04 Oct 2017

Does the Rest of Society Care if You Work?

David Friedman, Economics 32 Comments

So if you followed my orders, you have already listened to my critique of Paul Krugman, when he claims that the rest of society doesn’t benefit if rich people work more. (Krugman says that free-market economists like to claim that workers get paid their marginal product, so–he concludes–they can’t then turn around and say marginal income tax cuts will shower benefits on society at large.)

Well, one of my economist friends reminded me of the below passage from David Friedman’s classic book, The Machinery of Freedom. Check it out:

The media provide a striking example of the difference between the effects of public and private property, but it is an example that shows only part of the disadvantage of public property. For the ‘public’ not only has the power to prevent individuals from doing what they wish with their own lives, it has a positive incentive to exercise that power. If property is public, I, by using some of that property, decrease the amount available for you to use. If you disapprove of what I use it for, then, from your standpoint, I am wasting valuable resources that are needed for other and more important purposes—the ones you approve of. Under private property, what I waste belongs to me. You may, in the abstract, disapprove of my using my property wastefully, but you have no incentive to go to any trouble to stop me. Even if I do not ‘waste’ my property, you will never get your hands on it. It will merely be used for another of my purposes.

This applies not only to wasting resources already produced, but to wasting my most valuable property, my own time and energy. In a private-property society, if I work hard, the main effect is that I am richer. If I choose to work only ten hours a week and to live on a correspondingly low income, I am the one who pays the cost. Under institutions of public property, I, by refusing to produce as much as I might, decrease the total wealth available to the society. Another member of that society can claim, correctly, that my laziness sabotages society’s goals, that I am taking food from the mouths of hungry children.

Consider hippies. Our private-property institutions serve them just as they do anyone else. Waterpipes and tie-dyed shirts are produced, underground papers and copies of Steal This Book are printed, all on the open market. Drugs are provided on the black market. No capitalist takes the position that being unselfish and unproductive is evil and therefore that capital should not be invested in producing things for such people; or, if one does, someone else invests the capital and makes the profit.

It is the government that is the enemy: police arrest ‘vagrants’; public schools insist on haircuts for longhairs; state and federal governments engage in a massive program to prevent the import and sale of drugs. Like radio and television censorship, this is partly the imposition of the morals of the majority on the minority. But part of the persecution comes from the recognition that people who choose to be poor contribute less to the common ends. Hippies don’t pay much in taxes. Occasionally this point is made explicit: drug addiction is bad because the addict does not ‘carry his share of the load’. If we are all addicts, the society will collapse. Who will pay taxes? Who will fight off foreign enemies?

Do you see the potential problem here? Let me spell it out.

(A) Years ago, when I read David Friedman’s book, I’m pretty sure I gave him a mental high-five when he argued, “In a market economy, everybody keeps what he produces, so nobody else feels threatened by a person’s work effort. So it fosters a live and let live approach.”

(B) Last week, when Krugman argued that the rest of society doesn’t care if rich people work more, I went ballistic.

Am I just a hypocrite or can we reconcile this?

32 Responses to “Does the Rest of Society Care if You Work?”

  1. Capt. J Parker says:

    I don’t see where Dr. Murphy is headed with this. Is it that we all know full well a redistributionist like Dr. Krugman cares plenty about how hard the rich (and everyone else) work? But, that isn’t true. Krugman cares about how much output is available for redistribution. If you take as a given that we are not on the back side of the Laffer curve then Krugmans position that its fine to sacrifice some marginal output for the sake of a larger tax haul is internally consistent.

  2. Transformer says:

    Assume an economy with 2 people.

    If they each produce autartikly it makes no difference to one what the other produces.

    But if they trade some of their output, and one of then starts to produce more, then the other will likely benefit as a result because he/she will probably sell more of his/her good, and at a higher price.

    In a more complex economy with more people and where goods are produced by combining labor and capital I do not see that the outcome of the simple 2-person economy is altered. Even if everyone gets in income what they add to output (they get their marginal product) then on average most people benefit (at the margin) when one individual decides to increase output. (Some may lose – for example those producing the same or similar goods, but overall the benefits are very likely to be positive.)

    • Transformer says:

      And assuming there is a correlation between being rich and being productive, if a rich person increases output it is even more likely to benefit those who trade with them.

    • Tel says:

      Sure but imagine there are 2 people and also 2 different trades, each of which requires significant time investment to learn. So at a glance the logical optimization is for each person to learn only 1 trade thus division of labour.

      Now… a third person comes along. Suppose demand for both trades increases by 50% (i.e. from a 2 person economy up to a 3 person economy) if the third person learns trade A then supply of trade A increases by 100% (i.e. from 1 person supplying up to 2 people supplying)… however exactly the same applies if the third person would learn trade B instead. Either way, the existing people have a strong incentive to discourage the new person from learning their particular trade.

      Attempting to ignore this effect will result in economists getting laughed at because just about anyone in any business environment has a strong intuitive understanding of how this works.

      • Transformer says:

        In a market economy, everybody keeps what he produces, so nobody else feels threatened by a person’s work effort. So it fosters a live and let live approach.”

        • Transformer says:

          Opps, hit enter by mistake!

          Yes, That is a good point Tel. If someone increases production or produces for the first time then as long as some others gain and some others lose it will be impossible to prove that society as a whole gains when someone works harder.

          So when Bob says ‘In a market economy, everybody keeps what he produces, so nobody else feels threatened by a person’s work effort. So it fosters a live and let live approach.”’. This is not totally true. Those that lose may feel threatened and have a vested interest in stopping the increased production.

  3. Major.Freedom says:

    Krugman is just limiting his understanding to money flows. Apparently all of what people produce to earn that money doesn’t benefit anyone.

    • Josiah says:

      This is way too short to be an authentic Major Freedom comment.

  4. Tel says:

    In a market economy, everybody keeps what he produces, so nobody else feels threatened by a person’s work effort.

    This is trivial to prove wrong. David Friedman is attempting to imply that no rivalry could ever exist between businesses. Dozens of counter examples can be cited here… Coke vs Pepsi, Microsoft vs Apple, various motor vehicle manufacturers, and many others.

    Of course as a computer programmer I’ve watched the going rate for most jobs go down as a flood of new workers have come in from India, Asia and Eastern Europe… and now even greater since the Internet opens up the ability for programmers to work offshore. This is probably inevitable, especially when you consider that 30 years ago computers were only just getting out into the mass market, and now they are everywhere, so with any new industry people will rush to get trained and make money.

    Same thing happened with the US manufacturing (although US still manufactures a lot, but it’s been slipping significantly) as borders opened up the buyers of mass manufactured products have done well out of falling prices but the workers have done badly in many areas. We can argue that cities like Detroit were also badly managed, and that’s part of what happened, but anyway total production of motor vehicles on a worldwide basis is well ahead of the demand right now, while back in the 1960’s the demand was much bigger than production. Any successful technology will end up snuffing out it’s own market.

    Then there’s the whole concept of unions which would not even exist if it were seriously true that “so nobody else feels threatened by a person’s work effort”. But we can see plenty of situations where unions, guilds, professional associations and the like are able to artificially throttle supply in some industry and profit from that by driving up prices.

  5. Chris says:

    Sure everyone keeps what they produce – if we measure what they produce by its market value. But when you buy something it’s because you value it more than its market value. So total consumer surplus should still increase with more total production even if everybody keeps their marginal product for themselves.

    So in a way Friedman’s passage (particularly the second paragraph) is a bit misleading. If Steve Jobs decided not to create Apple because taxes were too high that would hurt him (he wouldn’t be rich) but it would also hurt society as a whole (nobody would have an iPhone). But I think the broader point still stands. When people work in a private property society, their compensation is actually less than their contribution, so we can’t say they are taking away from others.

    Not sure if that’s what you were trying to get at, but that would be my answer.

  6. Khodge says:

    Homework: Sorry, the dog ate mine so I am late turning it in.

    If you take Prof. Krugman at face value (i.e. what his headline says), why should I care about someone else’s work? If a neurosurgeon is better at scheduling than his secretary then, according to standard economics he should still leave the scheduling to his secretary.

    But…

    The neurosurgeon likes scheduling more than he likes neurosurgering. The Keynesian solution is that he should continue in neurosurgery. The libertarian position is that he can do whatever he damn well pleases.

    I would suggest that your economics are correct; you just need to define your perspective.

    P.S. I say Keynesian position advisedly; your critique, while definitely a supply side solution, strongly suggests a need to “correct” a market failure.

  7. Michael Tew says:

    The two arguments seem to have important differences.

    Friedman argues that private property is good because other people do not have to work to support those who do not work. People generally don’t like to work for the benefit of others, so avoiding that is a good thing.

    Krugman argues that society doesn’t care if rich people work more. But of course society cares. Society gets the surplus that worker contributes. For the company, it’s the difference between what that employee contributes to the bottom less that employee’s costs. For the rest of society, it’s the consumer surplus the company creates in selling its products or services.

    It seems to come down to the definition of “care.” If somebody is lazy and doesn’t reach their full potential as a person, I certainly care for the sake of both that person and society. But I care in a much different way if I’m told I will need to work to support people who choose not to.

  8. Levi Russell says:

    You’re not a hypocrite, you’re just forgetting a key component of the economics of markets. It’s not true that you keep what you produce in the sense that there are zero positive externalities. The article linked below makes it clear that there are significant positive externalities associated with market economies.

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2462262

    • RPLong says:

      I was able to get this far, too, but then I started thinking about David Friedman’s take. Denying significant positive externalities to society might be fair and reasonable, but it’s still an economic cost.

      The problem with the “he values it more than the market price” argument is that it’s possible for someone to obtain something for less money than “society” would have otherwise paid.

      Suppose I discover the Tree of Eternal Life in my back yard. With it, I can heal anyone, but I decide that what brings me the most utility is burning it to the ground. It’s easy to argue that this is within my rights as owner of a piece of property, but it’s hard to argue that I didn’t impose an enormous cost on society in the form of foregone immortality.

      • Kevin Edwards says:

        Ryan, is the absence of a large benefit the same as a large cost?

        I think that is how we reconcile Murphy. With public property, it really is a cost since we all own it. With private property it’s the absence of a benefit.

        We care about both, but one is a harm and the other is the absence of a benefit.

        • RPLong says:

          Economically, the absence of the benefit of efficiently utilized property is an opportunity cost. I thought about this a long time, and I still can’t decide if this kind of opportunity cost should be included or excluded from our models. It seems economically real, but it also seems unreasonable to moralize someone else’s property-usage decisions.

          But I’d guess that everyone would moralize these decisions at some point. David Friedman has a great example of how if we could save humanity from an asteroid-induced extinction by stealing a nickel from someone, we should probably do it. Yes, it’s stealing, and yes, it’s his private property. But the example illustrates that at some point, however extreme, most of us will violate the principle of private property. The question is when and under what circumstances?

          • Harold says:

            “But the example illustrates that at some point, however extreme, most of us will violate the principle of private property. ”

            Not MF, I think. Consistency demands that you do not try to follow utilitarian arguments, else where do you stop?

            “Ryan, is the absence of a large benefit the same as a large cost?”

            Surely the actual result is the same for the tree of life whether it is private or public?

  9. Fred says:

    I think you are looking at two issues simultaneously: an ethical question and an economic question.
    In Contra Krugman, you addressed the economic question just fine, so I wouldn’t worry about that.

    The real issue, I think, is an ethical issue.
    Namely, the State coerces people in a myriad of ways, but it uses extortion to fund many programs.
    If you don’t pay taxes, then there will be that much less money going to fund those programs.
    When you work more, more money goes to taxes and then those State programs.
    To a person who believes State propaganda, it would appear that working less is taking money from those people who receive from the State programs.

    So, I think that it is the effectiveness of State propaganda which leads many people to think that working less means people suffer directly.
    On the contrary, you and I have no obligations to other people, except our children/spouse and those people we unjustifiably harm.

    One last thing: State programs are not funded according to how much you and I can afford to pay for them.
    No, you and I are extorted at rates defined by politicians. Your and my ability to pay is irrelevant. It just so happens that politicians overall understand the diminishing marginal returns of extortion.

  10. Capt. J Parker says:

    I hope Dr. Murphy will allow me one more pass at this, so if you read this link https://consultingbyrpm.com/blog/2012/07/krugman-karl-and-kalculus.html from the Contra Krugman site you learn that a Cobb-Douglas production function for the whole economy will tell you that if Mr. Fat Cat works more and produces more capital, even though Mr. Fat Cat keeps all the earnings from the additional capital he produced and the aggregate income for everyone other than Mr Fat Cat is unchanged, us laborers still benefit. With more capital around, labor’s share of output increases and capital’s share decreases. When fat cat A produces more capital he helps all the non-capital owners at the expense of his fat cat buddies. So, Friedman is right that we, as a society, should live and let live with regard to the amount others work. BUT, a devout redistributionist like Dr. Krugman should really hope that all those fat cats work their butts off to increase the amount of capital since that benefits us peons at the expense of the Fat Cats just as Krugman would want.

    • Tel says:

      Krugman’s assumption is that the “fat cats” consumer their entire production and don’t create capital.

      Well, for these purposes at least, that’s Krugman’s assumption… I’m sure that when in Keynesian mode he will claim that the “fat cats” save too much of their income. Yes he can and will have it both ways.

      • Capt. J Parker says:

        Tel,
        I think Krugman;s assumption is only that the The Fat Cat’s compensation for their additional effort is equal to the market value of the additional output. Even if the assumption was that no capital was created and only something like “highly compensated executive services” was produced, Dr. Murphy’s analysis can still holds.

        Quoting Dr. Murphy: “As we’ve seen in the specific case of a Cobb-Douglas function, but which probably generalizes under most (reasonable) assumptions, adding a unit of Factor X will drive down Factor X incomes, while increasing payments to Factor Y.
        Thus, to continue with Krugman’s analysis, we can say: Yes, if WheelerDealer cuts back one hour of his work effort because of Obamanomics, total incomes to the rest of the country are unaffected. However, there is a redistribution of this (constant) total away from middle- and lower-skilled workers, and into the pockets of the other fatcats. The competition the other tycoons faced from WheelerDealer just went down by one unit, so their services, on the margin, are now that much more valuable, and hence they command a higher real income”

  11. Bob Murphy says:

    Thanks everyone who has chimed in so far. I’m running around before going to the Mises event in NYC but I will look at these carefully when I’m back home.

  12. Darien says:

    I think the two statements are relatively easy to reconcile, at least once we accept that, as Tel said above, Friedman’s statement is far too strong. The trick is that, in a developed market economy based on the division of labor, the vast majority of what we produce we produce expicitly *for* the benefit of other people. Say I work at a sandwich shop, and on a given day I make two hundred sandwiches. Surely I don’t do so because I personally want those sandwiches; I make the sandwiches, in fact, because I don’t want them — they’re made out of goods (and with labor) that I’m content to give away in exchange for other things I’d rather have. In return, of course, my customers want me to make those sandwiches, else they wouldn’t come purchase them. So while Friedman’s statement that “nobody else feels threatened” by my work is surely incorrect — the guy down the street who makes crummy sandwiches sure does — the spirit remains intact: I have materially benefitted at least some people without trampling on anybody’s rights.

    Meanwhile, Krugman’s statement hasn’t become less absurd with time. If nobody benefits from rich people working, why on Earth does anybody pay for it? This weird Krugmania could only make sense if we were to posit trade as zero-sum; then and only then would it matter that rich people consume “as much as” they produce. Otherwise, since they’re consuming things *different from* what they produce, they by definition must have made a difference to somebody else along the line — somebody who certainly would care if the rich people suddenly stopped producing and consuming.

  13. Matt M says:

    My take here is that “society doesn’t care if you work” is a sufficiently vague statement that’s very hard to really pin down. A few quick points.

    Generally speaking, most people want most other people to be happy. On average, most working age adults want to be employed. Therefore, we assume that most unemployed people are unhappy in this state, which makes us not indifferent to their employment status. We are happy for them if they find work, and we are unhappy for them if they get laid off. To this extent, we “care” whether they work or not, even if it does not directly affect our own incomes or standard of living.

    And despite the US economic system being reasonably capitalist in nature, there are a whole lot of people who embrace and live by collectivist values out there. Who do, in fact, believe that people are morally obligated to work “for the greater good” and to contribute their tax revenues and to keep themselves in prime physical condition in case war breaks out, and so on and so forth.

    I don’t think Krugman is wrong to say that if the GDP increased by 10%, and 100% of that increase was due to higher earnings by the top 1%, that (in the assumed absence of trickle-down) the poor are no better off and are indifferent to this. But I also don’t think that most people believe this. If that happened under a Democratic administration, Krugman would be the first to shout about the amazing GDP growth from the rooftops. A whole lot of people believe that high GDP, in and of itself, is automatically good.

  14. Craw says:

    If I engage in trade I increase the marginal product of everyone else, so even if I keep my marginal product others gain.

  15. Andrew_FL says:

    If Steve Jobs decides not to brainstorm and come up with an iPhone, the rest of society doesn’t care, because it doesn’t know it lacks the iPhone.

    Society may indeed not care, but it does not follow that they should not care

    • Tel says:

      This is a fundamental problem with economics, empiricism and using “The Seen and the Unseen” methodology.

      When considering “The Seen” we can take measurements, use our standard empirical tests, create charts, statistics, etc, etc.

      When considering “The Unseen” we have only imagination to work with. There’s more than one unseen, potentially there’s a vast array of possibilities… all based on whatever we can dream up.

  16. Josiah says:

    Bob,

    You should ask David Friedman what he thinks about this.

  17. Kevin L says:

    Others have brought this up, but I think I can phrase it a bit differently:

    When talking about lowering marginal tax rates, we’re talking about high earners. A good number of these high earners produce very large consumer surplus, especially compared to the marginal workers Friedman was discussing. Of course, not every high income earner gets that income from beneficial activity (some are government contractors, or bank managers whose incomes are inflated by regulation and government spending), but for example the tech giants probably have produced dozens of times more than their earnings in consumer surplus. Dead weight loss is much greater, then, at high incomes. I think for this reason some economists have argued that marginal tax rates should decline rather than increase with income.

  18. Samson Corwell says:

    I am so glad that this came up. Friedman’s argument in his first few paragraphs is absolutely idiotic (I think Friedman is still is a smart person). Private property does not prevent “the public” from telling you what you can/cannot do with it. If that were the case, then you guys shouldn’t be complaining about regulations since they wouldn’t exist (I’ll leave aside that property rules and contract laa are themselves regulation). Just because you waste something that what is considered to be yours is hardly inconsequential. Some people will argue that those resources could’ve been put to better use and that your claim to a resource is dependent upon its contribution to the greatest good for the greatest number.

    • Samson Corwell says:

      Never mind. You were pointing out this flaw. I think. Sorry, Bob.

  19. DZ says:

    Not sure it’s apples and apples. Friedman’s point seems to have more of a subjective or psychological tilt, while Krugman is trying to take an objective stance. To say that “nobody else feels threatened by a person’s work effort” in a market economy doesn’t = we’ll all have the same material well-being if no one works.

Leave a Reply