Does Inequality Spur Investment?

A blog about business and economics.
May 2 2012 12:30 PM

Does Inequality Spur Investment?

Adam Davidson profiles Edward Conrad and his case for economic inequality. Conrad-via-Davidson seems to be making two points throughout the piece. One is the contention that your typical Richie Rich earned his money through savvy business creation rather than by ripping people off and that savvy business creation is broadly beneficial. Conrad conveniently seems willing to actually take up the straw man position that nobody is getting rich through parasitical rent-seeking or using information asymetries to rip people off. That's clearly false, both empirically and as a matter of theory. Glenn Hubbard, who's a smart guy who adheres to a generally pro-inequality line and seems to want to Conrad to like him phrases this politely in terms of the idea that Conrad "doesn’t have the blinders of a model-based view of the world, which is an advantage and a disadvantage." In other words, Conrad is mistaken but in a somewhat trivial way.

Conrad's more interesting claim is that inequality isn't just the consequence of socially beneficial activities, it's the cause of socially beneficial activities because inequality leads to investment:

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works—that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.”

This appears to me to be a fallacy of composition. Within a given country, richer people tend to save at a higher rate than poorer people. Conrad infers from this that a more unequal society is going to have a higher level of saving and investment. But this doesn't really follow and it's famously the case that many European countries like Germany have a much higher savings rate than the United States.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


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