The Wailing of the 1 Percent and Its Defenders

Harry Binswanger wrote a post over at Forbes that lit up the internet yesterday. In it, he claims that really it is the 99 percent, that should give back to the 1 percent, from whose teet we apparently all suckle. Needless to say, the argument that unfolds is a total train wreck.

Binswanger’s theory is, like Greg Mankiw’s, a kind of desert theory. Desert theory, broadly speaking, claims that individuals are owed compensation equal to what they produce. Like Mankiw before him, Binswanger hasn’t the slightest idea what it would actually mean to operate an economic system on that basis.

The Problem With Intellectual Property 

Binswanger’s modern archetype of a brilliant one-percenter is Steve Jobs, whose earnings are actually a wonderful example of deep problems in desert theory. Jobs made most of his fortune off of a government welfare program called copyright (and patents). Under this government welfare program, the state uses the police and the courts to prevent people from making copies of certain things. The goal of this state intervention is to create copying monopolies in order to allow copyright holders to capture monopoly rents from consumers. The theory is that creating these government-issued monopolies incentivizes certain kinds of creative production.

In addition to violating the usual slate of libertarian prohibitions on state action, copyright—or more specifically the problem it seeks to solve—presents serious challenges to desert theory. A desert theory person can have two takes on copyright. The first is that it shouldn’t exist at all. If that’s your view, then most of Steve Jobs’ earnings were actually a kind of government-assisted theft. The second take is that it should exist because this soft intellectual production deserves compensation. If that’s your view, that means you admit the laissez-faire market is a total failure and cannot compensate intellectual production without government intervention.

But more importantly, that view raises a secondary question of how much copyright protection corresponds to how much you are owed. If desert theory has this tit-for-tat notion that a unit of production deserves a unit of compensation, what does that tell us about how much copyright there should be? A copyright scheme that affords copying monopolies for 20 years generates much less income for the Steve Jobses of the world than one that affords 30-year monopolies. So which one corresponds to desert? Is there any non-arbitrary way to figure that out?

Additionally, even an identical copyright regime will produce different incomes at different times. When the population of consumers increases, the exact same copyright law will produce higher incomes for the exact same amount of intellectual production. So how does that square with desert? Is it the case that as the population increases, we should reduce copyright protection so that the same unit of intellectual production does not end up generating more units of compensation? Intellectual property production is a desert theory disaster, making Binswanger’s use of Steve Jobs such an oddity on this topic.

We Don't Deserve Most Of Our Income

Beyond the Steve Jobs screw up, Binswanger just falls into the usual desert theory traps. For instance, he pretends the 1 percent make all their money doing high-value labor, when in fact they make a sizable chunk of it passively holding financial assets. He pretends there is such a thing as free contract and mutually beneficial transactions, when both concepts are deeply problematic, as I discussed last week. And so on.

After these usual pitfalls, Binswanger finally makes his big move, the one that is supposed to justify his view that really the 99 percent owe the 1 percent big time. Quoting Ayn Rand, Binswanger argues that the productivity of the 1 percent produces externalities that the rest of us soak up. You see, the gains from their brilliance aren’t entirely captured by them. They leak out and benefit the rest of us as well. Therefore, under a desert theory view, the increment that leaks out of the 1 percent’s brilliance onto the rest of us (the externalities) are really something we should give back to them, the 1 percent.

What’s interesting about this big move by Binswanger is that it concedes that processes, innovations, knowledge, technology and so on prop up all incomes, even those that have nothing to do with their creation. But if we take that understanding to its logical desert theory end, it actually generates the conclusion that every single person is a massive net moocher on generations of people long dead. I did not make electricity technology, but it makes me way richer. I did not make algebra, but it makes me way richer. Same goes for calculus, physics, engineering principles, and all the rest of it. If it is the case that we are not entitled to the increment of our income that is owing to technologies and accumulated knowledge we did not ourselves create, then the majority of everyone’s income does not belong to them. It belongs to people who are dead.

So what does desert theory do about the increment of production that is the result of the intellectual labor of people who are not alive, which it so happens is probably the majority of income we generate each year? We can’t give it back because the would-be recipients are gone. Seems like the next obvious answer is to give it to everyone. Since no one person has any particular claim to it, it only seems fair that we enjoy it equally. And if that’s the case, then the 1 percent is making out like a bandit right now.