rich people are hogging all the money!!!

Mindles,

Re; "Let me go on record to say that I am all in favor of these folks spending their money."

Exactly. What the envy the rich crowd seems to miss, is that the alternative to the rich spending their money on luxuries, is no one spending money on luxuries.

Specialization creates wealth, and it creates it primarily at the luxury end of the scale, else we would all be busy subsistence farming. There has never been a society with a solid middle class that did not also have a few spectacularly wealthy - and there never will be.

One reason the names aren't of people she's never heard of is that there's an awful lot of self-promotion going on - everyone who's really rich becomes a celebrity unless they actively avoid it.

the really, really funny thing about this is that NINA MUNK wrote it.

Nina is an adept writer, wrote a great book about the AOL deal (which she covered for Fortune), and is a completely freaking hilarious person to be writing about rich lists.

Her father is a man named Peter Munk. He is Canadian (he emigrated from Hungary to Canada) and has been in a number of businesses since the 50s. His current business is a small little thing called Barrick Gold. Family net worth is estimated around C$350 million, though he didn't make the Canadian Business 100 this year.

Though she's not familiar to Americans as someone with the last name Astor or Vanderbilt, this article has the same intellectual integrity and petty cattiness as it would have if one of the daughters of those families wrote it. It's a stain on her reputation that she would stoop this low to smear some entrepreneur, especially when her father is not exactly known for wonderful ethics (bankruptices, self dealing, etc) or a clean history (he's been mixed up with Adnan Kashogi... yes that one, and has attracted a bunch of detractors on the left for appearing to have bought GHW Bush an honorary degree from the University of Toronto).

All in all a no-class act from someone who shouldn't be throwing stones.

Thanks for fact-checking that story, Mindles. Munk's thesis of less social mobility in recent years instinctively struck me as wrong, a feeling reinforced by the near-total omission (apart from some dollar figures) of any sort of comparisons of past and present lists.

Many of these comments, in my view, are correct. Our consumer-driven brand of capitalism requires a substantial underclass so that others can live a life of opulent wealth and comfort.

I agree Rick, the moon is made of Green Cheese.

"Our consumer-driven brand of capitalism requires a substantial underclass so that others can live a life of opulent wealth and comfort."

The "underclass" is relative. Our brand of capitalism has brought undreamed-of comforts to all but the poorest of the poor. Two hundred years ago, poor people could seldom afford the luxury of candles and sat in the dark at night, at best huddled next to a smoky fire, undernourished and poorly clothed. If they got an infection or one of many common diseases, they simply had to suffer or die - there were no antibiotics, no vaccinations. If they could afford a doctor, he might let their blood or give them something that we now know to be poisonous. Even the upper class 200 years ago had less comfortable lives than the lower middle class today.

Now, most poor people (in the US) have color TVs. They still live stressful, difficult lives compared to the middle class in wealthy countries, but they wouldn't trade the lives they have for the lives that they would have had if all countries had been communist for the last 200 years.

Actually Rick absolutely none of these comments support your idiotic thesis.

Rick,

Re; "Our consumer-driven brand of capitalism requires a substantial underclass so that others can live a life of opulent wealth and comfort."

Replace underclass with middle-class, and your statement is sort of correct. But if you intended to imply exploitation (and I think you did), then you are totally incorrect. It is a symbiotic relationship. Neither the upper nor middle classes could exist without the other. As for the "underclass" - well, some people are just plain stupid - or they act in stupid ways - which is pretty much the same thing.

Mindles had the best response. I shouldn't have taken Rick's non-sequitur so seriously.

And concerning progress among the poor... anecdotes and $4 will get you a latte, but one example: A former coworker of mine, a gentleman of about 50 give or take a couple of years, had two birthdays. There was his real birthday, and there was the day his grandmother, who attended his birth in way-rural Texas, put down on his birth certificate the next time she hoofed it into town for supplies, several months later; she just misremembered the day. This man was born after WWII, midwived by his grandmother, in a sharecropping family; when I worked with him, he'd been a chemist at Dupont for a full 20 years before retiring from there and coming to work for the little oil and gas jobber I worked for at the time. He'll never be in the 400 (nor will I), but he's certainly been upwardly mobile over his life (as have I, though not as dramatically).

Doesn't investment ultimately result in consumption? When someone invests in a company, doesn't it result in capital improvements that involve spending money on stuff? And once a capital improvement is completed, doesn't it generate some kind of product or service that is then available for consumption, plus the fact that the income of the people who worked/work on it is now available for them to spend or invest? My mother-in-law keeps a cashier's check in her china cabinet for "final expenses," as they say; what good does that do anyone, not least herself?

Wouldn't concentration of wealth be best measured by percentage of GNP? Like government spending or debt, a larger economy creates a top percentage with larger fortunes. IIRC, Rockerfeller's fortune in the early 1900's was something like 2% of the GNP of the US. There isn't anybody now anywhere close to that range.

I would be willing to bet that as individuals, the super-wealthy hold a decreasing percentage of the GDP even as their absolute fortunes increase.

What is my point, I was asked.

I am all in favor of individuals going out and investing in a new business and making a fortune.
It is the greatest thing in the world and we owe much of our wealth to it.

But, on the other hand I see no need for inherited wealth in the modern ssystem. If I had my way I would have a 100% intergenerational inheritence tax and use that to cut income taxes.

We have a supply side theory if we cut taxes on the wealthy it will lead to greater investment.
But if you look at the data we have been cuting taxes on the upper income groups for 20 years.
But the results has not been what the theory called for. The share of investments stemming from the segments supposedly encouraged by
supply side tax cuts has fallen by about a third.

Moreover, the supply of savings provided by those subject to individual taxes has collasped to nothing.

For years we have been following supply side policies designed to encourage individuals to save and invest and the results have moved in the opposite direction. All the policies have done is shift the US from the world's greatest
creditor to the world's greatest debtor.

If after a quarter of a century the policies are not working don't you think it is time we considered different policies.

Spencer,

Re; "But, on the other hand I see no need for inherited wealth in the modern system."

Define "modern". Because what you seem to mean by modern is that family is less important than the welfare state.

I am sickened by the idea that the state has the right to take what I have earned simply because I would rather give it to my children than to some mythical public good.

Greed is the desire for "unearned" wealth. It is a sin, and it applies to those who would confiscate by force that which they have not earned. The wealth in question was earned by the parents, and it is theirs to distribute as they wish.

hear hear on the suggestion that wealth concentration be measured by GDP. There have been a number of articles (in Forbes and Fortune) that have mentioned how no matter how rich Bill G is, he ain't JP Morgan or Rockefeller by a long shot in terms of GDP. Bill G would need to be worth more than $200 Billion...

Would also like to thank Mindles for adding a link to a brief Peter Munk biography.

Spencer: The other problem with your idea, apart from that Randy already described, is that that gives people a giant incentive to die dead broke.

Why save anything? Why build up a fortune beyond what you can spend while you're alive?

To give the State a windfall when you finally die? That's not going to be a good motivator. Unlike, say, "to provide your children and grandchildren a much better life"... that's, evidently, a pretty good motivator to making wealth.

I'd like to sell these guys something large and spectacular myself.

I just can't read this without thinking naughty things. Remember, "They're real, and they're spectacular!"? That's probably why I have trashy thoughts. It's that there TV what's doing it to me.

Spencer, yours is a very narrow analysis. From 1971 to the present, fixed capital formation in the U.S. has far outpaced other developed countries. GDP growth and productivity growth have likewise been relatively strong. I suspect that you wouldn't accept an argument that these results conclusively prove the efficacy of tax reductions, would you?

It is true that the upper income quintile saves less of their income now (and is largely responsible for the aggregate drop in personal savings), but with respect to household net worth the savings/consumption rate is much more stable. (see the chart in this article for graphic evidence)

I suppose a 100% estate tax would provide greater consumption of accumulated wealth, but more likely it would encourage investment in assets or techniques that facilitate estate tax evasion/avoidance e.g. portable and less trackable stores of wealth, such as art, collectibles, precious metals; creation of private companies and foundations with strange control mechanisms, offshore accounts/trusts/corporations, interesting new wealth insurance mechanisms and frequent cash machine withdrawals.

Personally, I'd like to get the whole estate tax thing off the national priority list. The compromise bill options, offering exemptions of between $4 million and $6 million and likely tax rates around 25% are fine, although I'd rather see capital gains realized/taxed at death at regular rates and leave it at that.

Spencer -

You're still caught up in this silly debate about "we want savings", "no, consumption", "no, savings"..... We want people to work hard, take risks, and build a future. They've done that - we've had strong overall economic growth for the last 20 years. Where is the big failure that justifies drastically reducing the rewards to success (including the ability to share with your own children)?

Relative poverty doesn't matter. If Bill Gates is 10^5 times richer than me, is his health care 10^5 times better? Is his car 10^5 times faster? Is he 10^5 times more above the law than I am? I know his hair isn't 10^5 times better.

The only kind of poverty we should pay attention to is absolute poverty, the kind where your kids probably won't make it because of malnutrition, AIDS, and malaria. The kind of poverty where your DVD player isn't nice enough and you have to buy a used car? Not so much.

IIRC, Rockerfeller's fortune in the early 1900's was something like 2% of the GNP of the US.

Yes, but back then people also ate babies, thus requiring a permanent underclass to supply the necessary meat.

Or so we are told by a certain strain(ing) of thinking that periodically pops up here in order to check for a shadow.

I was merely stating what I think is self evidently true and nothing that anyone has said really refute it other then to call me names and call my statement as idiotic. How can a wealth distribution that has 20% of the population controlling 80% of the wealth be sustained unless there is a sizeable underclass?

Please don’t attack me, tell me how it can be done? Everyone can’t be rich since “richness” is a function of disparity of wealth. Also I’m not talking about now relative to 100 years ago, 100 years ago “the rich” lived at a much lower standard of living then they do now. So that is an ineffective argument.

I also said nothing about exploitation; I simply want to know how it is that the current income distribution can be maintained without a large underclass. Simple question, and for some reason I get nothing but hostility on sites like this one, it doesn’t do any good to ask the question on a liberal type sites because I just get a bunch of non-sense about conspiracies and “the man holding us down” and a bunch of crap like that.

But, on the other hand I see no need for inherited wealth in the modern ssystem

We don't need a reason. It is the people demanding restrictions on freedom -- i.e., people like you -- who need to provide reasons.

You are proposing an absolute ban on people giving their own money to other people, combined with total confiscation of assets at the end of life. If you want want to see that gross and pervasive violation of basic human rights implemented, you need to give a reason for it. A damned good reason, too.

I was merely stating what I think is self evidently true and nothing that anyone has said really refute it other then to call me names and call my statement as idiotic

In other words, you made an unsupported claim and are now whining that people didn't bother supporting their objections to it. That it is "self-evidently true" to you is meaningless, since you've given nobody any reason to believe you know what you're talking about.

Rick -

you're being stupid, but not quite in the way that many of the other commenters are attacking you for.

You're asking how "current income distribution" can be maintained. The answer is easy. It isn't being "maintained", it's the approximately natural result of a mostly-meritocratic mostly-capitalist system. There are a few features dependent on specific institutional arrangements, like the bias towards inherited wealth due to progressivity of income taxes and tax preferences for some passive investment vehicles, though that's not as bad as it was in the Carter years.

Almost all people are free to discover some way to get lots of other people to give them money and become hugely wealty, but very few are actually capable of doing so, or willing to put in the effort. The exceptionally smart and driven make lots and lots of money, the ordinarily smart and driven make decent amounts of money, and the dumb and lazy end up poor.

There isn't a large "underclass" in this country, though we're doing our best to import one from Mexico. If you live in the center of a large metropolitan area, it might appear as though everyone is either rich or poor, and that there aren't many people in the middle, but that's because liberal urban policies have driven the middle class out of the cities into the suburbs.

Simply -- if govt has to take x % of national income, I would rather it be paid by the people who get a windfall from inherited wealth like Kennedy and Bush rather then by the entrepeneurs
that are working to improve thing.

All taxes distort the economy but inheritence taxes distort it less then all other.

It is the lesser of the evils.

You are trying to tell me that having a class of people that do not have to produce anything is good for the economy. What is the difference between living off a trust fund and living off of transfer payments?

How much higher taxes are you willing to pay so that the next generation of the Kennedy and Bush families never have to work a day in their lives?

The reason the economy is doing well is largely because of of corporate investment and that is growing . The data I cited pointing out that investment by the people subject to the individual income tax -- the type of people now entering the Forbes 400 -- are playing a smaller, and smaller role in creating economic growth. That is a fact, it is not an opinion are a left or right position.

Actually, being against an inheritence tax is being strongly against free markets.

Anthony - well said.

Rick, The mistake you are making is in thinking of the economy as a zero sum game - the idea that if someone has more, then someone else must have less. It simply doesn't work that way.

Wealth is created through transactions involving an exchange of value for value. Countless millions of such transactions can be referred to as an economy, but each individual transaction involves only the parties involved. And in every such transaction both parties gain. Consider that the truly fair price of any item is how much it would cost you to make it yourself.

People aren't poor because they lose on transactions. They are poor because they don't participate in transactions - because they have nothing of value to trade.

Thus your idea that the rich are sustained by the poor is incorrect. The rich, and for that matter the middle class, aren't stealing from the poor, they simply don't care about the poor. They have no reason to transact with them.

Actually my question came from this comment up thread:

No, the economic argument for allowing income inequality is that it's part of the solution to the principal/agent problem between the individual and society.

Clearly there is an argument for income inequality (I guess that is different the wealth distribution), so naturally I thought well if there is a legitimate argument for income inequality there must be some reason for such a huge disparity in wealth distribution.

So to respond to some of you.

Dan,

I'm sorry; do you have some evidence to suggest that wealth in this country is something other then improbably lopsided? Or do you think that the current income distribution is normal? If so how can we ever “do away with poverty” if 80% of the population has to fight over the remaining 20%

I don’t think it's a stupid question at all. You don't want socialistic wealth redistribution and while individuals in the remaining 20% can improve their lot in life, it seems to me that this is only possible if there are a large number of people who simply refuse to “pull their weight”. I understand that the economy is not a zero sum game, but it is also not bandwidth on demand.

Anthony,

You're asking how "current income distribution" can be maintained. The answer is easy. It isn't being "maintained", it's the approximately natural result of a mostly-meritocratic mostly-capitalist system.

No, I’m not interested in how people gained wealth; you are saying that the exceptionally smart and driven make lots and lots of money. Well I can add to that list, criminals do too, Mafia Don’s seem to make a lot of money but they are all pretty smart, driven and ambitious. The politically well connected, George Bush’s entire business model was based on being the son of a president, unless you can point out some examples of GW's business acumen that don't involve his last name being Bush. Then there is the fortunate, Bill Gates owes his fortune to the fact that the Cater administration hadn’t started making Ant-Trust noises to IBM so they declined to by out Microsoft and Intel, both sales which would have taken place if it were not for the interference of the DoJ. Sure he would have been wealthy but not the uber billionair he is today without the fickel finger of fate.

I could go on all day citing different way’s, both legal and illegal, that people get unimaginably wealthy that has nothing to do with merit but I don’t really care for the purpose of this discussion. I’m not asking what people did to get their wealth, it’s irrelevant to the question; here is the question I am asking.

How can you have a distribution of wealth such as we have here in the US where 20% of the people control 80% of the wealth, without a substantial underclass to take low or even middling wage jobs which creates excess value for the owners and stock holders to pocket?

My observations have nothing to do with anecdote. I simply want to know if it is even possible for “everyone” to make a middle class living unless a) a large number of people cooperate by refusing to put in the effort to get a better job or b) shareholders and owners choose to make a little less.

As to your “import one from Mexico” comment that is kind of funny because the reason neither party wants to deal with illegal immigration is because many of the people who finance political campaigns make money off of this practice. So I guess one of the things that make you exceptionally smart and driven is having the foresight to have enough money to influence the political process in a way that most people can’t. :)

Randy,

I understand that the economy is not a zero sum game, but it is also not bandwidth on demand, which means that at any given time there are zero sum transfers of wealth.

That's quite a stretch. Rick. You take a transaction freely entered and suggest the profit, or the benefit reaped by the transaction, is enjoyed by only one party. That is, if some folks are rich, it has to be because they profited from the labor of others.

You could apply that the other way too, you know? A bum takes a job handing out flyers and is paid by the deli owner; the bum has profited from this transaction. How? Because he traded his efforts for cash, hence his profit.

People get rich by offering us goods and services we desire. We freely choose to purchase them--we even say Thank You at the checkout because we're so pleased with our purchase. I don't see how this differs from a transaction in which we sell our labor for cash.

It seems to me to be a stretch to figure it's rich guys profiting from our labor. They do not profit any more than we do when you look at the structure of the transaction--each of us are free to walk away at any time.

The sticking point with you guys seems to be that they are making more, but even you must admit this probably owes more to getting us what we want than any exploitation.

"The data I cited pointing out that investment by the people subject to the individual income tax -- the type of people now entering the Forbes 400 -- are playing a smaller, and smaller role in creating economic growth. That is a fact, it is not an opinion are a left or right position."

I'm afraid you didn't cite any data, other than a vague reference to a lower personal savings rate among the wealthy. And you are quite far from supporting your apparent thesis that Bill Gates, for instance, isn't contributing to economic growth.

I was the one who supplied specifics - the top quintile by income is saving much less (The much narrower sub-cohort represented by the Forbes 400 are saving plenty, however). But you can hardly expect us to accept that high earners are not contributing to economic growth based on that datum. I think you might be pursuing an argument based on the increased need for foreign capital, but I can't tell, frankly.

Your assertion of 'fact' is in dire need of support.

"Actually, being against an inheritence tax is being strongly against free markets."

This is a very strange claim. You may be confusing meritocratic principles with free market principles, while squashing property rights en passant.

Rick,

Re; "...at any given time there are zero sum transfers of wealth."

You are correct, its called taxation. And its more than enough to make up for any miscellaneous zero sum transactions that may be taking place in the rest of the economy.

But again, the reason the poor are poor, is not because they are losing in transactions, it is because they do not participate in transactions.

The ugly truth is that the economy doesn't include everyone. Only those with something of value to trade are included. They are beggars in fact, but their pride makes them demand.

Rick - I hope you don't feel I mounted any "attack" with my quip. I just thought you had mischaracterized or misread the discussion and presented an orthogonal line of argument. Up to that point there was nothing I could see that suggested the 'necessity' of a permanent underclass.

I'm not sure any particular distribution is 'sustainable' or not. Certainly there is ample evidence of more unequal distributions throughout history. Some societies have been very durable despite inequality. Inequality has also come in many flavors (in terms of skew and tail size. Consider Sweden two decades ago, with two immensely wealthy families and the state controlling the entire capital stock.

Given your 80/20, what seems to count is what the 20% affords and whether it is improving or deteriorating. Income at the low end has not been improving, but many aspects of modern (American) life at that end of the income spectrum are far superior to what they were, in terms of safety, opportunity and material convenience. I don't think we are on the brink of 'unsustainability', but these are hard things to predict.

I also think your comment about instantaneous zero sum transfers is not consistent with modern money supply elasticity. Consider that virtually all significant transactions are negotiated in balances and credit today.

Rick,

Re; "...how can we ever “do away with poverty...”

If by poverty you mean absolute poverty, people starving to death in the streets - we have already done so.

If by poverty you mean relative poverty, some earning considerably less than others - we never will - nor would it be wise to try.

As a practical matter, how would we redistribute the wealth of the country so that all citizens would be "equal" even if we wanted to? Income is a type of wealth but it is worthless if there is nothing to buy with it. The real wealth consists of factories and people who provide goods and services which people want to consume. How do you split this up? Would your share or mine be a section of cooling tower in a refinery? Just what the hell would I do with it if it became mine?

I would guess that there are very, very few super rich people whose assets consist of a pile of currency that they sleep on at night. Their personal fortune consists of the goods/services producing assets that they own. Although there are many exceptions to the rule, for the most part the people who own such things are in that position because they are good at running them. And as for the "masses," it is in their best interests that the articles of consumption be produced in a cheap and efficient manner. So long as this is the case, it really doesn't matter who owns them.

You can't redistribute the wealth of a modern industrialized nation. Not really. All the talk about redistribution of the wealth is just a screen for letting the government take over the productive assets and running them as the representatives of the people. Of course, as the Soviets learned, putting a bunch of political hacks who know nothing about running a railroad (or whatever) in charge of running one is a recipe for disaster.

Spencer,

Re; "What is the difference between living off a trust fund and living off of transfer payments?"

A trust fund is earned wealth. Though not earned by the individual currently possessing it, it was nonetheless earned, and then freely given.

A transfer payment is unearned wealth. It is money taken from one person and given to another.

It can of course be argued that taxes are to some extent freely given - though certainly not to the extent that an inheritance is freely given.

I was merely stating what I think is self evidently true and nothing that anyone has said really refute it other then to call me names and call my statement as idiotic. How can a wealth distribution that has 20% of the population controlling 80% of the wealth be sustained unless there is a sizeable underclass?

If you start with your definitions written in stone and bolted to the floor, you should probably be unsurprised that many others aren't interested in trying to carve statuary from them -- it is quite possible your definitions reflect a latent or overt bias in your thinking, which others do not share.

What does it mean, practically (and I assume the validity of your numbers), that 80% of wealth is being controlled by 20% of a population? It means:

1. 80% of wealth is being controlled by 20% of the population.

2. 20% of the wealth is being controlled by 80% of the population.

And that is exactly all that it tells us without the benefit of further context, and hence, is a mostly useless observation.

If net wealth happens to be a stunningly large number, than the 80% who are controlling 20% of a big number may be quite rich by any objective standard. If net wealth happens to be an exceedingly small number, than the 20% who are controlling the 80% may no be doing too well, either. And if net wealth falls somewhere in between those extremes, than the relevant question is how well the 20% are living and whether any deficits in wellbeing and income are due to a failure in personal responsibility, rather than a failure in, or lack of, a suitable skeleton framework of publically-controlled infrastructure and institutions.

You can call those who aren't living filthy rich a "permanent underclass" as an expression of a relative relationship with no accountability to the context, but for purposes of dialog it is pretty much useless -- except perhaps at somebody's political rally.

How much higher taxes are you willing to pay so that the next generation of the Kennedy and Bush families never have to work a day in their lives?

How about a portion commesurate to the level of goods and services I demand that government provide me, balanced against some minimum level of personal needs my income must first sustain, instead of arbitrarily pretending that The Rich (or their close relation, The Deceased Rich -- either of which are usually defined as "people with more assets than me") owe the rest of us ticket to paradise?

There's a fine line between asking that people pay according to what they receive, and base envy, and many well-intentioned people never figure out where it is.

A trust fund is not earned wealth. All the individual with a trust fund did to earn it is pick the right parent.

I cited data that the share of nonresidential fixed investment done by households, sole propietorships, and partnerships -- the segment subject to individual income taxes -- had fallen from 16% to 11% of capital spending. It has been flat while everthing else has surged.

The supply-side argument is that investment growth comes from cuts in individual taxes. But it hasn't. We have cut individual taxes on the wealth. But it has not generated an increase in either investment or savings by the wealthy. Actually, both have fallen sharply.. The theory that cuts in individual taxes lead to higher investments has been disproven by the facts. Virtually all the growth in investment stems from the corporate and nonprofit sectors -- areas not impacted by personal tax cuts.

Untill someone shows me data that shows me investment by entrepreneurs has increased it share of total investments in recent years I have no reason to believe that the Reagan-Bush tax cuts have worked.

No one has shown me any reason to reject my argument that consumption is consumption. It makes no difference if it is a billionare buying a yacht or a bum buying a donut. Standards of living reflect consumption, but are not determined by consumption. Consumption and standards of living are determined by investments,not consumption.

Dear Ms Munk,

In your recent New York Times article, you state "Today, the 400 richest people in America are together worth $1.13 trillion. To put that number in perspective, $1.13 trillion is more than the gross domestic product of Canada. And it is more than the G.D.P. of Switzerland, Poland, Norway and Greece - combined." Please note that this comparison is meaningless. The total net worth of the 400 richest Americans is a stock measure of wealth. The GDP of a country is a measure of value added, i.e. of income, which is a flow. To roughly compare the figures, assuming a real return to capital of 5%, you would need to divide the stock of $1.13 trillion by 20 to get a number comparable to the income of a country. Doing this, the "GDP" of the 400 richest Americans won't even come close to the GDP of Canada. Put another way, the wealth of Canada is considerably greater than the wealth of the richest 400 Americans.

Instead of putting "that number in perspective", your comparison confuses the issue by comparing apples and oranges.

Sincerely,

RW

You are trying to tell me that having a class of people that do not have to produce anything is good for the economy.

No, we are trying to tell you that meddling with the market in order to violate those people's rights and deprive them of their property is BAD for the economy. What is "good" is not screwing around with a system that is self-correcting. This semi-mythical "class" of people who "produce nothing" changes its membership every few generations -- because if you do nothing but sit on your ass and spend money other people earned, eventually you go broke.

What is the difference between living off a trust fund and living off of transfer payments?

What's the difference between buying something with my own money and buying something with money I stole from you? Same thing.

do you have some evidence to suggest that wealth in this country is something other then improbably lopsided?

I see no evidence that there's anything improbable about the distribution of wealth in this country. I would say that the distribution of wealth is pretty much inevitable; any free contest will have winners and losers.

Or do you think that the current income distribution is normal?

Wealth distribution has been lopsided in all societies for all of history. That's about as normal as normal can be.

If so how can we ever “do away with poverty” if 80% of the population has to fight over the remaining 20%

That's an idiotic question. The economy is not a zero-sum game; we're not "fighting" over "the remaining 20%". It is an even more idiotic question when you consider that 20% of the total wealth of the United States comes to around $100,000 for every adult in that 80%.

Here's a suggestion: define "underclass". Use exact figures for wealth or income, please. Then explain why anyone in America is trapped in this class. And don't say "people below the poverty line", because it is a simple fact that the portion of our population below the poverty line does little work and is a net drain on society. We don't rely on them; they rely on us.

All i can say is it must be great to go through life not being confused by the facts.

"A trust fund is not earned wealth. All the individual with a trust fund did to earn it is pick the right parent."

The parent (or perhaps grandparent) earned the money and should have a right to spend it as he/she wishes. You can't take the money from the child without violating the right of the parent to help the child, which reduces the incentive of the parent to work hard (plus it's just plain wrong for the government to strip people of their hard-earned money "on principle").

"The supply-side argument is that investment growth comes from cuts in individual taxes."

No, as I've said already, the argument is that economic growth may come from cuts in individual taxes. Why are you so determined to focus on saving vs. consumption, when what we care most about is wealth creation?

And how can you expect to separate out investment by companies and investment by entrepreneurs? Entrepreneurs start and run companies.

All i can say is it must be great to go through life not being confused by the facts.

You just don't get it. This isn't about who deserves to have money given to them; it is about the right to give your money to whomever you want to give it to.

If I want to give my children $50,000, that's my business. It is MY money to give to whomever I please. I do not see why the government has the right to step in, say "sorry, your kids don't deserve that money", confiscate it, and turn around and distribute it among half a dozen women who decided to drop of of high school and shit out six kids each. There is a world of difference between voluntarily giving an undeserving person some money -- that's the whole basis of charity and philanthropy, after all -- and being forced, by the government, to give undeserving people money.

What you are proposing is that the government should have the right, whenever person A wants to give some money to person B, to step in, declare that B doesn't "deserve" the money, and confiscate it. So they can give it to someone ELSE who doesn't deserve it either. Didn't the 20th century provide ample evidence that communism was a stupid way to run an economy?

The awful thing for the leftists of our time is that in order to provide the resources to fund a cradle to grave welfare state they must of necessity allow economic inequality, otherwise the wealth needed to finance their utopia will not be created, or more importantly, maintained, as certain European countries should be learning. Those of the Marxist persuasion have always talked about the internal contradictions inherent in capitalism, but they seem blind to the existence of the seeds of destruction inherent in the egalitarian welfare state.

Rocks don't fall up when you drop them, no matter how badly you want them to. Sorry.

Spencer -

"The supply-side argument is that investment growth comes from cuts in individual taxes. But it hasn't. We have cut individual taxes on the wealth. But it has not generated an increase in either investment or savings by the wealthy."

A supply side argument is that tax cuts increase the supply of investment. There has most certainly been an increase in investment. Your observation that it hasn't come from the bulk of the top quintile is reason to doubt the causality in this supply-side argument, but by no means sufficient to make the extreme policy recommendations you have.

"Untill someone shows me data that shows me investment by entrepreneurs has increased it share of total investments in recent years I have no reason to believe that the Reagan-Bush tax cuts have worked."

You're paving the way for a fallacy of composition. Is it not enough to cite (as I did) that capital investment and growth have exceeded other nations with higher tax rates? Do I have to make sure that it came out of specific individual's pockets? and, by the way, if these guys (Forbes 400) aren't saving or increasing investment, where did their stunning net worth increase come from?

"No one has shown me any reason to reject my argument that consumption is consumption."

There is not a single item in the post or the following comments that ever said it was. But feel free to tilt at windmills.

"All i can say is it must be great to go through life not being confused by the facts."

Given the looseness of your argumentation and laughable extremity of your recommendations, you don't appear to be in a position to patronize.

Yes, defining "underclass" is essential. If it means being in the lowest income quintile, then by definition there will always be 20 percent of households in the underclass so defined. So what?

If it means living on a household income lower than some specified number (e.g., the poverty level), then there is no logical necessity for anyone to belong to that underclass.

In fact, given that households below the poverty level consume (spend) nearly twice as much as their nominal income (because of section 8 housing vouchers, food stamps, Medicaid and more) it's reasonable to inquire how many households actually do belong to the underclass, in any functional sense.

Second fact is that to avoid being in a household whose income is below the poverty line it is approximately 98 percent effective to 1) graduate from high school and 2) get married before you have children.

He's using the Pareto rule. Worse is that he's using it wrong.

"The supply-side argument is that investment growth comes from cuts in individual taxes"

A straw man caricature of one sub-argument of the supply siders.

*The* supply side argument is given by Nobelist Robert Lucas, a convert to it ("The supply-side economists ... have delivered the largest genuinely free lunch I have seen in 25 years in this business, and I believe we would have a better society if we followed their advice." ) in his AEA Presidential Address. (pdf)...

"the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management...

"The potential gains from improved stabilization policies are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available 'supply-side' fiscal reforms"

And even taking that one caricature sub argument as is, it is totally specious to exclude investment levels by corporations and cite only that by "sole propietorships, and partnerships", saying corporate savings don't count, because after all corporate returns are taxed to people too on an individual level -- and the taxes rates that apply to corporate dividends and capital gains have been cut by more than the general personal tax cuts.

Note that if I as a shareholder have my corporation reinvest its profits, *I* am investing them, although you would say "a corporation is, the individual isn't", quite wrongly. And with the new lower 0% to 15% tax rate on long-term capital gains and dividends, it makes a whole lot of sense to have capital reinvest *within* corporations. (Although recent corporate investment growth really has more to do with the cyclic recovery following the 2001 recession, which is why we don't like to deal in caricatures.) So it is illogical to treat corporate investments as different from others as if they aren't taxed to people.

Now as to the personal savings rate falling in recent years (while the corporate savings rate has remained high), as the Fed letter cited above notes, this fall has been "the mirror image" of the increase in personal capital wealth, via financial gains and home values.

Note how the savings rate calculations (mis)count capital gains: If I have my corporation reinvest its profits so its value goes up until I decide to cash in a $100,000 capital gain on its stock, paying tax of $15,000, then the savings rate calculation says I have saved $0 from which an expenditure of $15,000 is deducted -- so my savings are not $100,000 or $85,000 but minus $15,000, *negative*. That's how rising capital wealth creates a falling personal savings rate.

As to some people having a lot more wealth than others, I'll just note that as Keynes famously said, the purpose of the economy is to sustain and increase consumption, as consumption (not income or wealth) is the determinate of welfare.

And as it happens the width of the consumption distribution is only a fraction as wide as that of the income/wealth distributions. A fact the class warriors never ever mention, for some reason.

"If I had my way I would have a 100% intergenerational inheritence tax and use that to cut income taxes."

Well, if as you said your concern is that savings and investment have fallen too low, it's odd to pick a remedy that must make that situation worse.

Assume that your inheritance tax reduces income tax dollar-for-dollar. The government's income and saving positions thus obviously remain unchanged.

But your inheritance tax falls 100% on accumulated savings and capital to finance gov't consumption. You are simply proposing to consume capital outright.

"As long as an inheritance tax remains a true inheritance tax it always involves a conversion of capital into income, hence an act of economic waste which is damaging to all."
-- Joseph Schumpeter

How much of this do you get back by cutting the income tax? Not much. If the personal savings rate is 5%, then 5 cents on the dollar, if 10% then 10 cents.

So the inheritance tax to reduce income tax reduces the nation's accumulated savings and investment by 90% - 95% of the tax collected.

For the problem of a too low savings rate, this is a strange remedy.

Jim,

Re; "And as it happens the width of the consumption distribution is only a fraction as wide as that of the income/wealth distributions."

Very good point.

Tcobb,

Re; "...in order to provide the resources to fund a cradle to grave welfare state they must of necessity allow economic inequality, otherwise the wealth needed to finance their utopia will not be created..."

Exactly. Socialism is parasitic. The socialist argument can never be to replace capitalism, but always to suggest that the host can be tapped just a bit more without killing it.

Objecting to the estate tax on the ground that people have an absolute right to decide what will happen to their assets after they are dead just begs the question. One could just as well claim that inheritance laws violate the common sense proposition that dead people can't own things.

That is not to say that there aren't practical arguments to made against the estate tax or for l*m*ting the size of the estate tax -- e.g., a 100% estate tax would encourage slacking and overconsumption by oldsters. But simply claiming that an absolute right exists isn't a meaningful argument.

[Inexplicably, the comment filter rejected the word spelled with asterisks above.]

"the common sense proposition that dead people can't own things"

Might be just the 'common-sense' idea that puts a stop to irrevocable Trusts (and Estates, and possibly Foundations for that matter) of all kinds. In the meantime, dead people have managed to exercise post-mortem control over all sorts of things, for better or, often, worse.

To clarify: I don't think "the common sense proposition" to which I referred is particularly meaningful either. My point was a naked appeal to "rights" -- or to purely abstract statements of "common sense" -- simply declares the question resolved without argument.

Actually, inheritance laws do not violate the common sense proposition that dead people can't own things. Inheritance laws exist *because* dead people can't own things.

Alkali,

I think that most would admit that they have an obligation to the state, as well as an obligation to family. The thing about the inheritance tax, is that the obligation to the state has already been met - taxes have already been paid on that money. Thus the only remaining justification for the inheritance tax is the idea that the inheritors do not deserve the money because they didn't earn it (an accusation of greed) - so the state might as well take it. Which totally disregards the fact that the person who did earn the money has met their obligation to the state and does have a right to distribute the remaining funds as they see fit. In short, the justification for the inheritance tax is simple greed (the desire for unearned wealth). It is funny, sort of, to see an accusation of greed used as a justification for greed.

"The thing about the inheritance tax, is that the obligation to the state has already been met - taxes have already been paid on that money."

I agree, although the one caveat is that in the case of unrealized capital gains, it seems reasonable to ask whether the deferral of these gains should survive the death of the owner.

I've made the point before that the elimination of 'stepped-up' basis in conjunction with the elimination of the estate tax might not hurt the Treasury as much as currently estimated.

Objecting to the estate tax on the ground that people have an absolute right to decide what will happen to their assets after they are dead just begs the question.

They have the right to decide, *before* they die, what will happen to their money at some point in the future.

Let's say I sign a binding contract with you, saying that I will buy a house from you on November 1st, 2005. Then on October 1st I drop dead of a heart attack. The government confiscates all my money and tells you to go fuck yourself. Is that justice? Obviously not; it violates both of our rights.

Another thing to consider -- do you want to live in a country where the death of a dissident gives the government ownership of all that dissident's intellectual property?

Randy writes:

The thing about the inheritance tax, is that the obligation to the state has already been met - taxes have already been paid on that money.

Taxation of the same money happens all the time. I earn income, I pay taxes. I use my (already-taxed) income to buy consumer goods; I pay sales taxes, and the store may have to pay income taxes. I use my (already-taxed) income to buy real estate; I incur property taxes year after year, and the seller may have to pay capital gains taxes on the property that is sold. I use my (already-taxed) income to hire someone; I have to pay payroll taxes and they have to pay payroll and income taxes. In light of all that, I'm not sure what principle taxing inheritance violates.

Dan writes:

They have the right to decide, *before* they die, what will happen to their money at some point in the future.

Why?

(I'm not saying that you can't come up with a reason; I could too. I'm just saying that asserting that they have such a right is not a meaningful way of arguing.)

Let's say I sign a binding contract with you, saying that I will buy a house from you on November 1st, 2005. Then on October 1st I drop dead of a heart attack. The government confiscates all my money and tells you to go fuck yourself. Is that justice? Obviously not; it violates both of our rights.

In the alternative world where all assets go to the state upon the owner's death, presumably I'd require some kind of a performance bond from you, particularly if I thought you might drop dead. If I demanded a performance bond as part of the contract, presumably you'd not be willing to pay quite as much, because of the expense of the bond. That would be inconvenient, but it wouldn't be a horrible injustice.

Note also that under our tax regime, the estate tax is assessed against net assets in the estate, so creditors would be satisfied first before any tax was paid. In your example, if the government took your entire estate, they'd have what was formerly my house, not the money you were going to use to pay for it.

Alkali,

Good point - money is often taxed more than once.

Perhaps the difference in the inheritance tax is that most taxes are honest confiscation (I want this money, I have the power to take it, so I'm taking it), whereas the inheritance tax is confiscation plus blame (I want it, I'm taking it, and you don't deserve it anyway). I think that any honest person must be repelled by such a vulgar display of greed. I'll never pay a penny in estate tax. I'm against it on principal. Same goes for progressive taxation.

Mr. Dreck,

Mr. Dreck,

A supply side argument is that tax cuts increase the supply of investment (capital?).

Who can tax cuts increase the supply of investment capital when the government has to turn around and borrow it back? I have argued that the Bush tax cut (or any tax cut that is not straight forward return of surplus tax collections) should more precisely be termed a tax loan and has no more economic benefit then any other deficit spending. In fact in this case the “tax cut” is pure Keynesian deficit spending, is it not?

"They have the right to decide, *before* they die, what will happen to their money at some point in the future."

Why?

For the same reason it is wrong for me to murder you, rape you, or rob you. You have property rights recognized by thousands of years of tradition and common law.

I'm not saying that you can't come up with a reason; I could too.

So you just like wasting my time, then.

Who can tax cuts increase the supply of investment capital when the government has to turn around and borrow it back?

Because the average rate of return on investments is greater than that of the bonds the government uses to borrow money. A tax break financed with deficits is akin to borrowing money at a one rate in order to invest it at a higher rate.

Objecting to the estate tax on the ground that people have an absolute right to decide what will happen to their assets after they are dead just begs the question.

Actually, the estate tax inevitably requires a gift tax, which limits what you can do with your money now (unless you're willing to pay the gift tax, which starts around 20%, hits 30% at $100k, and reaches 48% at $2 mil).

The argument that the estate tax is a remedy for the accumulation of piles of wealth is a bit ironic, since the accompanying gift tax tends to encourage this same accumulation (by discouraging giving money away). Not surprising, tho, because the state has an incentive to encourage any activity that's taxed, as we can see from all the lottery ads.

Dan writes:

For the same reason it is wrong for me to murder you, rape you, or rob you. You have property rights recognized by thousands of years of tradition and common law.

Yes, but there have been estate taxes for thousands of years, too. (Augustus imposed one.) So to the extent there is a right to decide what happens to your stuff after you die, it doesn't preclude an estate tax.

So you just like wasting my time, then.

Uh, no. My point is that "right" is just a word, and therefore to say there a "right" doesn't really answer the question, it just says what you think the answer ought to be.(*) To paraphrase Feynman, you might as well say that we can't have an estate tax because of "wakalixes."

There are coherent arguments for and against estate taxes (or about how big they should be) but asserting that you can't have an estate tax because of people's "rights" isn't one of them.

(* I'd except constitutional rights from that broad statement, unless we're having a discussion about whether the constitution should be amended.)

PJ/Maryland writes:

The argument that the estate tax is a remedy for the accumulation of piles of wealth is a bit ironic, since the accompanying gift tax tends to encourage this same accumulation (by discouraging giving money away).

Actually, there is a per-donee exemption from the gift tax that tends to encourage giving money away in modest amounts to lots of different people.

Alkali,

Re; "There are coherent arguments for and against estate taxes (or about how big they should be) but asserting that you can't have an estate tax because of people's "rights" isn't one of them."

It is true that we have only such "rights" as we have the power to enforce.

So what you are saying, in essence, is that because the government has all the power, and the power to tax, it therefore has the only real "rights", and that discussion of taxation must be limited to how much the government should take in its own best interests.

Er, no. What I am saying is that you can't determine whether or what kind of estate tax we should have by moving "rights" around on an metaphysical chessboard. In any event, I have no idea what it means to determine that something is in the government's "best interests."

Randy,

You've hit the nail on the head. As far as I can tell, alkali is genuinely disputing the right to property -- essentially suggesting that a person has property rights only to the extent that the government, when in a generous mood, deigns to grant them.

One might as well demand a justification for rights to life and liberty.

There are coherent arguments for and against estate taxes (or about how big they should be) but asserting that you can't have an estate tax because of people's "rights" isn't one of them

Why?

(I'm not saying that you can't come up with a reason. I'm just saying that simply asserting your claim is not a meaningful way of arguing.)

A less facetious response:

If the long-term existance of estate taxes serves as a refutation of the idea that people have no right to do as they wish with their property, then it logically follows that people have no rights at all. After all, every right supposedly possessed by humans has been routinely violated by governments throughout human history; if the fact that a government violates a right proves that right does not exist, then no rights exist.

After all, every right supposedly possessed by humans has been routinely violated by governments throughout human history; if the fact that a government violates a right proves that right does not exist, then no rights exist.

I think I see more of alkalai's argument here than I see of yours. Humans, unassisted by mutually recognized first principles such as religious or philosophical premises, have never been able to fully and completely agree on a universal 'right' -- not even to one's own life if its existence proves inconvenient to some potentate.

As it happens, societies (and their governments) that recognize and defend a set of rights, not the least of which is a strong form of property right, tend to survive longer and be more healthy than societies where such rights are not recognized (or recognized nominally, but practically subverted by corruption). This is one of many possible reasons for wishing that the property right be recognized and respected in the death of a property holder.

I have little use for inheritance taxes, and prefer the weak version if we must have one. I also suspect, but cannot prove, that a majority of people would agree were the thing ever put to a direct vote. But I also think alkalai has hit on something here: The current structure of your debate really does resemble pawns on a chessboard. You can't move the pawns around until they are positioned according to your preconceptions, proclaim "check," and expect to draw a meaningful discussion from it. Even someone who agrees with your desired outcome may find no common ground in your arguing means.

Humans, unassisted by mutually recognized first principles such as religious or philosophical premises, have never been able to fully and completely agree on a universal 'right'

Thats like saying you can't solve a math problem without invoking math; it is a tautology. Without religion and/or philosophy there is no morality, no ethics, and no right or wrong. Obviously you can't reach decisions about rights without those things.

But I don't understand your claim that humans can't agree on rights. Obviously many humans can; if your point is that agreement is not universal, I must ask why that matters. Not all humans agree that the Earth revolves around the Sun, yet nevertheless it does so.

Different cases, Dan. The earth demonstrably revolves around the sun, whether or not we "believe" that it does. There's no intrinsic "property right" at all, much less one that allows you to dispose of your property after your own death. We as a society have agreed on a certain formulation of property rights that most of us hold very strongly, and it does generally include the right to will your property to your heirs without 100% penalty. But just as I take a firm stance that estate taxation is punitive to those whose lifework might reasonably be expected to engender society's gratitude, my husband takes a similarly firm stance in favor of the justification some of the Founders gave for an estate tax: to reduce the risk of erstablishing a permanent aristocracy that could threaten our egalitarian principles.

Anony-mouse and Alkali,

I do understand that the concept of "rights" is a poor place to start a discussion of the "details" of a particular tax.

Because I do believe; We have only those "rights" which we have the "power" to enforce, individually or collectively.

Taxation is a very clear example of this. According to the constitution, I have the right to free speech. But what good is that right if the government has the power to take away my income, my means of survival, my power, at will? If I have no power, I have no rights.

Alkali is correct to the point that, if we have already collectively given up our rights, then there is no point in discussing rights when discussing taxation. All that is left is for the government to decide on the optimum blend of taxes and put them into effect.

I can offer only my opinion that rights are important, that it is time to take back our power, that it is not too late.

P.S. The means by which we were encouraged to give up our power - and therefore our rights - was to convince us that we could have a great society by taxing the rich. The proverbial free lunch. We thought we could violate the rights of some without violating the rights of all. We were wrong.

"How dare those nerds make products people want!"

That's not exactly how Microsoft got where they are. Of course, at a libertarian economics blog, we need to pretend like abuses of monopoly power don't exist, so carry on!

People bought microsoft because interfacing different software is a pain in the a$$ for a professional and close to impossible for an amateur. What I don't understand is why Microsoft's competition keeps trying to be different. Do I want to buy a car with three wheels? Microsoft is so big because their competition, so far, has been really stupid.

"That's not exactly how Microsoft got where they are. Of course, at a libertarian economics blog, we need to pretend like abuses of monopoly power..."

Um, Microsoft started off rather small. Sculley of Apple famously blew off Gates and wouldn't even answer Bill's letters. And IBM was even larger than Apple!

How does such a small company abuse its monopoly power to become big? (Most firms find they can't abuse monoply power until after they get it.)

Jim Glass -- bingo. One might make the argument that Microsoft *stayed* where they are by using monopoly power. But to suggest, as M1EK does, that monopoly power got them where they are is assinine. But I guess M1EK needs to pretend otherwise in order to take shots at a libertarian economics blog, so carry on!

Hey guys,

I worked at IBM on OS/2, and a friend of mine worked on Netscape. You're not going to win the battle of authority with me. The riches of the Microsoft guys were originally obtained through nothing but hardball business tactics, it's true, but that's a small piece of the overall pie by now. Far more of the aggregate wealth of MS now was due to using that initial monopoly.

Randy,

By the time Windows 95 rolled around, a heck of a lot of people bought it because they had no choice. Our competitor (OS/2 v3) couldn't even get preloaded __ON___ __IBM__ __PCs__ (i.e. part of OUR OWN COMPANY) because MS used the threat of charging full retail for the 80% of their customers who wanted W95 as a club to beat away preloads for the 20% who wanted OS/2.

As a result, the market for OS/2 even on those machines shrank by a bit, and all of the remainder ended up paying BOTH MS _AND_ IBM for their operating system software.

That's just one trivial example. Read the antitrust proceedings for about a hundred more, some of which were more egregious.

A libertarian slant is one thing; but this level of cognitive dissonance is quite another. Sometimes there really ARE reasons antitrust lawsuits are pursued beyond simple jealousy.

M1EK,

The thing is, Microsoft hasn't taken a dime from its competitors. Every dollar it has came from a customer. An anti-trust lawsuit isn't going to change my mind. An identical product at a lower cost, however... That could work.

Randy,

That's a useless way to look at the market, but if it makes you happy, you keep rolling with it. Consider, before you do, however, the opportunity cost, i.e., what we COULD have had by now, had OS/2 stayed alive and been enough of a competitor to keep Microsoft honest about Windows. (Linux isn't nearly enough, folks, trust me - I use it, and I like it, but it's not a real threat to them and they know it).

Likewise with browsers, except that free browsers, unlike free O/Ss, can actually pose a small threat to MS, which is why you finally see some work on IE the last year or so.

M1EK,

All I'm saying, is that if someone wants to compete with Microsoft, all they have to do is offer an identical product for less. Instead, they keep trying to offer something better (i.e., different). And the reason that people went with Microsoft is that they don't want different. The potential competitors have all been thinking product differentiation when they should have been thinking market share, leaving Microsoft as the only player in the only real market.

"All I'm saying, is that if someone wants to compete with Microsoft, all they have to do is offer an identical product for less."

How could Netscape have offered a browser for less than 'free'? Microsoft could subsidize IE development through the monopoly profits they got off Windows and Office. How could Netscape do better? (and yes, at the time, a good chunk of consumers (mainly corporations) DID pay for browsers).

As for operating systems + apps, the investment to produce a platform equivalent to Windows would, today, run in the tens of billions of dollars. Ain't Gonna Happen.

If Microsoft were forced to divorce Office from Windows, or somesuch arrangement, you could reduce the barrier to entry to something that another big company might afford. But even IBM (the one afraid of its own antitrust enforcement, not the hypothetical one) couldn't pay the full bill as above.

M1EK,

Re; "How could Netscape have offered a browser for less than 'free'?"

They'd have to start by offering an entire suite of products, just like Microsoft does.

Re; "As for operating systems + apps, the investment to produce a platform equivalent to Windows would, today, run in the tens of billions of dollars. Ain't Gonna Happen."

I don't believe it is impossible. I think that IBM could do it if they chose to. Same with Oracle. Probably Yahoo or Google. But if you are right, and nobody can - well, then nobody is ever going to compete with Microsoft - because Microsoft is putting out the product that people want.

"well, then nobody is ever going to compete with Microsoft - because Microsoft is putting out the product that people want."

That's what, like, an eighth-grade view of economics?

Didn't Jane post about something similar to this a couple of articles downstream? Let me see... yup, here it is:

"3. Libertarian economists don't understand market failure arguments."

QED. Guess I'm pissing in the wind here...

Yeah M1EK, you and every other competitor who couldn't beat the Great Satan. How's that anti-trust litigation going, by the way? They break up Bill's company yet?

Last I heard, Microsoft paid a couple billion to make the sore losers go away (chump change for a company their size) and now just keeps on rolling. But I'm sure the final trust-busting triumph is just waiting for your testimony to clinch the case. How could your authoritative arguments possibly miss? I mean, you have a friend who worked on Netscape.

Well, if you can't win your argument in court, no harm in trying to get a better verdict here. Let me know how that works out.

Different cases, Dan. The earth demonstrably revolves around the sun, whether or not we "believe" that it does. There's no intrinsic "property right" at all, much less one that allows you to dispose of your property after your own death.

I think it has been pretty well established that the concept of property ownership is hardwired into the human brain (and many animal brains, for that matter). So I don't think you can accurately say that there is no such thing as "intrinsic property rights"; the claim is true only inasmuch as the claims "color does not exist" and "anger does not exist" are true.

But setting that aside, rights can still be discussed empirically by examining how proposed rights meet the desired goals of the moral system. For example, any philosophical or moral system which cares about the poor must necessarily favor allowing people to leave money to their children, because forbidding them from doing so discourages investment and hard work, and thus worsens poverty. A person who says "we must confiscate all property upon death in order to aid society" is factually wrong in the same way that a person who says "the sun orbits the Earth" is.

I worked at IBM on OS/2, and a friend of mine worked on Netscape. You're not going to win the battle of authority with me.

WIth all due respect, OS/2 wasn't a very useful operating system. And before you say "it was better than what Microsoft was offering" -- no, it wasn't, not really. It was dramatically worse in the one way that counts more than any other, which is software support. It was more stable, sure, but people weren't using PCs as servers back then. It had better memory management, but end-users didn't have to deal with most of those frustrations. OS/2 was a better platform to develop for, but from a user's perspective it wasn't a good option.

As for Netscape, well, cry me an effin' river about Netscape. When they were dominant they used every dirty trick they could to keep rivals from competing. If I had a dollar for every time I had to tweak my code to deal with some deliberately-introduced, standards-violating incompatability in Netscape I could have started my own dot-com with the cash.

I worked at IBM on OS/2, and a friend of mine worked on Netscape. You're not going to win the battle of authority with me.

WIth all due respect, OS/2 wasn't a very useful operating system. And before you say "it was better than what Microsoft was offering" -- no, it wasn't, not really. It was dramatically worse in the one way that counts more than any other, which is software support. It was more stable, sure, but people weren't using PCs as servers back then. It had better memory management, but end-users didn't have to deal with most of those frustrations. OS/2 was a better platform to develop for, but from a user's perspective it wasn't a good option.

As for Netscape, well, cry me an effin' river about Netscape. When they were dominant they used every dirty trick they could to keep rivals from competing. If I had a dollar for every time I had to tweak my code to deal with some deliberately-introduced, standards-violating incompatability in Netscape I could have started my own dot-com with the cash.

M1EK,

Re; "3. Libertarian economists don't understand market failure arguments."

And as I said before, its not that I don't understand market failure arguments, its that I reject them in most cases. This is one of those cases.

Chrysler puts out the minivan, which sells like crazy. Your option, working at GMC, is to put out a minivan to try to get marketshare, or put out something else and try to convince the public your idea is better. If you choose the something else option, you have no right to complain that you don't have a share of the minivan market. That's not a market failure, that's a market success. Its only a failure on the part of your marketing department.

Microsoft's competitors are making the same mistake that Walmart's competitors are making. They're not thinking big enough. The result is that they are no longer competing in the same market - they just like to think so.

Dan,

WRT OS/2, "software support" is precisely the linchpin of the argument. IBM was too petrified of antitrust proceedings (hamstrung by their own lawyers) to basically invest another ten billion bucks building its own suite of software (they later made a half-assed attempt at it by buying Lotus).

I was there. I know.

This backs up my contention that the ONLY way to beat MS without antitrust intervention is the investment of those (by now, tenS of billions of) dollars.

Keep in mind that despite these software support liabilities, many PC Company customers (20% is what I heard) WANTED TO BUY IT PRELOADED, and Microsoft, by abuse of their monopoly position, was able to prevent it.

And Netscape could use dirty tricks - they weren't a monopolist. By definition, certain practices become illegal once your market position and barriers to entry keep out competitors - those practices might be unethical beforehand, but not illegal.

By any measure, anyways, Microsoft's practices were far more odious.

WRT OS/2, "software support" is precisely the linchpin of the argument. IBM was too petrified of antitrust proceedings (hamstrung by their own lawyers) to basically invest another ten billion bucks building its own suite of software (they later made a half-assed attempt at it by buying Lotus).

First of all, you exaggerate the cost of the software development by two orders of magnitude.

Secondly, you fail to explain why any customer would want to switch from a Microsoft OS with Microsoft apps to an IBM OS with IBM apps, given IBMs decades-long record of producing poorly-engineered overpriced crap and treating its customers badly. And don't give me any of that "Microsoft does that too" stuff -- IBM, back when it was the big boy in town (i.e., about a decade before the period in question), behaved MUCH worse than Microsoft has since reaching dominance.

Thirdly, you're ignoring the fact that virtually no other software companies wanted to develop for OS/2 either, and IBM didn't do much to encourage them (because they wanted a Microsoft-style monopoly on OS/2 apps).

I was there. I know.

It is clear that you're too personally invested to judge the events impartially.

And Netscape could use dirty tricks - they weren't a monopolist

In the mid-1990s Netscape had a bigger share of the browser market than Microsoft had of the OS market. So don't give me any of that "there was no monopoly" nonsense. They absolutely had a monopoly on browsers and they absolutely abused that power in ways that were both unethical and harmful to consumers and developers.

As for operating systems + apps, the investment to produce a platform equivalent to Windows would, today, run in the tens of billions of dollars. Ain't Gonna Happen.

It already happened via open source, the problem is the very reason Microsoft remains dominant -- standardization. Linux is available in a stunning array of flavors with an even more stunning array of applications. But good luck getting broad interoperability (software interoperability or hardware drivers) without being at least a dedicated novice -- because sooner or later you will have to either modify it yourself, or search out a substitute at no small investment of time.

People can scream all day long about abuse of monopoly power, and be correct so far as that goes, but that's not why Microsoft is still there.

Dan,

I don't know where to begin - your history book is so absolutely wrong on so many issues. While I don't pretend that my OPINION is automatically better because I was there; it's clear that your grasp of the facts is by far the weaker. I'll take one example, since I really need to get back to work:

"Thirdly, you're ignoring the fact that virtually no other software companies wanted to develop for OS/2 either, and IBM didn't do much to encourage them (because they wanted a Microsoft-style monopoly on OS/2 apps)."

IBM corporate was scared to death of writing OS/2 apps (end-user apps, I mean; not middleware). The company lawyers were still worried about the 1970s and 1980s antitrust action. You have no clue what you're talking about here; IBM corporate quashed every effort by various parts of IBM to fill the OS/2 apps gap, and instead, in fact, tried desperately to encourage ISVs -- going as far as basically PAYING them to write apps. When that didn't work, they bought Lotus, feeling better about the prospects of an isolated subsidiary writing those apps rather than IBM proper, from the antitrust scare perspective.

So, your reading of the situation is exactly 180 degrees from reality. I admit that I'm biased, but my facts came from the actual events that really happened. I'll take a biased opinion based in fact every day over one based on history from an alternate universe.

anony-mouse,

You inadvertently support my point in your attempt to refute it. No effort, apart from a tens of billions decade-long commercial one, can possibly dethrone Microsoft today, since you must first support 95-99% of the hardware out there (and do it well), then support existing Windows apps, then provide a good API for your own apps.

And it's NOT the impluse to standardize which is responsible for this. Standardization can happen just as easily on communications protocols as on API (i.e. http). But you'd first better have an answer for the commodity hardware market.

M1EK,

If I'm hearing you right, you're saying that IBM could have competed with Microsoft had it not been for the anti-trust action against IBM. Interesting. So an anti-trust action inadvertantly destroyed the ability of a corporation to compete. Sounds like a good reason to let the market sort things out in the future. By the way, I don't necessarily expect the competition for Microsoft to come from within the US. Perhaps we should be wary of destroying Microsoft's ability to compete when the challege comes.

You inadvertently support my point in your attempt to refute it.

I thought your point was that Microsoft maintains its position through monopoly abuse. My point, which you seem to have missed, is that while Uncle Pennybags does have a role in explaining Microsoft's continuing marketplace dominance, the creation of a broadly compatible standard has much more momentum and is a better explanation.

By the way, maybe you should try using some of these alternatives before waxing loquatious on your alleged understanding of the situation. I have. All of the tools and software applications and hardware drivers to compete directly with Microsoft are essentially there, the "tens of billions of dollars" having been created by an informal corporation, employing hundreds of thousands of people, each devoting their time and resources a few dollars at a time.

What this software base lacks is a coherent overseer to bring the components together under one roof and then market directly against Microsoft -- because without broad ease-of-interoperability, the knowledge cost for any one individual or business to jump in the pool is usually very high.

I have a different viewpoint on OS/2 vs. Windows. 99% of the computers out there are neither desktops nor servers - they are embedded systems, ranging from teeny microcontrollers running keyboards, mice, etc., to some quite hefty control systems. I worked with a couple of embedded control systems that ran in OS/2, and I never found a single bug in either of them. I have also worked with similar systems more recently put out by the same company running in Windows CE and XP Embedded - and they certainly are not bug free. It's just one data point, but the same programming team that could produce code with no discernible flaws in OS/2, could not write software for Windows that didn't require use of the reset button every so often.

Now, I think the real mistake here was in using a desktop OS for embedded control in the first place. You might as well drive screws with a hammer - but with XP Embedded, Microsoft is out there claiming to sell a screwdriving hammer.

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