Redistribution

In the presidential election campaign over here in the States, Senator Obama has been repeatedly criticised for telling Joe "the Plumber" Wurzelbacher that he wanted to "spread the wealth around" (NYT). Dr. Bernanke hasn't actually started the printing presses rolling yet so it is unlikely that plumbers in Ohio actually do make $250,000 per annum. But socialism is still a cuss word over here, so that idea that extraordinarily well compensated plumbers should see the government appropriate some of that compensation and pass it onto the less well compensated is on a par with all of Stalin's other atrocities. I don't want to harangue Americans for their inexplicable phobic reaction to "socialism" though. I would, however, like to say a bit about the redistribution of wealth.

There are three possible motives for redistribution: equality, improving the lot of the poorest section of society or a belief that it promotes overall economic growth. Obviously these are not mutually exclusive. Personally, I am not of the opinion that equality is in itself good. I do believe that society should place a priority on improving the worse conditions in which its members live over improving the average conditions. If greater wealth equality does promote overall growth then that is a happy corollary.

Redistribution doesn't imply anything about how an economy is run, at least up to a point. It is just as possible to redistribute wealth in a free market economy as it is in a dirigiste economy. If you are so aggressive about redistribution that you completely disincentivise gains in efficiency or production then you cannot maintain a free market. But as long as you limit redistribution to a proportion of gain - that is, it is still worthwhile to realise a gain because you will always be better off individually if you do so, even if you don't get to keep all, or even most, of it - then a free market remains an effective way of allocating capital.

Secondly, long term growth is still necessary. This is obvious really. If the overall economy is shrinking but the poorest members are getting richer, eventually they will catch up with richest. At that point, every one gets an equal share. But because growth is negative, the wealth being shared is diminishing, so those equal shares will get smaller. So perhaps my original contention needs some qualification. I want to improve the lot of the poorest part of society sustainably and in the long term.

The goal is clearly some sort of equality. But what sort? I think my desire is quite a British one: what we should be striving for is equality of opportunity, rather than equality of wealth. That is, we want people to be able to benefit from their own industry and innovation. Indeed, the only way to generate those benefits is to allow the people who a generate them a greater than general share in them. Otherwise the tragedy of the commons will ensure that they are not generated.

But there is still a strong argument for some significant level of redistribution. The playing field is currently highly uneven. Unless we ensure greater equality of wealth, we will not be able to create greater equality of opportunity.

There is a second, slightly more subtle, reason for wanting to create greater wealth equality though. By creating more equal consumers, you create an economy that is more geared to those consumers. By commanding more spending power, the poorer part of society can allow the supply-side to realise greater efficiencies and economies of scale as it competes for that spending. On the other hand, human nature being what it is, wealth disparity creates a sort of illusory "exclusivity value". This is real market value, but it exists because people are willing to pay a premium for something because others are not able to pay that premium. This is, I think, a component of GDP that should be minimised.

Now I can see that this argument could be stretched to support the idea that equality promotes growth. The more homogenous the level at which individuals within a society consume, the greater the efficiencies that can be realised in providing for that demand. I've no idea if this works in practice or not though. As I say, it would be a happy corollary if it did.