“Ought Presupposes Can”

Remarks on the 2006 Mackay Lecture by Richard S. Gilbert
February 28, 2006
St. Lawrence University

Steve Horwitz

            By now I’m quite used to being in the position I’m in tonight, apparently charged with defending the undefendable, but repetition does not make it any easier.  My remarks will focus on two issues raised by Richard’s talk: 
          1) What is the relationship between economics and ethics? 
          2) What is the empirical reality of income inequality and poverty in the US?
I doubt I’m going to change many minds, but I at least hope to “complexify” things and suggest that matters aren’t as clear as Richard has made them seem.
        Let me start with two definitions of economics from two Nobel Prize winners that seem relevant to the issues at hand.  James Buchanan, Nobelist in 1986, once wrote that “Economics is the art of putting parameters on our utopias.”  And in my favorite definition of economics, F. A. Hayek (1974 Nobel) said that, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”  What both of these definitions suggest is that economics deals with the realm of the possible and, in doing so, demarcates the limits to what should be imaginable.  Put differently: “ought” presupposes “can”  and the intersection between economics and ethics is that economics can help us to understand whether we actually “can” do what others say we “ought” to do.  That puts us economists in the position of throwing cold water on the plans and designs of social engineers both left and right.
        Ethicists of all stripes can imagine all kinds of schemes to redistribute income or remedy perceived social ills, but none of those can afford to ignore economic analysis.  Ought presupposes can.  Just because you can dream it, doesn’t make it possible nor guarantee that it will have the results you intend.  When ethics supplies hubris, economics demands humility.  So it is not that economists ignore ethical issues, rather we can attempt to describe the likely results of putting particular ethical rules into practice.  For example, you can argue that a living wage is an ethical imperative, but that doesn’t change the economic analysis of minimum wage laws, which, despite what you might have heard on All Things Considered or read on the Daily Kos, is still among the most agreed upon empirical results in the discipline.  Living wage laws will increase unemployment and/or lead to reductions in non-monetary forms of compensation among all workers, but especially the young, male, and non-white.  Pass it if you want, but do it eyes wide open. Just because you think we “ought to” doesn’t mean it will have the results you intend.  Yes, perhaps ethical issues don’t appear often enough in Introduction to Economics, but how often are students in Ethical Theory or Mystery & Meaning reading what economists say about how markets work or exploring economic data when discussing economic justice?
        As we turn to talk about issues of income inequality and poverty, it’s worth noting the phrase the “distribution of income.” That phrase is rhetorically problematic because it creates the image that income is “distributed” by some central force or by some act of human intention, when in fact income is not distributed in that sense at all.  One of J. S. Mill’s most famous errors as an economist, corrected by the disciplinary revolution that came not long after he made it, was to believe that the production and distribution of income were two different and separable processes.  They are not. Any attempt to affect the distribution of income is ipso facto an attempt to affect how, and how much, income and wealth are produced.  Richard’s talk tonight completely ignores this connection and tacitly assumes that whatever distribution of income we decide is ethically appropriate will not affect how much there is to distribute. I think that’s a major error.  It portrays capitalism as a zero-sum game when in fact it is a positive-sum game, and that complicates the ethical questions one might ask.
        To see that, ask yourselves this Rawlsian-style hypothetical:  would you rather live in a world where incomes were fairly equal or in world where incomes were quite unequal but where the poorest were better off than the average folks in the more equal society?  Which of these better comports with “economic justice?”  There is more than one way to understand that phrase. Personally, I’m far less concerned about income inequality than I am about the well-being of the poorest among us.  If the pattern of incomes in the US were to become more unequal, but at the same time improve the well-being of the poor, I’d be all for it.  And, in fact, I want to present some evidence that this is exactly what has happened in the last several decades.
        First, let me tackle the claim that the rich are getting richer and the poor are getting poorer.  As Richard correctly notes, the percentage of US income earned by the richest 20% of households has grown over the last couple of decades, while the percentage earned by the poorest 20% has fallen.  He does fail to mention that there are about 50% more individuals in the richest 20% of households than in the poorest, thus inequality on a per person basis is notably less than the household level stastistic suggests. 
        However, the bigger isssue is that this data this need not mean that specific poor households that are poor in one year are poorer in later years:  the households that comprise the “rich” and the “poor” vary from year to year.  If we’re interested in knowing whether specific poor households in one year are poorer in a later year, that data tells us nothing. What we would want to know is “what happens to the specific households who are poor in year 1 by year 5, 10, or 20?  Are they poorer or richer?  If so, by how much?”  This is the issue of income mobility. Well, thanks to household tracking data from the Panel Study on Income Dynamics put out by that bastion of heartless conservatism, my alma mater The University of Michigan, we can answer this question.  The best data I have at hand is from 1976 to 1991.  It’s old, but I like it because it covers the “Big 80s” when everyone knows there was a war on the poor.  What percent of the households in the lowest 20% in 1976 do you think were still poor in 1991?  Answer:  5%.  Put differently, 95% of the poor in 1976 were up at least one income quintile by 1991.  And the increase in income by those households averaged $27,745 in 1997 dollars.  The average increase for the households that began the period in the top 20% was $4,354.  So, for this period the poor got richer and the rich got richer, and the poor got “more richer” than the rich!
        Of course, 5% is still a lot of folks and nothing I’m saying here should detract from the need to think creatively about how to improve their chances of emerging from poverty.  I may have a very different set of ideas about how to do that than Richard does, but I do not deny that one of my ethical obligations as both a citizen and an economist is to be concerned with such issues and to use the tools at my disposal to attempt to address them.  Just because one believes that the extent of poverty and its causes and solutions are different does not mean that one doesn’t care.  
        Earlier I posed the hypothetical society that was much more unequal than another but in which the poor in it lived better than the average folks did in the more equal one.  Well, as I suggested, that’s not a hypothetical, it’s the US economy in the last 30 years, at least as judged by the items we find in the households of poor Americans. 


chart 



         That data is all courtesy of the Bureau of Labor Statistics.  These data suggest that over time, even if the pattern of incomes in the US has become more unequal, the lived lives of the poor have continued to improve and are by a number of measures better than the average American of a generation ago.  And yes, this measures consumption items, but they have to be purchased with income from somewhere. 
          My point, again, is not to say that “all is well.”  What I want to suggest is that it might not be accidental that we see the rich getting richer and the poor getting richer as well.  The phrase “trickle down economics” is one of the most unfortunate in the lexicon because, like “the distribution of income,” it creates the image that capitalism is a zero-sum game, where the main “ethical” question is how to divide up a fixed pie, or how much of a fixed amount of water to allow to “trickle down.”  In reality, it’s a positive sum game where both rich and poor benefit from capitalist acts among consenting adults and where one main ethical question is what policies and institutions best facilitate the process of wealth creation that benefits all.    
          Every time a wealthy person buys stock, buys a bond, or puts money in the bank or another financial institution, she is indirectly spreading that wealth to the poor.  Channeled through financial markets, that wealth becomes the funds for the improvements in capital that increase the productivity of everyone’s labor and raise their wages in the process. Of course, since that is not necessarily her intention and because she may well profit from it, we tend to overlook any possible altruistic unintended consequences it might have.  And this raises yet a third definition of economics: the art of seeing the unseen.  Just because the rich earn interest or capital gains from investing their wealth doesn’t mean that wealth isn’t, unintentionally, helping others.  Attempting to redistribute wealth through the tax system is far less effective in improving the lives of the poor than is the capital provided by the rich through the financial system.  Of course, the latter process is longer and more complex and the results are seen slowly over time.  Perhaps our belief that income redistribution is a preferred alternative is a consequence of the very instant-gratification society that Richard seems to otherwise condemn.
          The wealth of the rich also makes possible, through income taxes paid under the current system and through philanthropy, the investments in human capital (e.g., education and training) that also increase worker productivity and wages. If you doubt this, ask yourself where the funds for SLU come from. And if you think raising taxes on the rich will provide more income to “redistribute,” consider the following IRS data:  in 1980 when the highest marginal tax rate was 70%, the top 1% of income earners paid 19.3% of total income taxes.  After the tax cuts in 1981 reduced the top rate to 50%, the share paid by the top 1% rose to 25.7% by 1986.  When top rates were cut to 28% in 1986, it rose to 27.5% by 1992.  The top rate has come back up a few percentage points since then and in 2003, the top 1% paid 34.3%. So, over the long run, as tax rates on the wealthy were lowered, they paid an increasing percentage of total income taxes.  Between 1980 and 2003, the top tax rate fell in half from 70% to about 35% and the share of federal income taxes paid by the very rich almost doubled and their total dollars paid (in constant dollars) between 1985 and 2003 almost quadrupled.   Lower taxes contribute to more wealth creation and more resources to improve the lives of everyone.  Could not one argue that lower marginal tax rates are more “just” by Richard’s standards because the super-rich are paying a larger share of total income taxes?
          These same processes of increased wealth creation leading to increased productivity also drive down the real cost of goods and services, making life’s necessities and luxuries more available to the poor as we saw earlier.  Policies such as increasing the progressivity of the tax system will have the effect of reducing the incentive and ability of all Americans to both become wealthier and, if only unintentionally, put that wealth to work in improving the lives of the poorest among us.
          Just as Richard has exhorted us to remember the ethical when we discuss the economic, I would equally recommend that we remember the economic when we discuss the ethical.  Ought presupposes can.  A deeper look at both the data and the way in which markets operate, suggests that things aren’t as bad as Richard believes and that his proposed solutions might well make matters worse.  Invoking Robin Hood makes a very complex story seem very simple and I would argue that one of the most important of all of our ethical obligations is humility in the face of complexity.  After all, is that not how religious systems see the relationship between the human and the Sacred?  Contrary to our reputation, good economists are humble because we recognize the complexity of economic processes and thus understand the parameters on our utopias and the limits to our knowledge of what we only imagine we can design.  Before we try to turn ethical imperatives into public policy, a little humility in the face of what economics has to teach wouldn’t be a bad thing.