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« Edward Lazear on Becker on EconTalk | Main | Searching for the Texture of Inequality: Glen Loury and Rajiv Sethi Talk Piketty »

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Say that a wealthy Clyde McBucks accumulates a fortune manufacturing widgets. Along the way he does two things.

He buys land and builds a house costing $20 million. He is applauded by such economists as Krugman for spending his wealth into the economy, creating by his demand about 300 man-years of employment for working men.

Motto: Spending makes the economy go around.

He also invests into expanding his business, adding $20 million to his balance sheet for his business. This is considered an increase in his invested capital, and bad in some way, although it is also spending, but on business goods. This business expansion increases his sales of widgets by lowering the cost of a widget and improving its performance. His company goes up in value by $50 million, not a bit of it yet taxed.

Motto: The rich get richer by investing rather than spending, creating untaxed wealth for themselves.

Which of these actions gets the label "the idle rich"? The house benefits only McBucks, but his property taxes make him a pillar of the community, and many locals remember the work they did.

The business expansion is not considered "consumer spending", the 70% of the economy which people seem only to care about. It adds to McBuck's wealth, which people resent. Krugman says that this investment reduced demand and added to economic stagnation, because it is not current consumption. But, in reality, this expansion helps everyone else even after paying evil profits to McBucks.

The public, leftist, and government understanding of economics is entirely confused.

I agree that Keynes was more in tune with the rise of socialism among economists, especially the young. Frank Machovec wrote in "Perfect Competition and the Transformation of Economics" that only young economists swooned over Keynes. Age was positively correlated with rejection of Keynes.

But I was surprised to read Machovec that first Marshall and then Keynes held back the adoption of Walras' system of equations for a generation in US and British econ long after the continent had fully embraced it. Both did so primarily through the seer power of personality and authority. What do you think of that?

I have another question. Piketty wrote that the percent of inherited wealth in Europe is about 80%. He didn't include the US because he couldn't find good data. But Dr Thomas Stanley (The Millionaire Next Door) has done extensive research on the wealthy in the US and insists that inherited wealth in the US is only about 3% of total wealth.

Could the difference between the US and Europe really be that large, or are we looking at different methods of defining inherited wealth? Why does Piketty not know about Stanley's work? If the differences are real, there is something very wrong in Europe. According to Stanley, 85% of wealth in the US comes from growing a business for 30 years.

Interesting article, at least it starts off well. These are well-known aspects of the Austrian economic theory, but of course need to be repeated. I do think Mr Boettke should do some spellcheck and language check before submitting though; this is pretty sloppy writing.

Also, there are some key points which are not really clarified and which should be. This part for instanc,e may be comprehensible only to Mr Boettke himself:
"a public choice style argument about the wealthy capturing the aparatus of government and undermining democracy. Leave aside the the opportunity cost argument and the public choice style argument are in tension with each other!"

And this part doesn't make any sense at all: "If not positive, then wouldn't we simply see the old wisdom about a fool and his money are soon parted being manifested? In other words, if the idle rich were indeed idle, they wouldn't be rich."

To make sense, the second sentence should be: "In other words, if the foolish rich were indeed fools, they wouldn't be rich."

Again, this is all pretty sloppy. You can do better than that Mr Boettke.

The problem with "trickle down" or "rising tide" is largely one of globalization. These effects are not constrained to any borders. When the "non-idle" rich spend or invest, the economy that benefits is often focused elsewhere.

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