President Obama’s recent remarks
about business owners have intensified the national debate over the
proper relation of the individual to the rest of society. Economist and
pundit Paul Krugman has entered the fray from a different angle,
analyzing the rhetoric of conservatives: On the one hand, they praise
the free market for paying individuals according to their contribution
to the economy, yet on the other hand they also love entrepreneurs for
creating jobs and new products, thereby showering benefits on everyone.
Krugman claims that these
two principles contradict each other. Yet Krugman is making a basic
mistake in economic theory. There’s nothing wrong with standard
conservative attitudes toward the meritocracy of the market and the
social benefits of high achievers.
To set the context, let’s reproduce Krugman’s argument from July 9, when he thought he caught Romney supporters contradicting themselves:
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. This is, by the way,
standard textbook microeconomics: in a perfectly competitive economy,
factors of production are supposedly paid precisely their marginal
product.
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