Pitching In

I tend to agree with Don Boudreaux about almost everything, but I think one bit of this recent letter to the editor is misleading:

First, in market economies incomes aren’t “distributed”; they’re produced and earned.  Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; the fact that someone’s income rises means that he or she already is pitching in more.  Third, the share of federal individual income-tax revenues paid by America’s top one-percent of income earners has recently been on the rise.  In 2006 (the latest year for which data are available) this tiny group of Americans paid a whopping – and all-time high – 39.9 percent of such taxes.

The first point is right on, as is the third. But the first half of the second point attributes intention where it should not, and the second half of the second point fallaciously infers a kind of increased effort from increased productivity. Let’s look at it closer:

… persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs

Holding demand and hours worked equal, increased inequality in earnings in wages tends to imply increased inequality in productivity. But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity.  

… the fact that someone’s income rises means that he or she already is pitching in more. 

If the rise comes from an increase in hours worked, sure. But trends in increasing wage and income inequality are primarily a matter of supply and demand. If demand for a certain set of skills goes up relative to supply, the wages of workers with that set of skills tends to go up. The fact that engineers are paid more than gardeners mostly has to do with the fact that engineers are relatively scarce compared to engineering opportunities, while gardeners are relatively plentiful compared to gardening opportunities. Wage and income levels are a pretty poor index of the social value of work, so an increase in an individual’s income neither suggests an increase in effort nor an increase of the value of the individual’s type of work. What it means is that, for whatever reason, that person’s skills happen to command an increasingly high wage on the market. 

The idea that income tracks virtue, effort, or merit–anything other than supply and demand–is a myth that I think Hayek pretty well exploded. I think it hurts more than it helps to suggest that the emergent pattern of incomes somehow reflects who is and who isn’t pitching in, since it doesn’t. For my money, Don is the world’s best economic fallacy exposer, so consider this a tribute to Don.

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