The gap between the rich and the poor, also called income inequality, is a fascinating topic of study. The question which I have raised in the title can’t be answered through economics alone as it requires a great emphasis on political thoughts also. I would say that it’s the political philosophy that drives the question of equality and income redistribution, not economics.
There are three schools of thought which were developed from time to time, to address this issue of income inequality; utilitarianism, liberalism, and libertarianism.
It is the political philosophy according to which the government should choose policies to maximize the total utility of everyone in the society. It was founded by the English philosophers Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873).
The starting point of the utilitarianism is the notion of utility – the level of satisfaction or happiness a person receives from his/her circumstances. According to the utilitarian community, the ultimate goal of every public policy should be to maximize the utility. They claim that the motive of the government is to maximize the total utility of the society by maximizing the individual utility. In welfare economics, it means to maximize the efficiency keeping in mind the equity, the two contrasting and topics of debate since the economics started. It means to maximize the total welfare of the society giving an equal share of the pie to every part of the society.
How does this fit into the income inequality argument?
Diminishing Marginal Utility
The basis of this argument is the law of diminishing marginal utility. It says that additional utility from an additional unit of consumption decreases as we go on increasing the consumption.
The utilitarians argue that if a person A is earning $100,000 a year and another person B is earning $20,000 a year, then an additional dollar gives more utility to B than to A. This means that as the income of the person rises, its extra well-being from additional dollar falls. This assumption along with the goal of utility maximization implies that the government should look to achieve an evener income distribution.
We can approach this by taking a dollar from A and giving it to B. Since the rate at which the utility of A falls is less than the rate at which B’s utility rises, this should continue till both of them have the same utility. But the utilitarians forget two things; income isn’t fixed, and people react to incentives.
Both A and B will react to this incentive. Since A knows that the more he earns, the more money government will take from him to distribute it to others. So, he has less incentive to work hard. Similarly, B knows that the less he earns, the more money he will receive from the government, so he also has an incentive to earn less.
A and B both have an incentive to earn less, so they will work less, the income of the society falls, and hence the total utility. The government has to balance the gains from the equality of the society against the losses from distorted incentives. So, this government can never achieve the outcome of being total egalitarian (equality).
It is the political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a “veil of ignorance”.
Too technical, no? Let’s take it in a simple way.
John Rawls, the person who gave this philosophy in 1974 in his book, Theory of Justice explains this by a thought experiment. Imagine a situation of before birth, where all are gathered and will take birth after a particular amount of time. Since they are all on the “same page”, meaning no one knows what will happen and on which station each of them would land in future, they can reach an agreement. This agreement will be about the just laws and policies which will shape their societies. Since nobody has a special circumstance before birth, the policies made would be just and fair for everyone.
He wanted to say that all the institutions in this society should be made fair and just. But the question arises that who will decide what justice is for all? This led him to the above-mentioned thought experiment. In the context of the income inequality, he says that the just thing would be when the person doesn’t know where he would end up – top, middle, or bottom after the policies are implemented. He would be concerned mostly about landing in the bottom of the income distribution. Therefore the policies should be such that they raise the welfare of the worse of a person in the society. Rather than maximizing the sum of the utility of the society, the government should maximize the minimum utility. Rawls’ rule is called the maximin criterion.
This again is possible by taking the income from the rich and distributing them to the poor, so as to raise the welfare of the worse-off sections of the society.
Argument: Income inequality isn’t achieved
My argument is that this policy will again fail because rich have less incentive to work hard and poor also has less incentive to work hard, same as it was in the case of utilitarianism. So, the income levels will fall and the welfare of the poor will come down, not go up. In other words, income inequality will increase rather than decrease. Moreover, we are ignoring the fact that the people in the “before birth” state might be rational enough to treat all possible outcomes equally when designing the policies. In that case, they would end up maximizing the average utility of the society, which is more of utilitarian than Rawlsian.
It is the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income. Not redistribute income? Are you mad?
Not redistribute income? Are you mad?
Well, this one’s my favorite because it is reasonable and doable, unlike other philosophies.
In simple words, “Don’t redistribute the income, rather identify the shortcomings in the process of redistribution”. In other words, when the distribution of income is achieved unfairly – for instance when a person steals from another – the government has the right and duty to remedy the problem. But as long as the process determining the distribution of income is just, the resulting distribution is fair, no matter how big is the income inequality.
The underlying philosophy
It’s like identifying a leaky bucket in the process of transferring water from a filled oasis to a dry oasis. Robert Nozick, a philosopher, and writer of a famous book Anarchy, State, and Utopia, contradicting the liberal argument of “before birth” says:
Would you imagine yourself in Before birth and choose a grade distribution without knowing the talents and efforts of each student?
He gives an example of a grading system and asks, “Would you choose an equal grade distribution so that all are happy or a fair process so that everyone gets marks according to his/her talent?” and says that the latter one is a better option, no matter what individual marks are.
Read this also:
In our context, he wants to say that the equality of opportunities is more important than income inequality. The libertarians believe that the government should enforce individual rights to ensure that everyone has the same opportunity to use his or her talents and achieve success.
What do you think about the income inequality?