Envy as an Externality

Earlier in the day I was reading Volume 2 of the Collected works of Armen Alchian, a book I purchased for less than ten dollars, including shipping. It’s sort of amazing, since 15 years ago I wouldn’t have been able to find this anywhere, at any  reasonable price. Alchian was a pioneer in the investigation of property rights, so I started right in on “Some Economics of Property Rights”.

At one point he writes (talking about costs and benefits of property rights),

” Often the non-owner informational consequences are not even considered undesirable. If my behavior arouses your envy or covetousness, that is so much the worse for you, and since such reactions by you are not “proper,” these are excluded from the realm of pertinent or influential costs insofar as the owner is concerned.”

When progressive complain about income or wealth inequality, it seems that the only way it I can be construed is that the poor are harmed by others making more money than them. In other words, envy is an externality. So my question to the progressives out there is :Is there another way to interpret complaints about income inequality, or do you really believe that envy is an externality that should be compensated for?

It could be implicit that inequality means that the rich have gotten that way illicit and immoral means, but I haven’t seen complaints framed that way. It is certainly true that some rich have gotten that way through immoral means. The bailouts are a prime example of this. But many of the rich earn what they do because they actually produce that much more wealth than the average person.

If you don’t believe that, consider this example. Ebay facilitates billions of dollars of transactions every day. Most of these couldn’t have happened pre-ebay. Expanding the customer base of businesses to the entire USA and beyond has allowed goods to get to customers that never would have been available previously. The information value given by Ebay is amazing. I don’t know what the actual value provided by Ebay is, but using the market cap as a proxy, it is around $40 billion. The number of people needed to create this value is one person with a really good idea, maybe a CEO to execute the idea, and a bunch of really good programmers. Even if we were to include everybody currently employed at Ebay (about 16000 people), then the average ($40 bil / 16000) is about 2.5 million per employee. Given that some employees are more valuable than others, it’s not surprising that the CEO might make hundred’s of millions, and be worth every penny. Technology might just be making certain people much more valuable than the rest. (As an aside, I understand that market cap usually measures the value of a company amortized over several years. Possibly dividing 2.5 mil by 5 or 10 would be appropriate. But the fact is that Ebay creates a huge amount of value.)

Other technology companies work the same way. As much as I hate microsoft products, their software has been worth billions to businesses and individuals. Should Bill Gates be punished because others are envious of his great wealth?

Are there any other reasons other than envy to believe that inequality is undesirable? I suppose that if the wealthy decided to spend all their money at once they might distort markets, but that doesn’t seem likely to be a real concern.


15 Responses to “Envy as an Externality”

  1. Bill Says:

    There are several points that you made that probably need to be clarified. You state that “envy is externality”. Is your point the ONLY significant negative externality is envy? It seems obvious to me that there are many more negative externalities. It seems obvious that an increase in wealth disparity is strongly correlated with an increase in power, both physical and political. With a great enough power differential, those in power tend to modify law to benefit themselves regardless of the effect on the common good. If the government is sufficiently weak, those is power tend to use force more directly to serve them (even if the gains to themselves are minimal, and the cost to the others are immense).

    One assumption that I am making is that a government should work to promote the “common good.” A common good that is greatly attenuated by wealth disparity is “Creative Destruction”, as explained by Schumpeter — the ability of powerful ideas to displace the old means of accomplishing goals.

    That is playing itself out right now. Our banks (those with the most property in our society) taken tremendous risk, and in their failure, they should have gone bankrupt. However, since they have enough power, they have ensured that those without power, the general population, will bail them out. The general population is now punished in large part because of the disparity in power between the banks and everyone else. The banks have externalized their failure and privatize their successes. It seems because of their immense influence, they will continue to do so into the foreseeable future.

    I think another key premise in your discussion of property rights is that wealth will strongly correlate with ability. In a society concerned with the common good, a system of incentive should be enacted that enables those with the most ability to leverage their abilities. However, it is not at all clear that the system you advocate has those incentives.

    Is seems future wealth is much more strongly correlated with current wealth than ability. This idea is further explained in the books “Fooled by Randomness” and the “The Black Swan.” In your example, you mention CEO pay and how they are worth their money. However, if you look at CEO pay, is not correlated well with performance. If you look at CEO pay over the last few decades, would you argue that their ability has increased in proportion to their pay? Of course that would imply that the average worker’s ability has decreased, hardly a plausible conclusion.

    In SuperFreakonomics, they conceded that CEOs are not worth their pay. They then argued that the pyramid pay structure was necessary to properly motivate those at the bottom. Behavioral economist Dan Arierly tested the assertion that those incentives improve performance and found the assertion is contrary to his experimental data. So when you make the assertion that the CEOs are worth their pay, you need to provide better evidence that the mere assertion.

    So to answer your question, a strong wealth disparity can condemn those with immense potential to help society to the outskirts of society. Poor talented children will have less ability to acquire an education since they will more likely struggle to survive. Powerful interest will be entrenched even when they reduce the standard of living for those in society.

    I think a step in the right direction is to regularly revoke corporate charters, and sell off the assets of companies who don’t serve the public good. If a corporation is “Too Big To Fail” like Goldman Sachs, revoke their charter. If company policy result in death equivalent to negligent homicide (like in the case of Union Carbide), revoke the corporate charter. It seems that those steps would help reduce the power disparity in society and give corporation a greater incentive to be less evil.

  2. darfferrara Says:

    I asked the question whether envy was the externality that should be guarded against because I could see no other that deserved to be honored, and usually wealth disparity is usually presented as a negative in and of itself. And obviously envy is not the only externality of wealth disparity. If I create a machine that made gasoline out of water, I would get rich, and it would obviously reduce the value of certain land that had oil. But the law doesn’t recognize that I should compensate the people that owned that land. The question is whether the poor should be compensated by people just because they have become “too rich”.You’ve given some reasons other than what would directly be called envy, although it could be interpreted as envy, but maybe you can clarify that for me.

    1) Wealth disparity allows the wealthy greater ability to change the rules to keep themselves in powers.
    2) CEO’s (and I guess by implication no one?) is worth that much more than anyone else.

    With regard to 1), are you saying that the rich should not have more power than anyone else to change the rules? In other words, “I wish that I had the same power to change the rules that the rich have”. That seems like you envy that ability. Or you might mean “I think that the rules should be fixed beforehand, and I don’t like that rules get changed”. I think this view is not envious.

    Of course the rest of your analysis is completely wrong due to your lack of understanding of property rights and public choice. Luckily, you can remedy that by reading some Alchien and James Buchanan if you so choose. I’ll try to point out pieces of what is wrong with your statements.

    First, you assume that there is a “common good” called “Creative Destruction”. I would challenge you to clarify that idea. I doubt that it can be expanded in such a way that actually can be used to create a concrete system. If it can be, it likely will look like Alchien’s views on property rights.

    Second, if you believe that uneven distributions of wealth inhibit creative destruction (ie innovation), then the US should be far behind almost all other countries in innovation. But the US leads the world in innovation measured by patents, high technology, creative arts and other areas. Luckily for you, this claim by me involves empirical evidence, which I don’t permit on this blog.

    Third, you seem to think that I believe that all, or most CEO’s are worth what they are paid. I made no such claim. What I did show was that a generous definition of “person who works at ebay” shows that the group that started and runs ebay have created far more value than the average person. I do think that some CEO’s create huge value. A specific example would be Steve Jobs at Apple. Do you deny that Steve Jobs creates more value for Apple than one thousand average Americans in a year? Do you deny that Serg and Brin at Google have created more of value than most Americans? I understand that your argument doesn’t rest on that point, but I think it is clear that given todays technology, some people have created far, far more value than the average person. As an aside, I don’t think that Freakonomics are asking the same question that I would ask. They ask “What was a CEO worth?” I view CEO compensation as a value generated by an evolutionary market discovery process. I make no claim that the CEO of the first pet rock factory deserved his billion dollar bonus any more than I view hardworking, but unlucky people deserving of their fate.

    Your examples of the banks that are too big to fail prove the opposite of the point you were trying to make. The banks didn’t have enough money, that was the immediate reason that they were bailed out. The political reason that banks were bailed out because bailing them out was for the “common good”. If the banks weren’t given money then all of society would suffer. The real reason (the public choice reason, if you will) for the bailouts is that the process of money creation is a public good. The Fed is a private, but not for profit corporation. That means that money is not allocated by the price mechanism. When this happens there are rents to be extracted from the political process. This was for the public good. When someone mentions something is for the public good you should get your laundry, because you’re about to be taken to the cleaners.

    • Bill Says:

      Let me try to clarify my position. I am claiming that greater wealth disparity can cause power disparity, giving the wealthy greater means to exploit the poor. I think there is ample evidence to support that claim. I also find it interesting that you a drawing a moral equivalence between support for the common good and envy. That and you attribute motives to me I don’t have and didn’t express. What is wrong with the claim that the primary purpose of a government should be to promote the common good? Why cast my position as some other strange statement about “rules remaining the same” or “wish to change the rules”.

      I am not claiming that CEO’s are not worth there pay, although I tend to doubt that they are. I don’t care to do that analysis. I was mostly reacting to your statement that it’s not surprising that the CEO might make hundred’s of millions, and be worth every penny. You are making several strong claims (not just this one) and you should support those with both an argument and evidence. It seems likely that most CEOs would use the power and influence of their position to maximize their earning, even if there is a slight negative affect on the long term health of the company. If you pay attention to corporate culture, you would find that that is commonplace.

      In response to Of course the rest of your analysis is completely wrong due to your lack of understanding of property rights and public choice. If you want to convince me that my analysis is completely wrong, you at least have to demonstrate that you understand my point and then address claims I make. You really haven’t done so yet.

      For example, look at your statement Your examples of the banks that are too big to fail prove the opposite of the point you were trying to make. Recall my point, those in power tend to use their power to entrench themselves, regardless of the effect on the common good. In support of this point, I talked about the bailouts to the big banks. Over the last several decades the banks have used their influence to:
      – get leading positions in Treasury
      – reduce regulation and oversight
      – repeal legislation that limits financial “innovations” (Glass–Steagall)
      All of this was done without regard to how it would affect the common good.

      So because their Ponzi scheme should have collapsed and they were able to use their influence to further damage the common good, my point is refuted? The collapse of the Ponzi scheme didn’t mean that the captains of corporate finance were without resources. They still have their personal fortunes. They are able to use their current resources to ensure that they can continue to make “financial innovations” that will continue to bilk the public. Those financial structures should be destroyed, but will not be. What drugs are you taking that make you believe that this situation proves the opposite of my point?

      I think your statements The political reason that banks were bailed out because bailing them out was for the “common good”. If the banks weren’t given money then all of society would suffer really demonstrates your tendency to avoid my arguments and points I make. Let say that the bail outs were needed for the common good – does that refute my point that those in power entrench themselves regardless of the affect on the common good? If the bailouts aren’t good for the public, does that refute my point? Can’t you see how irrelevant this point is to anything I said?

  3. Jon Says:

    Suppose we concocted an economic order that lead to having 100 families with 90% of the wealth and the remainder was disbursed amongst the rest. In that economy basically the poor would serve the rich almost exclusively, since they are the major spenders. Suppose those 100 families continued to demand more of the poor so they could extend their wealth. You’re in no position to negotiate with them. If you won’t work for 1000 calories of food per day they’ll find someone who will. Make it 900.

    Suppose the death rate due to starvation was about 50%. The suffering remainder that survived did so by doing the bidding of the wealthy.

    Now, it’s just a hypothetical, but based on it answer this question. Would you support some wealth redistribution via government?

  4. Jon Says:

    Here’s an interesting quote from Adam Smith.

    “It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.”

    Here’s another really good one:

    “In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”

  5. darfferrara Says:

    Interesting quotes. The first one has been explored thoroughly by the methods of public choice theory. If the law is a public good, then it is subject to these problems. This is why I favor the evolution of government to a competitive form of government. In the absence of government competition, I think that limiting the scope of government to areas where clear externalities and economies of scale are present.

    As to the second quote, I agree that limited experiences will limit the outlook af a person. However, do you think more Americans should be experiencing “the adventurous life of a soldier”? Allowing individuals the freedom to choose their own actions, as far as possible will expand his mindset better than any government program. Keep in mind too, that the “working poor” in America today are richer in many ways than the kings that lived in 1776.

  6. Jon Says:

    The first quote is in support of Bill’s point that as inequality increases this increases the power of some to contrive an economic order that suits their own interests. That’s in the interests the producers, but the effect on consumers generally is negative. That’s a legitimate public concern. As far as limiting areas to where externalities, that’s my main concern. That’s where I’m always advocating government involvement. But that means global warming, banking regulation, controlling capital flows, and many other items I presume you don’t want to see government involvement.

    I have no clue where your comments about life as a soldier comes from. That’s totally out of left field and in no way relevant to anything I said as far as I can see. Kind of bizarre. I imagine you’ve concocted an argument in your mind that you are attributing to me and I have to wonder what it is, but it’s safe to say I don’t affirm it.

    Here’s a choice for a Jamaican peasant. You can sew underwear together or you can starve. Is that supposed to expand his mindset better than a government program of schooling would?

    • darfferrara Says:

      You may want to read the quote you ask me to read. The second Smith quote says, “The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier.” Smith is extolling the virtues of the life of a soldier here. You approve?

      There are plenty of externalities. The law does not recognize many of them as requiring reimbursement. Envy is an externality. Should it be compensated for? Noam Chomsky wakes up angry at everyone not behaving nicely. Should Noam be compensated? Your definition of externality can, and has been used to argue that Happy meals shouldn’t be sold, foods with too much fat should be banned, businesses that compete with the state favored business should be outlawed or restricted, violent video games should be banned, non-government sanctioned views should be off the airwaves (think about the Smothers Brothers in this context), and dozens of other areas. I’ve mentioned this term many times, but the Public Choice aspects of allocation of resources by government doesn’t look very good for government. Look it up. Public Choice. You might learn something that isn’t just a conspiracy theory about virtual senates or why capitalism, (at least capitalism as you imagine it) is bad.

      • Jon Says:

        He’s not saying everyone should be a soldier. He’s saying that monotonous labor dulls the mind and makes a person incapable of defending his country because he’s so stupid.

        How my view entails that Chomsky should be compensated because he’s mad I have no clue.

        Oooh. Public Choice Theory. You’ve got a field of study you can vaguely point to and pretend it refutes me or something. Here’s a field of study you should look in to. Logic. Look in to how reasonable arguments are constructed and how to properly ascertain the argument of your opponent, so as to avoid concocting straw men.

        When you’ve done that go back and read your old stuff. You’ll notice some things. First, nobody recommended that everyone become a soldier. Me being wrong about soy is not a logical basis for rejecting polling results. Nobody said a Prius has fewer external costs than an SUV. Your speculations about arguments that are “insinuated” are just wrong. When I say that Hatians are suffering this does not mean that I think I’m suffering. My view is not the same as saying I don’t enjoy technological advancement, nor do the poor in other countries. Seriously, you are so frequently so far off in your understanding of what I’m saying it seems you aren’t trying. I wonder if you are just trolling. Fine, I’m learning some things, but it would work much better if you tried a little.

      • darfferrara Says:

        If you think it would be more helpful to have the discussion in the language of first order propositional logic, and then substitute quantifiers later to verify whether or not our conclusion are valid, then we can have a go at that. I’ll let you go first. Many times I don’t make arguments or even claims. I ask questions. These are sometimes meant to lead you into thinking in areas that you may not have thought about. They are not always related to the subjects you posted. This is similar to you posting interesting quotes by Adam Smith in a post that has nothing to do with these quotes. They may not be relevant to the current discussion, but can lead to interesting digressions. But when you find that a quote from one of your own posts is coming from left field, it may be an indication that you aren’t paying close attention.

        Leading people to learn by way of asking questions is known as the Socratic method. I understand that you are justifiably proud of your ignorance of Public Choice economics, property rights economics, and “book learnin'” in general, but knowing the label “Socratic method” might help you understand what I am doing better. To give you a free one so you don’t have to hurt your brain thinking, Chomsky’s feelings are an externality of other people’s actions. Virtually all actions that people take create externalities, but many of these are not culturally or legally recognized as requiring reimbursement. So when does an externality rise to the point that it should be remedied by some societal structure?

        Regarding your other digression about what is the correct division of wealth, I think that that is an unanswerable question, and not a helpful way of viewing the issue. A better question to ask is “what social institutions and structures lead to the greatest utility?” I believe that a strong system of private property rights does that. Property rights is a complicated subject and it is possible that there are some areas where assigning private property rights is not the best system for allocation of resources, but it has the advantage (in the US, at least) of several hundred years of evolution through the legal system refining the definitions of property rights. If you wanted to you could learn more about these so-called “property rights”, but unfortunately it might involve reducing your ignorance.

  7. Jon Says:

    Digressing into a discussion about whether everyone should be a soldier is like digressing into a discussion about your thoughts on wife beating. Adam Smith doesn’t say everyone should be a soldier. I don’t say everyone should be a soldier. Nothing I’ve said suggested I would think that or would lead anyone to rationally conclude that I hold such a view. Based upon your prior knowledge of my other opinions you would know immediately that I wouldn’t subscribe to this. So what is interesting about this digression? It looks to me like an effort to attribute an absurd position to me as if this position is entailed in my views. But since it isn’t and you haven’t even tried to show that it is, it seems you are either trolling or just trying to be irritating, or maybe your ability to work out the logical consequences of a statement is just not at all good, and hence this repeated sequence of straw men arguments.

    It’s not about being proud of ignorance. It’s about something called “ontological parsimony”. Also induction. Here’s how it works. There are many logically possible claims, but because I have limited time to investigate every claim I don’t just accept something without evidence. If someone makes an assertion that contradicts my present opinion that I hold based on evidence, I’ll pretty much dismiss it. Look into “Burden of Proof” at Wikipedia for further information.

    Does the assertion “Arrow’s Theorem shows I’m right, look into it you ignorant yutz” constitute evidence? No. That’s basically saying “Go find an argument for me since I don’t want to do the work.” Well, I might look at it anyway, but I’m not obligated to and I’m rational to not bother due to ontological parsimony. So it’s not about being proud of ignorance in “book lernin”. It’s about being efficient. Everyone has limited time and must make decisions about how best to allocate study time in order to maximize learning.

    I do a quick Bayesian analysis in my head. What’s your track record of properly extracted the logical consequences of statements? Not good. So should I expect that if I look into Arrow’s Theorem I’ll see that I’m wrong? Does it in fact lead to conclusions that contradict my view? Only if you are properly understanding it. You don’t understand my statements. You improperly extract the logical consequences of Bill’s statements. Should we expect you to properly extract the logical consequences of Arrow’s Theorem?

    Here’s another inductive argument. I have experience debating people online. I’ve seen in some cases that when people are incapable or unwilling to construct an argument they simply point vaguely to some other source and claim that I’m refuted over there, if only I’d put in the time to understand it. Sometimes I have put in the time. Often it has nothing to do with the issue. So again, this is not hostility towards learning. This is me learning from experience and making efforts to maximize the allocation of my time.

    In the case of Arrow’s Theorem, Bill was familiar with it, and he explained that it was irrelevant. I did look into Public Choice Theory at Wikipedia. What I saw seemed to confirm my position. Why do democratic governments not enact policies that reflect the public will? Because of special interest groups and lobbyists. Yeah, that’s kind of what I’ve been saying. So what now? Keep digging until I find something that shows me to be wrong somewhere? That’s an unreasonable expectation because it is a demand that I spend my time in a way that I should expect to be inefficient.

    As far as the digression about what level of inequality is acceptable, I’m just repeating to you the question you asked me. When I indicate I thought the level of inequality presently in the US should change you asked me what a correct distribution of wealth would be. When you indicated that a certain hypothetical level of inequality was unacceptable to you I asked you what would a correct distribution be and you say the question is unanswerable. Why do you expect me to answer when I’m unsatisfied with a given level of inequality but you are not obligated to answer when you are unsatisfied with a given level of inequality?

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