Wednesday, 23 April 2014

What Is Wrong with Inequality?

Thomas Piketty and the financial crisis have prompted talk and concern about "rising levels of inequality" (in both wealth and income) in recent years. Paul Krugman repeatedly talks about those making most money (the top 0.01 per cent, I believe) as "the Oligarchy", and POTUS has urged people deemed rich to pay "their fair share".
A simple question may motivate this blog post: "If A willingly gives B money for some product or service and B piles it up, perhaps only to make a bigger pile, why should there be a problem with that?" Maybe the transaction involved externalities, but suppose that it did not. If transactions of this type happen many times, the vast array of possible outcomes includes some in which B becomes very wealthy, indeed. This blog post collects and evaluates some arguments why inequality is a problem. In my judgement, none of them does very well.
  1. The Utilitarian Argument: Because the utility of additional wealth or income is lower the greater is the wealth already possessed or the income already earned, many utilitarians like to argue that wealth equalization (or, as much of it as is possible without disincentivizing effort) raises total utility because the resources that did little for an already rich person have a greater positive effect on utility for the indigent. The problem with this argument is that there is no way of knowing whether a wealthy individual has become so because even after having amassed millions of dollars he really wants additional wealth. Marginal utility is surely lower for him when he makes a lot of money, but it could still be greater than even the utility of the first dollar for a penniless person. Maybe those preferences are the ones which lead to large fortunes? Conversely, maybe poor folks do not care for even small fortunes, and that those preferences are why they remain poor?
  2. The Idealistic Rational Egoist Argument: This one is also known as the Rawlsian argument. The argument is idealistic because it envisions a scenario in which future generations must agree upon certain rules on how society is to be governed, and it is rational and egoistic because the individuals behind the veil of ignorance are assumed to care only about themselves and to realize that, since they cannot know their position in society, they can sacrifice potential fortune for guaranteed security. I have not read Rawls' book in full, so I am going out on a limb here by critiquing it. If anyone can correct me, I will be very happy, but it is my impression that Rawls envisions realized (post-veil) society as consisting of rather static positions, with individuals denied personal advancement, even if they apply themselves. If I am right, I do not see how the Rawlsian argument can be saved. Certainly, there are some positions in society from which great advancement is really hard, but there are hardly any positions from which it is impossible. Maybe the Rawlsian point is that no effort should have to be so very high? But if effort can improve lives, why should individuals behind the veil of ignorance ignore it in devising society's rules?
  3. Inequality Aversion: Interesting laboratory experiments, mainly associated with economist Ernst Fehr and collaborators, have convincingly shown that persons playing the Dictator Game choose to share what they are given with co-players, even when recipients have no way of finding out who it was that chose to share or not share some given amount. Many smart economists have tried to incorporate these queer preferences into standard models (Matthew Rabin comes to mind), but, unfortunately for them, I believe these efforts are not really going to be remembered in fifteen or twenty years. John List came along and showed that the received wisdom from the laboratory experiments was largely in error. For instance, if participants in these experiments were made to work for their money, or if, in addition to the possibility of giving an option to steal was introduced, the standard results were mostly restored. Since it is not robust to variations of the sort introduced by List, inequality aversion is a poor argument against inequality.
  4. "Guilt-by-Association" Arguments: Finally, there is a whole class of arguments in which opposition to inequality is a by-product of opposition to "really bad" things that happen to be caused by inequality. Maybe inequality makes some few people very politically powerful, so that they monopolize leadership positions in their political jurisdiction and keep others down as best they can? I do not have any evidence on this and I doubt the accuracy of this particular example, but I only mean to suggest the possibility that inequality might bring about disagreeable things. The obvious retort to these arguments is that, since they do not provide any principled opposition to inequality, inequality may persist, or even increase greatly, if the things that are actually bad are solved in a way that does nothing to inequality.
Have I been unduly unfair to some or all of these arguments? Or have I neglected other arguments against inequality? I will be happy to entertain suggestions, but in the meantime I will have to tentatively believe that no really good argument against inequality exists. And because attempts to "rectify infelicitous wealth distributions" necessarily violate private property and voluntary arrangements made on its basis, I will also tentatively believe that there is really nothing that should be done "against" wealth (or income) inequality.

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