… the point about a Veblen Good is not that sales rise when prices do. Rather, it’s that a Veblen Good is desirable because it is expensive. It is a way of showing that you can afford to buy something expensive. That you can afford something expensive is a sign of social status (well, it is in our society, where having lots of money and thus being able to buy something expensive is a sign of social status. It’s possible to imagine other societal forms which don’t include this).
The archetypal example was certain of the Vanderbilt women who would have diamonds implanted into their backs, where they would be visible to people at parties given the low cut backs of dresses at the time. The point of such implantations simply being to show that one had enough money (and perhaps little enough sense in a pre-antibiotic era) to have a diamond implanted over one’s spine. There’s a story that Mick Jagger had a diamond implanted into one of his teeth for the same sort of reason at one point (removed when it promoted caries).
The point being that a Veblen Good does signal something, and as such the greater the price the more desirable the ability to transmit that signal. But it doesn’t go as far as stating that the more the price rises then the higher sales go.
Tim Worstall, “Being Quoted In The New York Times Is Great But…”, Forbes, 2014-11-22.
December 14, 2015
QotD: Veblen goods
November 27, 2015
Wealth, inequality, and billionaires
Several months ago, the Washington Post reported on a new study of wealth and inequality that tracked how many billionaires got rich through competition in the market and how many got rich through political “connections”:
The researchers found that wealth inequality was growing over time: Wealth inequality increased in 17 of the 23 countries they measured between 1987 and 2002, and fell in only six, Bagchi says. They also found that their measure of wealth inequality corresponded with a negative effect on economic growth. In other words, the higher the proportion of billionaire wealth in a country, the slower that country’s growth. In contrast, they found that income inequality and poverty had little effect on growth.
The most fascinating finding came from the next step in their research, when they looked at the connection between wealth, growth and political connections.
The researchers argue that past studies have looked at the level of inequality in a country, but not why inequality occurs — whether it’s a product of structural inequality, like political power or racism, or simply a product of some people or companies faring better than others in the market. For example, Indonesia and the United Kingdom actually score similarly on a common measure of inequality called the Gini coefficient, say the authors. Yet clearly the political and business environments in those countries are very different.
So Bagchi and Svejnar carefully went through the lists of all the Forbes billionaires, and divided them into those who had acquired their wealth due to political connections, and those who had not. This is kind of a slippery slope — almost all billionaires have probably benefited from government connections at one time or another. But the researchers used a very conservative standard for classifying people as politically connected, only assigning billionaires to this group when it was clear that their wealth was a product of government connections. Just benefiting from a government that was pro-business, like those in Singapore and Hong Kong, wasn’t enough. Rather, the researchers were looking for a situation like Indonesia under Suharto, where political connections were usually needed to secure import licenses, or Russia in the mid-1990s, when some state employees made fortunes overnight as the state privatized assets.
The researchers found that some countries had a much higher proportion of billionaire wealth that was due to political connections than others did. As the graph below, which ranks only countries that appeared in all four of the Forbes billionaire lists they analyzed, shows, Colombia, India, Australia and Indonesia ranked high on the list, while the U.S. and U.K. ranked very low.
Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had zero politically connected billionaires. The U.S. also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.
When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn’t due to political connections, income inequality and poverty all had little effect on growth.
October 2, 2015
An Orgy of Innovation (Everyday Economics 5/7)
Published on 20 Apr 2015
The list of famous inventions from the last few centuries is long, and you may even be making use of one right now — laptops, smartphones, tablets, and televisions, for instance. There are countless unsung improvements, too, that make our daily lives much easier. We’ve all benefited from zip top sandwich bags, twist bottle caps, and long-lasting batteries, to name a few!
The economic historian Deirdre McCloskey coined the term “innovationism” to describe the phenomenal rise in innovation over the past couple hundred years. While there have always been inventors and innovators, that number exploded after the eighteenth century, contributing to what we’ve described in previous videos as the “Hockey Stick of Human Prosperity.”
Why has innovation grown so rapidly? Economist Douglass North argues it has to do with institutions such as property rights, non-corrupt courts, and rule of law, which lay the foundation for innovation to take place. Others attribute the rise to factors such as education or access to reliable energy. McCloskey argues that what really kicked innovation into high gear is a change in attitude — ordinary people who once celebrated conquerers and kings began to celebrate merchants and inventors.
In this video, we discuss these ideas further. After all, a better understanding of what drives innovation could help poor countries that still live on the handle of the “Hockey Stick” reach a much greater level of prosperity.
September 25, 2015
An economic theory of avant garde and popular art
Published on 3 Sep 2015
When do artists sell out and when do they keep their artistic integrity?
September 3, 2015
The beer ineQuality index
I took a couple of weeks off over the summer and subsequently forgot some of the interesting articles I’d intended to link to from the blog (but no sensible person comes here for breaking news, do they?). Here’s one from the wonderfully named Worthwhile Canadian Initiative blog:
The conventional Canadian view is that American beer is bad; watery and weak. Yet American breweries produce some of the world’s best beers — superb brews coming out of microbreweries across the country.
What is striking about the United States is the country’s level of inequality — or, to be more precise, the beer quality inequality. Countries like Germany, Belgium — the Scandinavian countries in general — have much less variation in the quality of their beer.
The question is: why? Does beer quality inequality result from other forms of inequality, like disparities in income and wealth? Or do the forces that produce income inequality also produce beer quality inequality? Is it a spurious correlation, or is the armchair empiricist’s observation that the US has more beer ine-quality simply wrong?
The income-causes-beer quality inequality story is easily told. Some people are poor. They demand cheap beer, and cheap beer is necessarily poor quality. Some people are rich. They demand high quality beer, and are willing to pay for it. Hence, in theory, we would expect income inequality to produce beer quality inequality. As an empirical observation, the US has substantially more income and beer quality inequality than other rich countries, including Canada, while Scandinavian countries have some of the lowest levels of income and beer inequality in the world (here). So income inequality causes beer quality inequality: Q.E.D.
This story is plausible, and there may be some truth to it. The problem with it is that not everybody drinks beer. Take a country like England, for example. There beer was traditionally a working man’s drink — the upper classes sipped Pimm’s on the lawn, or perhaps a gin and tonic. If the rich aren’t drinking beer, an increased concentration of income in the hands of the richest 1 percent will have no impact on the variation in beer quality.
September 1, 2015
August 24, 2015
Billionaires, good and bad
In the Washington Post, Ana Swanson examines the good and bad (for economic growth) of the billionaire class:
Over the past few decades, wealth has become more concentrated in the hands of a few global elite. Billionaires like Microsoft founder Bill Gates, Mexican business magnate Carlos Slim Helú and investing phenomenon Warren Buffett play an outsized role in the global economy.
But what does that mean for everyone else? Is the concentration of wealth in the hands of a select group a good thing or a bad thing for the rest of us?
You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.
Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.
A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.
Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.
August 13, 2015
The Hockey Stick of Human Prosperity (Everyday Economics 1/7)
Published on 24 Jun 2014
In this series, Professor Don Boudreaux explores the question economists have been asking since the era of Adam Smith — what creates wealth? On a timeline of human history, the recent rise in standards of living resembles a hockey stick — flatlining for all of human history and then skyrocketing in just the last few centuries. Without specialization and trade, our ancient ancestors only consumed what they could make themselves. How can specialization and trade help explain the astonishing growth of productivity and output in such a short amount of time — after millennia of famine, low life expectancy, and incurable disease?
July 11, 2015
QotD: The Businessman
It is, after all, a sound instinct which puts business below the professions, and burdens the business man with a social inferiority that he can never quite shake off, even in America. The business man, in fact, acquiesces in this assumption of his inferiority, even when he protests against it. He is the only man who is forever apologizing for his occupation. He is the only one who always seeks to make it appear, when he attains the object of his labors, i. e., the making of a great deal of money, that it was not the object of his labors.
H.L. Mencken, “Types of Men 7: The Business Man”, Prejudices, Third Series, 1922.
July 3, 2015
“People with money have alternatives”
Frances Woolley on the hidden advantages even a modest amount of money can provide:
Less often observed is that wealth itself generates consumption benefits, even if one never spends a dime of it.
I own a 12 year old Toyota Matrix. The front fender has collided with one too many snow banks, and is now held together with string. The exhaust system has seen better days. It breaks down occasionally. But overall it’s very cheap to run.
If I was poor, it would be tough having an old, unreliable car. The unexpected, yet inevitable, major repairs would be a financial nightmare. $750 to repair the clutch. $200 to fix the axle seal. If the car broke broke down, and I couldn’t get to work, I might lose my job.
But because I’m financially secure, I can afford a cheap car. I can self-insure against financial risks: unexpected repair costs, taxi fares, rental cars, and so on. I can afford to get my car towed. If it was beyond repair, I could get another car tomorrow.
The real value of having $10,000 in the bank isn’t $200 in interest income, or the stuff $200 in interest income might buy. $10,000 in the bank creates a little bit of room to take risks. One could call it the “implicit value of self-insurance generated by own capital.” It’s the comfort of being rich (or having rich relatives). It’s real. It’s valuable. But it wouldn’t be taxed if Canada had a consumption tax.
Admittedly, the insurance value of having wealth isn’t taxed under an income tax either. But at least under an income tax some of the return on wealth is taxed, so there is, at least potentially, some shifting of the tax burden onto those with wealth.
The greatest freedom money offers is the freedom to walk away. Your bank doesn’t offer you unlimited everything with no monthly fees? Walk away. There’s always someone else who wants your money. Your phone plan is too expensive? Walk away (o.k., that may not be the best example).
People with money have alternatives, which makes their demand for goods and services elastic. Food may or may not cost more in poor areas. But a rich person can shop at Value Village if he chooses. A poor person may not be able to afford expensive purchases which save money in the long run, like bread machines or high efficiency appliances or pressure cookers. Consumption taxes aim to tax the amount of stuff people actually consume. But if poor people pay a higher price for their stuff than rich people, is a system that taxes only consumption spending, without taking into account the ability to command consumption wealth conveys, fair?
June 25, 2015
Refuting Piketty on the inevitable “rich get richer” meme
At Reason, Ronald Bailey links to a study that appears to undermine most of Thomas Picketty’s claims:
From the study:
We believe Piketty’s core message is provably flawed on several levels, as a result of fundamental and avoidable errors in his basic assumptions. He begins with the sensible presumption that the return on invested capital, r, exceeds macroeconomic growth, g, as must be true in any healthy economy. But from this near-tautology, he moves on to presume that wealthy families will grow ever richer over future generations, leading to a society dominated by unearned, hereditary wealth. Alas, this logic holds true only if the wealthy never dissipate their wealth through spending, charitable giving, taxation, and splitting bequests among multiple heirs.
As individuals, and as families, the rich generally do not get richer; after a fortune is first built, the rich get relentlessly and inevitably poorer.
The “evidence” Piketty uses in support of his thesis is largely anecdotal, drawn from the novels of Austen and Balzac, and from the current fortunes of Bill Gates and Liliane Bettencourt. If Piketty is right, where are the current hyper-wealthy descendants of past entrepreneurial dynasties — the Astors, Vanderbilts, Carnegies, Rockefellers, Mellons, and Gettys? Almost to a man (or woman) they are absent from the realms of the super-affluent. Our evidence — used to refute Piketty’s argument — is empirical, drawn from the rapid rotation of the hyper-wealthy through the ranks of the Forbes 400, and suggests that, at any given time, roughly half of the collective worth of the hyper-wealthy is first-generation earned wealth, not inherited wealth.
The originators of great wealth are one-in-a-million geniuses; their innovation, invention, and single-minded entrepreneurial focus create myriad jobs and productivity enhancements for society at large. They create wealth for society, from which they draw wealth for themselves. In contrast, the descendants of the hyper-wealthy rarely have that same one-in-a-million genius. Bettencourt, cited by Piketty, is a clear exception. Typically, we find that descendants halve their inherited wealth — relative to the growth of per capita GDP — every 20 years or less, without any additional assistance from Piketty’s redistribution prescription.
Dynastic wealth accumulation is simply a myth. The reality is that each generation spawns its own entrepreneurs who create vast pools of entirely new wealth, and enjoy their share of it, displacing many of the preceding generations’ entrepreneurial wealth creators. Today, the massive fortunes of the 19th century are largely depleted and almost all of the fortunes generated just a half-century ago are also gone. Do we really want to stifle entrepreneurialism, invention, and innovation in an effort to accelerate the already-rapid process of wealth redistribution?
June 17, 2015
When you tax something, you get less of it
At International Liberty, Dan Mitchell points out an example of leftists who genuinely want higher taxes on “the rich” even when the higher rate will return less money to the government:
Every so often, I’ll assert that some statists are so consumed by envy and spite that they favor high tax rates on the “rich” even if the net effect (because of diminished economic output) is less revenue for government.
In other words, they deliberately and openly want to be on the right side (which is definitely the wrong side) of the Laffer Curve.
Critics sometimes accuse me of misrepresenting the left’s ideology, to which I respond by pointing to a poll of left-wing voters who strongly favored soak-the-rich tax hikes even if there was no extra tax collected.
But now I have an even better example.
Writing for Vox, Matthew Yglesias openly argues that we should be on the downward-sloping portion of the Laffer Curve. Just in case you think I’m exaggerating, “the case for confiscatory taxation” is part of the title for his article.
Here’s some of what he wrote.
Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends. We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. …But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.
The tobacco tax analogy is very appropriate.
June 13, 2015
The secretive Bilderberg group meets to plan global domination
… or, y’know … to get the global movers and shakers together for a quick rubber chicken dinner or six and a few grip’n’grins among the well-connected and the extremely-well-wealthed:
The annual Bilderberg meeting begins today in Telfs-Buchen, Austria. This year the summit’s influential attendees range from David Petraeus to Henry Kissinger, from the CEO of Airbus to the secretary general of NATO. There are some press figures on the guest list too — Bloomberg‘s John Micklethwait, The National Post‘s Andrew Coyne, The Washington Post‘s Anne Applebaum, and a few others. But the journalists won’t be writing about what they see, because the whole thing is off the record.
This combination of power and secrecy inevitably produces conspiracy theories, and the Bilderbergers have been dogged for decades by people convinced they’re the secret parliament of the world. The meeting is more mundane than that, sitting somewhere on the spectrum between a G7 summit and a Davos forum. But if some of the things people claim about Bilderberg are crazy — a couple years ago, Michael Tracy interviewed a protester outside the meeting who was convinced it featured “Devil worship” and “pedophilia” — it’s not at all kooky to recognize that powerful people are gathered there and that the things they’re saying in private may be newsworthy. Bilderberg is not a hidden government, but it’s certainly an elite institution, and it has been since it was founded in 1954.
May 21, 2015
QotD: Silicon Valley hypocrisies
The point of reviewing these hypocrisies is not to suggest that the rich profit-makers of Silicon Valley are any greedier or more cutthroat than the speculators of Wall Street or the frackers of Texas, but merely that they are judged by quite different standards. Cool — defined by casual dress, hip popular culture, and the loud embrace of green energy, gay marriage, relaxation of drug laws, and other hot-button social issue — means that one can live life as selfishly as he pleases in the concrete by sounding as communitarian as he can in the abstract. Buying jet skis is as crass a self-indulgence as buying an even more expensive all-carbon imported road bike is neat.
If Silicon Valley produced gas and oil, built bulldozers, processed logs, mined bauxite, or grew potatoes, then the administration, academia, Hollywood, and the press would damn its white-male exclusivity, patronization of women, huge material appetites, lack of commitment to racial diversity, concern for ever-greater profits, and seeming indifference to the poor. But they do not, because the denizens of the valley have paid for their indulgences and therefore are free to sin as they please, convinced that their future days in Purgatory can be reduced by a few correct words about Solyndra, Barack Obama, and the war on women.
Practicing cutthroat capitalism while professing cool communitarianism should be a paradox. But in Silicon Valley it is simply smart business. The more money you make, any way you can make it, the more you can find ways of contextualizing it. At first these Silicon Valley contradictions were amusing, then they were grating, and now they are mostly just pathetic.
Victor Davis Hanson, “The Valley of the Shadow: How mansion-dwelling, carbon-spewing cutthroat capitalists can still be politically correct”, National Review, 2014-07-22.
May 17, 2015
Real philanthropy, Slim style
This report says that one of the richest men in the world is opening new frontiers in philanthropy:
Perennial contender for World’s Richest Man Carlos Slim announced Friday that he had reconsidered selling his Upper East Side home for $80 million, and instead was opening the Beaux Arts mansion to undocumented roomers. “Ever since I became the second largest shareholder in New York Times Inc., I’ve started reading the editorials,” explained the telecom monopolist. “And they’ve convinced me! What’s all this obsession with documents anyway?”
The Mexican oligarch continued, “If you can fool my doorman into letting you in once, or if you have the moxie to throw a brick through my window and crawl in over the broken glass, well, it would be inhumane to evict you. And if you have kids or parents, then they can come too because I wouldn’t want to stand in the way of family reunification. If I find you inside my house, then mi casa es su casa!”
This is clearly too good to check (but I did verify that the story isn’t dated April 1st, so it must be true, right?
