Are market-generated differences in income unfair? Nope.
“Inequality” and Fairness
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Someone once commented to me that, “calling a situation ‘unfair’ is the last refuge of those without a better argument.”
Life is unfair, trying to make it fair usually leads to worse outcomes than leaving it alone.
I phrased it this way years ago, and it is a core value for me:
Very true! It’s inherently unfair but that doesn’t mean we have to wallow in self pity. There is a reason for the emergence of the division of labour.
I’m a better analytical chemist than you, most likely. I’m being a bit presumptuous, I don’t know how well you can read Mass Spec data…but you get the idea.
We’ve both taken, what is an inherently unfair life, and through voluntary exchange, are both better off.
I just wish the Statists and Anti-Capitalist could see the beauty of it.
Don’t presume.
I am the only communicator I know that had 40 hours of hard sciences and calculus on the transcript. (Transferred out of Geology to Broadcast Journalism. Long story.)
“Another possibility is that Tony wanted to become a surgeon, but he doesn’t have the brains to get into medical school.”
But Tony had the brains and all that. However, the number of study places are limited by the doctor’s union,
and this union and the medical school prefers to take in children of alumni and/or students prepared in 50.000$/year private schools plus 1 Asian and one poor black girl, to keep the balance.
Professor Boudreaux, only if Tony would live in a nanny state like Belgium, he actually would have the choice, since anybody bright enough is allowed to become a doctor there, if he wants to. Or a teacher. Doctor’s salaries are there not higher than a teacher’s, you certainly understand why. Also no waiting lists and doctors even still make home visits. The doctor’s union is very upset about this, as you certainly understand.
But I can’t think of a second country where your argument would not be bending the truth. Maybe France, but I am not sure.
I was talking to a co-worker about the medical unions this morning, you wouldn’t have link to an article about the role of unions limiting the number of doctors do you?
For me, the question is, why would we have faith in a process as inherently unfair as politics, or a group of people as inherently unfair as politicans, to achieve fairness? We all have our own understanding of what fair is, and mine is as subjective as all the rest, but I’m fairly certain that fairness requires cooperation, not politics.
B.S! Several of my friend’s (first generation immigrants just like me) kids are now in medical schools. AMA and such certainly put artificial barriers and help to inflate doctor’s earnings (you may want to call this unfair), but there is no way to argue that if you have enough brains and will you can’t get in because your parents are not doctors.
I agree with the post, but would qualify it. I understand that Don is making a generic point which is often contested by those believing in “wage slavery” and such. But, I would say that market-generated differences in *labor* income are fair. Many differences in income are not market-generated, e.g., economic rents. Reframing your example: it would not seem as fair if Sal is the son of a billionaire but earns several millions a year on interest, and Tony is still a teacher.
Another case that needs qualification (I think): what is your position when individual receive different income for the same performance based on other attributes (e.g., nationality/ethnicity/gender)?
Exactly.Don never cites any politicians saying the market is unfair, so it’s hard to understand exactly what he’s talking about here. But usually I think when you hear people talking about this they’re talking about (1.) leveling the playing field when it comes to what family you’re born into, through public education, child nutrition programs, child health programs, etc., and (2.) efforts to eliminate discrimination on attributes other than performance.Even our BAD attempts at leveling the playing field, like AFDC, was still very explicitly tied to the presence of children that couldn’t control or influence the market behavior of their parents. I can’t think of any good examples off the top of my head of prominent politicians who think the market distribution itself is unfair. Usually the case is much more specific than that. Certainly there are some out there, though.
Daniel,
maybe it’s because I listed to NPR and read the NYT, but I have heard/read many times that market distributions are unfair, most recently in an interview to Michael Sandel (who teaches political philosophy at Harvard). Examples involve comparisons between Judge Judy vs John Roberts, and Michael Jackson vs Nobel Prize (NOT Obama). At a different level in academia, I have been reminded countless times how the Welfare Theorems prove efficiency of allocations in equilibrium, but not fairness. I would say that this argument is among the most used to advocate for progressive taxation. And, on the ideological left, the “wage slavery” argument attacks market-based wages. I think that Don has a point, as long as he doesn’t take it too far. As I mentioned above, I don’t think that being a billionaire heir is very fair (nor efficient, for that sake), compared to a hard-working professional bourgeois. And a market-based income that pays a person based also on the hue of his skin is unfair and unjust.
And it might just be a difference in how I understand the ethical implications of “unfairness”. I think it’s “fair” to have a progressive income tax to provide public services. There are other reasons for it – Edgeworth’s justification of equalizing marginal disutility of taxation not tax rates, for example – but ultimately it’s fair that the rich pay more because they can, and it’s a good thing, if possible, to have a more egalitarian income distribution. I see that as very different from saying that the market itself is unfair, and I’ve never really thought of the progressive income tax, EITC, etc. as being a reaction to perceived unfairness of the market so much as an attempt to introduce more equality, given the fair but unequal state of the market. Most of the political spectrum in this country is very market-friendly, and I think that is a very good thing. This may just boil down to a difference in understanding where what I’m often hearing as “equality is good to foster” others are hearing “inequality is inherently unfair”
it’s fair that the rich pay more because they can
The progressive income tax exists because it is easier to collect from a few people who then collect from the many than it is to collect from the many directly (the king taxes the nobles who collect from the serfs). This is especially advantageous if the many do not understand that they are actually paying the tax – and thus the propaganda to which you refer.
“but ultimately it’s fair that the rich pay more because they can,”
Everyone can pay more.
“and it’s a good thing, if possible, to have a more egalitarian income distribution.”
What? Why? Nevermind. That’s just asinine.
“I don’t think that being a billionaire heir is very fair”
Why not? There are only two outcomes of what happens to the original billionaire’s wealth… either he/she leaves it to their heir(s), or somebody or something disallows that transfer, and takes it. I guess you could have something in between those two, but it still doesn’t seem fair that an entity should take the wealth so that the heir can’t have it…
To reply to your last question, I like to point to Walter Block.
http://www.youtube.com/watch?v=WAzkQWgIEbU
I remember Block’s argument, because it caused controversy a while back. The argument (which is laid out more succintly here: http://www.lewrockwell.com/block/block112.html) is that females are not equal to men on the workplace because the do the lion’s share of the work in the family and because they specialize. I find this argument built on very, very thin evidence, e.g. lack of price differentials at the beginning of careers. If you take this as “proof”, we have very different standards of evidence. To test his theory, he could look at the differentials for low-skilled jobs (where effort, or hours worked, is a good proxy for performance). As it happens, the wage differential still exceeded 23% in 1995. Or, one could look at the wage differential in professional jobs in which an estimate of performance is available (e.g., annual reviews), and test whether there is a differential for like performance in the same role for different genders. None of this is present in Block’s presentation. I am not saying that Block is entirely wrong, just that he makes a very poor case and that available data don’t entirely support it. In the current state, this is a rationalization of a fact that is not in accord with the libertarian dogma that *every* agreement that is voluntary and non-coercive is thereby occurring in the best of possible worlds.
Can I ask for a link to your statistics? I’m also curious why the last update you have is from 1995?
In any case, I think Block did a pretty good job answering your points. The first being low-skill earners – the women of the house have other priorities other than just working, as you have also pointed out. The question I have for you is, why would the family burden only hurt high skill workers? If I have a 50lb weight on my back while I walk and someone else doesn’t, who’s going to walk faster? Now, a more appropriate comparison would be to compare females without a family to working men. I don’t have the statistics off the top of my head, but I’m going to take Block at his word and say they’re even.
The second Block doesn’t answer directly, but it’s not hard to find big problems with your statistics (or lack thereof). Annual reviews can be, and most likely are, subjective. Not to mention, highly variable, and subject to the same claims of sexism. What would stop a sexist employer from understating a female’s performance? Even with all my complaints, I’d still be interested in seeing how the statistics corroborate to the evidence, so if you have it please post. But again, this leads me to believe that still, the more appropriate comparison is to compare single working woman to their male counterparts.
Anyway, if Block doesn’t convince you how about Milton Friedman’s take?
http://www.youtube.com/watch?v=bZA1Q_1t1E0
Can I ask for a link to your statistics? I’m also curious why the last update you have is from 1995?
In any case, I think Block did a pretty good job answering your points. The first being low-skill earners – the women of the house have other priorities other than just working, as you have also pointed out. The question I have for you is, why would the family burden only hurt high skill workers? If I have a 50lb weight on my back while I walk and someone else doesn’t, who’s going to walk faster? Now, a more appropriate comparison would be to compare females without a family to working men. I don’t have the statistics off the top of my head, but I’m going to take Block at his word and say they’re even.
The second Block doesn’t answer directly, but it’s not hard to find big problems with your statistics (or lack thereof). Annual reviews can be, and most likely are, subjective. Not to mention, highly variable, and subject to the same claims of sexism. What would stop a sexist employer from understating a female’s performance? Even with all my complaints, I’d still be interested in seeing how the statistics corroborate to the evidence, so if you have it please post. But again, this leads me to believe that still, the more appropriate comparison is to compare single working woman to their male counterparts.
Anyway, if Block doesn’t convince you how about Milton Friedman’s take?
http://www.youtube.com/watch?v=bZA1Q_1t1E0
Can I ask for a link to your statistics? I’m also curious why the last update you have is from 1995?
In any case, I think Block did a pretty good job answering your points. The first being low-skill earners – the women of the house have other priorities other than just working, as you have also pointed out. The question I have for you is, why would the family burden only hurt high skill workers? If I have a 50lb weight on my back while I walk and someone else doesn’t, who’s going to walk faster? Now, a more appropriate comparison would be to compare females without a family to working men. I don’t have the statistics off the top of my head, but I’m going to take Block at his word and say they’re even.
The second Block doesn’t answer directly, but it’s not hard to find big problems with your statistics (or lack thereof). Annual reviews can be, and most likely are, subjective. Not to mention, highly variable, and subject to the same claims of sexism. What would stop a sexist employer from understating a female’s performance? Even with all my complaints, I’d still be interested in seeing how the statistics corroborate to the evidence, so if you have it please post. But again, this leads me to believe that still, the more appropriate comparison is to compare single working woman to their male counterparts.
Anyway, if Block doesn’t convince you how about Milton Friedman’s take?
http://www.youtube.com/watch?v=bZA1Q_1t1E0
I’d agree with your sentiment “Political discourse has more than its share of question-begging words.”
Take your own – “market generated”. What exactly do you mean by “market generated differences in income”???
Certainly my income is largely influenced by the fact that I grew up in a well educated household, that I was well nourished, that my parents were upper-middle class. I have two supportive parents unlike a lot of people, and an extended family that is supportive too.
So generally I agree with you – market generated income differences are not unfair. Indeed, that’s the whole point. As I’ve said before, income inequality is like Bernoulli’s principle in aviation. You HAVE to have inequality to create lift.
But let’s not gloss over the fact that not all income differences are market-generated. Much inequality is generated by the luck of birth. Starting points matter considerably.
Most actual inequality is generated by the political realm I’d say.
Why would you say that?
I wouldn’t know how to parse it between family background, the market, and the “political realm”.
Well, trivially because I think it is the case.Anyway, if family background were such a big deal to modern liberals they would of course bar immediate family members of politicians from running for elected office.
For example, consider ballot access laws and how they are used by the major parties to squelch competition.
Is it fair for politicians/government to trap kids, that cannot afford to leave, in failed schools (see DC school vouchers)? This is especially important when you consider education key in making things more fair.
There are lots of other examples of the government interfering with fairness.
I’m a little confused by your point… DC school vouchers are a fantastic example of how government can intervene to level the playing field for children who have been born into disadvantage. I definitely support them.
I don’t think that’s some sort of disproof of the value of the public school system, though. As bad as many public schools are in many situations they are better than nothing. DC has some unique problems with the way the union has stifled reform. While I support vouchers, I wouldn’t jump to the conclusion that “school vouchers” and “fixing the public school system” are diametrically opposed.
Also, while I don’t want to see the voucher program canceled, I also know there are problems with the prospect of scaling it up to serve the number of kids it would ideally serve. I can’t speak to these problems in any detail, so I’ll just say I definitely support vouchers without second guessing decision makers that are more knowledgable about the problems facing the program than I am.
And what exactly do you mean by “the political realm”?
The realm of politics; the world that the discipline of political economy concerns itself with.
But a different starting point isn’t better or worse … it just “is”. To me, the concept shouldn’t be fairness … it should be justice. And redistributing wealth / opportunity / property is not just for anyone that has an understanding of property rights.
To your point, I had the opportunity to go to a good high school, was raised in a loving family, go to college (state not private), etc. However, I made (and am still making) a lot of sacrifices to go to an ivy league graduate school. I have a ton of debt that greatly reduces my standard of living on a monthly basis. But that was a choice I made that will, hopefully, allow to me jump to the next income bracket.
Someone of lesser means in their childhood has to make a similar decision about going to college at all, or perhaps staying in high school. I disagree with you that these income differences are not “market” … everything is market. A market is just a collection of decisions and trades (education, etc. being some of those decisions).
RE: “And redistributing wealth / opportunity / property is not just for anyone that has an understanding of property rights.”
But an existing set of property rights is recursive, m4liberty. You’re redistributing property that was in part acquired through the luck of advantageous birth. That’s like using a word in it’s own definition.
As to your own achievements – I never said that the circumstances and luck of birth wholly determine success. Of course effort and intelligence and your own decisions play a huge role too (then again, effort and intelligence are also in part genetically determined…).
Re: “I disagree with you that these income differences are not “market” … everything is market. A market is just a collection of decisions and trades (education, etc. being some of those decisions)”
Right, but in some cases it wasn’t the individual that made the decisions. Someone made the decision for them. That’s not a free market transaction. And even when they do make decisions, their decisions are inextricably tied to the circumstances they grew up in. You were raised to value education. It wasn’t your choice to be raised that way. It was your good fortune to be raised that way.
Fair enough. Having crappy parents / being poor put you at a disadvantage compared to your wealthier counterparts with better parents. I still don’t see a way around that without an all knowing / all powerful distributor of wealth to switch things around without creating a whole new slew of problems.
However, I will say that redistributing property rights due to lineage isn’t the same as redistributing property rights in the name of “fairness”. As an owner of property, I have the right to do what I please with it — including leaving it to my children. I can also give it to charity, burn it, etc.
Anyway, I should probably get some work done. Nice chatting with you.
RE: ” I still don’t see a way around that without an all knowing / all powerful distributor of wealth to switch things around without creating a whole new slew of problems.”
Well… there’s always the possibility that nobody sees or wants this prospect but that they think there are a few things they can do like build schools, give kids reduced price fruit and vegetables in the lunch room, and guarantee mothers can buy formula when their children are young.
You don’t have to turn to an extreme solution.
The luck you talk about may have something to do with your parents accepting responsiblity and working hard to raise their children. Would you have them accept that all of their hard work and all of their sacrifices were just your luck. For your parents your starting point is not luck.
Perhaps to make it fair for all, all investments in people (from the cradle) should be left to an unbiased entity.
It’s not that it MAY have something to do with it, it DOES have something to do with it. I’m not discounting the role of decision making. But consider a parent that makes different decisions. Wouldn’t you say it’s unlucky to be born to those parents – to experience that sort of disadvantage through no fault of your own? And I’d also point out – any good or bad decision-making skills on a parent’s part could ultimately be traced back (in part – only in part) to grand parents, and then back to great grand parents. It’s a recursive system. You don’t abandon the fairness of the market to recognize that – and you don’t do free markets any favors by denying the fact that pre-existing disadvantages and inequalities can unfairly hurt two otherwise equal actors in a fundamentally fair market economy.
One of my favorite quotes on fairness comes from Scott Adams, the Dilbert cartoonist: “Fairness is a concept that was invented so that children and idiots could participate in arguments”
Haha
do you have a link to the strip?
It was on his blog, not on a strip.
In the last post on income inequality, you said that you just didn’t care about income distribution. I find it interesting that you keep posting, writing letters and articles, and commenting on income distribution. It sure seems like you care.My point is not to call you a hypocrite. Rather, that if there is value in caring about income distribution at all, wouldn’t be worth caring about things that are true about income distribution (e.g. it helps the poor by making all of us richer) rather than false things (e.g. it’s unfair). Assuming, of course, that both of those things are accurately represented as true & false. You’re certainly a better judge of that than me.
Talk of “fairness” is mostly hokum, but the economics interesting to me is more ontological than ethical. I don’t care what’s “fair” one way or the other. Market incomes are fine with me. A progressive consumption tax, even with rates approaching 100%, is also fine with me. I advocate both for the same reasons, and neither seems “unfair” to me. Private property (beyond ownership of oneself) and market organization are useful or they’re not. Neither is an end in itself, and the only proper measures of utility are empirical.
the only proper measures of utility are empirical
I’d make that, “subjectively empirical”.
Individual utility (happiness, satisfaction) is subjective. The utility of a policy governing many individuals, like a statute, is some function aggregating the individual, subjective measures. One vote in a biannual plebiscite is an extremely crude measure of an individual’s satisfaction with a candidate’s past policies or policy proposals. Vote totals aggregate the individual measures.In a market, individuals need not choose one policy governing all. Instead, individuals freely associate into smaller groups seeking similar satisfaction, Honda drivers vs. Ford drivers for example. For this reason, market organization is far more democratic than representative, majoritarian organization. Majoritarianism is not very democratic at all really, and “representative” bodies chosen in occasional, majoritarian plebiscites are even less so.My support for market organization over a majoritarian state is based on this utilitarian analysis, not a “natural rights” assertion of the intrinsic virtue of particular, forcible proprieties.
I accept some fundamental, essentially natural rights, like an individual’s right to life, certain parental rights and particular individual liberties. I also sympathize with the Lockean propriety of a laborer’s dominion over his direct product, but Ken Lewis’ unchecked right to consume income from Bank of America is not remotely in this category.
Lewis’ entitlement to consume is the furthest thing imaginable from a “natural” right in my way of thinking. Nature offers nothing like it outside of human culture. It is plainly an artifact, and it is furthermore an artifact of statecraft, of gaming the decrees of central authorities.
Don, I understand what you’re trying to do with this article, but IMO, you’ve simplified it to the point where it makes no sense and people who are predisposed to claim “unfairness” are simply going to dismiss your argument because they won’t accept that it’s possible that people “choose” their income. You might have done better to explain that income is nothing but a price paid for services rendered, and like all prices, it simply reflects a good or service’s scarcity and demand. Sal makes a lot more money because fewer people have the drive, education, and commitment that it takes to become a surgeon, therefore there are fewer surgeons. Since surgeons are relatively scarce compared to teachers, the price for employing one is necessarily higher.
Great article. It reminds me of one of my favorite P.J. O’Rourke quotes:I’ve got a 10-year-old at home. She’s always saying, “That’s not fair.” When she says this, I say, “Honey, you’re cute. That’s not fair. Your family is pretty well off. That’s not fair. You were born in America. That’s not fair. Darling, you had better pray to God that things don’t start getting fair for you.”
But …… is extreme inequality, such as we are now experiencing, healthy for the long-term survival of our society?
“Fairness” is a red herring, a cover-up for plunder.
And you’re still missing the point, that plunder doesn’t pay.
If we are to be rewarded according to our abilities and our abilities for whatever reason are distributed unequally then the only just outcome is an unequal one.
And herein lies the beauty of it all. Life would be a nightmare if all our abilities were equal… or if we treated them as such.
I’ve heard that theory on the corporate tax (and I agree in that case), but not the income tax. How are you suggesting that that works with an income tax?
As for the line of mine that you quoted – thank you for not being as brutal as you could have been. I was lazy writing that and glossed over. I’m not of the “it’s the job of the rich to support us” persuasion. I hate this idea of a surcharge to fund health care, etc. My point was simply that (without getting into reasons), a progressive tax is fair REGARDLESS of whether market generated inequality is fair or not… ie, it’s fairness doesn’t depend on the assumption of market unfairness, as I think Giuseppe was suggesting.
How are you suggesting that that works with an income tax?
Because every tax is ultimately a tax on transactions. Every transaction involves a negotiation, and part of what is negotiated is who will pay the tax due to the sovereign. While it might be possible in the short run for the king to actually tax the nobles, in the long run the nobles will renegotiate the transactions.
Not asinine, but a very general statement not worth getting into the weeds on here. I was just trying to make the point to Giuseppe that you don’t need to think the market is unfair (I don’t think it’s unfair) to support a progressive tax.
You keep baiting me to come back for more… Stop it. I have work to do yet no self control.
I agree that the first step is to build them schools and give reduced price access to fruit and formula — but the last step is socialism. There is no “fair” distributor of wealth other than a market based approach. Charities should take the place of the government activities / fiats that you’re advocating. And, given that my approach all but eliminates most taxes, I have a hard time believing that charities wouldn’t be the beneficiary of at least some of that excess cash.
You replied to a post that stated inequality was caused by political interference. Your reply was a question that asked why would he say that. I gave an example of political interference that keeps things “inequal”. You talk about scaling etc.. which has nothing to do with the fact that politics traps kids in crappy schools.
I was going to say the same thing.
Vouchers is a government solution to a government created problem to begin with.
Charities do fine with the level of taxes we have now. I agree, I know I’d give more to charity if I didn’t get taxed as much as I do now.
Just not to the United Way…you know that almost 2/3 of the money they get goes to admin expenses and salaries…talk about a con.
Well you know what they say when you assume?
You get my point though.
I got the point… and you would be very wise to assume that people who have ever worked in television know next to nothing about science or economics.
I was a black swan in TV news. They carved me up and served me for dinner.