When it comes to income, economists ask the wrong question. So they get the wrong answer.

Blair Fix

You can't get the right answer when you ask the wrong question.

This truism, I've come to believe, explains much of what is wrong with
economics. When it comes to studying income, economists ask the wrong
question. Economists, I argue, have mostly asked: *is income fair*? The
problem is that this is a *moral* question, not a scientific one. It has
no scientific answer.

### When the wrong questions get entrenched

You can't get the right answer when you ask the wrong question. This
principle seems trivial. Of course you need to ask the right question!
The problem, though, is that when you do science it's rarely obvious
which question is right. Compounding this problem is the fact that
scientists are, well, *human*.

Once we (scientists) pose a question, we get engrossed with *answering*
it. The problem is that it's not easy to answer a question while
simultaneously being skeptical of it. It's like adding two numbers while
you think about multiplying them instead. It's an exercise in cognitive
dissonance.

Here's how you can make this exercise even more difficult. Join a group
in which everyone else asks the *same question*. This, in a nutshell, is
what it means to belong to a scientific discipline. A discipline is a
group of people who agree on the questions they're asking. Particle
physicists, for example, agree to ask "what are the fundamental
constituents of matter?" Evolutionary biologists agree to ask "what are
the determinants of evolution?" Economists, I'll argue, agree to ask "is
income fair?"

When you join a discipline, you get indoctrinated in its central
questions. If you absorb these questions readily, it's easy to join the
discipline. But if you contest these questions, it's much harder to join
the group. You risk [being labelled a
'crank'](https://economicsfromthetopdown.com/2020/02/05/how-do-you-spot-a-crank/){target="_blank"
rel="noopener"}.

So although it may seem easy (especially in hindsight) to know when
you've asked the wrong question, it's actually not. There's a strong
social pressure to ask the same questions as everyone else in your
discipline. That's how the wrong questions get entrenched.

### You can't get there from here

Back to economics. In his book [The Neighborhood
Project](https://www.goodreads.com/book/show/10852303-the-neighborhood-project){target="_blank"
rel="noopener"}, biologist David Sloan Wilson recounts his horror as he
learned more about mainstream economics:

> The more I learned about economics, the more I discovered a landscape
> that is surpassingly strange. Like the land of Mordor depicted by
> J.R.R. Tolkien and portrayed so vividly in Peter Jackson's Lord of the
> Rings films, it is dominated by a single theoretical edifice that
> arose like a volcano early in the twentieth century and still
> dominates the landscape. The edifice is based on a conception of human
> nature that is profoundly false, defying the dictates of common sense,
> before we even get to the more refined dictates of psychology and
> evolutionary theory. Yet efforts to move the theory in the direction
> of common sense are stubbornly resisted.
>
> ... Neoclassical economics provides an outstanding example of the
> *"you can't get there from here"* principle in academic cultural
> evolution. It will never move if we try to change it incrementally. It
> must be replaced wholesale with a more realistic conception of human
> nature.
>
> ::: {style="text-align:right;"}
> (David Sloan Wilson, emphasis added)
> :::

I love Wilson's principle: *you can't get there from here*. It nicely
summarizes how scientists get themselves into dead ends. With Wilson's
principle in mind, let's dive into how economists study income.

When it comes to understanding income, neoclassical and Marxist
theorists have both gone down a dead end. And they've done so, I
believe, because they've asked the wrong question. Both schools of
thought have asked: *is income fair*?

### The neoclassical appeal to reciprocity

Neoclassical theory proposes that in a competitive economy, each person
earns income in proportion to what they produce. Here's how the
principle architect of the theory, John Bates Clark, described his work:

> It is the purpose of this work to show that the distribution of the
> income of society is controlled by a natural law, and that this law,
> if it worked without friction, would give to every agent of production
> the amount of wealth which that agent creates.
>
> ::: {style="text-align:right;"}
> (John Bates Clark in [The Distribution of
> Wealth](https://www.econlib.org/library/Clark/clkDW.html){target="_blank"
> rel="noopener"})
> :::

On the face of it, Clark appears to ask the following question: why do
some people earn more than others? His answer: because some people are
more *productive*.

I argue, however, that this isn't Clark's question. The problem is that
Clark doesn't really explain why some people earn more than others.
Instead, he passes the buck. If income is proportional to productivity,
then the question of income is transposed onto productivity.

It's like if you asked --- what makes people have different height? I
answer: "Height is equal to skeletal length". You respond: "Thanks
Sherlock, but what explains skeletal length?" In the same way, Clark's
explanation of income just shifts the ball to productivity. But what
explains differences in productivity?

Here economists offer only hand waving. Search the literature for a list
of mechanisms that determine productivity. You won't find them. Instead,
you'll find hand-waving arguments about 'human capital' --- a concept so
vague that economists agree on little else except that it 'increases
productivity'.

This lack of interest in actually measuring and understanding
differences in productivity is revealing. It shows that Clark (and the
neoclassical economists who followed him) weren't interested in
explaining why some people earn more than others. Instead, they were
responding to a different question: *is income fair?*

Their answer was a definitive *yes*.

The genius of Clark's theory lies in its appeal to reciprocity. All
societies expect individuals to contribute to the group. But in
pre-capitalist societies, what you contributed to the group (and what
you received in return) wasn't explicitly quantified. But in capitalism,
this changed. Suddenly what you received from the group (your income)
had an exact quantity. Clark's genius was to 'prove' that what you
received was exactly proportional to your contribution to society. So
all is fair in capitalism.

### Marx's appeal to reciprocity

Like neoclassical theory, Marx's theory of capitalism seems to answer
the following question: why do some people earn more than others?

Marx responds by observing that capitalist societies have two classes:
capitalists and workers. Workers, Marx argues, are the sole source of
value. But because capitalists own the means of production, they are
able to steal part of what workers produce. That's how they earn a
profit.

As with Clark, it seems like Marx explained why people earn what they
do. But similarly to Clark, Marx's explanation mostly passes the buck.

If capitalists earn their income by exploiting workers, then the size of
this income hinges both on the rate of exploitation and on the
productivity of workers. Like neoclassical economists, Marxists have
spent almost no time investigating what makes workers more productive.
And while they have thought a lot about the rate of exploitation,
Marxists have never developed a way to measure it independently of
income. At best, they offer hand-waving arguments that the rate of
exploitation is determined by 'class struggle'.

If Marx (and his followers) were seriously trying to explain why people
earn what they do, then this hand waving makes no sense. But it makes
perfect sense if Marx was actually answering a different question: *is
income fair*?

Marx's answer was a definite *no*

As with Clark, Marx's genius was to appeal to reciprocity. Marx 'proved'
that workers do *not* receive back from society what they put in.
Capitalists take an unearned cut from workers' contribution. So all is
*not* fair in capitalism.

### An unanswerable question

Marxists and neoclassical economists have erred by asking 'is income
fair'? This question has no scientific answer.

The problem is that fairness is fundamentally a moral issue. We want our
interactions with other humans to *feel* reciprocal. I emphasize the
word 'feel' here because reciprocity has nothing to do with an
underlying equivalence. It is a *feeling* and nothing more.

Take the simplest type of reciprocity --- an exchange of services.
Suppose I fix your car. In return, you cut my hair. Is this reciprocal?

It is if we both *believe* it is. Nothing underlies reciprocity except a
belief that it occurred.

Marxists and neoclassical economists err by looking for something
quantitative under this belief. Marx argued that an exchange is
reciprocal if the same amount of labor time is involved. But this is a
*moral* proposition, not a scientific hypothesis. Neoclassical
economists, in contrast, argue that an exchange is reciprocal if both
people derive the same utility from it. But this just adds (meaningless)
quantitative lanquage to our simple truism. An exchange is reciprocal if
two people *believe* it is reciprocal.

Here's the crux of the matter. "Is an exchange reciprocal?" is the wrong
question. Instead, we should ask: "why do people *believe* that an
exchange is reciprocal? The same thing goes for income. "Is income
fair?" is the wrong question. We need to ask: "why do people *believe*
that income is fair?"

When we ask this new question, it becomes clear that to explain income,
we have to understand beliefs. More than that, we have to understand how
the beliefs of one person relate to the beliefs of others, and how this
plays out when they divide the resource pie.

Here's an example. Suppose Bob is a low-ranking worker in a large
company. His direct superior is Alice. In which scenario is Bob more
likely to receive a raise?

1.  Bob thinks he's underpaid, but Alice does not.
2.  Alice thinks that Bob is underpaid, but Bob does not.

It's obvious that Bob is more likely to get a raise in scenario 2.
That's because as Bob's superior, Alice's beliefs outweigh his. Put
bluntly, Alice has *power* over Bob. So when it comes to income, beliefs
mix with power. Power determines the extent that someone can impose
their beliefs on others.

It gets even more complicated when we realize that power itself rests on
beliefs. Hierarchies work because subordinates *believe* that superiors
have the right to command them. (If subordinates don't believe this,
they must at least choose not to act on their insubordinate ideas.)

### Beliefs all the way down

A theory of income distribution, then, is fundamentally about beliefs.
It asks why people believe that income is (or is not) fair. And it asks
how people are able (or not able) to act on these beliefs.

When posed this way, we can see why neoclassical and Marxist theories of
income distribution are scientific dead ends. They're in the business of
*shaping* our beliefs, not explaining them! Neoclassical economics tells
us to believe that income is fair. Marxism tells us to believe that
income is unfair.

Neither has anything to do with the truth, which is this: when it comes
to income, it's beliefs all the way down.

\[Cover image:
[Pixabay](https://www.pexels.com/photo/art-background-brick-brick-texture-272254/){target="_blank"
rel="noopener"}\]

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You can’t get the right answer when you ask the wrong question. This truism, I’ve come to believe, explains much of what is wrong with economics. When it comes to studying income, economists ask the wrong question. Economists, I argue, have mostly asked:
<em>
 is income fair
</em>
? The problem is that this is a
<em>
 moral
</em>
question, not a scientific one. It has no scientific answer.

Messaggi di Rogue Scholar

Understanding Income: You Can’t Get There from Here