One-Armed Economics and Wealth Creationism

I venerate expertise as a truth warrant. In judgments of correspondence goodness evaluating quality, it can substitute for clearly defined standards (see “Expertise”). Because expertise is to some degree built upon experience, it is a deeply flawed justification for truth and goodness claims, though its reliance on rational examination of experience raises its reliability. That being said, the criteria for developing expertise depend on the subject. The human sciences have compiled a dismal record in this regard, in part because of weaknesses inherent in their fields (see “The Calamity of the Human Sciences”) and in part because their roots in academia encourage professional disagreement. Nevertheless, the hardest of the soft sciences and one of the few that is based upon quantitative analysis is “the dismal science”: economics.

Because it is a human science, it is built on the shifting sands of conflicting paradigms. We see broad disagreement about essential subject matter along the political spectrum, but even economists embracing capitalism splinter in their premises and the conclusions built upon them. Pit a disciple of Hayek against a Keynsian and watch the sparks fly, justifying Harry Truman’s famous preference for a one-armed economist who wouldn’t say, “on the other hand….” The general unpreparedness of economists for the crash of 2008 does not speak well of their predictive powers. The psychic hot line did better. So call economics an immature science, one step below respectable status. Even keeping that caveat in mind, I cannot help respecting economists for their devotion to data, something all too rare in the human sciences, and I respect the their analytic method, flawed though it may be by the theories that dictate it. They know so much more than I do. I only participate in the economy. I do not profess to understand it. My field is epistemology, so I am painfully aware of what I do not know, but I have a few issues with the concepts of wealth and job creation as some economists define them that confuse me. Perhaps an expert can set me straight.

I took a dollar out of my wallet the other day, and right above George Washington’s head in a kind of corona, a girlish hand had printed in red marker the name “Maria.” That got me thinking about how many hands that bill had gone through since Maria had first claimed it for her own, and how many transactions had been facilitated by its existence. Now I’ve heard conservative pundits and a few economists insist that wealth can only be created by free enterprise, that government can only transfer rather than build wealth. Since the money comes from tax revenues, they say, it is merely changing hands, not creating value in the way private enterprise does. This seems obvious when given their favorite example of a Steve Jobs inventing the iPhone. There was nothing and then there was something that people were willing to pay for. This is true wealth creation, as in creation ab initio, a making that seems almost divine. Advocates of this position contrast that kind of wealth making with the confiscatory policies of government taxation that only moves money around after, of course, squandering a large percentage in fraud and waste. So when government spends, it is spending not only what the earner would have spent more wisely but also what it did not create. The assumption is that the taxpayer created the wealth by her labor just as Steve Jobs created the iPhone. So taxation is not only wasteful in that it adds an unnecessary drain for money to go down. It is also parasitic in that it adds nothing to the economic basket. Have I got that argument right?

But Maria’s dollar tells another story. Does your job “create” wealth from nothing in the sense of inventing value? More likely it does what all those people who passed on Maria’s dollar do: perform a service that the payer considers worth a dollar. Whether that service is performed in the public or private sector is irrelevant. The taxpayer pays for a service that government provides just as she pays for a babysitter or a taxi or a pizza. I will admit that I can choose whether to purchase these things and that I have no such choice in government spending except, of course, through my vote. But look at it another way in respect to other purchases. I have no choice about fulfilling any of my economic needs. That’s why they are called “needs” (see “Needs Anchor Morality“). Can I refuse the grocer, the hospital, the landlord? You may respond that I can choose another provider to meet my needs if dissatisfied and such freedom is denied me in regard to government services. This is an undeniable burr under the saddle of the cowboy libertarian wing of the conservative cause. But let us examine this irritant more closely.

There are two good reasons for the monopolies that government “enjoys” in performing its services and these affect but transcend economics.

First, since the raison d’etre of government is justice rather than profit, it must retain a monopoly of power so as to be the final arbiter in its goal of providing justice to meet those needs that citizens cannot meet by their own efforts. The legitimate scope of such efforts, I must add, is limited to those needs citizens cannot satisfy for themselves. These fall into two broad categories: those too expansive for any individual to provide such defensend those that might be skewed into injustice by gross inequalities [such as the court system and the legal rights of minorities] (see “Natural and Political Rights.“).Secondly, the issue of its efficiency and desirability in regard to any particular but necessary service is skewed by the simple truth that government is often the provider of last resort in regard to these essential services, performing public functions (like fire protection and other disaster relief) that no private employer would undertake because they could never prove profitable. Florida provided another example after hurricanes ravaged the state in 2004. Private insurers deserted the state, which was obligated to go into the insurance business to provide needed coverage for homeowners. Needless to say, that effort did not turn a profit.

These two realities put to the lie the claim by some economists that government only transfers rather than creates wealth. It provides services citizens cannot provide for themselves, services that meet human needs and that may demand an attention to justice over profit.

Now it is worth discussing whether government can perform some of these services as well as a private entity, but this is a question of relative efficiency, not absolute wealth creation. But in considering efficiency, you can be sure that no corporation will pursue these kinds of opportunity unless profit is factored into the job, profit that adds to the cost of providing the service, profit that blinds the provider to issues of justice in provision of services. Does it really matter whether Maria’s dollar passes through government hands by way of taxation or into the till of a business if it then goes to pay some employee for doing necessary work? By the logic of those who deny the value of public expenditures, the education private colleges provide has value while that provided by public colleges does not. Can anyone claim that a nurse working at a VA hospital provides no valuable service in comparison to one working at a for-profit hospital? Does this make any sense?

So much for the absolute claim that public dollars cannot create wealth. But conservative economists might then simply pivot to the question of efficiency, subtracting from that wealth the costs incurred by government’s incompetence, leading to the same conclusion by means of a different set of presumptions. For if the admitted economic value is reduced by waste, fraud, and inefficiency they think inherent in government spending, the net sum might still be zero. This is certainly a different argument from the definitional claim that the public sector is a drain, and it resonates. The Soviet Union was hardly an exemplar of socialism, but it surely was a model of waste and bureaucracy, and conservatives are on much more solid ground in condemning the poor performance of some government bureaucracies at all levels. But let us examine this point critically as well, for it is based on two false claims.

The first is that government is for some reason inherently wasteful, but that conclusion relies on a cost/benefit analysis appropriate to private rather than public enterprise. Put another way, “wasteful” in capitalism refers to cost versus profits, but as the goal of public enterprise is not profit, at least not the profit that can be quantified into dollars, on what grounds can it be termed wasteful? Unless critics are willing to use a broader standard of value, they can hardly objectively judge the public sector, and to use the standard of value appropriate to private enterprise is grossly distorting.

Underlying the charge though is a psychological theory of motivation that capitalism’s champions mistakenly take to be indisputable.  They charge the poor performance of government services less to weak oversight than to the slackness of its work ethic. No reasonable person can argue against the profit motive as an incentivizer of efficiency, but it is carrying the argument to absurdity to view it as the only incentive as Ronald Reagan did in his infamous contrast between public and private workers: “The best minds are not in government.  If any were, business would steal them away.” I doubt that even Steve Jobs found profit more motivating than his own love of discovery and invention. Millions of dedicated police officers, firefighters, teachers, and public servants are moved to do their duties by their commitment to the general welfare rather than the size of their paycheck. Bureaucracy is not necessarily a pejorative term.This is not to dismiss charges of waste and incompetence nor to diminish good faith efforts to make government more effective, only to challenge the presuppositions of those who seek to discredit it by inept comparisions.  It is only an inspiring Chamber of Commerce vision of wealth that sees it as created from nothing by the ingenuity of the human spirit in pursuit of profit.

Maybe not so inspiring as we might wish, as the ugliness of Ayn Rand’s portrayals demonstrate. Her “arguments” as phrased in her novels are certainly created out of nothing (see “Tall Tales”). But more to the point, they are adolescent fantasies. It is hard to decide whether they are more objectionable for their Romantic excess or their childish ingratitude. Even a moment’s cool thought after reading Rand’s overheated prose should make it obvious that Steve Jobs did not build Apple from nothing. It hardly detracts from his genius to note that he relied on the education, protection, and facilitation that his parents, his community, and his government provided to apply his genius. What would the iPhone have looked like if Jobs had labored away in a slum in Somalia? Rand’s heroes hardly made themselves (though I am not sure their parents would have wanted to claim them), and while her warnings of the dangers of collectivism were on target against a Communism that championed a stupid equality of degree, it is an elephant swatting gnats in today’s liberty-loving America (for more on the battle between liberty and equality, see “Our Freedom Fetish” and “The Riddle of Equality“). The self-made man is a staple of the American dream, perhaps because it is a dream to imagine anyone being totally responsible for his own success.

A stronger point of leverage against government as a wealth creator might target simple overreach. I mentioned earlier that government’s positive obligations in justice focus on broad needs for the general welfare and more pinpoint needs to arbitrate competing demands for justice (see “Two Senses of the Common Good.”). The emphasis must always be on needs that individuals cannot provide for themselves. This is an inherently hazy category. Its components are built upon the universality of human needs that introduces an equality of kind that imposes obligations on government (see “Economic Justice“). But it is not merely the ambiguity and difficulty of the topic that lead both liberals and conservatives to avoid facing it. Both sides have reasons to blur the issue.

Liberals refuse to face the thorny issue of individual responsibility. Though each of my needs confers a right, the satisfaction of most of those needs is my own obligation. It is, in truth, my core duty as an adult human being (see post “Virtue Ethics Primer“). Should I fail through my own error, government as the collective will of my fellow citizens is under no obligation to repair my situation unless I am unable to repair it for myself. I understand that Christian values in the U.S. have tinted many persons’ views of this sort of thing, but all those conservatives who think this a Christian country might want to differentiate their Christian from their political duty (though they seem loath to face either: see below), and liberals who wish to use government resources to satisfy any unmet needs whatsoever might want to clarify in their own minds which are government’s duty and which are each citizen’s. Conservatives have a point about the “nanny state” that liberals rather wish to ignore. Look it at this way; to treat adults who should go about the business of satisfying their own needs as children the rest of us must care for is pure paternalism: insulting and crippling to those we seek to help. It is also a waste of public resources in that individuals are not only responsible but also more efficient in these efforts than those who seek to ameliorate their condition for them. It violates the only duty of government in that it is inherently unjust both to the individual and to the citizens who attempt to do for her what she should do for herself. Liberals need to face the matter of individual responsibility squarely.

Conservatives have a different motive for blurring the issue of needs, for to base government upon their satisfaction would call into question the social contract justification for government and with it the majoritarian argument that has long delivered injustice to minorities (see “Why Invent a Social Contract?). More pragmatically, it would cost more money, for to finance a government seriously committed to the general welfare– a term I define as meeting needs that individuals cannot meet by their own efforts– would socialize some efforts now undertaken for profit. The absurd cost, inadequate distribution and poor outcomes of American health care is one prime example from among many. The net result would be to change our value system from the orientation that wealth determines worth to a respect for the equality of kind rooted in our common humanity, an innocuous enough notion that you would think Christians as well as champions of human rights would subscribe to, yet one many conservatives find threatening.

A related wealth creation story lauds the positive contributions of the job creators in our economy, those who stimulate the economy by providing employment for the ninety percent of us who work for a wage. The argument hinges on the more basic notion discussed above: that wealth is created out of nothing only by those operating within the free enterprise system. See, Apple had two employees in 1976 and 45,000 last year. Each of those well-paying positions only exists because of Jobs and Wozniak. They are not only wealth creators. They are also job creators. Again, it is hard to argue with this. Something came into being as a result of their genius that did not exist before and by dint of their hard work and smarts; that new thing has created both wealth and jobs. Surely, job creators deserve recognition and reward for their efforts. This version of events is convincing, yet it seems just a bit truncated and simplistic. There’s more to it than just invention and production. All those sleek computers and phones and tablets are great products, no doubt, but all those high paying jobs and profits were not created from production. There is also the little matter of consumption. Even the paragons of job creation could not have made their companies or built their wealth or hired their workers without a demand for their products. And demand depends on the health of the economy. No titan of the marketplace could work her magic in a failing society, which brings us right back to the necessity of government not just as a wealth creator but as a job creator. Just as most wealth creation is not ab initio but derives from the providing of a desired service or product, so too does job creation depend on the consumer’s purchasing power and the health of the economy. This health is a dance between private enterprise and public policy. See the way the stock market embraces the Federal Reserve and vice versa! Yet from the way conservatives portray their version of a job creator, one would think he pays salaries from his own pocket rather than from the operating expenses of his company, but then maybe that impression is enhanced by the ridiculous salaries paid these self-styled giants of the marketplace. A moment’s thought should uncover the real job creators for the bulk of the economy are the middle-class consumers whose income provides the demand that increases the cash flow that creates the jobs. This healthy cycle characterizes any productive economy. To signal out the employer as the lynchpin of this cycle is to distort its nature. The United States has the highest level of economic inequality in the developed world (But we are more equal than Mexico and Turkey. Yay!) One may make a legion of moral arguments about what various stakeholders in our economy deserve, leading to interesting discussions about minimum wage and CEO compensation, but as a purely pragmatic matter, the real job creators in our economy, meaning consumers, can hardly perform their part in the economic cycle if this level of income inequality continues. But the conservative moral argument disputes this pragmatic one. We may discern a number of reasons for the widening gap between rich and poor since the 1970’s, but surely the position that employers have a more important role in the economy than workers and the concomitant conclusion that they have a moral right to a larger slice of the pie than at any time in our history (excepting the ominously significant year of 1928) is largely responsible for the current disparity.

In moral philosophy, we see the concept of “ought implies can,” a very valuable check on the applicability of moral principles. It is fine to say that such and so moral principle should apply, but the argument is defeated before it begins if no way exists to apply it. It is worth asking if the conservative argument about job creators introduces the ought/can issue. In other words, should moral principle bow to pragmatic necessity? Because consumers are as necessary a part of the business cycle as employers, should that be the end of the discussion? Does their practical necessity as purchasers trump the moral argument for the superiority of job creators in creating wealth? I would argue no, for no amount of pragmatic limitation would tamp down the position that bosses should prosper disproportionately to their employees as much as business cycles will allow because of their greater contribution to the general welfare. So let us overlook the strictly pragmatic argument and examine this moral one.  The moral argument justifying the economic disparity between employer and employment transcends any dependency on economic conditions. Its foundations require moral interrogation: that workers are interchangeable drones, that shareholders matter more than employees; that profit is the only real product of any business; that crony capitalism, influence peddling, and corporate welfare are acceptable governmental functions; and that rigging the system so as to deliver obscene wealth to a fortunate few while denying the satisfaction of economic needs to the rest should not trigger the obligation of government to deliver equal justice under the law. We not only can do better as a society, but we ought to.

Which brings me right back to economics as a science. I began this entry by admiring its devotion to data and quantitative analysis. I will end it by pointing out the most glaring reason why economics as now constructed can never be a real science: it can never apportion proper value to the human concerns that the economy should serve. The goal of science must be to find truth. It does not have the means to find goodness within its modes of warrant, and questions of value are always questions of goodness. I have frequently discussed the wise blindness that science must bring to its objects of analysis (see Religionists Fighting the Wrong Battle“) in order to provide a reliable warrant for its truth claims. Like its sister human sciences, economics can never provide that warrant because it can never quantitatively address all of the necessary components of societal well being, which is why even those of us lacking in expertise should apply our reasoning to its provenance.

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