Please note that my opinions are my own, and the opinions of the anyone or any institution quoted are theirs. The opinions expressed herein do not reflect the opinion of North Carolina State University, its board of directors, the College of Management or any other college, Student Media Authority, or WKNC Raleigh.

Wednesday, October 11, 2006

Edmund Phelps on Rawlsianism

From the recent "Dynamic Capitalism" by Mr. Phelps in the WSJ:

"[In testing ability to grow:] In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth. An organization that leaves the bottom score lower than it would be under another feasible organization is unjust. So a new organization that raised the scores of some, though at the expense of reducing scores at the bottom, would not be justified. Yet a high score is just if it does not hurt others."

(No Child Left Behind? That's another blog article. Someone else write it. Please?)

Isn't it in our best interest to redistribute ability (scores, incomes, whatever) to allow the greatest possible chance of economic innovation rather than quality or size of that innovation? In other words, the idea goes that the more equal distribution of ability, the more absolute economic or business innovation will occur at the expense of the quality of those innovations.

In this age following record-setting growth and innovation, are there that many more to find? Shouldn't we have a lot of monkeys searching for a needle in the haystack (forgive the cliche orgy)?

A week ago I would have said yes--the absolute number of innovations is far more important than the quality (or leap) of those innovations. But I realize now, that stifles a basic incentive structure so dear to free capitalism. So my answer is an emphatic:

No! Dynamism allows those least fit to survive to perish. That's the nature of dynamism: its a constantly changing econo-scape. Business thrive, grow, die, spin-off, and birth. And we're all better off for it. Creating a greater oppurtunity for innovations is necessary for further development in any economic system, so long as its aims are a higher standard of living and increasing purchasing power.

Mr. Phelps might say its dynamism versus high-cost, concentrated R&D. As he related in the article:

"So if the increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity, as I argue -- and if that in turn pulls up those bottom wages, or at any rate does not lower them -- it is not unjust. Does anyone doubt that the past two centuries of commercial innovations have pulled up wage rates at the low end and everywhere else in the distribution?"

A Different View of Protectionism, or anti-Greenpeace (Stop Thinking Globally, for a second)

You have rights. In Hayek's version of capitalism, you have the right to lose your shirt.

Should I let you?

I think not. I have something to gain by protecting your wealth from your own destruction, even if the wealth does not change hands.

The idea goes that I should allow you to lose your shirt. Someone else gains that shirt, but is that really what happens? How do we define "cost," "gain," or "waste?"

If your own mistakes cause you to "lose your money," its a sunk cost, and your continued existence through support or subsidization would classically be viewed as inefficient.

If by some congruence of circumstance you should happen to be less risk-averse than average, and not inherently stupid as I supposed before, protecting your wealth may actually encourage some innovation.

By formulating some policy, or promoting the foundation of an institution that allows you to take on the risk of others less risk-averse than yourself, you receive rents and others gain a sense of security. Positive sum game. Period.