Nobel laureate and New York Times journalist Paul Krugman has once again lived up to his legacy of being a Keynesian simpleton. His most recent blog post that has left me open-mouthed is titled What You Add Is What You Get. Krugman writes on the effects of raising taxes on the rich:
So, imagine a Romney supporter named John Q. Wheelerdealer, who works 3000 hours a year and makes $30 million. And let’s suppose that he really does contribute that much to the economy, that his marginal product per hour — the amount he adds to national income by working an extra hour — really is $10,000.
Now suppose that President Obama has reduced Mr. Wheelerdealer to despair . . . Wheelerdealer decides to go Galt. Well, actually just one-third Galt, reducing his working time to just 2000 hours a year so he can spend more time with his wife and mistress.
Wheelerdealer adds $10,000 worth of production for every hour he works, so his semi-withdrawal reduces GDP by $10 million. Bad! But what is the impact on the incomes of Americans other than Wheelerdealer? GDP is down by $10 million — but payments to Wheelerdealer are also down by $10 million. So the impact on the incomes of non-Wheelerdealer America is … zero.
Clearly, Dr. Krugman sees the economy as a simple numbers game to be manipulated at the whims of the elite. Can he truly not see that the economic consequences go beyond immediate GDP statistics? By his logic, the government could raise taxes to 100% on every single person, distribute the funds arbitrarily, and the economy would still be perfectly fine. There's still the same amount of money in the economy, right Paul?
No, something that cannot be measured in GDP is the incentive to invest in future production. Communism fails because the incentives to produce are absent. Capitalism leads to prosperity because members of the society receive a reward equal to value in what they produce. Mises eloquently sums up one of the necessary conditions for action:
A . . . condition [for human action] is required: the expectation that purposeful behavior has the power to remove or at least alleviate the felt uneasiness. In the absence of this condition, no action is feasible. Man must yield to the inevitable. He must submit to destiny.
When income is distributed, not by what an individual produces and earns, but by the determination of need according to the government, the power to affect one's own condition is lessened. Thus, individuals are incentivized to show need (or establish political pull) instead of benefiting the economy through producing goods or providing services. There is no way to manipulate GDP that will make a man productive. Krugman, being an excellent mathematician, lacks the capability to use simple economic reasoning.
Now, Krugman allows income to be equal to a person's marginal product for the purposes of this particular writing. However, he strongly implies that it is not actually so. I must agree on this. But it is not due to the flaws of the free market, as Krugman would have us believe. To the contrary, the reason that the top income earners are able to receive incomes which exceed their marginal product is that people like Krugman prop up the corporate welfare system through Keynesian bailouts and central banking. Through bailouts, large companies are able to receive benefits from the government while the market is trying to oust them. Similarly, central banks are capable of providing loans with low interest rates to companies that are going through financial difficulties.
In a free market, choices are made voluntarily. Every monetary transaction is made with the consent of both the purchaser and the provider. It is inconceivable that a consumer would purchase a good or service at a price higher than its worth to them. Thus, it is implausible that anyone, in a purely free market, could earn an income larger than their marginal product. Only through theft could such an outcome be possible.
