Why Do Economists Care About Inequality?
The topic du jour on the econ blogs is Krugman’s claim about the effect of politics on income inequality. Before I solve that problem for you in different mindblowing post, let me say that I don’t really understand why economists care about income inequality qua economists. I understand why they care about income: more money buys a more preferred consumption bundle, which, by definition (not mechanism) gives you more utility.
What leaps to mind is that economists must be impressed with diminishing marginal utility (DMU) arguments for redistribution. But this is not qua economist. Orthodox utility theory is not in the business of interpersonal utility comparison, so there is no language in which to say that overall utility has been increased by redistribution. There’s just one guy’s utility going down, another guy’s going down, and no way to say whether one compensates for the other. (This is one of the reason some economists are attracted to happiness research: they want a language in which to do principled interpersonal utility comparisons.) But, as I have noted in the past, when economists have anything interesting to say, it’s usually because they are applying what I like to call economic folk morality, which plays fast and loose with the various senses of utility. Economists qua amateur moral philosophers in my experience are very impressed with DMU justifications for redistribution.
But professional moral philosophers with high-level training in economics, such as David Schmidtz, are rather better at this kind of thing than economists who occasionally indulge their philosophical prejudices on blogs and in the NYT. Schmidtz shows that even assuming everyone has the same utility function, marginal utility diminishes smoothly, there are no incentive problems, and redistribution costs nothing, it still does not follow that utility must increase when inequality is reduced.
Schmidtz notes that DMU is precisely why some dollars are not consumed, but invested. There is a point where an extra dollar will have a higher expected utility if allocated to production than consumption, and we need enough people at that point to have the kind of production that ensures that there is anything to redistribute. From Schmidtz’s Elements of Justice (which I highly recommend), where he discusses a simple example involving the redistribution of corn:
Precisely because of diminishing (that is, downward-sloping) marginal utility of consumption, production becomes a higher-valued use as wealth … rises.
Note: Production’s tendency to be more desirable relative to consumption is a general consequence of consumption’s DMU, and not an artifact of an odd example. The general conclusion: If a community does not have people out that far on their utility curves, so that they have nothing better to do with marginal units of corn than to plant them, the community faces economic stagnation at best.
Therefore, unequivocal utilitarian support for egalitarian redistribution is not to be found in the idea that consumption has DMU. This result in no way depends on questioning the premises of the DMU argument. On the contrary, it is grounded in DMU. A society that takes Joe Rich’s second unit [of corn] and gives it to Jane Poor is taking that unit away from somebody who, by his own lights, has nothing better to do than plant it and giving it to someone who, by her lights, does have something better to do with it. That sounds good, but in the process, the society takes seed corn out of production and diverts it to current consumption, thereby cannibalizing itself.
There is much more to Schmidtz’s argument, and I encourage you to check it out. Like Schmidtz and like a bad socialist, I am cold on material equality, and, like a good liberal, warm on material sufficiency. What matter is that people have enough to realize the ends that make our lives worth having. If a system that encourages those who already have enough to invest their extra in production is more likely than a heavily redistributive system to provide everyone with enough, then a highly materially unequal society may best serve liberal ideals.
Whether we should be morally worried about inequality depends on its sources. But then the real worry is the source of inequality, not inequality per se (though the resulting inequality may exacerbate or consolidate the original injustice.) If inequality is based in predation, then the moral worry is predation. In a system like ours rife with corporate welfare, some people do get rich off political predation. (I can see K St. from where I’m sitting!) I don’t know how many of the top 1% (that both includes Krugman and makes him insane with indignation) got there through rent-seeking. Maybe a lot, but certainly not all the software millionaires, and all those entertainment and sports stars. Anyway, as I’ve mentioned before, redoubling our efforts Krugman-style to take more money from the rich through the political system is mostly an effective way of providing the rich with an incentive to put more money into the political system to prevent having even more taken. It is in principle possible for the people with the least leverage and weakest incentive to bend the political system to their will, just as it is in principle possible for a dog to catch its tail. The only option for separating money and political power is to reduce the desirability of political power by reducing its scope and effectiveness. My guess is that constraints on government power, such that the rich would have less incentive to try and dominate it, would lead to more people having enough, but perhaps even greater inequality.
August 21st, 2006 18:23
Will,
This is a very good post.
I’ve made these arguments before, and have never successfully had an egalitarian liberal change his mind about whether attempting to increase equality through the political process was the best way to achieve his purported goals.
I think that the truth is that they care more about equality than about their purported goals, or logic.
I suspect it’s a value they acquired in kindergarten, or earlier, and have a very difficult time examining rationally.
August 21st, 2006 18:25
That is an excellent point made by Schmidtz.
So let’s redistribute income via luxury taxes / progressive consumption taxes instead.
Then we get even more captial investment and reduce the positional happiness issues.
August 21st, 2006 22:29
When you ask why economists care about income inequality, do you mean “care” in the narrow sense of “think it’s a problem”? Because there’s a very obvious sense in which economists, qua economists, would care about income inequality: it’s an economic phenomenon whose extent we can potentially explain theoretically and empirically, quite apart from whether we approve or disapprove of it.
August 21st, 2006 22:41
Glen, Yeah, in the narrow sense. Why do they worry about it, is what I meant. It’s clearly something worth understanding.
August 22nd, 2006 09:30
I think it’s something as an economist that you have to end up obsessed with simply because so much of the population is. If you believe in it, you have to prove it can work because so many people obsess over it. If you don’t believe in it, you constantly have to debunk it because so much of the population is obsessed with it.
August 22nd, 2006 13:13
It remains a mystery to me how people can not be upset by gross inequality. I don’t care if you’re conservative or liberal, libertarian or statist, how can your blood not boil when you are presented with huge differences in income? Is there some gene missing? Is this like being color blind? I am not trolling; I honestly don’t understand how people can be relaxed knowing that others make so much more money than them.
August 22nd, 2006 13:19
Dirk, Really? Why fixate on money? Why not people who are better looking, more athletic, or something?
I think some people just wrongly assume that wealth is a pie of fized size, and if some people have a bigger slice, then that’s just unfair. But if you understand that there’s no pie, and that economic activity is a positive sum and not a zero-sum game, inequality just stops bothering you. If somebody has a bigger share than me, chances are they have made me better off, not worse off.
August 22nd, 2006 18:43
>>If somebody has a bigger share than me, chances are they have made me better off, not worse off.
August 22nd, 2006 18:44
“If somebody has a bigger share than me, chances are they have made me better off, not worse off.”
So what?
Are you completely unwilling to acknowledge that the proximate wealth, attractiveness, ability of another person may influence your level of contentment?
What drives you to earn if not dissatisfaction with your current level of consumption relative to others’ you observe?
Likewise, do you not pity the retarded or the hideous or the poor?
I am with Dirk - must be something genetic.
It isn’t about justice or fairness except for those seeking justification for change. It is just unfortunate that certain people have to spend their limited time alive in the presence of joy that they cannot know due to circumstance outside their control.
As a sometimes economist, I am well aware of the positive sum nature of markets and even think that income equality is a neccessary feature of growing economies. And yet I am still bothered by the plight of the less fortunate.
August 22nd, 2006 19:31
“Are you completely unwilling to acknowledge that the proximate wealth, attractiveness, ability of another person may influence your level of contentment?”
No.
“What drives you to earn if not dissatisfaction with your current level of consumption relative to others’ you observe?”
Having goas that require money to achieve.
“Likewise, do you not pity the retarded or the hideous or the poor?”
Of course.
“As a sometimes economist, I am well aware of the positive sum nature of markets and even think that income equality is a neccessary feature of growing economies. And yet I am still bothered by the plight of the less fortunate.”
Being less fortunate than some: not a plight. Not having enough: plight.
August 22nd, 2006 20:16
“Being less fortunate than some: not a plight. Not having enough: plight.”
I am afraid I am too dense to recognize the distinction.
I don’t want to drag you into a debate about something you have probably discussed ad nauseum. So just direct me via email to one of your past posts where you lay out this idea in more detail.
Specifically - what do you mean by “enough” and is the conception of “enough” a pliable cultural concept or an absolute measure of what is neccessary for survival.
Thanks, Will.
August 22nd, 2006 20:25
The years 1945-1970 with low inequality in America had real good productivity. Inequality doesn’t have to cause a massive productivity hit.
Schmidtz is off on the corn metaphor. Most seed corn is hybridized which means it is a bad idea for Joe Rich to replant the corn he gets from his fields.
August 23rd, 2006 10:54
This is one of the best posts I have ever read.
I don’t think those who are not upset over inequality are missing a gene, they have just made a rational choice. Envying those who are better off and coveting their possesions will never make you happy. They are much more likely to make you unhappy.
If I am at a restaurant enjoying a hamburger, does the fact that the guy at the next table is eating filet mignon make my hamburger taste worse?
August 23rd, 2006 11:19
Kyle, You recognize the distinction. Imagaine you have more in the bank than me. Will you sympathize with my plight? No, because I have had sufficient material resources to develop my basic capacities, and I have enough to enact my plans. The fact that you or anyone else may have more than me is external and irrelevant to my chane of having a good life.
I think “enough” is somewhat relative, but mostly absolute.
August 23rd, 2006 21:11
“…let me say that I don’t really understand why economists care about income inequality qua economists.”
A reading of the history of economic thought indicates that the origins of economics seemed to root its concern in inequality.
When Axel Leijonhufvud traced the endevors of macroeconomists, his starting point was Irving Fisher and Knut Wicksell where Axel mentions that Fisher and Wicksell were both deeply concerned with distributive justice.
However, I don’t think this is the answer you were wanting. I think your real question is *should* economists be concerned about (income) inequality? For that, I think economists should read more moral philosophy and be required to read Lionel Robbin’s article on the fallacy of comparing utilities.
August 24th, 2006 01:30
I find Kyle and Dirk interesting, because I’m exactly the opposite. I can’t for the life of me figure out why anyone cares about inequality qua (if Will gets to use it, so do I) inequality. I can see being concerned about inequality if you think it leads to some other bad outcome–as perhaps in Brazil, where the structure of wealth ownership is inhibiting development and growth. But I don’t understand what makes inequality ipso facto bad.
August 24th, 2006 05:51
I think some better reasons to be concerned about inequality would include its potential health and social consequences. Rates of murder and other violent crime, for instance, track a nation’ level of inequality (not it’s wealth). The same goes for various measures of health and social capital.
Correlation needn’t imply direct causation, obviously, but some of the patterns are striking, to say the least. Richard Wilkinson’s book ‘The Impact of Inequality’ is a good review of this literature from an epidemiological standpoint.
August 24th, 2006 22:10
Well, it’s important to distinguish between instrumental and intrinsic value. It’s easy to think of situations where equality might have some instrumental value, but Will (and Krugman, presumably) are talking about intrinsic value.
September 3rd, 2006 12:25
[...] C) Explain at length that their handwringing about material inequality consists mostly of category errors, like Will Wilkinson. [...]