05 Apr 2014

One Single Post on the Koch Stuff

Krugman 51 Comments

I’m mostly posting this because I don’t like it when people have one image of me that turns out to be wrong. So, it’s a good time for me to make sure anybody who reads my stuff realizes: I do consulting for a lot of clients, and it’s all in the genre of “explaining free markets and bad consequences of government policies to the public,” so you do the math.

But, I do want to point out the hilarious bouncing around of Krugman when it comes to demonizing rich people. In the past few years, here are the various positions Krugman has advanced:

==> In July 2012 Krugman said (in a post titled “What You Add Is What You Get”) that according to standard textbook economics, rich people take out of the economy (through their earnings) exactly what they put in, and so that’s why it’s fine to tax the heck out of them. If rich people go Galt and cut their output, it doesn’t matter to anybody else, because it just means rich people take less out of the economy then; the whole thing is a wash. This is why Krugman says we have to stop taking seriously all the standard Republican rhetoric about entrepreneurs being “job creators” and the “engine of the economy”; that is all garbage, according to standard economic theory. (BTW Krugman’s argument is totally wrong, as I pointed out here and cited Karl Smith in support of my response to Krugman.)

==> Now you can see hints of it in the post above, but Krugman doesn’t actually think that ALL rich people truly get paid an income exactly equal to their marginal contribution to the rest of society. No, when it comes to people who earn their income in the financial sector, Krugman actually agrees with Paul Samuelson–as he explains in this June 2013 post–that these people are OVERpaid; they earn much more than they actually contribute. Krugman doesn’t explicitly call for it in the post I linked, but in general Krugman has no problem with various government interventions into the financial sector; he’s certainly not worried about cutting down on all of the “innovation” in the financial sector, since he doesn’t think it’s very socially productive activity anyway.

==> So to sum up, when Krugman wants to justify taxing the crap out of rich people, he tells his readers that standard price theory says rich people take out of the economy in earnings exactly what they contribute; it is a total right-wing myth that entrepreneurs create jobs or introduce new products to benefit the masses, blah blah blah–whatever they give to the masses, they take back with their high incomes. However, when Krugman wants to justify taxing and regulating the crap out of the financial sector, his position becomes more nuanced: Now Krugman tells his readers that standard price theory doesn’t work in this arena; people who get rich in the financial sector actually take out of the economy far MORE than they contribute.

==> Now, in 2014, Krugman wants to justify the Democratic Party’s obvious campaign strategy of going after the Koch brothers. So naturally this is how Krugman spins it:

[T]he Kochs are perfect villains. It’s not just what they are — serious evildoers who use their wealth to push hard-line right-wing, anti-environmental policies that redound very much to their own benefit. It’s also what they aren’t: they’re wealthy heirs, not self-made men, they aren’t identified with innovation (which you can at least argue for Bill Gates), they haven’t made money for other people like Warren Buffett. So focusing on the Kochs is a way to personalize a vision of conservative politics as a defense of people with unearned privilege.

Everyone got that? The super-rich Bill Gates innovates (and so contributed more to society than his immense earnings would indicate he “took back out”?), and at least Warren Buffett got rich by helping others do so as well. I mean, if you’re going to be a rich guy, at least do it in the financial sector and help some people, right?

For the record, this kind of stuff is why I invented the term “Krugman Kontradiction.”

51 Responses to “One Single Post on the Koch Stuff”

  1. Transformer says:

    isn’t Krugman making a non-economic point here ?

    The Koch’s are good villains from a political perspective because people perceive them in a worse light than Gates and Buffett. This is totally independent of what economics might say about their actual contribution.

    I agree though that the “What You Add Is What You Get” post is horribly off base.

  2. David R. Henderson says:

    Excellent post. I have no idea, though, why you wrote the first paragraph. What’s the “image” of you that turns out to be wrong? Also, what does “you do the math” mean in this context?

  3. marris says:

    According to wikipedia, the business has grown 2600x since they inherited it. Sounds good to me.

    Someone should make a joke about how in the meantime, Bam Bam inherited a national debt and made it X times bigger.

  4. Major_Freedom says:

    Krugman is clueless about the obvious fact that saving and investment ANY percentage of your wealth, makes you a net producer who “puts in more than is taken out.”

    Last time I checked, rich people save and invest a significant portion of their wealth, which would make them significant net providers of wealth.

    The only people who “take out more than they put in” are those who control an institution of threatening others with force if they don’t give up their wealth. You know, the very institution that Krugman idolizes.

  5. Koen says:

    [T]he Kochs are perfect villains. It’s not just what they are — serious evildoers who use their wealth to push hard-line right-wing, anti-environmental policies that redound very much to their own benefit. It’s also what they aren’t: they’re wealthy heirs, not self-made men, they aren’t identified with innovation (which you can at least argue for Bill Gates), they haven’t made money for other people like Warren Buffett. So focusing on the Kochs is a way to personalize a vision of conservative politics as a defense of people with unearned privilege.
    Everyone got that? The super-rich Bill Gates innovates (and so contributed more to society than his immense earnings would indicate he “took back out”?)
    I’m not sure that your rephrasing here is correct. I mean, if you innovate then you can still capture almost all the benefits that are the result of that innovation yourself (the people who buy the innovation just have to bid slightly lower than what the innovation gains them). Similarly, you can make money for other people and capture almost all these benefits (the people you make money for have to bid just slightly lower than the money you make for them).

    So what Krugman writes here is consistent (in letter and spirit (if it were only in letter and not in spirit it’d be a Kontradiction)) with what he wrote earlier when talking about how rich people take out exactly (or rather, almost exactly) what they bring in.

    the real problem with Krugman here is that the distinction he makes between the Kochs and Gates and Buffett disappear very quickly: obviously the Kochs also innovated in some ways and obviously they also made money for others (their employees and customers for example). the fact that they inherited their money is not that relevant. Their being able to run the business successfully already implies that they are innovating and making money for people.

    • Tel says:

      Krugman is completely wrong when he talks about technology. Go through the history of Microsoft and find some innovation:

      The original MSDOS? Tim Paterson at Seattle Computer Products wrote a clone of Digital Research’s CP/M, called it x86-DOS and Bill Gates purchased the clone to rename it.

      The graphical user interface? Xerox PARC, then Apple, then finally Microsoft (with collaboration with IBM).

      Compressed files? Read about what happened to “Stacker” when they made an agreement with Microsoft.

      Internet Protocol networking? They ripped chunks out of BSD, and made that the core of the Microsoft protocol stack. Because of the BSD license this is legal, and Apple have also borrowed a lot of BSD for their operating systems.

      The only innovative thing that I’ve ever come across, done by Microsoft was their business agreements with PC vendors whereby the reseller must pay a license fee on every PC sold regardless of whether Microsoft is pre-installed. For this reason, we end up with a lot of pre-installed Microsoft machines. Strangely enough, this agreement was declared illegal, but that hasn’t made an iota of difference.

      Bill Gates was very good at running a business. That’s what made him money.

      • Emil says:

        You have jsut discovered the difference between inventions and innovations

  6. Koen says:

    Funny that Krugman is sort of hedging when he writes “they aren’t identified with innovation”. I mean, he doesn’t write “Gates produced innovation”. if he had written that, he would have the problem that the Kochs also produce innovation, so instead he goes with a necessarily subjective term ‘identified with’, and yeah, people identify Gates with innovation, while they probably don’t identify the Kochs with innovation. But how would it matter how other people regard them, what prejudices other people have about them? What would matter is whether otnot (and to what extent) Gates and the Kochs in fact innovated.

    and so Krugman is able to write something factually true (gates being identified with innovation) that nonetheless suggests (but does not -say-, so that he can always backtrack by saying ‘I didn’t-say- that’) a substantial difference that is not true (Gates innovated and the Kochs did not) that in turn allows him to argue that the Kochs are rightly the subject of scorn etc while that doesnt necessarily is the case for Gates.

  7. Koen says:

    Also, doesn’t Krugman’s post http://krugman.blogs.nytimes.com/2012/07/09/what-you-add-is-what-you-get/?_php=true&_type=blogs&_r=0 imply that innovation is useless to society because all its benefits get captured by the innovators anyway? (the only use for society then comes in the form of the taxes the innovator pays over these earnings)

    I don’t think Krugman leaves himself muhc room to deny that this is what he thinks (the room he leaves himself is in the form of the above being a result of a perfect market model and he could say that he doesn’t believe in that, but at the same time he prefaces his post by saying that he is going to explain his point and then he does this by using said theory, so to the extent that he thinks his point is valid he believes in the applicability of a perfect market model. To the extent that he does not believe in the latter he needs a different argument for his point.

    • guest says:

      “What you add is what you get” is another way of saying he believes in the Labor Theory of Value.

      The Austrians have addressed the Labor Theory of Value:

      The Birth of the Austrian School | Joseph T. Salerno
      http://www.youtube.com/watch?v=dZRZKX5zAD4

      • Keshav Srinivasan says:

        I don’t think need to subscribe to the labor theory of value to believe that in a competitive market, the various factors of production get paid their marginal product. Isn’t that just a standard result of neoclassical economics?

        • Koen says:

          Keshav is right.

          re Tel: i don’t mean ‘innovation’ in any normative sense. Microsoft may have copied a lot of stuff from others, but even small changes or new applications (in technology, management or whatever) would still count as innovations. also, I think (but this is little more than a hunch) that if one looks at it in detail Microsoft will actually be responsible for way more innovations than they are credited with in the eyes of the public.

        • guest says:


          … in a competitive market, the various factors of production get paid their marginal product.

          That is true, as far as it goes. But since the marginal value of the various factors is based on subjective consumer preferences, only those specific people who can make a profit off of the payment offered by the consumer should attempt to do so, if the goal is to make a profit without violating someone’s individual property rights.

          So, for some people, the payment is too little to justify their time and effort. So they should look for employment elsewhere.

          And it may be that the consumer is only willing to pay such a small amount that it would be cost prohibitive for every unskilled laborer; And that the only people who can make a profit off of satisfying those preference at that price would be those with the capital to mass produce it.

          Consumers set prices, not laborers; It is the consumer’s pursuit of personal satisfaction that causes them to act to employ the means to do so.

          When you see someone employing resources, that may be an opportunity for you to make a profit, if the payment they are willing to offer ranks higher on your personal preference scale than your personal, subjective costs would be to supply those resources.

      • Tel says:

        There isn’t a perfectly competitive market for people like Bill Gates or the Koch bros.

        • Ken B says:

          Right. Which is why Krugman is wrong. He’s using results only applicable at equilibrium in a situation far from equilibrium.

          • Keshav Srinivasan says:

            Krugman’s point is not that CEO’s are paid their marginal product. Rather, it’s that if you were a right-winger, then you should be committed to the view that CEO’s get paid their marginal product, because otherwise you’d have to admit the existence of a market failure.

            • Tel says:

              Why is this a market failure ?

              How do you identify a “market failure” at any rate? What exactly failed?

    • Bob Murphy says:

      Right Koen you are spot-on in both of your comments. I think you are the only one here who shares my understanding of the supreme slipperiness of Krugman.

      • andrew' says:

        I beg your pardon.

        • andrew' says:

          I just don’t give him quite as much credit for allegedly being clever.

          Mostly he just has a compliant audience who wants to be lied to.

  8. guest says:


    … focusing on the Kochs is a way to personalize a vision of conservative politics as a defense of people with unearned privilege.

    “Unearned” does not equal “stolen”. I couldn’t care less that people are wealthy because of inheritances.

    What I do care about is whether or not the wealth was stolen, like when the government protects counterfeiters like the Fed.

    The only reason Krugman is right about people in the financial sector getting rich by stealing from specific people (my words, not his) is because printed money allows them to do so. But Krugman favors THAT part of the financial sector.

    • Tel says:

      Lottery winners did not “earn” their winnings, but it was not stolen either.

      • guest says:

        Nothing wrong with #Winning.
        😀

        Of course, when government does it, it’s fraud. Why pay bureaucrats to run a lottery?

        Oh, right. It’s because the government regulates otherwise free market gambling, which protects politically connected, licensed gamblers.

        No wonder the government has money to offer as lottery winnings.

      • Rick Hull says:

        Lottery winners could be said to have earned their winnings by taking on the risk of not winning in exchange for funding whatever lottery proceeds are directed towards — often education for state lotteries.

        • Tel says:

          I mean “earned” by doing useful work. Taking risk in itself is not (by my measure) useful work. Taking a judged and measured risk by investing is useful only to the extent of the expertise that goes into the judgement, i.e. generating wealth by using knowledge. Lottery players don’t put any skill or judgement into what they do, and the winners don’t win because they have played better.

          • guest says:

            All that matters is whether or not the risk-taker had his preference satisfied. It’s “useful” for the risk-taker if he, himself, has determined that it did.

            Whether something is useful or not is subjectively determined by the individual.

            • Tel says:

              Well in context of the discussion above, you are implying that “earning” would therefore also be understood only in the context of the individual who collected the payment.

              By that rule, since no one can judge whether anyone else earns their money, we pretty much have abandoned the whole concept of “Unearned” as meaningless and all ways of coming into money are universally equivalent (including printing new money). If the Federal Reserve decide that from their subjective perspective the new money is useful and they earned it, how can you argue otherwise?

              • guest says:


                … “earning” would therefore also be understood only in the context of the individual who collected the payment.

                It’s one thing to say that something wasn’t earned; Gifts and accidental resource discoveries are unearned.

                It’s another thing to say that the collected payment was stolen.

                No one’s property rights are violated if someone sells a gift or some resource the acquisition of which required zero effort.

                Printing IOUs in excess of the goods they are claimed to represent is fraud.

    • Matt M (Dude Where's My Freedom says:

      Hey, my turn to quote Rand!

      “Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune.”

      • Tel says:

        … not yours and you would have done no better with it.

        The question of “not yours” is a matter for agreement, people have different opinions on property rights and Rand has no idea what someone else would have done with the same resources.

        There are better arguements against envy, if people see advantage for themselves in acting out of envy it makes it difficult and pointless for anyone to strive. This is not an argument based on some theoretical moral code, it’s an argument based on practical outcomes. Of course, deciding whether some moral codes were better than other moral codes would require a metric of overall social wellbeing, which itself is a matter of opinion.

        • guest says:


          Of course, deciding whether some moral codes were better than other moral codes would require a metric of overall social wellbeing, which itself is a matter of opinion.

          +1

  9. skylien says:

    I agree there really are people in the financial sector who are overpaid. It’s those guys at the Fed. And I don’t know if Krugman is actually aware but he himself belongs to the rich…

  10. Warren says:

    —-Everyone thinks of you a committed free market economist but you’re actually a socialist who takes Koch money to “explain free markets and bad consequences of government policies to the public” just to get rich.—

    Yeah, Bob is one of those Fallopian Socialists that Wells and Shaw started back in the 80s.

  11. andrew' says:

    “The brothers inherited the business from their father, Fred C. Koch, and have since expanded the business to 2,600 times its inherited size”

    • andrew' says:

      “,… which represents an annual compounded return of 18%.”

      • Warren says:

        They didn’t build that.

  12. andrew' says:

    Krugman is a liar and dissembler. Stop it.

  13. andrew' says:

    Gates was mostly lucky, like the facebook guy. In case you haven’t noticed, we all aren’t warren buffett.

    Neither is warren buffett for that matter. Saint warren and actual warren are different. I won’t give examples but suffice to say neither would krugnan unless it served his interests.

    Truth is explaining that not explaining why people think buffett is a saint in ways that people leave even less informed.

  14. Innocent says:

    Great kids book that illustrates this is “The Fisherman’s Catch” that actually goes through and shows a man inventing the ‘net’ that he has to invest time and energy into it. Because of his invention it takes less time to catch fish. Cost of fish goes down but the fisherman still becomes wealthy. Village chief decides fisherman has too much, tries to share the wealth with the village. This causes productivity of village to decrease compared to what it could have been ( people decide not to work and get free fish… sound like the CBO and 2.3 Million people deciding not to work? )

    Book then shows that even though the Chief takes the fisherman’s catch ( or a portion of it each day ) the fisherman still has more than others – this is due to the fact that the fisherman has a method of production – he can go and get more fish each day – however those that have stopped working have no method of production they are ALWAYS going to have less than the fisherman. They have no way to catch up, so in fact what has happened is that the Village chief has perpetuated poverty rather than making things better.

    Ultimately the fisherman leaves the village when offered a better ‘tax deal’ by a traveling merchant ( that sold him the goods to make his ‘web’ – the net ) to begin with.

    Honest to goodness it is a kids book – 34 illustrated pages lol. The author calls it a ‘Conservative’ bedtime story because he wants to make certain people know the book has a point of view and he wants parents to go into it with their eyes wide open. I makes the comparison to “The Lorax” and how that screwed him up as a child and doesn’t want people reading his books without knowing what they are getting into.

    Anyway… for a kids book it nails some economic behavioral concepts pretty well. In a limited universe of course. You can see the book images here at least some of them…

    http://www.conservativebedtimestories.com/

    Anyway I Krugman Kontradictions are fairly common place.

  15. Ken B says:

    Harry Reid is like the love child of Joe McCarthy and Philip Glass.

    http://freebeacon.com/politics/one-trick-pony/

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