Pursuit of Truthiness

my gut tells me I know economics

Archive for September 2011

How to care about Equality

with 2 comments

Like many utilitarians and economists, I have a hard time caring about inequality for its own sake, even though many people seem to think it is very important.  Making poor people richer is good on standard utilitarian grounds, but it is hard to imagine wanting to make rich people poorer just to make everyone feel more equal.  How can utilitarians support wealth equality, and redistribution, without putting any value on equality itself?

One reason is as old as utilitarianism itself- the diminishing marginal utility of money.  If rich people don’t value $1000 as much as poor people, in theory we can increase total utility by taking from the rich and giving to the poor.  Wolfers’ finding that happiness rises with the natural log of income supports this.  Of course in practice this leads to incentive problems and an efficiency/equality tradeoff; this lowers the optimal amount of redistribution but gives us no reason to think it is zero.

Second is the fully general trump card against utilitarians (I hope a philosopher can tell me how to get out of this): other people say equality will increase their utility, and you say you want to increase utility, so you should support their desire for equality.

I think one version of this is influential in practice.  An economist like Greg Mankiw might not care about inequality himself, but everyone around him talks about it, so he thinks of more constructive things to say than “your values are silly”.

Another version is the “realpolitik” concern.  Bismark invented the welfare state not because he cared about equality or happiness but to stave off revolution.  Similarly, we might care only about happiness, but realize that voters may be more supportive of happiness-enhancing pro-market policies when inequality is small.  Look at the Economic Freedom of the World Index– Northern European countries like Denmark have high levels of redistribution but are otherwise very free markets.  Denmark is often rated the happiest country in the world.  I would like to see a poli-sci paper on this, or write one if none exists.  If you count the Republicans as the pro-market party (iffy), I have written a paper finding this for the US.  But one should look internationally, as well as looking at survey data on opinion in addition to actual outcomes.

There is one more utilitarian argument for redistribution that I don’t recall hearing, though I am sure it has been made.  Economists like to emphasize that the price system is an amazingly efficient mechanism for allocating resources to their highest valued use.  A common response to this point is that the system is inefficient and unfair, because a poor person who will get 10 utils from a good can be outbid by a rich person who makes 4 times as much money and gets 5 utils from the good.  Somewhere, a rich kid is ignoring or complaining about a toy that a poor kid would love to have but can’t afford.  What I have yet to hear is the obvious corollary of this criticism: the more equal incomes get, the more efficient, fair and utility-enhancing the price system becomes.  The price system more efficiently allocates resources in Denmark than in Mexico.  Perhaps Danish voters are more willing to let prices work because they actually work better in the more equal country of Denmark.

Written by James Bailey

September 19, 2011 at 2:34 pm