I agree that there is an increasing gap between the have and
the have-nots which needs to be addressed but how and towards what goal? What
is the equation of utility that we want to maximise? It usually helps to consider
the extremes.
Would we prefer to live in a world where everyone can afford
an average sized house and a mid-tier car but nothing more or a world where
some cannot even afford a boda-boda but others can own private jets?
You think the answer is easy?
How about this one - Would you like to be born in a world
where, no matter how hard you work, it's near impossible to achieve your desired level of financial affluence but equally impossible to be in nightmarish
poverty; or would you like to live in a world where the world is your oyster,
where the harder you work the greater the return on it and there is no limit to
what you can achieve while running the risk of being unable to afford a loaf of bread. I don’t believe financial wealth should be a measure of
success but a man should be given the freedom to his definition of success.
The two scenarios seem to be two sides of the same coin.
What is the statement we want to maximise?
In Paretian welfare economics, if a particular change in the
economy leaves at least one individual better off while no individual worse
off, then the change is said to have increased social welfare. Looking at the
graph above, each of the changes, whatever they were, while helping the
"rich", are still assisting the "poor", albeit to a smaller
degree. Is this 'occupy' unrest just a response to a bad case of "keeping
up with the joneses"?
I’m sure the more astute will argue that, though it is not
disputed that the current model increases over all social welfare, there are other
models that are closer to Pareto efficiency. I am mixing concepts here I'm sure,
but each change in the economy (through policy, what else?) should take us
closer to Pareto efficiency.
Pareto efficiency is complicated further by the fact that new utility is being created. It is not just a reallocation of existing utility but the model for distribution of new utility that is also being questioned. What that Pareto efficiency point is in a model where new utility is constantly being created, I don’t know.
Maybe Paretian welfare economics is not the right model at all. Maybe, the marginal happiness for each unit of utility is higher for the poor than the rich and that should be reason enough to shift utility (tax the rich and fund the poor) to the poor. This will maximise total happiness at the expense of the rich. Will we as a society decide that an individual should give up his hard earned utility because someone else gets more value from it? You all better send your money to Burkina Faso right now. Tax reform is required but there are other reasons for that besides transfer payments have their own side-effects.
If it’s a matter of individuals measuring their happiness,
not by their access to goods and services, but by the difference between their
capacity and that of the richest, we could modify the model by saying that
increase in the utility of one individual reduces the utility of the rest. Not
because a resource is taken away from the rest, that has already been taken
into account, but because the rest "feels" worse off. This would
imply that a person working extremely hard and aiming for greater financial
success should be taxed to compensate for making the less successful feel bad.
No, the model cannot be based on how one "feels". It needs to be more
objective.
Part of the problem is not money earned but money bequeathed.
Why should one person be born to a red carpet path to success while another to
hunger, poverty and illiteracy? In Australia, inheritance is taxed as capital gains at the
income tax rate (max of 45%). In US (now this is ridiculous), it was REPEALED in 2010 and
was reinstated by Obama in Dec 2010 at a ridiculously low top tax rate of 35%
and an exlusion amount of $5 million. If anyone has figures on revenue earned
from this over the years, I would love to see it. Before being repealed, the tax rate had
steadily declined over the years while the exclusion amount increased.
Deep down I know that economic equality is the way to go but
I would love to be able to defend it mathematically. I want a model where individual agency is not curtailed more than the current model, overall utility is increased and everyone feels bloody fantastic.
There has been a lot of food for thought this last week.
Here another article: http://www.newyorker.com/talk/comment/2011/10/24/111024taco_talk_kolbert
I won't discuss this here but here's something else to think
about: http://en.wikipedia.org/wiki/Mere_addition_paradox
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