So I read Wealth and Democracy
by Kevin Phillips. I have never encountered a work so riddled with factual errors, inconsistencies, repetitious quotes (Twain, Lincoln, and James Weaver each have the same quote in different chapters) and idiotic arguments. The thesis is that the rich are getting richer (true), that they exercise an influence on politicians (of course), and that this is at the expense of popular power (indisputable). The implicit thesis is that this is a bad thing -- that there is some (unstated) proper balance between the power of people who earned their money by producing something of value, and the power of those who earned their authority by turning 18 and not getting convicted of a felony.
I started taking notes on the more egregious mistakes, in the form of a letter for Phillips. I think it's worth sharing, so I'll post this and send him a link:
On page 38, the terms 'wealth' and 'income' are used interchangeably. This is interesting, because wealth is the bigger number, and you use it to exaggerate big numbers, while income is the smaller number, which you use to exaggerate smaller numbers. Also, why did you pick 1999 as part of your trend-line? That's the peak! Measure from 1912 to 1982, and suddenly the biggest of the big is (relatively) 90% smaller.
Also, on page 49, you say the average income was below $500. This contradicts the table on 38: "The income of the average family was less than $500 [in 1907]," versus the income of the average family being $540 in 1890 and $800 in 1912. Since 1907 was the peak of a massive boom (~18% annualized growth in manufacturing over a seven-year period) that number was eye-catching. Was there a source?
Another issue: on page 151, you note that large companies are losing employees. And yet unemployment is going down! Doesn't the fact that small business are overwhelmingly responsible for growth in economic output (and employment) belie your thesis that large companies keep getting larger?
On page 155, debt and stock buybacks simultaneously raise and lower the stock price. Given that they're publicly announced (that's how they influence the stock price), how are the able to unduly help one constituency at the expense of another? Shareholders can sell their stock at any time; options owners have to wait for vesting. In this case, wouldn't options owners be disproportionately cautious (of course, their leverage could compensate for that -- which is why Microsoft uses restricted stock now. Thoughts?).
Again on page 155, you point out that companies cut prices near the end of the quarter. Isn't this good for consumers and bad for the rich? Or are these cost cuts bad for consumers because they're done for profit-seeking reasons? Related: is a doctor bad for consumers if he became a doctor partly for the money?
Again on 155, you claim that pension surpluses are added to 'operating profits'. This is contrary to GAAP, and I've never seen it on a 10-Q or earnings report. What I have heard is that companies with a surplus in their pension fund don't have to contribute extra money to the fund (which is about as evil as deciding you don't have to chase boring but high-paying work if you make an unexpected amount of money on royalties from a bestseller).
On page 160, technology companies fire people in the wealthiest country in the world, and hire people in some of the poorest. Is this bad? Would it be bad if they fired investment bankers in New York and hired factory workers in Detroit, too? Would this be better or worse if the investment bankers joined a union?
Page 256: "Austrian" as in "Austrian Economist" has a specific meaning that has nothing to do with one's national origin -- calling Schumpeter an "Austrian economist" is as sloppy as referring to the Austrian legislature as the "Congress of Vienna."
Page 305: Carnegie Steel's capitalization was $5 million, but a cursory examination of their financial statements shows that their return on capital ranged from about 40% to 80% -- so their real value might have been closer to $30 million at the time. Carnegie understated capital to keep dividends low so he could retain more of his earnings, which is why he was able to sell it for so much in 1901. A more plausible market value might have had Carnegie Steel trading at 20X earnings (high for an industrial at the time, low for a company growing so fast), for a value then of $50 million.
306: The labor theory of value was never popular. It is, by the way, the theory that if you got a certain sum for writing your book, I should be entitled to exactly the same sum for writing 400-odd pages of utter gibberish.
334: Milton Friedman's policies were not 'designed' to support corporations, any more than Einstein's theories were designed to level Nagasaki. As it happens, Friedman and Einstein were right -- as evidenced by the fact that the US economy is still soaring while, as of August 1945, Nagasaki was flat.
335: (On calling Posner crazy for thinking that human behavior that describes working and consuming might have applications in deciding things like how adoptions should work -- specifically, the idea that people should be able to pay to adopt a child) Your criticism of Posner consists entirely of the statement that he's wrong. His theories are well-considered; another way to restate your argument is that it is better for poor people to stay poor and raise children they don't want than for rich people to distribute a little of their money to the poor and raise a child they do want. I don't understand how anyone wouldn't be embarrassed by such sentiments.
Later on the same page, you criticize tax cuts for encouraging overproduction. This is true, but nonzero taxes cause more underproduction than overproduction (if X% of someone's wealth will be confiscated, lowering X will probably encourage them to earn more money by increasing the marginal product of working -- but unless X is zero, they'll be working less on average than the market wants, so a high X deprives people. I'd rather live in a world where goods are too abundant than where they're too scarce -- as would the millions of people who immigrate to the US from the Third World, apparently).
337: Public Choice theory doesn't just postulate greedy politicians, any more than Darwinism suggests that everything tries as hard as possible to ensure a maximum number of descendants. Public choice theory and Darwinism both recognize that, all else equal, being competitive increases one's chance of success -- and thus that Machiavellian politicians are more likely to win elections and more likely to behave like Machiavellians. The contradiction of public choice theory is that politicians are somehow Different -- that someone who wins 51% of the votes (or stuffs the ballot box) is qualitatively different from the grubby sort of humans who go to home, work, or prayer without stopping by the hallowed halls of the legislature. How do one's human motivations -- desire for food, sex, sleep, and approval -- change once one receives mass approval in a democratic election?
339: On Social Darwinism: "This time, the jungle in which the fittest, both individual and corporate, would survive. "There is no alternative," said British Prime Minister Margaret Thatcher." This quote seems a little bit out of context. Is it really acceptable to do that? "I think Democrats should win the next election. "I think so, too," said President Bush." Not kosher.
355: The line "Greed is good" was not uttered by Ivan Boesky. It is from a fictional film, "Wall Street" -- Boesky said "You can be greedy and still feel good about yourself," though.
On page 410, you cite imaginary polls of rich people as evidence that rich people feel a certain way. No, really. You mention a survey that says "58% of Americans regarded foreign trade as "bad for the US economy because cheap imports hurt wages." The highest-income tenth of Americans, by contrast, would have disagreed by two-to-one, the top 1 percent probably by five-to-one." While unintelligent people think these imaginary data are okay, 76% of Mensa members and 98.52% of Nobel prize winners and Fields Medalists would be appalled at your dishonesty, if I asked.
On page 411, open economies are defended as good entirely on the grounds that people who support closed economies are evil. I don't know what to say. I must not have read Milton Friedman's price theory work very well -- I don't remember the line about how capitalism is a bad idea, but, hey, nobody likes Stalin and Stalin hates capitalism, so...
On page 415, you complain about independent national banks. There is no evidence whatsoever that a politician allowed to redefine the value of a dollar (or the cost of his constituents' mortgages) is going to make better decisions than someone disinterested in election. Giving politicians control of the Fed lets them write their own economic report card, to the detriment of their constituents.
And there are less sinister theses than the simple "Rich get richer." Like "The smart get richer." By all accounts, Bill Gates is a smart guy -- but so's his dad. The difference is that billg, senior, was born at a time when the best occupations for smart people were law and medicine. Had Bill Gates, Junior, been born when the most powerful computer was a Hollerith punched-card machine, he probably would have been a lawyer, too.
Let's call it the software/hardware theory: as 'software' (not just computers, but standard ways of thinking -- how to run a store like Walmart or McDonald's, how to recapitalize a company a la KKR, how to trade currencies like Soros) becomes more accessible, mental 'hardware' is at a premium. I don't think any early 20th-century observer would have guessed that the two most desirable employers (both with an acceptance rate less than Harvard's, squared) would be a computer company (Google) and a hedge fund (D. E. Shaw), both of which tend to hire PhDs.
This myopic insistence on seeing only the most evil motives and unfriendly aims in the last two centuries' unprecedented gains in economic welfare and individual freedom is bizarre and indefensible. Everyone in any way involved in this book should be deeply ashamed. It is a masterpiece of bad theory, bad data, and whiny writing. Utterly irredeemable. No one should buy it, no one should borrow it; it should not have been written, and whoever published it has committed a merciless and unforgivable breach of professional responsibility.
