My Response to Robert Frank's ...
The basic claim made in his Op-ed and defended in his posts here is that poorer people are worse off due to the existence of richer people, richer people better off due to the existence of poorer people, hence that it is only just to compensate the poorer at the expense of the richer. That claim has two parts. One is his old argument about the effects of the fact that humans care about (among other things) relative status. The other is the claim that, concern with relative status aside, the existence of rich people makes the less rich materially worse off and that the existence of poor people makes the less poor materially better off.
The first claim is, I think, correct; humans do care about relative status. But, as I pointed out in my initial post and as each of us has agreed since, those effects are local, hence provide no justification for income redistribution on a national scale. In his most recent post I think Robert Frank to some degree concedes that, referring to his own argument as “difficult-to-document claims of psychological damage used [caused?] by inequality,” and recasts the argument in terms of “concrete costs” due to a cascade of competitive expenditures, in effect substituting for his first claim a version of the second. Doing so makes the first half of the argument in his Op-ed, his old analysis of the effect of concern with status on wage differentials in the market, almost entirely irrelevant to the second half, his defense of governmental income transfers. Yet it was the first half which was supposed to persuade libertarians that they should approve of the transfers defended in the second, since they only reflected, on a larger scale, what would come out of voluntary interactions in a world without transaction costs.
It is the second claim that seems to me strikingly mistaken. He has now twice—in his most recent post and the one that preceded it—first agreed that what matters in health care is the absolute level and then proceeded to put his argument in terms of the relative level, not how good the health care is that someone can get but whether or not he can get “the best” health care.
Perhaps my point can be made clearer if I put it in terms of a comparison between two hypothetical societies which differ only in the number of wealthy inhabitants; the second consists of the first plus an additional million people, each with an income of a million dollars a year. Obviously, if they get that income by stealing it from everyone else, their presence makes other people worse off, but that is not Robert Frank’s argument. He started, after all, with an explanation of why the wages of more productive workers do not fully reflect their additional productivity. Hence I think I can fairly assume that each of those million gets his income by producing goods and services worth, to other members of the society, at least a million. The question is then whether people other than the million wealthy are worse off in the second society than in the first.
One of the things the additional people will spend their income on is medical services. Hence the second society will have more, and probably better, medical services than the second—more good hospitals, more highly trained surgeons, a larger quantity and probably a larger variety of medical drugs. We might quantify the effect by supposing that the first society has a million doctors whose skill ranges, on some metric, from one to ten, and the second adds to that an additional ten thousand whose skill ranges on the same metric from five to eleven—all of whom are providing their services exclusively to the additional wealthy people.
Robert Frank tells us, correctly, that “When a serious health problem strikes, a person wants the highest absolute quality of care possible, but because the quality and quantity of care are limited at any given moment, not everyone seriously ill patient can have the best. My claim, which is surely completely uncontroversial, is that someone with high social rank is more likely than others to get the best care.” That sounds as though it means that the addition of people of high social rank reduces the quality of medical care available to those of lower rank—but it doesn’t. In my example, constructed to simplify the argument but consistent with his view of the situation, it means that someone who before got medical care of quality ten is still getting medical care of quality ten. The reason he is no longer getting “the best care” is that there are now other people getting care of quality eleven.
Robert Frank conceded, two posts back, that what matters is the absolute level of medical care not the relative level. To complain that someone is no longer getting the best level with the implication that he is now worse off, when what has actually changed is not the medical care he can get but the care others can get, is to treat a relative change as if it were an absolute change. It is his failure to see that very simple point—now twice repeated—that makes me feel as frustrated at his responses as he appears to be at mine.
There is, I think, a second error embedded in what I just quoted, this time in the words “at any given moment.” If my additional million people, complete with their income and their demands for medical care, suddenly appeared in a society, and if none of them happened to be physicians, they would indeed bid existing medical services away from others.
But that is not what is happening, either in my hypothetical or in the real world that we have been arguing about. Putting the analysis in terms of “any given moment” implicitly converts the real economy, in which goods are produced as well as consumed, into the fixed pie economy that one can imagine existing at any single instant, with production frozen and consumers competing over already produced goods. That is a perspective popular with people making political arguments, especially ones in favor of income transfers, but a very odd one for an economist to adopt.
I have focused on medical care, but the same analysis applies to education. It is true that having gone to a better school makes you likely to be accepted into a better job. But the distribution of available jobs is not frozen any more than the distribution of available medical services; both reflect, among other things, the distribution of productive abilities in the society. If my additional million people spend part of their income on their children’s education the result will be more well educated people, hence more very productive people, hence more high paying jobs. The individual who before would have gotten the best job the firm offers at a salary of a hundred thousand a year now gets only the second best job the firm offers—at a salary of a hundred thousand a year. It is true that “persons of high social rank are more likely than others to be able to send their children to the best schools.” But the best schools are now better, as are the jobs available to the graduates of the best schools, so the graduate of what is now only the second best school need not be, in any material sense, worse off. Again there is a confusion, although a less obvious one, between relative and absolute.
In arguing that the poor are not made materially worse off by the existence of the rich I have understated my case. In material terms, Robert Frank’s account is not merely wrong, it is backwards. Not only do poor people not lose, materially speaking, from the existence of rich people, they can be expected, on average, to gain.
This is true for two reasons. One I already pointed out in my previous post. The production cost for some things—medical drugs are a particularly striking example—is in large part the cost of generating information. The more buyers that is divided among, the less the cost to each. The fact that some people are wealthy results in a larger demand for medical drugs, which makes any particular drug less expensive, as well as funding the development of additional drugs. That is a benefit to the poor as well as to the rich.
The second reason is a point underlying the principle of comparative advantage: we can gain more by exchange with people who are different from us than with people who are similar to us. I would have a hard time persuading any of my colleagues to mow my lawn at a price I would be willing to pay. The recent immigrants who in fact mow my lawn would have a hard time persuading any of their friends and relations to pay them a price for mowing a lawn that they would be willing to accept. I am better off by the existence of the immigrants and they by my existence—our different situations make possible exchanges to our mutual advantage. Generalize that and it follows that the rich are indeed made better off, as Robert Frank believes, by the existence of the poor—at least in the context of voluntary interaction on the market—but the poor are also better off by the existence of the rich.
Robert writes: “Unless David has new evidence that persons of low social rank have greater access to the best health care and greater access to the best educational opportunities, I hope he will abandon these objections.”
Unless Robert has evidence that persons of low social rank have access to a worse quality of health care and education than they would if people of high social rank did not exist or had lower incomes than they do, I hope he will abandon arguments that hinge on the word “best,” and so depend on confusing relative with absolute outcomes.