Response to David Henderson's article "AOC Versus Adam Smith"

In response to David Henderson’s article entitled, AOC Versus Adam Smith, (published in the Hoover Institution’s, online newsletter “Defining Ideas,” Economics Department, Stanford University, Feb 7, 2019, https://www.hoover.org/publications/defining-ideas) here are some of my thoughts: Henderson is correct that the possibility of making money does benefit the public by motivating people to produce goods and services that people want, and that the success of individual entrepreneurs is therefore often beneficial to society. Clearly, one of the implications is that we ought not demonize success. That, after all, is pretty much the underpinning of the success of capitalism. Fair enough. But Henderson treats this fact as though it is the only consideration in political economy. It isn’t.

It is true that some people are wildly successful because of their hard work, willingness to take risks, and creative intelligence. But that is not the only route to great wealth, and benefit to the larger society is not the only outcome. The accumulation of massive amounts of wealth often has something to do with luck and inheritance and also with things like corporate welfare, insider trading, price fixing, using monopoly power to run competitors out of business, and ignoring externalities (such as the fact that a product pollutes the air or water and hurts people not directly involved in the buy/sell transaction). In other words, the accumulation of huge fortunes often takes us way past the point of benefiting the public by producing something others want to buy. It often involves using money to tilt the playing field, rig the rules, bribe the umpires, etc. (what an economist would call “rent seeking”.) Examples: Enron, epi pens, insulin, Bernie Madoff, the junk bond fiasco from the 1980s, the CMO debacle that kicked off the 2008 recession, etc.

Adam Smith is often read as Henderson reads him, as justifying totally free, totally unregulated markets. Smith did argue for loosening regulations and letting the markets work. But he was not for totally unregulated markets. The invisible hand sometimes needs to be restrained. He also thought markets do and should exist within networks of cultural and social norms. Some restraints should come from shared values, and not necessarily from formal regulation. Nowadays America seems to worship the free market as a sort of abstract concept. The formula seems to be that the more money you make, the better you must be doing. That isn’t Adam Smith; it’s Gordon Gekko.

It is often said that what we should give the poor is “not a hand out but rather a hand up". If we’re serious about the "hand up” thing lets properly support public schools, provide healthcare for everyone, make college a lot cheaper, invest more in infrastructure (eg: public transportation to make it easier in urban areas to live without a car), provide subsidized childcare and early childhood education for low income people, etc. Those sorts of things would make it easier for low income people to advance, and in advancing, to benefit society by paying taxes, starting businesses, creating jobs, creating new products, etc. As the artist Banksy said in one of his street art pieces, what if the cure for cancer is stuck in the head of some kid who can’t afford to go to college? Or what if a great way to combat climate change is in the head of someone who dies prematurely because they can’t afford insulin?

If the wealthy pay a much higher marginal rate on very high incomes, and if there is a substantial estate tax, then we can afford at least some of these kinds of things.

On the other hand, if the wealthy do not pay more in taxes, and if the estate tax is very low or non-existent, if companies continue to pay CEOs hundreds of times what other employees make, then we eventually get a ruling aristocracy that can afford to buy elections, a growing population of poor people with menial jobs that pay squat, and a shrinking middle class in between. Markets shrink (which hurts businesses), innovation suffers, and the world is a nastier place.

If some of the very wealthy, like Bill Gates and Warren Buffet, use a large part of their fortunes to try to advance the public good, that's great, and they are to be commended for their efforts. But I'd rather have a much more progressive income tax, an estate tax, a decent safety net, more widespread social mobility, a healthier and therefore happier and more productive nation, and a functioning democracy, than low prices at Walmart and a few benevolent billionaires.

And I should think that the possibility of earning, let’s say a hundred million or so, ought to be enough motivation to spur innovation.