Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 20 of 36 Income Inequality and Poverty
Section 12 of 20
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What should government do about economic inequality?
Views on this question are largely a matter of political philosophy.
Three prominent schools of thought in political philosophy
· utilitarianism
· liberalism
· libertarianism
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Liberalism
Philosopher John Rawls in his 1971 book “A Theory of Justice” begins with the liberalism premise: a society's institutions, laws, and policies should be just.
Next, the question: how can the members of society ever agree on the meaning of justice?
It might seem every person's point of view of justice is based on their own circumstances, e.g. whether they are talented or less talented, educated or less educated.
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Rawls proposes the following thought experiment to answer the question of “can we ever objectively determine what a just society would be?”
Imagine before any of us is born, we all are able to get together for a meeting to design the rules that govern society.
At the beginning of the meeting we do not know the station in life each of us will end up in.
We are sitting in an "original position" behind a "veil of ignorance."
In this original position we can choose a just set of rules for society because we must consider how those rules will affect every person.
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Since in this scenario all are similarly situated and no one is able to design principles to favor their particular conditions the principles of justice are the result of fair agreement or bargain.
Designing public policies and institutions this way allows us to be objective about what policies are just.
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Rawls then considers the question of what the public policy designed behind this veil of ignorance we would try to achieve.
What income distribution a person would consider fair if that person did not know whether they would end up at the bottom, middle, or top of the distribution?
A person in the original position would be especially concerned about the possibility of being at the bottom of the income distribution.
Therefore, we should aim to raise the welfare of the worst-off person in society
rather than maximizing the sum of everyone's utility, which is the utilitarian’s goal, we would maximize the minimum utility.
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Rawls' rule is called the “maximin criterion.” because the maximin criterion emphasizes the least fortunate person in society.
It justifies public policies aimed at equalizing the distribution of income by transferring income from the rich to the poor society raises the well-being of the least fortunate.
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However, the maximin criterion does not advocate a completely egalitarian society.
If the government promised to equalize incomes completely people would have no incentive to work hard.
Society's total income would fall substantially and the least fortunate person would be worse off.
Therefore, the maximin criterion still allows disparities in income because such disparities can improve incentives thereby increasing society's ability to help the poor
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Because Rawls' philosophy targets only the least fortunate members of society it calls for more income redistribution than does utilitarianism.
The thought experiment he proposes has much appeal.
The experiment allows us to consider the redistribution of income as a form of social insurance.
From the perspective of the original position behind the veil of ignorance, income redistribution is like an insurance policy.
When we as a society choose policies that tax the rich to supplement the incomes of the poor we are all insuring ourselves against the possibility we might have been a member of a poor family.
Because people dislike risk, we should be happy to have been born into a society that provides us this insurance.
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However, it is not clear rational people behind the veil of ignorance
would truly be so averse to risk as to follow the maximin criterion.
Because a person in the original position might end up anywhere in the distribution of outcomes they might treat all possible outcomes equally when designing public policies.
Their best policy behind the veil of ignorance would be to maximize the average utility of members of society.
The resulting notion of justice would be more utilitarian than Rawls’ liberalism.
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