Inequality Market Failure?

In ordinary talk, you often hear arguments like:

  • There aren’t enough Jazz stations – government should subsidize them.
  • Too many kids today let their pants hanging low – that should be illegal.
  • Not enough kids want to be scientists – schools should push that earlier.

But to an economist, it is not enough to note that you do or don’t like something, to justify a policy to encourage or discourage it. We instead hold ourselves to a higher analysis standard – is there a net market failure sufficient to justify an intervention?

Except, alas, on (national at-a-time between-family) income and wealth inequality. There, most economists think it sufficient to just note that a policy influences inequality – they rarely feel a need to identity an associated market failure. For example, Christina Romer:

A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. … The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories. None are completely convincing:

MARKET FAILURES Government intervention can be justified on efficiency grounds if the free market won’t work well. … The market can malfunction if there are positive externalities across companies. … But large clustering effects have been hard to find. … A study of the semiconductor industry found that although learning by doing was substantial, most of the rewards went to companies doing the early investing. … We need a strong manufacturing base in case of war. … But it still doesn’t follow that all manufacturing deserves special treatment. …

JOBS A key argument for encouraging manufacturing is to create jobs and reduce unemployment. Unfortunately, those effects are probably small. … Today, we face a profound shortfall of demand. That truly is a terrible market failure, and it warrants government intervention. …

INCOME DISTRIBUTION A final argument for supporting manufacturing is distributional. Manufacturing jobs are seen as one of the few sources of well-paying jobs for less-educated workers. … But that is much less true today. … If increasing income equality is the goal, it might be wiser to put money into infrastructure than to subsidize manufacturing. …

Public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. (more; HT Tyler)

Note that she even uses market failure to justify pushing jobs. But not for income equality – that is just obviously bad. I see the same thing over and over – only economists wary of equality-promoting policies talk market failures, and then they mainly ask what they are. For example Charles Lane:

Americans may never agree on an optimal distribution of income, either morally or practically. But they probably could agree that, to the extent possible, government should limit its interventions to bona fide cases of market failure. (more)

Well, no, Americans probably don’t agree on that. But you might hope economists would. Tyler Cowen has an article where he says there are market failures in the finance sector that increase inequality, and recommends fixing them. Which of course makes sense, but we’d want to fix those problems even if they reduced inequality.

The closest I could find to a market failure argument for reducing inequality was Ian Ayres and Aaron Edlin:

The progressive reformer and eminent jurist Louis D. Brandeis once said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” (more)

But that is quite a stretch – there is no evidence that wealth concentration is threatening to stop our nation from being a democracy. And it is far from obvious that not being a democracy is a market failure.

As Obama has decided to make reducing inequality a central issue in his reelection campaign, we are going to hear a lot about it between now and November, including from economists. Could economists who support policies to reduce inequality please identify their market failure arguments?!  Why lower our usual standards for this topic?

(I argued here that a poverty insurance market failure seems implausible.)

Added 2p: In case it is not clear, this post is directed to economists, in their role as economists. I’m not saying market failure is the only consideration anyone uses to decide policy, but I am suggesting that it is the main consideration that economists use in their role as holders of economic expertise. Economists don’t have much expert to say about whether we have too much or too little inequality, outside of their expert ability to discern and fix market failures.

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  • Will

    This post is extremely unimpressive. Market failure arguments are needed to justify interventions in markets because of theorems that prove that markets are efficient. However, these theorems prove that markets are Pareto efficient, an efficiency condition that fails to address our collective dislike for inequality. Inequality is not a market failure because addressing inequality is not something markets try to do.

    • http://juridicalcoherence.blogspot.com Stephen R Diamond

      >Inequality is not a market failure because addressing inequality is not something markets try to do.

      What I take you to be saying is that inequality doesn’t qualify as an inefficiency. But any externality that imposes disutility is inefficient. If people would pay to have a more equal society, then the production of inequality is inefficient.

      But I agree with your basic point: inequality is *inherently* obnoxious. Apart from our detestation of inequality from a far perspective, we also hate the envy (of the rich) and spite (for the poor) it engenders, from a near perspective. If Hanson were objective, his evolutionary psychology would immediately compel agreement. The relevant anthropology is much stronger here than for the importance of status to humans.

      • KPres

        “Apart from our detestation of inequality from a far perspective, we also hate the envy (of the rich) and spite (for the poor) it engenders, from a near perspective.”

        What is this “we”. I don’t detest inequality from a far or near perspective. And I don’t detest envy either…at least not when it’s directed toward productive outcomes, only when it’s directed toward redistributive outcomes, which is theft.

      • efp

        I don’t think we need to resort to expressions of distaste; I think we can cite specific market failures brought about by extreme income inequality:

        1. Poverty has negative externalities. It’s no fun living in a luxury fortress surrounded by slums and tent cities.

        2. Imperfect competition. There are positive feedback mechanisms in personal income just as there are in firm competition.

        3. Kind of a blend of the first two, if there is insufficient social mobility, you will lose the potential productivity of people born into unfortunate circumstances, and be stuck with the incompetencies of those born into fortunate circumstances.

        Of course, government has some functions beyond fixing market failures, like maintaining law and order. This also provides an interest in preventing extreme inequality.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        If people would pay to have a more equal society, then the production of inequality is inefficient.

        I wrote that, but it’s clearly wrong, whatever its supposed to mean.

    • Hansenista

      Ideally, real markets should be *really* efficient, not just Pareto efficient. So if reducing inequality actually makes people better off, a failure to reduce inequality is a market failure.

      • KPres

        “….So if reducing inequality actually makes people better off…”

        Of course reducing inequality makes SOME people better off. But why is this desirable? Should murderers be made better off? If you don’t think so, then clearly you don’t believe equality is desirable just because it “makes people better off.”

        Usually people want want wealth redistribution because it makes THEM or their clan better off, be it financially or ideologically.

      • fburnaby

        KPres,

        So why do other people decide to tolerate income inequality, if not for their own financial or ideological benefit?

        There *might* be a CEV-like reason to advocate for tolerance of income inequality, but those aren’t usually the “true rejections” of its advocates.

    • KPres

      Hanson is talking about economists in their function as economists. Their personal preferences outside of that, then, are pedestrian. The reason the economics as a science is focused on pareto optimality is because value is subjective, making it the only possible objective measure. Going on about evolutionary psychology or “collective dislike” (whatever that means) has nothing to do with what an economist’s policy prescriptions should be concerned with.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        “The reason the economics as a science is focused on pareto optimality is because value is subjective, making it the only possible objective measure.”

        You’re committing economists to the position that only objective measures should form policy–pretty much obviating any need for politics. Otherwise, they’d have no business prescribing–only analyzing that part of the problem addressable in the narrowest objective terms.

  • http://juridicalcoherence.blogspot.com Stephen R Diamond

    The argument for a tension between democracy and inequality is far stronger than you believe. Is it democratic that Newt Gingrich has traction because of a single billionaire, to use a somewhat trivial example for intuition-pump reasons. You might argue from classical republican rather than strictly democratic value, but since it’s you who refer to “democracy,” your position is wildly implausible. Those who have money have more power, where democracy commands that each citizen be equally powerful.

    Unfortunately, I’m confident this is such semantics; you are far from embracing democracy as conferring utility. But there’s a knock-down argument proving that inequality is a huge market failure: the sharply declining marginal utility of increased income at higher levels of income and wealth, even if you reject out of hand the scientific evidence that the marginal utility of income becomes negligible at $75,000/year.

    [I always thought yousplit from Yudkowsky because you're a rightist and Yudkowsky is apolitical. (Is there any published account of that split?) But you've now been outflanked from the right. (http://tinyurl.com/7zdc3pu) Is that the reason for the sudden drop-off in the number of commenters (except for an explainable outlier).]. [Perhaps truly more important is the recent LW attack on your signaling theories, increasingly seen as cynical.]

    • mjgeddes

      [I always thought yousplit from Yudkowsky because you're a rightist and Yudkowsky is apolitical. (Is there any published account of that split?) But you've now been outflanked from the right. (http://tinyurl.com/7zdc3pu) Is that the reason for the sudden drop-off in the number of commenters (except for an explainable outlier).]. [Perhaps truly more important is the recent LW attack on your signaling theories, increasingly seen as cynical.]

      In fact, Yudkowsky is a political extremist, just like Hanson. Yudkowsky has stated he is a small-l libertarian and writes essay for the right-wing think-tank CATO institute. All this extreme ideology needs to be filed in the Yudkowsky dossier.

      Incidentally, the top contributer to ‘Less Wrong’ (outside Yudkowsky himself), Yvain, has written a good FAQ debunking the entire crack-pot Libertarian ideology.

      http://raikoth.net/libertarian.html

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        In fact, Yudkowsky is a political extremist, just like Hanson. Yudkowsky has stated he is a small-l libertarian and writes essay for the right-wing think-tank CATO institute.

        Interesting, in that it makes his posting “Politics is the Mind Killer,” (until very recently) gospel for Less Wrongians, sheer hypocrisy.

      • Wonks Anonymous

        “Interesting, in that it makes his posting “Politics is the Mind Killer,” (until very recently) gospel for Less Wrongians, sheer hypocrisy”
        As far as I know he’s not a big-L Libertarian or part of any “libertarian movement”. So the question is whether preaching “Mind Killer” contradicts having political/ideological preferences or leanings. The content of his post focused on having digs at political opponents.

        I googled the main Cato site (it’s not an acronym, neither is FED) for “yudkowsky” and got nothing. He participated in an edition of Cato Unbound, but part of the point of that typically is to get disagreeing viewpoints and for his part he criticized Michael Shermer for saying neuroscience/ev-psych justifies libertarianism. This is not to say I think Eliezer never indulges in ingroup vs outgroup type thinking, but (at least of what I’ve read) it’s typically not political in a conventional sense.

        Another example of a libertarian (other than Sherman) making a mindkiller -> my-ideology-is-justified type argument is Mark Pennington, who does have an explicitly identified target: Habermas and other advocates of “deliberative democracy”. Bryan Caplan avoided being so explicit in “Myth of the Rational Voter”, though Dan Klein thinks he should have done so.

      • http://omicron-theta.blogspot.com Ari T

        Incidentally, the top contributer to ‘Less Wrong’ (outside Yudkowsky himself), Yvain, has written a good FAQ debunking the entire crack-pot Libertarian ideology.

        As if in the history of Western philosophy it never occurred to anyone to criticize libertarianism. That FAQ isn’t very high quality.

        If you want criticism (or rather, truth) about libertarian beliefs about economics, just read about different kinds of market failures and inefficiencies from economic textbooks. Many (bandwagoned) beliefs of libertarians have been researched in economics.

        If you want criticism about libertarian ethics, read philosophy (of the 20th century at least).

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        Wonks Anonymous,

        part of the point of that typically is to get disagreeing viewpoints and for his part he criticized Michael Shermer for saying neuroscience/ev-psych justifies libertarianism.

        His own libertarian politics and his reasons are the “alternative hypothesis” counterposed to Shermer’s.

        Eliezer Yudkowsky suggests that the partial mutability of human traits is an auxiliary reason at best for Michael Shermer’s libertarianism. Take that fact away, and Shermer’s politics probably wouldn’t go with it. Yudkowsky says that his own small-l libertarian tendencies come from the long history of government incompetence, indifference, and outright malevolence. These, and not brain science, are the best reasons for libertarians to believe what they do.

        He’s saying Shermer isn’t a “real” libertarian; that to be one, you’ve got to have the populist, tea-bagger gripes that characterize today’s reactionaries. He’s attacking Shermer because he claims to be a better libertarian than Shermer.

        This shows an appetite to plow deeply into the political morass.

    • http://lesswrong.com/user/Jayson_Virissimo Jayson Virissimo

      The argument for a tension between democracy and inequality is far stronger than you believe. Is it democratic that Newt Gingrich has traction because of a single billionaire, to use a somewhat trivial example for intuition-pump reasons. You might argue from classical republican rather than strictly democratic value, but since it’s you who refer to “democracy,” your position is wildly implausible. Those who have money have more power, where democracy commands that each citizen be equally powerful.

      Why single out wealth? Surely, there are other characteristics of people that give them greater “power”. Intelligence, height, beauty, athleticism, and any number of other things grant people more “power” than those who lack these things. Frankly, if “democracy commands that each citizen be equally powerful”, then democracy is simply not possible.

      • KPres

        Frankly, if “democracy commands that each citizen be equally powerful”,
        then democracy is simply not possible.

        Nor is it desirable. If everybody has equal power, then nobody can express their will to power, and life becomes meaningless.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        Intelligence, height, beauty, athleticism, and any number of other things grant people more “power” than those who lack these things. Frankly, if “democracy commands that each citizen be equally powerful”, then democracy is simply not possible.

        You do need to apply the maxim with a sense of proportion.

      • Damien RS

        The differences in wealth can be arbitrarily large, unlike the differences in intelligence or height. No one is a million times smarter than anyone else. And perfect equality is a red herring; we can try to make society more equal. In fact, we had, legally cutting out some of the political role of wealth. Then Supreme Court justices appointed by the more plutocratic party struck down those limits.

      • Wonks Anonymous

        Jayson Virissimo, in ancient Athens to avoid such other factors tainting democracy they appointed some people by lottery. Some folks have proposed reducing the electorate to just a random sample so that the smaller number of people can devote more attention to their (now much more important) votes.

      • Konkvistador

        Belive me they will get around to it some day. Democracy is socialism.

      • KPres

        “And perfect equality is a red herring; we can try to make society more equal.”

        Except that isn’t desirable.

      • KPres

        “Democracy is socialism.”

        Socialism (workers owning the means of production) is illogical nonsense (what does it mean to “own” something?). Democracy, then, with all its corruptions, is what the emotional ideal (envy) behind socialism degrades into.

    • KPres

      “But there’s a knock-down argument proving that inequality is a huge market failure: the sharply declining marginal utility of increased income at higher levels of income and wealth, ”

      That isn’t knock-down (or even compelling), because it only measures total utility in the present moment. By corrupting the incentive structure, wealth redistribution negatively effects total utility in the future.

      “Perhaps truly more important is the recent LW attack on your signaling theories, increasingly seen as cynical.”

      Since when is “cynical” an effective measure of a hypothesis?

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        KPres

        That isn’t knock-down (or even compelling), because it only measures total utility in the present moment. By corrupting the incentive structure, wealth redistribution negatively effects total utility in the future.

        You have a point. As Hanson puts it, it’s a matter of net market failure.

        So, the knockdown argument must be more complicated. 1) Equality optimizes for immediate utility but corrupts incentives.

        2) The market optimizes for incentives.

        3) Utility will be maximal at some intermediate point between the two optimizations.

        4) Therefore, therefore the market fails, when measured against a utilitarian standard.

        5) If this is right, it’s an argument appropriate to an economist’s professional role.

      • KPres

        1. Market failure isn’t measured by total utility (because total utility can’t be measured), but by pareto efficiency.

        2. Also, even if total utility could be measured (which it can’t), #3 does not follow from #1 and #2. What follows is that total utility could only be measured for a given moment in time.

    • KPres

      “even if you reject out of hand the scientific evidence that the marginal utility of income becomes negligible at $75,000/year.”

      The reason utility drops off at $75,000 is because that’s the point that one becomes “upper-middle class”, and can claim to be financially superior to a significant majority of one’s peers. At that point, utility is increased by pursuing other avenues of expressing comparative superiority, such as increased leisure or intellectual advancement.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        The reason utility drops off at $75,000 is because that’s the point that one becomes “upper-middle class”, and can claim to be financially superior to a significant majority of one’s peers. At that point, utility is increased by pursuing other avenues of expressing comparative superiority, such as increased leisure or intellectual advancement.

        So, why does anyone need more than $75,000? Seems like you’re making my point.

      • KPres

        Because the above doesn’t apply to everybody. Not everybody is satisfied being upper-middle class.

    • steve

      “Those who have money have more power, where democracy commands that each citizen be equally powerful.”

      While I agree that “Those who have money have more power.” I disagree that this is necessarily less democratic. Media corporations have more power, politicians have more power, famous people have more power. Eliminating money as a source of power doesn’t really make your vote more powerful it just concentrates power in the hands of these other sources. It is not at all clear to me that concentrating power in fewer hands is somehow more democratic.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        Eliminating money as a source of power doesn’t really make your vote more powerful it just concentrates power in the hands of these other sources.

        So, there’s some theorem that says the amount of concentrated power remains the same over all changes in its sources? I think you’re right that it would be wrong to assume (as I perhaps did) that concentration of wealth necessarily concentrates power further. For example, perhaps in China, where there is strong centralized state power, the rise of billionaires serves to decrease concentration by creating competing centers of power. (I don’t think that’s the case in China, by any means, but I can’t rule it out on purely theoretical grounds.)

        But surely concentrated wealth maychange the concentration of power, and it probably will when concentration reaches some point. We’ve reached the point where one billionaire can finance a presidential candidate (while promising more support to his opponent, should Romney prevail).

        At least one poster maintained that wealth doesn’t concentrate power because heeding the ads is a voluntary act. But ignoring “nudges” is antedeluvian. You could as easily say that there’s no authoritarianism in arbitrarily taking a candidate off ballot, just as long as voters had the right to write-in the candidate. After all, it’s their choice to take the easy way out and choose a candidate on ballot.

    • Philo

      @ Stephen Diamond
      “Is it democratic that Newt Gingrich has traction because of a single billionaire . . .”? Well, there’s nothing *undemocratic* about it; the people will still decide *democratically* who gets to be President. The disagreeable fact to which you are alluding is that the people are sheeplike, and will tend to support whoever has enough money to mount a big publicity campaign. But that is simply a feature of democracy. Note that the people display their sheeplikeness (and their ignorance, narrow-mindedness, etc.) in many other ways as well, which would still manifest themselves even if, by some miracle, there were perfect equality of wealth.

      You add “democracy commands that each citizen be equally powerful,” but this is a ridiculous misstatement. The point of electing a President is to give someone vastly more power than the rest of us have. Democracy is just the allocation of political power by majority vote. During the voting, the voters (ideally) have equal political power *with respect to the office or issue on which they are voting*; but that aggregate power, once it has been allocated, is always very unequally distributed.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        The point of electing a President is to give someone vastly more power than the rest of us have.

        True point — but so easy to distinguish in the context of this discussion as not to merit the space.

    • billswift

      I have been commenting, and reading comments less, because idiots like you and daedelus have made it a painful chore. I still read all of Robin’s posts via RSS.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        I don’t know who you’re talking to, but I find such insubstantial and vague name calling as yours above a sheer waste of my time.

  • david

    Isn’t it conventionally emphasized in EC10 that market non-failure in the general sense of Pareto optimality says nothing about the justice of distribution of endowments to begin with?

    The sadist tortures his victim: this is efficient and there is no market failure.

    Worse, equality of outcome vs. opportunity is also orthogonal to the question of efficiency – John Galt invents the singularity friendly AI and saves the world; unfortunately for him his high IQ was detected at birth and a huge lump-sum tax was imposed upon him. This is also efficient and there is no market-failure. Ask Mankiw & Weinzierl about their height-tax paper… as they point out, it is the logical consequence of conventional egalitarian utilitarianism.

    Ultimately the distribution of endowments is a political choice.

    • http://lesswrong.com/user/Jayson_Virissimo Jayson Virissimo

      The sadist tortures his victim: this is efficient and there is no market failure.

      The victim is made worse off by the sadist torturing him. Therefore, a move from a world where the victim is not tortured to a world where he is would not be a Pareto improvement.

      • david

        But the sadist is made worse off by not torturing his victim, so moving from a world where the victim is tortured to a world where he is not would also not be a Pareto improvement.

        Moving between Pareto optima is unsurprisingly never a Pareto improvement.

  • http://juridicalcoherence.blogspot.com Stephen R Diamond

    >Isn’t it conventionally emphasized in EC10 that market non-failure in the general sense of Pareto optimality says nothing about the justice of distribution of endowments to begin with?

    You’re conceding too much to Hanson. Even though efficient production of utility can be objected to based on ideals of justice, there remains the question of whether the market’s creation of inequality is inefficient on top of being unjust. That’s the barricade to which Hanson and his ilk have been forced to retreat. It’s indefensible.

    • david

      I have no illusions to the efficiency of the market process in assigning, say, ownership of capital – e.g., any lending that requires collateral must be both inefficient and inefficient in a way linked to existing wealth – but I doubt Hanson does, either. The problem is always designing an alternative that does better.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        but I doubt Hanson does, either.

        You’re right: he has one more point of retreat: although inequality is inefficient, any alternative would be more inefficient.

    • KPres

      It’s neither inefficient nor unjust, especially since you’ve provided no definition of “just”. Stealing what people have worked to accrue is incredibly unjust, as is giving to those who have not accrued.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        It’s neither inefficient nor unjust, especially since you’ve provided no definition of “just”. Stealing what people have worked to accrue is incredibly unjust, as is giving to those who have not accrued.

        I don’t need a definition to critique Hanson. I just borrow the implications of the evolutionary psychology he endorses. Taking from those who have accrued a substantially disproportionate wealth isn’t unjust to most hunter gatherers, wasn’t unjust in our “effective evolutionary environment” as far as we can tell.

      • KPres

        “Taking from those who have accrued a substantially disproportionate wealth isn’t unjust to most hunter gatherers, wasn’t unjust in our “effective evolutionary environment” as far as we can tell.”

        To some degree, historically, it has been considered unjust. That’s why ethics against theft exist in every culture. But my point in declaring theft unjust was exactly to reveal the shaky ground underneath your declaration that inequality unjust. INOW, there are essentially no grounds for either, even in “evolutionary psychology”. You just made an empty claim. So did I.

  • Chris Gregory

    To a man with a hammer the whole world looks like a nail.

  • Doug

    From a utilitarian perspective the strength of markets are that they force people to reveal their relative preferences. I.e. if two rational equally wealthy people both desire something of limited scarcity than the one willing to spend more of his wealth on it must derive higher utility from it.

    Consider the modification where one person has vastly more wealth than the other. He might be able to spend far more on the scarce resource than the poor man, yet his derived utility could be much smaller. E.g. Bill Gates could outbid a middle class family for a house, and use it for nothing but an overpriced storage shed close to the office. All things being equal inequality shifts the distribution of resources away from the utilitarian optimal point.

    Of course there’s three primary reasons to limit redistribution. One is obviously deadweight loss and disincentives resulting from redistribution. The second is to consider the end consumption of the wealth rather than who actually owns it. Most billionaires will never consume more than a tiny fraction of their wealth. They’ll either leave it charity or their descendants. So the actual consumers of the wealth will be much poorer than the current holder of it.

    The last is that much inequality is driven by leisure versus work preferences. If there are two people who both earn the same wage, but one works twice as many hours, then there should be no redistribution. The first man’s actual wealth is greater than his monetary wealth because some of it is consumed in the form of leisure.

    In this case I would say Bryan Caplan’s argument of the deserving vs the undeserving poor should carry very high weight. If someone dropped out of high school and got pregnant, when education and contraception were readily available, then there should be no redistribution. They’ve already expressed their utility preferences by choosing that lifestyle.

    • http://juridicalcoherence.blogspot.com Stephen R Diamond

      >In this case I would say Bryan Caplan’s argument of the deserving vs the
      >undeserving poor should carry very high weight. If someone dropped out of
      >high school and got pregnant, when education and contraception were readily
      >available, then there should be no redistribution. They’ve already expressed
      >their utility preferences by choosing that lifestyle.

      If you favor redistribution to the virtuous poor, how have the wicked poor expressed their utility functions? They made their decision with the expectation that the earthly rewards of virtue were lower than after redistribution. Unless, as I’d guess, Caplan proposes giving less to the evil poor, not giving more to the virtuous poor.

      Another point on utility functions. What if the wicked poor had the same utility functions, and where they differed was in their capacity to exert willpower? I think there’s good evidence that’s the case, but I’ll be glad to leave it as hypothetical for the moment. This is tantamount to spaying that they wanted the benefits of education more than the more immediate gratifications, but they ran out of willpower juice. (Decision fatigue is the technical term.) Would that change your position?

      • Doug

        Consider a simple model where everyone lives for two periods, working in the first period for a uniform wage income, then retiring in the second and living off their savings. Assume that there’s a single consumption good, and a downward sloping investment demand curve. Also assume everyone varies in their future time orientation, with everyone having an individual upward sloping savings supply curve.

        In this case there will be a market equilibrium saving and interest rate. The more future oriented people you have the higher the total investment and the lower the interest rate. People with a future orientation will save a lot and end up a lot wealthier in the retired time period. More present-oriented people will form a deserving poor class.

        Assuming the agents are rational and just heterogenous with their time preference, such a situation represents a utilitarian optimal point. Even though there is inequality, redistributing to the deserving poor retirees would both transfer utility from savers to spenders, as well as decreasing aggregated utility. Redistributing to poor retirees would form an effective tax on investment, creating deadweight loss.

        Now tweak it and assume that in the model the spenders would actually derive more utility from spending but they have impulse control problems. In this case redistribution among retirees still moves away from the utilitarian optimal point. The spenders still save just as little, and now the savers are incentivized to save less because they’ll end up being taxed. You get some utility gains by redistributing to undeserving retirees, but you destroy a lot of aggregated wealth, and hence utility. Overall the net gain is almost assuredly negative.

        In contrast the solution in this case is decidedly more fascist than socialist. Instead of redistributing from high savings wealthy retirees to poor spendthrift retirees the solution is for the state to intervene in the first period and force people to save at a certain rate. This corrects the bad decisions the poor are making without creating deadweight loss through taxation.

        Redistribution has nothing to do with the optimal solution in this case. Direct behavior regulation is far more effective.

        In the case of the real-world this means a private pension system like Chile’s. It means making health insurance mandatory, but still private like Singapore.

        At the extremes for the very poor present time orientation has to do with personal not economic decisions. Things like dropping out of high school, having a baby out of wedlock, joining a gang. If you believe these decisions are irrational and that people would like to avoid them but don’t have self-control there is a solution.

        It has nothing to do with redistribution to the undeserving poor. Rather you would legalize indebted servitude/termed slavery. In this case the slaver owner would have the right to exercise a high degree of control over the slaves personal life for a fixed period. The slave would have no right to leave his employment during the terms of the contract. Much like how military service commitments now work but on a private scale.

        The slave owner would accrue the slave’s earnings in escrow, but control his access to them and not allow the slave to blow through it all at once.

        If you really think the deserving poor actually do have high future time orientation, but low impulse control, then many of them should leap at such a self-control opportunity.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        Doug,

        If you really think the deserving [I think you meant 'undeserving'] poor actually do have high future time orientation, but low impulse control, then many of them should leap at such a self-control opportunity.

        This follows under a conventional impulse-control conception, but not under a contemporary decision fatigue conception. “Effortful choice is costly [in "decision juice"], but so is accommodating to choices made by others.” (http://tinyurl.com/7y8g4cs)

  • http://suntzuanime.wordpress.com suntzuanime

    Please explain to me two things:

    *Why market failures are bad
    *Why nothing else is

    If you can do that, then I will agree that it makes sense to bend the apparatus of government to correcting market failures and nothing else. And I suspect the first one will be pretty easy, so heck, you’re halfway there!

  • chepin

    But that is quite a stretch – there is no evidence that wealth concentration is threatening to stop our nation from being a democracy. And it is far from obvious that not being a democracy is a market failure.

    What is the evidence that supports not being a democracy is a market failure?

  • luff

    The progressive reformer and eminent jurist Louis D. Brandeis once said, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.”

    But that is quite a stretch – there is no evidence that wealth concentration is threatening to stop our nation from being a democracy. And it is far from obvious that not being a democracy is a market failure.

    I read that quote the other way around. Not that wealth concentration leads to less democracy, but that it makes the poor majority want to tax the rich. And if it’s a functional democracy, the majority won’t allow too much inequality.

    • KPres

      “And if it’s a functional democracy, the majority won’t allow too much inequality.”

      How does this follow? Presumably, a “functional” democracy is one where everybody has one vote, and nothing more. Inequality doesn’t alter that situation at all. The only thing that could alter it is legislation changing the number of votes a person has.

  • Matt Flipago

    “There aren’t enough Jazz stations – government should subsidize them.”

    “is there a net market failure sufficient to justify an intervention?”

    Yep, it’s called copyright laws, radio licencing, and the RIAA.

  • Ken S

    “But to an economist, it is not enough to note that you do or don’t like something, to justify a policy to encourage or discourage it. We instead hold ourselves to a higher analysis standard – is there a net market failure sufficient to justify an intervention?”

    It seems like it would be unethical to recommend a policy by appealing to one’s own authority as an economist without giving any actual justifications, but is that what Romer is doing at all? If an issue doesn’t have a satisfactory economic analysis, is it that unprofessional to state preferences in a public forum?

  • Jason

    Robin — I think you’ve left off the the background. We didn’t start off the ‘free market’ debate in the 1960s and 70s with a free market and then suddenly say “Look at all the inequality!” today; we started off with a more progressive tax system. We were then given arguments for market reforms. At the time it was said that we would get more inequality but a host of other benefits would follow as well. Unfortunately, all we seemed to get was more inequality.

    The current debate is not so much whether there is market failure created by inequality, but that there appears to be no broad benefit to a functioning market. And the reason we create (or allow) markets is to provide benefits to humans. Therefore, we can throw out the market handbook and make policy to redistribute wealth in ways that benefit humans.

    ps As a side note, I thought if you did something that I didn’t like that affected me, it counted as a negative externality that needed to be priced regardless of my reasons for not liking it? Maybe that price is low to negligible, but it should still be priced.

    • roystgnr

      Indeed, the 1960s were noted for their pro-market reforms, when John B. Lyndon passed his conservative agenda, established a “War on Progressiveism”, and established his “Great Market”. Since then, government expenditures have plummeted, volume of regulation has dwindled, and…

      Wait, sorry, I was having one of those backwards-world daydreams again. You too, huh? Aren’t the goatees weird?

  • Hannes

    If person A owns everything and person B owns nothing, then A’s riches and B’s starvation is efficient. Every statement of the market’s efficiency is conditioned on the initial distribution of property rights.

    It is not even clear to say that we introduce an inefficiency by redistributing some resources A to B. Even though A might work less due to incentive effects, the consumption of B might have a different composition than that of B and then the national product is not comparable on a one-dimensional scale.

    To talk about that we have to find a market failure to justify interventions against inequality is a misunderstanding of the term market failure. It could be said that you have mixed “no market failure” with “good outcome”, and you are then mislead by the normative name for a descriptive term (and these types of misunderstandings are good justifications for that we should use less normative terms such as failure, optimal and efficiency).

  • Psychohistorian

    This post is precisely why people have low opinions of economists. Economists themselves often forget that economic descriptions are non-normative: systems being more efficient is not inherently good or bad. It happens to generally be good where certain assumptions hold. An economist cannot simply say, “It maximizes efficiency; prove there’s something wrong with it.” The fact that it’s efficient doesn’t make it more desirable than all other outcomes; it makes it more desirable than all other outcomes if certain parameters are held constant; those parameters vary based on your moral values.

    Where someone has a particular moral objective or standpoint, the entire point of their position is that efficient markets will lead to a bad outcome. If you believe abortion is murder, or if you believe abortion is completely morally acceptable, you will not be happy with current outcomes in the US; even if the market were efficient, it is producing too many or too few outcomes based on your beliefs. Indeed, the jazz aficionado and judgemental middle-aged person from your examples have these values: one wants there to be more jazz in the world, the other wants those kids to put on a belt and get off of his lawn. Whether the current situation is the result of an efficient market is completely irrelevant to these people.

    Income inequality is one of these problems however you look at it. Unless you believe, “Income distribution is not of moral consequence” or “the skills that nature happens to distribute and society happens to reward at a particular time are justly rewarded in the exact proportion to which they are actually rewarded” then you’re probably going to have some problems with market outcomes. The skills we award vary dramatically over time and are often distributed arbitrarily by nature and chance. How many musicians could now be superstars if their careers worked out just a little bit differently? How many hedge fund managers would never have gotten their current jobs if they’d been a bit unluckier trading in their early years? Point is, a desire to smooth out these arbitrary outcomes is as natural of a human value as risk aversion.

    • http://juridicalcoherence.blogspot.com Stephen R Diamond

      From a utilitarian standpoint (i.e., Hanson’s), efficiency (broadly construed) *is* constitutive of public morality. Economists don’t have to be utilitarians (I don’t think the Austrians are, if they count.) But it seems a natural fit, and it produces all the obnoxious consequences of utilitarianism.

      Here’s my take on morality: http://juridicalcoherence.blogspot.com/search/label/morality

      • Psychohistorian

        I don’t think that’s fair to utilitarianism. If you define utils as dollars, maximizing social efficiency is maximizing utility, but few would actually do so. Market efficiency places vastly greater importance on Bill Gates’s preferences than on mine (or pretty much any given ten thousand people’s) – utilitarianism generally does not give special value to the preferences of the rich.

        See also a commenter below who points out that income redistribution is generally utility increasing, as the rich have a low value for the marginal dollar and the poor have a high value for it. Yet, markets do not naturally result in income redistribution.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        Psychohistorian,

        I stand corrected in my overzealousness. I think utilitarianism has obnoxious consequences (I would go at least as far as Rawls in *privileging* the utility of the least advantaged and I would assign value to equality independently of its effect on utility) the distortions introduced by the use of money as a stand-in for utility far exceed the perverseness of true utilitarianism.

      • Douglas Knight

        Rawls is explicitly not a utilitarian. But that’s a math error, not exactly the result of privileging the worst-off. It follows from his veil of ignorance assumptions that he should be a utilitarian, adding utility across individuals. Since Rawls doesn’t know math, he reaches his conclusion by fiat, but he pretends that it follows from his assumptions.

        Incidentally, John Harsanyi, who introduced the veil of ignorance decades before Rawls, got it right.

      • Evan

        I’ve read your take on morality and noticed it is founded on a major error in definition. You seem to assume the word “morality” refers to some sort of magic mind-control argument that is so intrinsically persuasive that it has the power to bridge the is-ought gap. That is not the common meaning of the word “morality,” that is some bizarre alternate definition some mixed-up philosophers use. Saying that “Ultimate moral judgments are always false” because magic mind control arguments don’t exist is like saying that the statement “stainless steel is silver in color” is always false because stainless steel doesn’t contain the element Ag in its alloy. Saying that making ultimate moral judgements is an error like “green grows” is like saying “stainless steel is silver” is an error because it’s using the word “silver,” which refers to an element, to refer to a color of all things.

        “Good” is simply a shorthand word for something along the lines of “increases utility for yourself and others.” A good person is someone who increases utility for themselves and others. Morality is a system that the systematizing parts of our brains created so we could do good more efficiently. Trying G. E. Moore’s trick of asking “This increases utility, but is it good?” is like asking “This is water, but is it H20?”

        The next giant mistake you make
        is saying:

        the only incentives for conforming to moral principles are avoiding effortful decision-making, for your present benefit, and (much more importantly) strengthening or at least not weakening the habits constituting moral character traits, for your future benefit

        This is patently false. There is another incentive: your moral conscience. The conscience is an innate desire humans have within them to be good (that is, to be a person who increases utility for themselves and others). You seem to be assuming that self-interested desires are innate, but non-self-interested desires are caused by environment. This is patently false, there is plenty of evidence that some rare people are born without consciences and have no innate desire to be good no matter what society tells them (they are called “sociopaths“).

        Of course, since the desire to be moral is a desire like any other, it can be overridden by other desires. That explains why people aren’t moral all the time, even though everyone who isn’t a sociopath wants to be.

        This leads us to the source of your (and Moore’s) error of definition. When someone is asking what they morally “ought to do” what they are actually asking is “what should I do if I want to be a good person.” Because the desire to be a good person is inherent in all humans who are not sociopaths, the “I want to be a good person” part is implicit, it is assumed the listener would be intelligent enough to figure that part out for themselves.

        It’s like if I tell an unhealthy friend “you ought to see your doctor.” What I’m really saying is “if you want to be healthy you should see your doctor.” Since the desire to be healthy is nearly universal in humans the “if you want to be healthy part can go unsaid.”

        To wrap it up:
        1. Ethical naturalism is correct.
        2. Good is a synonym for something like “increases utility.”
        3. The existence of the human conscience makes the is-ought gap irrelevant to moral discourse, because we already innately want to do good (unless we’re a sociopath).

      • KPres

        “There is another incentive: your moral conscience. The conscience is an innate desire humans have within them to be good (that is, to be a person who increases utility for themselves and others). You seem to be assuming that self-interested desires are innate, but non-self-interested desires are caused by environment. ”

        Non-self-interested desires don’t exist. All action is directed toward the expansion of the ego. The ego, however, is dynamic, and can be identified with things other than the body. (William James has it right with his “the self is all that a man can call HIS OWN”. That could mean his own country, his own family, or his own bank account). The problem with expanding the ego by identifying with a group, however, is that said ego doesn’t actually have control over, ie doesn’t actually own, the actions of the group. If the group acts in ways contrary to the desires of that ego (which it inevitably will), the association splinters. That’s why the workers of the world can never unite for any extended period of time.

    • Doug

      You say that market outcomes are not optimal because some people value things other than maximizing aggregated utility. For example their values morally oppose baggy pants for baggy pants sake. Their preference is for no one to wear baggy pants, even if people derive positive utility from wearing baggy pants.

      On the other hand there are those who do prefer to personally wear baggy pants. Clearly the preferences of these two groups conflict. The brilliant of Coase 1974 was to say that ultimately the market will arbitrate between these preferences as long as property rights are assigned.

      So even though people have non-market values, the market is the best way to aggregate and arbitrate their preferences. If some group of people truly despise baggy pants in all forms they can pay those who wear baggy pants to stop. Indeed we can even invert baggy pants rights, saying by default those who hate baggy pants have the right to tell people whether they can wear them or not. In this case those who love baggy pants can offer to pay to wear them.

      It doesn’t matter, in either scenario the outcome as Coase describes is exactly the same. And if it isn’t it has to do with market friction. So all of your examples of non-market values, assuming they can’t be resolved by market action, are market failures.

      Ergo we arrive at the point where all personal values are reduced to market supply and demand functions for those values.

      • Hannes

        The market does NOT maximize aggregate utility. If you have a strictly concave utility function, a redistribution of income can increase the sum of utilities (if this concept is definable…).

        Coase theorem does NOT say that you can solve externalities to maximize aggregate utility. He says that conditional on the property rights you can get a situation that, conditional on those property rights, cannot be improved on in the pareto sense (all are weakly better and at least one is strictly better of).

      • Psychohistorian

        I take issue with a few things. First, Coase’s theory only works where there are no bargaining costs, which happens approximately never, and certainly not for things like pants-bagginess.

        Second, if you assigned women property rights to their unborn children and allowed pro-lifers to buy those rights to prevent an abortion, how do you think that would work out? They might pay a whole lot for a society-wide rule, but there’s just no way to make that work.

        Third, this doesn’t address the Jazz station issue; the objection is that people should be demanding it but aren’t, not that the market is failing.

        Fourth, people don’t work like that. There a lot of things we are not comfortable exchanging cash over from both directions – we feel it’s wrong to get paid for it, and we feel it’s wrong to pay for it.

        I suppose you could use the following syllogism: “Under the right circumstances, markets solve all problems. Not having the right circumstances is market failure. Thus, X is caused by market failure.” This makes market failure a pretty useless concept conceptually, though, since it operates by definition and not as a practical description of the real world.

  • A Carraro

    I think it’s pretty hilarious that a university professor thinks there is no poverty insurance market. What do you think a college education is for? Or trust funds?

    Almost any business is a form of insurance for your children, as it will generate income/provide jobs for them… In fact wealth is the best insurance policy. Do you think people don’t like acquiring wealth?

    People have always bought insurance for their children. There is no organized market as such, but there are lots of institutions that provide a similar function.

    As for the lack of an explicit transfer between siblings, family members help each other all the time. It’s just not a formal contract. And there are still forms of extreme insurance embedded in law. For example relatives have to care for children in case of death of the parents. There are lots of non-monetary exchanges as well, such as caring for old parents.

    And in the most explicit economic transaction between generation (inheritance), usually parents treat children equally. This is actually enshrined in law in many countries.

    I think he is right that parents don’t want equality between children (probably because we understand incentives). But that’s an extreme in the possible distribution. It doesn’t prove that we like the other extreme. I would say that both extremes are equally disliked by people.

    So I think the case you make is very weak…

  • Pingback: Inequality Market Failure? « Daniel J. Smith

  • Alex J.

    Those who want to wield envy can’t name it.

  • http://theviewfromhell.blogspot.com Sister Y

    there is no evidence that wealth concentration is threatening to stop our nation from being a democracy

    Amy Chua wrote a whole book about this (World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability) before she became famous as an authoritarian parenting enthusiast, explaining how free market capitalism plus democracy necessarily means that some identifiable ethnic groups win, and the more the losing ethnic groups are the majority, the more the two (democracy + free market) don’t coexist for long, because either (a) the democracy side starts doing ethnic cleansing/redistribution type stuff, or (b) the winners of the market start reducing the effect of democracy. Or both.

    Luckily this would never happen in the United States because we’re not racist like that.

  • MPS

    I think this is a very good point.

    What if we think of inequality as a “bad” that can be dealt with separately because we recognize the market failures at its root but WE’VE ALREADY COMMITTED OURSELVES TO ACCEPTING THEM, despite the fact that they cause ‘too much’ inequality.

    This is how I think about intellectual property. Patents, trademarks, copyrights… these are government interventions that restrict free competition. This has enormous, pervasive consequences for society. For instance, lot of wealth surrounds the company Apple. But Apple products are largely manufactured in relatively independent factories overseas. If I were allowed to contract with those factories alongside Apple, to get them to make the same products for me, and I were allowed to copy Apple software and put it on, I could undercut Apple’s prices and destroy all of the wealth associated with Apple. This applies not just to Apple but to Microsoft and to RCA and to Nike and Prada and so on. Corporate wealth is built on intellectual property protections. Without those protections, all those high wage jobs would go — as would the investment opportunities these companies create, and all the high-wage industries their operations and advertisements support — and there would be MUCH less inequality.

    But, obviously, those intellectual property protections do a lot of good. So we accept them, despite the fact they are market interventions and despite the fact that they exaggerate inequality. This leaves inequality now as a residual evil, that we try to deal with in other ways if we can. Progressive taxation and expanded public entitlements are the major component of that. Evidently Romer thinks perhaps increasing manufacturing incentives to better compete with the intellectual property incentives is potentially another way.

  • http://nationofbeancounters.wordpress.com Navin Kumar

    The first reasonable arguments against against inequlity, I came across in this article by Thomas Weiskopf. I’m unpersuaded by many of them, but they’re worth reading, if only to understand the theory:

    http://epw.in/epw/uploads/articles/16768.pdf

  • Jim Rutt

    If in addition to an estimated income/marginal utility curve, we also had a discount rate for utility and an estimator for the trade off between reallocative income equality and economic growth, we could approximate an instantaneous optimal amount of income redistribution.

    Experimentally we’d probably find something like fairly steep hyperbolic discounting for utility, but just like selecting emergent economic exponential discount rates when thinking about the long term viability of the ecosystem, one wonders about the “wisdom” of directly applying empirical discount curves to long term social questions.

    Indeed, perhaps political wisdom consists principally of selecting “wise” discount curves when making political decisions.

  • http://juridicalcoherence.blogspot.com Stephen R Diamond

    Utilitarian economists use wealth as a stand-in for utility. Within this model, inequality isn’t a market failure in itself (although some of its societal consequences that destroy wealth, e.g. crime, economic depressions perhaps, might be). But using this model, the point is virtually tautologous and only as good as the model.

    You can say that inequality is a market failure or that the criteria for market failure poorly model diminution of actual utility. But economists shouldn’t equivocate about their definitions.

  • Gabriel Weil

    Still no response to the genetic-lottery insurance market failure argument. ?Birth position is almost entirely a matter of chance, but can have enormous impacts on lifetime earnings and consumption. If possible, I think many ‘people’ would want to insure against poor (genetic and environmental) circumstances of birth. Of course, nation-level policies cannot address international birth position inequality, but that does not necessarily undermine the case for government provision of this kind of insurance to the extent feasible. This approach is philosophically fraught since there aren’t really a bunch of souls on shelf somewhere lined up to be put in bodies upon birth, but the same sort of risk analysis applies. Even though there is no ‘person’ who can be said to exist to have the preference to be insured against the risk of bad birth position, the revealed preferences of living people support the risk aversion that implies a preference among the ‘unborn’. It would probably be better if the insurance could isolate the moment of birth, cutting down on moral hazard issues, but this may not be feasible. In practice, there is still a real tradeoff between insuring against uncontrollable risk from birth position and creating incentive problems, but the non-existence of private insurance markets in this area is not dispositive, given their inability to insure against birth position risk.

    • http://juridicalcoherence.blogspot.com Stephen R Diamond

      Even though there is no ‘person’ who can be said to exist to have the preference to be insured against the risk of bad birth position, the revealed preferences of living people support the risk aversion that implies a preference among the ‘unborn’.

      This is the crucial point, which Hanson fails to address, but it’s, of course, a theoretical argument, and it’s appropriate to consider more specific evidence as well. Hanson’s empirical arguments, as I recall, were his informal study of his students and perhaps some others and his own introspections. I suspect for him the latter are utterly dispositive–after all, don’t we all strive single-mindedly for status, because that’s the overweaning tendency he detects in himself? Still, it should be possible to explain the introspections if Hanson and others who share them.

  • http://juridicalcoherence.blogspot.com Stephen R Diamond

    Added 2p: In case it is not clear, this post is directed to economists, in their role as economists. I’m not saying market failure is the only consideration anyone uses to decide policy, but I am suggesting that it is the main consideration that economists use in their role as holders of economic expertise. Economists don’t have much expert to say about whether we have too much or too little inequality, outside of their expert ability to discern and fix market failures.

    What if inequality has a dramatically adverse effect on well-being, but the tools economists use can’t demonstrate it. Economists are then compelled to propose solutions that don’t take the consequences for inequality into account, since they don’t know how to take them into account. Then, economists will have to appraise markets as efficient when they obtain their efficiency at the _expense_ of disutility caused by increased inequality.

    Since you can generally gain efficiency with respect to incentives by sacrificing efficiency through maldistribution, economists will be biased for inegalitarian solutions.

    You can’t leave something out of the calculation merely because you don’t know how to calculate it–when it isn’t a matter independent of the one you’re addressing: here inefficiency.

    • KPres

      “Then, economists will have to appraise markets as efficient when they obtain their efficiency at the _expense_ of disutility caused by increased inequality.”

      Uh….if you can’t calculate utility, then you can’t claim that increased inequality creates disutility.

  • Jim Rutt

    Interesting concept, the idea of insuring against Rawlsian birth risk…. of course the tendency of at least American humans to oppose estate taxes and other diminutions of cross generational wealth transfers could be seen as a preference for a selective form of insurance for one’s own descendants.

    • Gabriel Weil

      I would actually disagree with the point about the estate tax. The biggest risk that you want would want birth position to hedge against is precisely who your parents are. Sure, exactly what sperm and egg combination produces you and when that happens matters, but those are less significant risks than the identity of your parents. If your parents are wealthy enough to be affected by the estate tax, then you don’t need birth position insurance. In my argument, there is no way for parents to protect children from birth position risk, only to make being born as their child a more or less desirable outcome. True birth position insurance would benefit all children who are borne under conditions below some chosen threshold, at the expense of those born into positions above the threshold.

  • David C

    Brad Delong once gave an argument of the sort you are looking for:
    http://delong.typepad.com/sdj/2009/04/hoisted-from-the-archives-a-non-socratic-dialogue-on-social-welfare-functions.html

    Bryan Caplan concurred:
    http://econlog.econlib.org/archives/2009/06/how_markets_val.html

    Christina Romer never actually gave the argument that lower demand is a market failure either. She just took that as given. The argument that people in first world countries are buying too much crap and should just relax a little, even if it reduces GDP, is even more rarely made among economists. I’d say this lowers economists’ standards just as much as not arguing whether inequality is in itself bad. This strikes me as something that belongs in philosophy, not economics.

    • http://hanson.gmu.edu Robin Hanson

      No, that isn’t a market failure argument.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        > No, that isn’t a market failure argument.

        But, “I’m not saying market failure is the only consideration anyone uses to decide policy, but I am suggesting that it is the main consideration that economists use in their role as holders of economic expertise. Economists don’t have much expert to say about whether we have too much or too little inequality, outside of their expert ability to discern and fix market failures.”

        Yet, the argument (how would you characterize it?) is one that economists seem quite capable of making. So economists aren’t limited to market failure arguments.

        And, to repeat, if it isn’t a market failure, then the definition of market failure is inherently biased in its promotion of narrow efficiency at the expense of overall utility–becoming more pernicious than useful.

  • http://juridicalcoherence.blogspot.com Stephen R Diamond

    DeLong stated (recapitulating and ultimately approving the argument of Diamond [no relation] and Saez::

    The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.

    The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.

    Caplan quoted the dialog and presented a surprisingly Hansonian analysis trying to discredit the proponents as hypocrites.

    ——–

    A more conventional “market failure” that has for some reason been omitted from this discussion is that inequality decreases effective demand, making the economy more volatile.

    • KPres

      “A more conventional “market failure” that has for some reason been omitted from this discussion is that inequality decreases effective demand, making the economy more volatile.”

      It’s been omitted because it’s gobbledegook nonsense.

      • http://juridicalcoherence.blogspot.com Stephen R Diamond

        It’s been omitted because it’s gobbledegook nonsense.

        Perhaps when it comes to proving it from axioms, but addressing the effect of inequality on the business cycle is a reasonable empirical question. There seems to be good reason to think the economy is more vulnerable with increasing inequality. What is gobbledegook is the Austrian view of economics insofar as it tries to define the discipline as a priori.

        Would that be a market failure by Hansonian standards?(and how universal are those standards to economists who use the term?)

  • Paul Christiano

    Even in the most austerely value-neutral role for economists, they still have a place in proposing policies designed to achieve various levels of redistribution at minimal cost or with minimal disruption. Other economists seem to believe this, and seem to explicitly say it fairly often, at least to their students.

    After all, as a matter of empirical fact policy makers often do want to reduce inequality of various sorts, and the question of how best to do it is an economic one. The problem is just as well-posed as and similar in character to addressing market failures, with different but equally objective goals.

    It seems not only unjustifiably righteous but also unfortunate if some economist decided to provide no input on this question, because they had decided that efficiency was the only acceptable goal. (Though there may be other reasons to provide no input on this question, for example if one was deeply opposed to redistributive policy and hoped that by generally scorning it they could reduce its social acceptability etc.) In particular, this would be unfortunate even from an efficiency perspective–since politicians will endorse redistributive policies, as noted, and we’d like them to choose policies which are as efficient as possible given their desire for redistribution.

    • Wonks Anonymous

      The anonymous quote that Caplan gives as an endnote here agrees with you.

  • Patrick

    Scenario 1: Bob can be made better off without making any other person worse off. In the OP’s view, this is a place where an economist, speaking as an economist, can comment.

    Scenario 2: Bob can be made dramatically better off, but Tim will be mildly inconvenienced. In the OP’s view, this is a place where an economist, speaking as an economist, cannot comment.

    Why? The expertise needed to identify the latter situation is the same expertise needed to identify the former situation. And to the extent that Scenario 2 requires accepting certain normative premises that aren’t implicit in the factual expertise of economics, well, Scenario 1 does the same thing.