In his new book, The Signal and the Noise, Nate Silver’s deals with a whole lot of things that human beings try to predict in advance:
earthquakes, hurricanes, political elections, the stock market, and on and on
and on. In my opinion, though, the best chapter in the book is about poker. Silver himself was once an avid online
poker player who (he reports) made more than 400,000 during the years that he
played the game. But his success lasted only for a few years, during what he
calls “the poker bubble,” and the reason that the bubble burst is explained
quite clearly in this graph found on page 318:
You see, it’s all about the suckers--the bad players who lose heavily and whose losses allow the good players to win. Though anybody can win a single hand of poker, the people who win
consistently over long periods of time have certain definable skills: they
understand human nature extremely well, they are willing to realize small gains
over long periods of time, and they have a deep intuitive understanding of
probabilities. These skills are real, and they can lead to moderate-to-high
incomes for the best players in the game.
But whatever the final position of the players, wealth is not created during a poker game; it is merely transferred from those who do not understand the rules of the game very well and towards those who do. But this transfer of wealth only last as long as the suckers stay in the game. When they get fed up and leave, the whole game pretty much collapses until some new suckers can befound to take their place.
And this is exactly sort of more or less what Stiglitz says in The Price of Inequality, except for “people who understand the rules of the game” read “the upper 1% of our society” and for “suckers” read “the rest of us.” It doesn’t have to be this way, of course. There really is such a thing as creating wealth, and when people do it, we all benefit by the increase in the size of the socioeconomic pie. What Stiglitz emphasizes, however, is that there is another kind of economic activity (he calls it “rent seeking”) that leverages a superior knowledge of the rules, and a higher ability to influence the game, to capture a larger share of the existing wealth without creating anything new.
Throughout The Price of Inequality, Stiglitz presents evidence that much of the current economic activity follows the logic of the poker table, where the goal is to increase one's own share of the winnings rather than the overall size of the pot. Under such logic, strategies to create jobs by stimulating economic activity do not. New jobs require new wealth, but what we are getting is old wealth in different hands. Rich people are getting significantly richer by using their knowledge and their power to transfer more of society’s existing wealth to themselves, which is propelling income disparities to third-world levels.
But whatever the final position of the players, wealth is not created during a poker game; it is merely transferred from those who do not understand the rules of the game very well and towards those who do. But this transfer of wealth only last as long as the suckers stay in the game. When they get fed up and leave, the whole game pretty much collapses until some new suckers can befound to take their place.
And this is exactly sort of more or less what Stiglitz says in The Price of Inequality, except for “people who understand the rules of the game” read “the upper 1% of our society” and for “suckers” read “the rest of us.” It doesn’t have to be this way, of course. There really is such a thing as creating wealth, and when people do it, we all benefit by the increase in the size of the socioeconomic pie. What Stiglitz emphasizes, however, is that there is another kind of economic activity (he calls it “rent seeking”) that leverages a superior knowledge of the rules, and a higher ability to influence the game, to capture a larger share of the existing wealth without creating anything new.
Throughout The Price of Inequality, Stiglitz presents evidence that much of the current economic activity follows the logic of the poker table, where the goal is to increase one's own share of the winnings rather than the overall size of the pot. Under such logic, strategies to create jobs by stimulating economic activity do not. New jobs require new wealth, but what we are getting is old wealth in different hands. Rich people are getting significantly richer by using their knowledge and their power to transfer more of society’s existing wealth to themselves, which is propelling income disparities to third-world levels.
According
to one narrative of the current recession, unemployment remains high because job creators are still
being taxed too much. If we stop stealing their money, they will be able to do
what they do best: create new wealth and produce new jobs. But this formulation
only works if we are living in an economy where the highest performers are
creating new wealth. If Stiglitz is right, we are living in a poker economy,
one in which the top players are simply better able to game the system than the
suckers. To the extent that this is the case, continuing to tilt the playing
field towards the current winners is probably the stupidest thing that we can
do. Even the worst poker players will often refuse to change the rules to make
them lose their money even faster.
Will the majority of Americans ever do the same? In
the 1998 poker movie Rounders, Matt Damon gives us a warning: “If you
can't spot the sucker in the
first half hour at the table, then you ARE the sucker” (Silver, p. 317). As
this is very likely the case in our economy today, isn’t it about time that we
stopped playing the game?
