Monday, May 7, 2012

Are the Rich Worth a Damn?

I take the title of the post from the title of an article in yesterdays New York Times Magazine.  Adam Davidson writes about Edward Conard, a former partner in Mitt Romney's Bain Capital, and author of a forthcoming book, Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong. Conard argues that all the concerns about the 1% and income inequality are mistaken, and that the increasing wealth of the 1% is an indication that the situation of the 99% is improving. Davidson writes, "This could be the most hated book of the year."

According to Davidson's article, the argument is that the capitalist system encourages risk taking, and that risk taking leads to greater wealth for the successful entrepreneurs, but also improvement in the lives of everyone else as the entrepreneurs have created products and services that people value.  The investment in these projects by people seeking wealth have the unintended consequence of improving lives for everyone else.

This is not the way the term, "unintended consequences," is used by economists today.  Instead, it usually refers to the unintended negative consequences of legislation or actions that have good motives behind them.  But the term as unsed in Conard's title is in line with Adam Smith's notion of the invisible hand.  In The Wealth of Nations, Smith wrote:
"As every individual, therefore, endeavors as much as he can both to employ his capital in lthe support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individualo necessaily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."

The unintended consequense is the result of the invisible hand, in Smith's statement.

I will read Conard's book when it comes out. Based on the interview, I suspect I will agree with much of it, but not all.  I consider crony capitalism to be a problem and am not convinced that some of the financial innovation actually generated great social gains. But the book and discussion of the book should be interesting.

For the article, see here.

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