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Thursday, September 21, 2006

From Comments: Inequality and Economic Rents

kharris with a comment about recent changes in inequality in response to "The Great Attack Squad Distortion":

Comment on "The Great Attack Squad Distortion," by kharris: ... Somewhere out there, on a not-very-obscure website (I know because I'm too lazy to hunt through the obscure ones) is a wonder piece on economic rents. (Not land rents - don't even start!) I can't remember where I saw it, and I'd like to recommend it to everybody.

The starting point is that shifts in technology which allow extensive replication of good performance has meant that the top of many fields have enjoyed a big rise in compensation. That's not new. The ending point was that this is essentially an instance of economic rent collection. Prior to the existence of nationwide broadcast of athletic events, athletes were paid a lot less. A whole army of people have been involved in making broadcast possible and profitable, but some of the big winners had nothing to do with developments in broadcasting. They just play basketball, same as the generation before them. Madonna is richer than Ella ever was because of developments in the music industry and technology, not because she is a better singer than Ella. Bill Gates has made tons of money, in part because of things that universities and the Pentagon and IBM did while Bill was still in diapers. These people are collecting economic rents.

Once we see these things as partly rents, rather than what NRO would argue they are (exclusively smarts and hard work), the argument changes. Taxing rents doesn't change economic outcomes, the argument goes. Only when taxes get to the point of cutting into normal economic returns do we see distortions. Huge disparities in income and wealth can't be justified on the grounds of rents.

Nor can they be justified by being lucky. There is, of course, a big element of luck in being the beneficiary of economic rents. Bill Gates could have been born in the era of the telegraph. Then where would he be? More to the point, those guys IBM went to see first could have been in the office, and IBM would never have bothered to meet with Gates. If Debbie Harry had gotten the attention of a better agent or producer or whatever, rather than Madonna, think how much better pop music could have been, and how much less rich Madonna would be now?

The problem is - and this is a killer - the word "rents" was always the wrong one, since it sounds so much like what you hand to your landlord. The argument is tough enough to sell, because it is a degree more complicated than simple supply-and-demand. Add in a term that is going to confuse the issue and it gets worse. Let's try to sell this story, but do it without using the word "rents."

    Posted by on Thursday, September 21, 2006 at 02:46 PM in Economics, Income Distribution, Market Failure, Policy, Politics | Permalink  TrackBack (1)  Comments (40)


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