Inequality and Political Remedies
Suppose someone wanted to show why we need the state to correct the free market’s indifference to inequality. It might like this:
Let us consider a simple economy with three individuals. Alice is a restaurateur; she has fed herself, and has just prepared a delicious turkey dinner, at some cost in materials, fuel, and her time.
Dives is a wealthy conceptual artist, who has eaten and is not hungry, but would like to buy the turkey dinner so he can “feed” it to the transparent machine he has built, and film it being “digested” and eventually excreted. To achieve this, he is willing and able to spend up to $5000. Dives does not care, at all, about what happens to anyone else; indeed, as an exponent of art for art’s sake, he does not even care whether his film will have an audience.
Huddled miserably in a corner of the gate of Dives’s condo is Lazarus, who is starving, on the brink of death, but could be kept alive for another day by eating the turkey. The sum total of Lazarus’s worldly possession consist of filthy rags, of no value to any one else, and one thin dime. Since, however, he is starving, there is no amount of money which could persuade Lazarus to part with the turkey, should he gain possession of it.
Assume that everyone is a rational agent, with these resources and preferences. What does economics tell us about this situation?
First, whatever Alice has spent preparing the turkey is a sunk cost, and irrelevant to deciding what to do next.
Second, Alice would be better [off] selling the turkey to either Dives or Lazarus than keeping it for herself, and either trade would also benefit the buyer, so that’s a win-win. Either trade would be Pareto-improving. However, neither trade is strictly better for everyone than the other: if she sells to Lazarus, Dives is disappointed, and if she sells to Dives, Lazarus starves. Of course, if we are being exact, Lazarus starves to death whether Alice keeps the turkey or sells it to Dives, so that trade makes Lazarus no worse off.
Third, Lazarus can only offer ten cents. Since Dives would be willing to spend up to $5000, Alice will prefer to sell to Dives. Since Dives, being a rational agent, knows how much Lazarus can pay, he will offer 11 cents, which Alice will accept as the superior offer… The market clears, Alice is 11 cents better off, Dives enjoys a consumer surplus of $4999.89, and Lazarus starves to death in the street, clutching his dime. Nothing can be changed without making someone worse off, so this is Pareto optimal.
But this isn’t an economy. It’s a puppet melodrama.
In an economy of three, how does Alice keep a restaurant? Who are her customers? And her suppliers? If Alice bought the turkey from a farm, then Lazarus must be the turkey farmer, and he shouldn’t be starving. But if there really are only three people in this economy, maybe they’d better start foraging. That could be the last turkey dinner in existence.
Where does Dives eat? At Alice’s? Then how did Alice, facing possibly the world’s simplest price discrimination problem, somehow flub it? She should charge Dives exorbitantly for all his food, then serve Lazarus and charge him ten cents. The art project never happens, Alice is a fat pile of money and one thin dime richer, and nobody starves to death.
Until next time, anyway, because they maybe just ate the last food in existence. (But why would Alice sell it? She should keep it. It’s priceless.)
Assuming there is more food out there somewhere, would Lazarus really never sell the turkey? He should sell it to Dives, then eat somewhere else. Might Alice want a busboy or a dishwasher? She could hire Lazarus and charge Dives $5,000 for every meal. At those rates she can afford the leisure it would give her, even if Lazarus wasn’t very productive.
The genealogy from Adam raises fewer awkward questions. Every detail of the story tugs at the heartstrings, but as a whole, it’s impossible. And feelings of pity based on impossibilities are no basis for public policy.
Now, it is certainly true that in a real economy the desires of the rich are enacted more often than those of the poor. That’s part of what it means to be rich. It’s also true that poor people face hardships, including starvation.
Yet in a real economy, the rich virtually never buy up all of the subsistence goods. That sort of thing only maybe happens during a famine, and by then — let’s be honest — we are inevitably a long way off from a modern market economy. In a famine, even the rich don’t actually eat very well. Only the political elites do, because they run the distribution system that prompted the famine in the first place.
In the real world, and under any reasonable conditions, rich people buy limited amounts of necessities, then bid up the price of luxuries. Real market economies demand paid labor while working hard to supply cheap food. Which is to say that market economies alleviate hardship by generating wealth. The rich tend strongly to help out by investing in the process, unless of course they can get their hands on the government (in which case, yes, they cause lots of mischief).
Also in the real world, I can tell a true story that pushes in exactly the opposite direction.
This nasty little molecule….
… is melarsoprol. The mauve sphere is an atom of arsenic, which is very toxic. Melarsoprol has only two redeeming qualities. First, it’s cheap. And second, it cures African sleeping sickness. Although melarsoprol itself kills 8% of patients, it still beats sleeping sickness, which kills 100%.
…is eflornithine. It’s prized for two things — first, it cures one form of African sleeping sickness. And second, it prevents unwanted facial hair in women. Eflornithine’s big drawback is that it’s expensive, presumably from a difficult chemical synthesis. Its side effects are relatively mild.
In the real world, a pharmaceutical company — call it Sanofi-Aliceventis — makes eflornithine. A rich but hirsute woman — call her Divina — pays $5,000 for a treatment. Never mind that it might cure sleeping sickness. She supports beauty for beauty’s sake.
But there’s some leftover eflornithine, so Sanofi-Aliceventis takes it to Lazarus Africanus. He’s dressed in rags and dying of sleeping sickness. Sanofi-Aliceventis cures him. For free.
This isn’t fiction. This actually happened. Why? Good press. The world isn’t three people, and we should be glad that it’s not. Living in society tends to make decent folk of us all. Not perfectly, of course, but enough that a three-person model is probably going to make us look worse than we really are.
Yes, I know. The real world is a loooong way from laissez faire capitalism. The point here is not to defend the status quo. It’s to observe that talk about inequality aims for the gut, not the head. It also ignores important counterexamples for fear of offending the all-powerful gut. It seems impolite, somehow, to bring up real stories like eflornithine while fictional Lazarus is starving.
Inequality talk also typically aims at moving further away from any existing aspect of laissez faire and toward greater government control. The appeal to pity is a means to an end.
And it is strange how so many assume that state intervention promises a decrease in inequality. In fact it always increases an inequality of a different kind — the inequality of political power.
As long as he was just a billionaire, Michael Bloomberg couldn’t stop synagogues from delivering bagels to homeless shelters. As mayor, he can. A billionaire can urge you to quit smoking, but a politician can ban it. And a billionaire can buy goods in the market, but a politician can confiscate them in broad daylight, with the full blessing of the law.
Politicians who complain about economic inequality tend to achieve two things: First, they extend political inequality. And second, they make it harder for market forces to raise the living standards of the least well-off. (Why is eflornithine expensive? It might be a difficult chemical synthesis, but it’s probably patent law or regulatory compliance. If so, then the government is a real-world Dives, and it deserves a lot more odium than the fictional one.)
Politicians do these things not because good remedies don’t exist, but because politicians don’t like good remedies. The political elite isn’t stupid. They want what everyone else wants — power. Unlike most of us, they already have a power base to build on. That’s also why they need to be stopped. Concentrations of power are dangerous, particularly when they can’t be punished by customers walking away.
When asked how much the rich should pay in taxes, we are primed to think of figures like Dives, and the answer is always more. Why? Because Dives is an asshole. Really. Our answer — “more” — arrives no matter how much the rich already pay, and whether or not they actually are assholes. I’m fairly sure that the answer will always be more; this alone should raise suspicion.
Taking both economic and political inequality seriously would probably lead us to scrap the entire welfare state and replace it with a negative income tax. Many discretionary powers of bureaucrats and politicians would end, and almost no one would face even a vaguely Lazarus-like situation that wasn’t of their own choosing.
I could sign on to that, and I don’t understand why more people don’t agree. Then I think of Alice, Dives, and Lazarus: If you don’t want someone big and strong to step in and do something, then you obviously don’t have a heart. Politics is ultimately about showing that you care. It’s not about doing anything particularly effective.
When I wrote this post, I hadn’t seen Patrick Cahalan’s very thoughtful post “Distribution of Agency.” By his typology, I’m more or less reviewing Problem Number Six.
 Or she should give it to Dives to make art. Why not? They’re all going to die soon enough anyway. Ending humanity with one last art project is a glorious gesture, even if we do question Dives’s good taste.