Inequality

What's wrong with income inquality? Or, put differently, why is income equality desirable?

This cannot be taken as a basic good that doesn't need explanation. There's nothing fair about people who work hard having the same income as people who don't. There's nothing really fair about smarter people having no higher an income than dumber people, or having lower income than them, for that matter.

There is indeed one good reason why at first cut income equality is desirable: that it maximizes happiness if everybody is identical, since it equates their marginal utilities of income. In ordinary language, everybody gets equal happiness from their last dollar of income, and otherwise if we take a dollar from the richer man and give it to the poorern, we reduce the happiness of the richer man less than we increase the happiness of the poorer.

But when we apply this logic, we have to introduce second-cut considerations too, like incentives to work harder, which economists well known and have studied a lot, and other things economists haven't thought about much. Among these other things are (a) externalities from consumption of the rich and the poor, and (b) differences in the ability to consume.

First, consider externalities from consumption. If the poor man is so poor he is starving, the rest of us feel bad. We don't like to see his gaunt, hungry, face. Indeed, we would voluntarily give him some food, because not only does it make him happier, it makes me happier too, the double-bonus from altruism that Gordon Tullock, I think, talked about. On the other hand, suppose the poor man isn't all that poor, and is not starving, would spend any extra income on his private pleasures--- stamp collecting, bass fishing, eating filet mignon. The rich man, on the other hand, would spend any extra income on private pleasures that have public benefits--- commissioning a work of art, running a botanical garden, building a house with a beautiful exterior, funding a trip to Mars. Those positive spillovers mean that since the private benefits are about equal to the two men, we should give the extra income to the rich man.

Second, consider differences in the ability to consume. I can think of two categories of these. First, there is whether a man's tastes means that he gets more utility from money than someone else. When I was growing up, at least, my brother was much more interested in buying things and took much more interest in finding what would be good to buy, and got much more appreciation from what he bought. Thus, it would make more sense to give him an extra money that was available than me. Some people get higher marginal utility of income than other people do. If we are going to be non-judgemental about materialism, which I think proper in this context, we should give them more money. "From each according to his abilities; to each according to his need," implies that the materialist should get more, though I think the marxists don't really understand that, probably because they are confused about what "need" means.

Another category of differences in the ability to consume comes from talent, production ability, the same variable that makes some people having higher marginal product. [To be continued...]