A response to Roberto Mangabeira Unger

Above is a video from Harvard professor and Brazilian politician Roberto Mangabeira Unger, containing his declamation against what he sees as the problems with the American economy and with both political parties, and his prescription for setting the conditions to allow "the voice of democratic prophecy to speak once again in American life."

Central to his critique is his allegation that one side in the US (the Republican party) threatens freedom and prosperity -- primarily through what he sees as a reckless reduction of taxation -- and that the opposition (the Democrat party) doesn't offer anything better but merely seeks "to put a human face" on the rapacious policies of the Republicans.

We have stated in many previous posts that our perspective here is for the investor, and not for one party or another -- see for example this previous post, in which we wrote:
We do not make these suggestions as representative of one political party or another -- we are speaking on behalf of investors, and for policies that we believe are good for overall economic growth, innovation, and the investors whose capital fuels that growth and innovation. After all, we actually are investors and professionally represent investors.  
However, we do feel that Professor Unger's video, which has received over 200,000 views as of this writing, requires a brief response, particularly in light of his statements in the first thirty seconds of the diatribe, in which he lays out his most important beef with the position of those who believe that "if only government became less costly and restrictive, with lower taxes and fewer regulations, economic growth would make up for inequality."

He argues that this recipe is actually disastrous, because "inequality would become even greater than it is now."

Professor Unger's unstated assumption is that "inequality" is the primary evil that must be eliminated, and he seems to take it as a given that all of his listeners agree that the reduction or elimination of inequality is the primary criterion by which to judge all policy.

While it certainly would not occur to any politician to argue that inequality is good, and while at first glance it seems the reduction of inequality is something that we should all support, we believe it is important to examine that assumption carefully.

First, we would point out that in many countries -- including Professor Unger's home country of Brazil -- there is tremendous inequality, with a huge population of very poor and a tiny population of elites.  This situation is extremely common worldwide, especially in tyrannies and in countries without the respect for the "rule of law" that the United States has traditionally enjoyed.

Under the "rule of law," the same laws  are supposed to apply to everyone regardless of status, and we believe that in the US (however imperfect) this still takes place to a far greater extent than in most other countries on the planet.  Inequality that has been created by forcibly stealing from or oppressing a large portion of the population is a great evil, and one that should be addressed (through the introduction of the rule of law and the elimination of different legal treatment for different groups).

However, if we were to imagine a situation in which the rule of law were perfectly applied (admitting that there is no nation today that is perfect in this regard, including the US), we could then ask ourselves, "is the elimination of inequality the primary goal to be pursued?"

Put another way, we might phrase the question by asking, "Should individuals be entitled to try to make as much money as they can legally make, given their talents, skills, and willingness to work?"  If my talents and past hard work have made me into the world's greatest basketball player, should I be entitled to try to make as much money from those skills as I can legally make?  Likewise, if my talents and past preparation have enabled me to become a highly sought-after writer, speaker, or actor, or if they enabled me to start a company such as Apple or Intel or Intuitive Surgical* (or to be an indispensable executive at one of those companies or at one of the thousands of other great companies in the world), should I be allowed to do so?  If I am not incredibly talented but I simply work harder than another worker at the same company with similar skills to mine, should I be entitled by my harder work to seek better compensation?

If you think that individuals should be allowed to assess their talents and training and then try to find the place where those skills will be most valued -- and most well-paid -- then we agree with you.  However, please note that if you take that position, it is inevitable that there will be "inequality."  The harder worker may end up being paid more than his friend who doesn't work as hard.  The basketball player who spent more time developing his skills when he was growing up -- or who also combined hard work with greater natural talent -- might be able to command a higher salary in the NBA than another player could.

However, if you believe that laws should be written that stop people from being able to make as much as they possibly can in this world (without using force to steal from people or using fraud to deceive people), then you are, in our opinion, siding against the rule of law.

We say that because laws that stop some extremely high achievers (whether they are CEOs, NBA stars, or venture capitalists) from making as much as they can make are laws that create a system where one group has different laws than another group.  Presumably, those people who want to put a "cap" on the salaries of high-paid CEOs (or movie stars or athletes) do not argue that there should also be a "cap" placed on the salaries of restaurant busboys or hard-working but low-paid hair-stylists.

Why is it right for people to write laws which limit one person's ability to make as much as he can, while not limiting other people from trying to make as much as they can?  The hair-stylist may be making as much as he can possibly make (he may have found the place where his talents are best applied), but because he is not making very much, the law doesn't apply to him.  That path leads to different laws for different people, just based on how much they make -- how is this any better than corrupt countries where the ruling elites are "above the law"?  It just reverses the system and creates a new unfair situation, where some people are deemed "below the law" and some are deemed "rich enough to be treated unfairly."

Finally, the simple fact of economics is that the best way to create prosperity for everybody is to enable greater economic growth.  Real economic growth leads to greater "inequality" (as successful entrepreneurs create companies like Apple and thereby create groups of people with higher salaries than before),  but it also tends to lead to the situation where general standards of living improve across the entire spectrum of incomes.  This improvement in standards of living even at the lower income levels does not typically happen in places with low regard for the rule of law (including Brazil and many other Latin American nations), but it has taken place in the US, where large portions of those in the lowest income brackets can afford a better standard of living than the "middle class" could afford just forty or fifty years ago.  Professor Mark Perry has published statistics on this phenomenon in the past on his economics blog such as here and here.

While Professor Unger argues against lower taxes and fewer regulations and less costly and restrictive governments, and identifies calls for such things the Republican position, we would argue that lower taxes and fewer regulations and less costly and restrictive governments are what actually work in the real world to create greater economic growth and prosperity (and freedom!), which means that people and politicians of all persuasions should embrace these methods.  We previously linked to a video that provides ample evidence from history for this assertion -- see "Why can't we all just get along (on economic policy)?" from February 2010.

We would also point out that Republicans in the US have been guilty of cronyism and betrayal of these principles as well as Democrats.

We hope that Professor Roberto Mangabeira Unger will accept the reality that the rule of law is the real solution -- we would recommend to him the work of another South American thinker, Hernando de Soto, who champions the benign power of the rule of law on any continent, and with whom we heartily agree.

However, even if Professor Unger does not see the light, we hope that his 200,000+ YouTube viewers will not be misled by his faulty arguments.

* At the time of publication, the principles of Taylor Frigon Capital Management owned securities issued by Apple (AAPL), Intel (INTC), and Intuitive Surgical (ISRG).