November 24, 2023
In a prior post, I suggested that a broad set of cultural practices referred to collectively as
the “Tall Poppy Syndrome” (TPS) might preserve overall wealth. Might.
At first glance, it doesn’t look like the TPS has wealth-preserving properties. Where the TPS prevails, people actively search for ways to cut their neighbors down to size (sometimes, quite literally!) Keeping up with the Joneses (or is it the Ivanovas?) in societies like the Soviet Union often involved a quite vindictive and creative act of violence, meant only to inflict a flesh wound, of course. See this video for the bizarre details.
TPS-style behaviors may enhance wealth on net in societies where profit opportunities are predominantly zero-sum. After all, if people in your society acquire wealth through transfer and conquest, disincentivizing transfer and conquest by means of TPS-style retaliation could, in theory, preserve wealth.
Of course, TPS-style behaviors are far from the only means of mitigating wealth destruction. “TPS culture” is not even a uniquely counterintuitive means of curtailing wealth destruction.
In a classic paper— ”The Allocation of Talent: Implications for Growth”—Kevin Murphy, Andrei Shleifer, and Robert Vishny find:
“..that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow more slowly.”
Why? Well, engineers (on net) produce wealth; lawyers (on net) transfer wealth, facilitate rent-seeking, and lobby for special privileges. “On net” does a lot of heavy-lifting here because (of course) there are “unproductive” engineers and “productive” lawyers—in fact, a person could alternate between “productive” and “unproductive” activities throughout his career. You could even imagine societies where attorneys do relatively little besides productively protect person and property, but that is not the world in 1991—when Murphy et al. was written—at least.
Here are the key results from their paper:
So, if more lawyers means more transfers, shouldn’t fewer lawyers mean fewer transfers and less wealth destruction? And if so, what’s one way societies get fewer lawyers? One channel is none other than attorney-erected barriers to entry. That’s right, restriction of output and higher prices, courtesy of the American Bar Association (or whoever) to the rescue. Just as TPS-style retaliation may dissuade rent-seekers of various stripes, so too entry barriers deter would-be entrants to a profession that largely exists to transfer wealth.
On the one hand, lawyers securing special restrictive privileges reduces entry to their wealth-destroying/transferring (remember, on net) occupation. Wealth, preserved. On the other hand, lawyers expend resources lobbying for said restrictions. Wealth, destroyed.
The counterintuitive conclusion: At least in theory, it’s possible for cartelization—even that which leans on government for enforcement—to preserve wealth in certain instances. All that’s required is that the cartelized industry meet two conditions. First, it must be a wealth-destroying industry. Second, it must destroy more wealth by expanding output and lowering price than it does by lobbying for rents.
It’s difficult to think of many industries that usually fit these criteria, and it’s not possible to determine a priori which way the ledger tilts—even for lawyers—in any given society. But I think the theoretical conclusion is right: State-backed cartelization is capable of increasing a society’s wealth.