Just Deserts? Do the 1 Percent Deserve their Wealth?

Greg Mankiw put up a short paper recently making the rounds called "Defending the One Percent." It is not a rigorous academic work. It is basically Mankiw trying as hard as he apparently can to be big picture and philosophical about things, with predictably disatrous results. The specific details in the paper have been adequately criticized elsewhere, and so I won't repeat that work. Instead, I will address Mankiw's economic morality.

In this paper, as elsewhere, Mankiw claims to follow a "just deserts" perspective on economic justice. Under Mankiw's understanding of this long-standing concept, just deserts dictates that individuals receive compensation congruent with their contributions.

Before diving into what this theory actually entails, it is important to note that it is a wildly implausible notion of economic morality, one that I doubt Mankiw himself actually supports. Is it really the case that children have no just claim over some of the product of society? Is it really the case that disabled people have no just claim to the product of society? Does that actually speak to anyone's intuitive notion of what economic justice requires? Moreover, what each particular individual ends up "contributing" is itself a function of what kinds of background economic institutions have been established. Think about that last sentence hard enough and you'll see the hopeless circularity that is involved in trying to use "just deserts" as a method of justifying background economic institutions, something Mankiw attempts to do.

But for a second, let's put aside the problems with the "just deserts" view itself. A more interesting exercise is to accept a "just deserts" view for the sake of argument and actually see where it leads. Mankiw's take is essentially that just deserts requires that we organize society under the maxim: to each according to their marginal productivity. His view is that an economy "described by a classical competitive equilibrium without any externalities or public goods" ends up distributing income under this maxim. He is wrong.

First, as Nobel Prize-winning economist Amartya Sen points out, although marginal product accounting is a useful fiction for determining how best to use additional resources, "it does not 'show' which resource has 'produced' how much of the total output." Production involves a massive complex of inputs and "there is no obvious way of deciding that 'this much' of the output is owing to labor, 'that much' to raw materials, 'that much' to machinery, and so on." The idea that the economist's conception of marginal product actually maps what fraction of total output is the result of each input is a joke.

Second, the dirty secret of these kinds of "just deserts" approaches is that they conflate "what a person produces and what is produced by resources that he happens to own." The problematic nature of this conflation becomes especially easy to see when you consider the kinds of passive capital income streams that exist in modern capitalism, e.g. those earned on the stock market. On Mankiw's view, if you fell into a coma and immediately afterwards your parents died and bequeathed you a $100 million dollar fortune in trust, and then while you remained in that coma for 20 years that $100 million dollar fortune grew to $200 million, your marginal product while lying in a coma for 20 years was $100 million. That is, you contributed $100 million to the nation's output in your decades-long slumber. A more sober take on "just deserts" theory rejects income derived from passively owning things as undeserved and non-contributory, making capital income an unjust scourge on the economy.

Finally, a great deal of our total output is not attributable to traditional factors of production like land, capital, and labor. Economists call this rather large fraction of total output the Solow residual. Theories abound about what constitutes this residual, but there seems to be a consensus view that accumulated knowledge and technology make up a substantial part. If we are being good "just desert" adherents, then we need to divorce out the massive chunk of the total output that constitutes the Solow residual and ensure it makes it to its rightful contributor. All of our national product attributable to the world's accumulated knowledge of algebra -- which includes much of Mankiw's work it should be noted -- rightfully belongs to ancient Babylonians, ancient Greeks, and a whole host of other long-dead historical figures. All of our national product attributable to electricity technology rightly belongs, not to anyone living, but to people like Nikola Tesla and and Thomas Edison. In short, the view that individuals should receive only their marginal product actually generates the conclusion that the substantial part of our national product resulting from inherited technology and knowledge belongs to no living person, or more reasonably to everyone in general.

So Mankiw's just deserts view, in addition to being silly on its face, actually generates conclusions about the appropriate distribution of income that greatly differs from the kind people of his ilk -- self-proclaimed defenders of the 1 percent -- advocate for. If Mankiw had any serious interest in understanding the long-established literature on the just deserts view, he wouldn't hold up "just deserts" as something that supports his preferred income distribution. But of course he doesn't. His proclaimed adherence to a just deserts view is transparently superficial, something adopted post-hoc to justify an otherwise unjustifiable philosophical position.