Economists are still arguing over a three-year-old paper about what makes people rich and successful

Rich poorSpencer Platt/GettyA businessman walks by a homeless woman holding a card requesting money on September 28, 2010 in New York City.

Three years ago, Harvard University economist — and Mitt Romney advisor — Gregory Mankiw stirred things up with a paper in defence of the 1%.

Basically, Mankiw said the rich deserve to be rich because they contribute more to society — not because they’re gaming the system. Inequality is a product of invention and creativity, such as Steve Jobs’ iPod and J.K. Rowling’s Harry Potter books.

Naturally, the paper was met with a strong response from a range of dissenters including (predictably) Paul Krugman, and (maybe less predictably) the Economist magazine.

But if you thought the discussion was over, then you don’t understand economists, or academics. Three years after Mankiw made his case, Nancy Folbre, an economist at the University of Massachusetts, just weighed in on his argument in new paper.

In it, she argues that, the top 1 per cent of earners are buoyed by unfair advantages, not Mankiw’s ‘just desserts.’ Specifically, Folbre focuses on the idea that external factors play a huge role in an individual’s success or failure.

Here is Folbre:

“The market is like a boat sailing the ocean. Some crews — and crew members — are certainly more skilled than others. But their success is shaped by prevailing winds, tides, icebergs, and storms not easily foreseen. Workers are tossed and turned by waves of economic expansion and contraction. Like sailors, they can’t always choose the boat they sail on, and once they have signed on, it is difficult for them to switch vessels.”

Those who believe that investing in oneself — which could help boost productivity and ultimately earnings — are painting a rosy picture, she argues. It takes time to acquire skills, and they’re not easily interchangeable in the market, Folbre argues.

It’s also difficult to predict future changes in labour supply or demand as one decides on a career path.

For example, bachelor’s degrees aren’t as richly rewarded as before:

By contrast, Mankiw thinks internal factors — such as genes and family background — plays a great role in shaping economic outcomes. Smarter parents are likely to have smart children, he argues, and that leads to higher incomes on average.

Those who don’t have the financial means to continue their education leads to both unequal and inefficient outcomes, Mankiw argues. However, he thinks poverty shouldn’t limit oneself in getting the “right investments,” citing himself as an example:

“I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age.”

Both economists widely differ in their perspectives on compensation. In order to achieve an equitable outcome, Mankiw believes people’s rewards should be in line with their contributions. Folbre, however, thinks a huge percentage of workers’ productivity cannot be easily measured.

Nurses, for example, aren’t billed for their services per hour but by a fixed daily rate. Those in health, education, or social services tend to work in teams and their efforts do not come with an explicit price tag, Folbre said.

Folbre further argues that democratic governance is falling short. Even with policies aimed to reduce inequality, people often forget that labour market doesn’t necessarily deliver equitable or efficient outcomes.

In short, these theories are perpetuating a psychological bias known as “belief in a just world.”

Here is Folbre again:

“Belief in a just world can encourage good behaviour and hard work by increasing confidence that these will be directly rewarded. Competition creates little ill will if losers perceive themselves as undeserving. Unfortunately, belief in a just world can also lead winners to naïvely overestimate their own contributions and blatantly disregard those made by others.”

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