Richard Epstein, "Forget the Envy Principle"

Forget the Envy Principle
Richard A. Epstein
January 19, 2010

This past week JPMorgan Chase turned a nifty $11.7 billion profit, virtually all of it from its investment and trading divisions. In calmer times that news would have been greeted with pleasure by people who didn't get a dime in payouts. They would realize that large profits and high salaries for banks and bankers make life better all round.

On the public side, those profits generate additional tax revenues. On the private side, what remains allows firms and individuals to save and consume in ways that prop up the rest of the economy. By getting richer, successful people make others richer, not poorer. So everyone is made better off and no one is made worse off. What's not to like?

Plenty it turns out if, like the president of the U.S., you cling to the envy principle, which holds that I am worse off solely because you have become better off. The remedy for this purported malady is a raft of special taxes on the profits of the banks and the bonuses to the executives who turned things around, all on the misguided theory that there's only a dime's worth of difference between a successful entrepreneur and a common thief.

Yet there is little sense in this self-righteous political adventurism whose likely consequence is to undermine the very financial institutions on which a sustainable recovery depends. But Obama thinks otherwise when he excoriates the bankers for believing "That by some twisted logic it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses."

Richard A. Epstein


Epstein's fiction

I'm writing this with the notion that Epstein has some intellectual honesty - that may be a stretch but here goes anyway.

The statement " large profits and high salaries for banks and bankers make life better all round." is a platitude. It's about as accurate as saying "high salaries for professional athletes make life better around" or even "large profits for organized crime make life better all around".

In good times banks make higher profits, professional athletes make higher salaries and organized criminals make more money too. The key question is: correlation or causality. Intellectual prostitutes like I suspect Epstein to be simply tell us what the wealthy and powerful want us to believe without critical analysis.

Statements like "By getting richer, successful people make others richer, not poorer. So everyone is made better off and no one is made worse off." are simply not backed up by the facts. The increases in wealth in the last 40 years are overwhelmingly concentrated in the top 20% of the country and more and more concentrated in that 20% group as you go towards up. An incredible portion of ALL increased wealth is concentrated in the top 1%. It's debatable if the bottom 80% of the American population has seen ANY progress in wealth or income in the last 40 years - yet those at the top have lived a golden age. If the rewards had been distrubuted fairly and broadly - reflecting the true contributions of those who have actually created the wealth then there would be little anger today.

Instead our system has been corrupted by powerful self serving insiders. People are upset because they sense (correctly) that they do not have the privilidge or access which allows bankers (and some others) to make huge amounts of money in the kind of environment we have had in recent decades in America. Can the average person borrow money from the federal reserve bank at virtually 0% like the large banks have been able to do? Can the average person borrow billions this way and then buy bonds yielding 5 or 6 percent? If so it would be a different story. Does massive oligopoly power weilded by large investment banks in America today work for the benefit of the general public or for themselves. Do the army of K street lobbyists in Washington DC on behalf of banking interests really work for joe six pack. The same way the fox works on behalf of the chickens.

Epstein talks about "envy". Is it just envy that drives us to put bank robbers in prison - we are just envious that they would be able to get a large amount of money quickly with little effort? Is it just envy that caused Teddy Roosevelt (and others) to break up monopolies a century ago? Any time there is action to end or right an injustice the 'envy' canard can be brought out. It's funny how people are not so "envious" of Steven Jobs and people like him.

Perhaps some in society make usefull things that enrich our lives while others twist and corrupt our instutions in a self serving manner?

The bottom line is that the statement "By getting richer, successful people make others richer, not poorer" is simply not supported by facts.

Blame, not envy.

The basic principle behind the urge to tax banks suddenly pulling in record profits is not envy but the assigning of blame. Epstein's point might make sense if the President were calling for increased taxes on Lego or some other business that has seen an increase in profits during the latest crisis, but the banks are a special case. It was in large part due to their irresponsible business practices that recession happened to begin with and their unwillingness to issue many relatively safe loans while at the same time pulling in record profits is preventing our recovery. Couple this with their lobbyists fighting like mad to avoid regulations capable of preventing similar crises form occurring in the future, and even the most level headed person may wish to cast some blame in that direciton.

Of course it would be foolish to believe that we can get our money back by taking it from the banks. The losses have been in the trillions and the banks simply do not have that kind of money. It would also be less than productive to attempt to punish the banks in the hopes that they won't transgress again. Instead we should be focusing on creating regulations that might prevent them from being able to do so legally.

This is not about envy. This is about justice. Because when main street looks around to see who is paying for Wall street's mistakes that's what we see: just us.

Envious Post

Yes, large profits for professional athletes makes us all better.  Do you somehow doubt that Professor Epstein would agree?  Their salaries are market determined and they do things others can't (just like highly successful bankers).  Your parallel is exactly right and only your own apparent envy of athletes blinds you to that fact.

As for organized crime, the parallel collapses because of the presumptive negative externalities of the organized action that has led it to be declared "criminal."  Unless the law is unjust, there is a reason for the illegality.  So you cannot assume that the "profits" of organized crime are parallel to those of bankers and athletes without a far more rigorous analysis of costs and benefits.

Finally, anyone who would name-call Professor Epstien an "intellectual prostitute" lacks the intellectual rigor to be associated with U of C.  If you are (and I doubt it), please return your diploma.