Thursday, April 20, 2006

Utility, Liberalism, and Economic Reality

by Joe Miller

Rick makes a nice point with respect to my claims about rich societies providing a safety net:
And sure, the idea of Utilitarianism is to maximize utility (happiness), but what about those situations that don't *maximize* but are still the right thing to do. Such as Joe's comment that a wealthy nation should provide a fairly large safety net for the lower class at the expense of economic growth. It seems (to me at least) that the economic growth factor would *maximize* utility in the long run, but he's willing to sacrifice a bit of that "because it's the right thing to do."
I've been giving a lot of thought to how exactly to square my newly-developing belief that restrictions on markets inhibit the growth of wealth with my intuition that a rich society ought still to provide a safety net. Or more specifically, I've been wondering how it is that both beliefs can continue to be consistent with my utilitarianism. I don't have a fully worked out view yet, but I do at least have some vague hand-waving sorts of ideas. And as there is no better forum for vague hand-waving than the blogosphere, here they are.

First, despite the impression that one might get from a too-casual reading of economics texts, it's important to realize that wealth is not the only measure of utility. Wealth may well serve as a useful proxy for utility, but the two are not extensionall equivalent. It's at least logically possible that maximizing wealth could nevertheless fail to maximize utility. One can, for instance, imagine a world in which there is fabulous wealth that is all concentrated in the hands of just 1% of the population while the other 99% live in terrible poverty. That world may well be the wealthiest world possible, but it would be unlikely to be the one recommended by utilitarianism. Now I don't think that capitalism in fact produces a result like this; indeed, it's hard to see how this world would ever actually come about. But the possibility of such a world is sufficient to show that wealth and utility are not identical.

That said, it may well be the case, then, that sacrificing some wealth will indeed turn out to maximize utility. And that's pretty much the sort of argument that I want to make. I think that there are two possible ways in which a safety net might still be utility-maximizing despite the cost in terms of lost wealth.

(1) Risk taking. This is, I'll admit, the weaker of my reasons, and there may well already be studies out there that would cast some doubt on the efficacy of this argument. I'm just too lazy to look for them. Besides, a number of my readers tend to know about these sorts of things, and this whole blogging thing is supposed to be educational, so if I'm wrong here, educate me. Anyway, my thought is this. A safety net may well help to encourage people to take some risks. Now maybe this strikes you as an odd reason to favor a safety net. But consider that many ventures that have turned out pretty successfully began with someone (or several someones) taking pretty big risks. Now I know that capitalism already has some built-in rewards for risk-taking, and maybe those are sufficient. Still, it seems to me that it might well encourage people to shoot for bigger things if they know that, should they fail, they won't starve. Or that if they get terribly sick before their new company takes off, then they will still have access to medical care. And it's not only capitalist ventures that might benefit here. Leaving my job to write full time is somewhat easier when I know that, if my novel doesn't end up selling that well, I'll have some assistance while I try to get my old job back. Now maybe none of these things strike you as being worthwhile enough for the loss of wealth. I've no idea, personally, how to calculate the value of these things and then how to compare said value with the hypothesized difference between the amount of wealth with a safety net of a certain size and the amount of wealth without that safety net. But that's why we have economists.

(2) Diminishing marginal utility. Yes, I know, many people are skeptical that we can calculate this. How can one possibly make the sorts of interpersonal comparisons of utility that are required if I'm to determine how much value your 100,000th dollar gives to you and then compare that to how much value that same dollar would bring to someone who had only 10,000 of them. Some of those worries, however, are a bit overblown. When we talk safety net, we're not talking about distributing wealth from people with some to people with slightly less. I know that many of the social welfare programs that we have in the U.S. currently do just that, but I'm not here to argue for the status quo welfare state. I'd be happy to see it modified pretty radically. What I'm proposing, rather, is the transfer of funds from people who are very comfortable to people who really need it. Unless you are a utility monster of a pretty rare sort, it's unlikely that your 100,000th dollar will bring you more happiness than that same dollar would bring for someone who otherwise must do without lunch in order to feed his child.

What we have to be aware of, then, is that providing a safety net is redistributive in two ways. First, it redistributes from those who currently have money to those who currently do not. But it also redistributes in that it takes some wealth from future generations and gives it to people in the current generation. We should take both into account when considering the cost of a proposed safety net. Again, we'd need economists to do the actual empirical work; I'm just not qualified to do so. I seem to recall, though, that it's rational to discount somewhat future wealth, so the cost to future generations is not simply the difference between the wealth that would have existed without the safety net and the wealth that exists with it. It's also worth noting that capitalism does increase wealth over time pretty consistently. So while we may be redistributing wealth from future generations, they are future generations that will be wealthier than we are. So again, drawing--in a pretty crude and general way--on the principle of diminishing marginal utility, it strikes me that redistributing wealth in this way may still be consistent with utilitarianism.

5 Comments:

Blogger Thomas said...

Joe,

I still plan to comment about the broader issues you raise in this post and your previous one ("Liberals and Leftists Redux") For now, I will focus on your version of utilitarianism. You say:

"Unless you are a utility monster of a pretty rare sort, it's unlikely that your 100,000th dollar will bring you more happiness than that same dollar would bring for someone who otherwise must do without lunch in order to feed his child."

First, by what calculus do you measure utility? Second, by what calculus do you make interpersonal utility comparisons? I don't think personal utility can be measured (read Arnold Kling on "happiness research"), and I'm certain that interpersonal utility comparisons merely reflect the comparator's preferences.

Third, you overlook the "social value" of striving for the 100,000th (or 1,000,000,000th dollar). A person who strives for additional income and wealth must, in order to accomplish his aim, provide something of value to others. A direct byproduct of that striving is the creation of jobs. On top of that, the more wealth and income one has the better able one is to engage in the risk-taking (financial and entrepreneurial) that yields economic growth. It is economic growth that will most assuredly give the poor person an opportunity to become less poor -- and, most importantly, to learn the lesson of rising from poverty by the sweat of his own brow.

Moreover, persons of wealth and income fund private charity. Taxation of wealth and income suppresses private charity.

For more about the effects of government policy on wealth and income, see this:
http://libertycornerii.blogspot.com/2005/01/practical-libertarianism-f_111101202817050268.html

I have addressed the effects of taxation on private charity here:
http://libertycorner.blogspot.com/2005/11/taxes-charitable-giving-and.html

Tom

7:50 PM  
Anonymous Megan said...

If there is a safety net then where's the risk?

12:56 AM  
Blogger Joe Miller said...

Tom,
I appreciate the comments and look forward to your broader response. I'll take a look at your posts this weekend and see if I have anything to add.

Megan,
A safety net is not a trampoline. It doesn't return people to where they started; it merely ensures that they do not splatter on the pavement. There is still a risk to be taken even with a safety net in place; I can still fall a pretty considerable distance.

7:33 AM  
Anonymous jamie mccall said...

It seems to me that if you provide a saftey net, it encourages people to take risk (as you have said). The fact that you will have many more risk takers...isnt necessarily a good thing. The counter to this would be stating that such a saftey net would not replace lost wealth in risk taking ventures, but just be enough to prevent people from starving. So those with any small amount of wealth would most likely not be moved to take up risky ventures.

But for many people, such a saftey net WOULD be replacing all their lost wealth, because they had almost nothing to begin with. Perhaps I am being far to capitalist about this, but it seems to me that when many of the just-above-poverty types of people (which includes me!) all have a incentive to go out and take huge risks, they'll do it. And in the mean time while we wait for them/us to become successful or fail, were having to provide for alot more people than we were orginally and we have many "lower level skill" jobs that need to be filled that wont be. Economically, this is not good and depending on the risk taken it could be disasterous for a capitalist system.

But then again it is late, so maybe what I just typed wont make any sense. Well, that wouldnt be anything new...

11:35 PM  
Blogger Thomas said...

Two quick points:

1. The best safety net is called "society" -- and by that I mean families, friends, churches, and all of those other self-created "support groups" whose usefulness has been eroded by the taxes and institutions that are part and parcel of the welfare state. It was the institutions of society that got America through the Great Depression -- not the New Deal, which was an abysmal, counterproductive failure. (Follow the first link in my preceding comment.)

2. Risk-taking is one of the drivers of economic growth. But risk-taking should be prudent -- that is, one's own money ought to be at risk. The problem with government safety nets is that other people's money is at risk. Government safety nets therefore encourage imprudent risks -- that is, they encourage people to do dumb things that make them (and the taxpayers who support them) generally worse off instead of generally better off.

9:02 PM  

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