Asymmetrical Information

Kleiman sez: "But think of the social waste involved in converting a potential biologist in to, say, a detail man for a pharamaceutical (sic) company."

What?!?! I don't quite know what he's suggesting, but I'm guessing that he thinks that biologists don't exist inside pharmaceutical companies. [And that pharma has 'detail men', whatever that is. Grim faced suits, doubtless.] Or that biologists outside pharma are fated to lives as tree-counters or fish-counters. While that certainly may have a little truth to it, it's my observation that the people in those jobs typically love them, no matter how low paying they are.

Besides, isn't there some social benefit to working in pharma?

"I've said before that I think the supply-siders who argue that lowering our marginal tax rates will raise revenue are full of bunk."

Jane, it takes great courage to believe that when you have been proven wrong so many times before. It also takes great courage to disagree with Edward Prescott, a recent Nobel Prize winner in economics.

Learn about Sub-S corporations and the affect of high taxes rates on those corporations. When you do, you might acquire an understanding on how taxation affects economic activity.

I didn't say that I disbelieved there was deadweight loss from taxation; I said I didn't believe that cutting taxes raises the amount of revenue collected.

"Similarly, let me posit that any fashion trend, automobile, restaurant, or what have you, that is adopted by the poor will rapidly become a low-status item among higher income quintiles."

It's not clear to me that fashion trends adopted by the poor (let alone, "what have you" ... hip-hop, reggae, anybody?) rapidly become "low-status items" among higher income quintiles.

Certainly, syrup sandwiches and vacations at the state beach aren't likely to catch on with wealthier folks, but there does seem to exist a pattern of "street" trends getting adopted by wealthier segements of society ... at which point, the opposite of the formula you posit happens - the trend loses its "cred" on the street.

the Fortune 500 is increasingly composed of people who earned, rather than inherited their money

I think you meant to say Forbes 400?

"It also takes great courage to disagree with Edward Prescott, a recent Nobel Prize winner in economics." Some of us might think that when Economists get sufficiently interested in precision to stop implying that the Swedish Central Bank's prize is indeed a Nobel prize, then we might pay more attention to them.

That is why I encouraged individuals to look hard at their spending to eliminate the things that do not truly make them happy, rather than calling for government programmes. They're in the best position to actually know what they need.

And therefore have no need of your encouragement. Sorry to harp, but it's true.

Aside from the factual and moral shortcomings of Kleiman's exaggerated ideas about financial insecurity, I don't think he realizes how poorly this belief of his fits with the rest of his argument. If even the specter of financial ruin
isn't sufficient to stop people spending their money on worldly vanities, why does Kleiman expect higher taxes to do the trick?

All of this hoo-rah can be dealt with by three brief observations:

1. When more money doesn't provide more happiness (call it satisfaction or utility, if you will), people stop trying to earn more money. Until then, more money, by definition, buys more happiness.

2. It is impossible to make interpersonal utility comparisons which show that taking money from the rich and giving it to the poor increases the total sum of happiness. There is no such thing as a social welfare function. Those who think there is such a thing must be willing to submit to robbery by poorer persons.

3. There is no such thing as "the economy"; there are crude aggregate measures of economic activity by individuals and firms. Therefore, leisure, per se, isn't "bad" for "the economy." After all, leisure (when sought) adds to the utility of the person who obtains it. The only time leisure is bad is when someone is taxed to support someone else's leisure.

1. When more money doesn't provide more happiness (call it satisfaction or utility, if you will), people stop trying to earn more money. Until then, more money, by definition, buys more happiness.

I believe you meant "by tautology."

Moreover people are quite capable of pursuing a tangible in hope of obtaining an intangible, without ever acquiring said intangible, continually motivated by the hope that the next tangible aquisition will bring the intangible about. The only way to know this outcome is to be an intellectually honest first party, or to be a second party when the first party honesly declares it, or to be a third party when a second party accurately reports it.

In the present example I suppose one could try to argue that the motivating hope is actually a happiness of another form, hence continued utility, but that is really just a creative way of begging the question.

This makes it inherently difficult to gauge just how much intangible happiness (or lack thereof) is obtained by someone else in a tangible acquisition. Since humans tend to have similar modes of behavior even when tastes differ, the best approach one can take is to draw lessons and illustrative anecdotes from one's own experiences.

Ironically, this was exactly what Jane did a few posts ago and for those efforts, she was thanked with roof sealant and goose down by a few posters. (I wonder if it made any of them happier?)

When I see stories like the one referenced at Marginal Revolution, about the woman paying $5,000 to have her hymen reattached, as a gift to her husband for their 17th wedding anniversary, and that this is a fast growing segment in the plastic surgery industry, I really think our society has definitely jumped the shark. People clearly have too much money. But as far as deciding how people should spend their money or how much is enough, I don't know who could possibly make that determination. So I disagree with overly aggressive redistribution. I'd like a safety net, but I don't think we need to put people up in style and comfort. What does bother me is when my own comfort level is jeopardized by some hard-charging greedy boss. Maybe I'm perfectly happy with where I'm at, but I find that it's hard to stay in place. So I'm happy, but my boss wants a new Ferrari so is driving me to work gobs of unpaid overtime so he'll get his bonus and buy his new toy. That would by annoying.

But the loss of everything I had counted on was what enabled me to take an enormous risk: becoming a journalist. I never would have dared to do something so insane if I'd had a cushy job.

This strikes me as a little unintuitive as an argument against redistributive policies. How about if you knew that if you were out of work you'd have a livable unemployment benefit and guaranteed access to health-care, don't you think that might have made the 'daring' necessary to try journalism a little easier to come by?

It seems quite obvious to me that our economy compensates the people that create the most new wealth: entrepeneurs. While there are plenty of people who work for large corporations, we no longer live in a 1950's America where nearly everyone worked for big corporate organizations. Small business is where the growth is, and it provides the vast majority of jobs in the United States, along with much of the innovation Kleiman expects hard science grads to provide. Correspondingly, successful entrepeneurs tend to be compensated more than others, and the economy rightfully incentivizes more entrepeneurs.

Separately, I wanted to note that's amusing that Jane's hypothetical has a tired mother eating Arby's. There must be relatively few people whose first fast food place they think of is Arby's.

When I see stories like the one...about the woman paying $5,000 to have her hymen reattached...for [her] 17th wedding anniversary...I really think our society has definitely jumped the shark. People clearly have too much money.

I think it's great that we live in a society where material wealth is so abundant that people can afford to do stupid things like that. Excelsior!

Mr Kleiman gently, with an air of patient wisdom, advocates theft as a basis of free government.

Not that he allows himself to see that. He believes the good effects among the recipients of such largesse means its no longer theft. Taking it from people who won't miss it is OK, he says.

I think creating a society where theft on our behalf is taken for granted renders it not worth it.

The mugger who takes my cash is also better off than he was before.

Nobody wants to tar and feather Jane; at least one of us is dismayed that she seems to be bringing a journalist's credulity instead of the old economist's skepticism to this narrative in which everyone keeps making the same mistake over and over. You don't need to hold any exalted idea about individual rationality to wonder whether even the dullest person might begin to smell a rat after the dozenth time he buys some expensive gewgaw expecting his personal happiness meter to spike, only to see the needle stay stubbornly in place. I can't help but think it would have occurred to the pre-journo Jane-- as it has to people like Will Wilkinson-- that the happiness meter is a weak link in the story. Yet without it, there's no story at all! (Related thoughts from Tyler Cowen.)

You don't need to hold any exalted idea about individual rationality to wonder whether even the dullest person might begin to smell a rat after the dozenth time he buys some expensive gewgaw expecting his personal happiness meter to spike, only to see the needle stay stubbornly in place.

True, but the original question was not about whether a person is capable of figuring this out, but whether or not s/he will have figured it out, changed ways, and begun saving against calamity before a sinkhole's worth of unexpected debt comes along.

That was undoubtedly the worst period of my life, made even more dreadful by a growing fear that it would never end, and my life would be ruined. But the loss of everything I had counted on was what enabled me to take an enormous risk: becoming a journalist. I never would have dared to do something so insane if I'd had a cushy job. And that was possibly the best thing that ever happened to me.

Preach it, Sister.

This actually applies to several recent Asymmetrical Information posts, but I suppose I'll leave it here. I'm a natural-sciences Ph.D., specializing in a magnificently non-commercial field, who also made the jump into entrepeneurship about 18 months ago. I now have a dual life: academic researcher by day, small-business owner nights and weekends. I often joke that I spend half of my time generating the tax revenue that funds the other half of my time.

How do I feel about it? Smartest thing I ever did. Having one foot in each world gives me a very healthy perspective on both. After a lifetime in the ivory tower, I find I really enjoy many aspects of the business world--especially the part where I helped my clients earn more money than they paid me. Everyone wins, which is a refreshing change from the desperate, zero-sum game of grantsmanship. But I never would have made the leap if I didn't have a funding glitch that forced me to the edge. Basically, I decided that I would never again allow myself to be in a position where a granting agency got to decide whether I went bankrupt or not.

On the other hand, I love the rush of discovering knowledge, which is what keeps me in academic science despite the truly crappy pay. There's an incredible pleasure in being, just for a few moments, the only person on the planet who knows something new. So, at least for now, I'm staying in that world, too.

Jane has it dead on, IMO. Know the odds, know the tradeoff, and whatever you do, do it with your eyes open.

What does bother me is when my own comfort level is jeopardized by some hard-charging greedy boss. Maybe I'm perfectly happy with where I'm at, but I find that it's hard to stay in place. So I'm happy, but my boss wants a new Ferrari so is driving me to work gobs of unpaid overtime so he'll get his bonus and buy his new toy. That would by annoying. - Rufus Sarsaparilla

Regardless of whether your boss lusts for a Ferrari Enzo or is perfectly happy with his '85 Yugo, he wants to pay the least amount necessary to attract and retain the workforce that's best for his business. Ideally, he would like to have the most qualified candidates in the world falling all over each other to put in 80 hours of unpaid volunteer work in his office each week. Alas, the labor market does not care what he wants.

Thinking that many business owners and executives are happy settling with less productivity than the money they spend on wages could buy, but the "greedy" Ferrari-mongers among them suddenly get the notion to extract everything they can out of their workforce, does not seem like a reasonable assumption to me.

It's kind of similar to the "logic" behind the "oil gouging" claims: we're supposed to believe that oil companies are capable of charging whatever they want, but aren't really interested in doing so until a hurricane or some other macro-event makes them "greedy". The reality is that they charge as much as they can at all times, but this level changes as supply and demand changes.

When I see stories like the one...about the woman paying $5,000 to have her hymen reattached...for [her] 17th wedding anniversary...I really think our society has definitely jumped the shark. People clearly have too much money.
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I think it's great that we live in a society where material wealth is so abundant that people can afford to do stupid things like that. Excelsior!

I would too -- if there weren't children who don't get serious cavities cared for in a timely fashion because their families are too poor, and other similar situations. I argue that the current system is not properly allocating funds between hymen reattachments and cavity repair -- and that any proposals to improve the system need to show that they will adjust that allocation in the proper direction.

Ah, good point, Rob. That makes me feel better. I must make sure to keep providing labor that is in demand!

...you cannot get as good as a result by splitting a lawyer's work in half and assigning the two halves to two different lawyers....That's the main reason that big law firms don't have many part-time associates, and partners don't get to take it easy once they've got it made.

I don't think this is right, because I don't think there are too many associates who are only working on one case at a time, and I doubt there's much value added by the fact that you have one lawyer working on, say, two cases instead of two laywers working on one case each. (Replace "case" with "deal" for transactional lawyers.)

I think the lack of part-time associates is due to a number of things, including (1) somewhat large overhead and start-up costs for a new associate, and (2) a culture that doesn't afford much respect to the kind of person who would want to trade a reduced salary for reduced billable hours.

The biggest problem that I have with most income redistribution schemes, worthy behavior incentive programs, and programs to make people "do the right thing" is that they all require someone who can determine what the proper outcome is and then determine what incentive will produce the proper outcome without harmful side-effects.

In this case, the person in charge of this program would need to what level of income produced no extra happiness and then would have to be able to determine who to give it to to maximize the happiness result. This program would, of course, have to be based on average maximum happiness incomes, and would actually cause some people to become more unhappy while leaving others just as happy as before (taking income can't increase happiness normally) while giving income away to poor people will most likely increase their happiness, in some cases it won't. So how to measure these two happiness effects and balance them out? How should the decrease in happiness of the victims be weighed against the increase in happiness of the benefactors? 1:1? 2:1? How do you measure this? What units?

It's nice to write about a theoretical program to maximize the total happiness in the world. It's quite another to actually implement a program to maximize something that can't be measured using a relatively inefficient government to move money around (probably at significant cost and with a plethora of unintended consequences and abuses).

How about simplifying the rules so that it's easier for people to make decisions and then letting them make those decisions? The government should focus on ensuring that markets remain efficient, NOT on making them even less efficient and more complicated and convoluted.

EI

There is plenty of room for a greedy boss to drive employees harder than normal for a short period of time to maximize his own benefit in management compensation. While the market will not permit such behavior in the long run (when the market is efficient), changing jobs has a cost and employees may not want to leave a company for other reasons. Every workplace does not pay market wages for market work.

Even in the long run, the labor market is not very efficient as employers have access to much more information to make decisions than the employees do. For many employees, losing their job is much more unpleasant than it is for companies to lose an employee. Thus I would expect that the wage/work balance is not at the market level in many jobs.

I've always believed that all salaries should be posted along with labor posters and all that crap so that everyone can see what everyone is making. In addition, results of labor surveys and industry average salaries should be posted by the company, as well.

EI

"...while to a liberal that implies that we should take some of that money that isn't producing any happiness and give it to others, to a conservative this points up the essential futility of income redistribution."

Painting with a pretty broad brush, Ms. McArdle. I don't know of any liberals (a category in which I count myself) advocating "happiness" as a basis for income redistribution (though there certainly may be a few), nor do I know of any conservatives that believe all income redistribution bears an "essential futility." There may be some conservatives (or, yes, even liberals!) who give nothing to any charity, who favor flat taxes from the first dollar of income and proportional expenditures by government based upon local incomes, but I've never read of any, save perhaps for the anarchists who wish to rid us entirely of government and taxation. Income redistribution is, I believe, part of our essential nature; the desire to help those less fortunate than ourselves, to assist those desperately in need of assistance, is hard-wired into the parts of our brains that value the common good. The relevant question -- raised in the comments rather than in the post -- is not "how do we maximize the happiness of people through income redistribution," but rather "what level of income redistribution is desired by constituents and upon what basis is income redistribution best allocated." Let's discuss that, and see where we get.

EI, that's exactly the argument my husband and I have all the time: he thinks salary should be water-cooler conversation; I think it's "crass" or something. He points out, and I have to admit he's right even though it makes me blanch to consider changing my ways, that as long as I'm not telling my coworkers what I make and don't know what they make, the company is in possession of information I don't have that gives them a significant advantage over me.

Back on target: we have a friend who wouldn't be happy if she were seated at the Right Hand of God. I, by contrast, was pretty much as happy as I am today back when we were living in three rooms total and dining out exclusively at places that take coupons. But that doesn't mean I want someone from the government (or anywhere else) to decide that, since my happiness threshhold or whatever is apparently more elastic than hers, we have to sacrifice our four bedrooms so that she can get as close to the Right Hand of God as possible. Getting more stuff hasn't necessarily made me happier - but having it taken from me, willy-nilly, is pretty much guaranteed to make me unhappier.

This idea of companies’ fully disclosing every employee’s salary is interesting. Has anyone heard of any company that did it? I haven’t. So why don’t they?

I know the first response of those devotees of the paranoid style is going to be something like: “So The Man can keep us down!”, but “The Man” doesn’t really exist, and all of those millions of candidates for the role of “The Man” are in competition with each other in the labor markets. If employees really believed that they would benefit from seeing all of their compatriot’s salaries, they would presumably accept less money to work at a company that made discovery easy for them. And it certainly doesn’t cost much to post the information on the bulletin board - the cost of a couple of copies and a thumbtack?

And still, no one does it. Perhaps all employers are stupid? There's a theory!

Wait! Here’s an idea! I read a survey once that showed that 70% of employees believe they are in the top 10% of performers. So, as long as people’s beliefs about what they contribute and their resultant worth are so divorced from reality, publishing their salaries is mostly going to accomplish pissing them off and crappy morale. Not to mention regular fistfights.

Regarding utility (i.e. happiness) and income redistribution, didn’t Kenneth Arrow win a Nobel prize in economics for (at least in part) “The Impossibility Theorem”, which pretty much proved that you can’t get there from here? The original paper was called "A Difficulty in the Concept of Social Welfare".

Mr James, this begs the question. What is the point of this redistribution? Should we spend money to, say, paint all poor people's houses pink, just because poor people cannot afford to paint their own houses pink? No, because most people do not want pink houses. The point of redistribution is, presumably, that we are alleviating the misery of the poor.

But by and large, the misery of the poor is no longer that they are cold and hungry; it is that they cannot afford a big-screen television or a nice car. The argument is that what really makes people happy about these things is the status associated with them, not the objects themselves. Since it is impossible to redistribute status, enabling poor people to buy them will not, in fact, alleviate their misery, since their misery stems largely from the lack of status, not the lack of objects.

(Poor people do have some inferior objects that presumably reduce happiness independantly of status: unreliable automobiles, for example. But my understanding is that this is not a general problem.)

Also, there are in fact liberals seizing on happiness research to advocate redistribution, not least of them Mark Kleiman and Robert Frank, about whom this post was written. The fact that you haven't met them does not mean they don't exist.

LizardBreath: no. The reason I did what I did was that I could not find work in my chosen field. A "living wage" guarantee of, say, $40K a year is no better than what I could earn on my own teaching GMAT courses and doing clerical work. The issue was not that I couldn't work; it was that I couldn't work at anything I thought I would find rewarding. Similarly, most people who become entrepreneurs are already earning far more than any reasonable income guarantee would provide; so, for that matter, are the PhD's Mr Kleiman is complaining about. The median wage in the US is somewhere around $36K; there's no feasible way that the government could guarantee even that much, much less enough to make Biology a good financial alternative to investment banking.

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