Why, You Just Want to Redistribute Income

From time to time I run into a charge that I or someone supporting some seemingly non-market policy or other “just want to redistribute income (or wealth).” Something like that is often hurled as if “redistribution” were a glob of tar that soils the opponent’s entire position. Once the accusation has been leveled, the leveler then rhetorically struts around like an alpha rooster, crowing as if the argument has been won.

Income or wealth redistribution should not end any argument. It should, in fact, be an integral part of the discussion among those who base their preference for markets on the fundamental theorems of welfare economics, which I will attempt to explain intuitively (though I am not confident I will succeed). Lest you think this is theoretical nonsense of no importance, crack any basic (or even advanced) text on economics and you’ll find these theorems. They are also behind the scenes in many claims of market efficiency. Many people probably believe in the efficiency of the market from this perspective, even if they do not recognize it.

Let’s start with the notion of a perfect market, one that exhibits perfect competition. In such a setting, there are an infinite number of consumers and sellers, all with perfect information and no transaction costs, among other requirements (check the prior links). Also, all transactions are voluntary and there are no externalities (meaning that everyone not involved in any transaction is not affected by it). Since nobody has to transact, it follows that every exchange makes both parties better off. Since there are no externalities, nobody outside the transaction cares. It’s pretty clear from this that an economy consisting of nothing but perfect markets in everything will arrive at a point where there is no way to make someone better off without making someone else worse off (aka, Pareto optimality). Only a party to a transaction can be harmed and nobody makes a transaction that doesn’t want to. (I’m assuming people use their resources in a way they find most pleasing (utility maximization) and don’t do things to harm themselves.) There are many such market outcomes. Pareto optimality is not uniquely satisfied.

What I’ve just described is basically the First Fundamental of Theorem of Welfare Economics. There’s a second one as well that says that any particular market outcome of the type just described (nobody can be made better off without making someone worse off) can be achieved via perfect markets given some initial distribution of wealth. If you don’t like the outcome, you can change it to another (Pareto optimal) one by redistributing wealth. I am not sure how to sense intuitively that all Pareto optimal outcomes can be achieved this way, but I think it is fairly clear that changing the wealth distribution will change market outcomes.

Consequently, if you are among those that justify markets based on these theorems — even implicitly because you buy the concept of the efficient market even if you don’t know where it comes from — and believe that actual markets resemble perfect markets sufficiently well, the only way you can and should condone intervention in order to change the market outcome is by changing the distribution of wealth, i.e. redistributing it. That is, redistribution should not be inherently abhorred. Among market purists of this type, it is the only policy lever that remains. (There are other reasons one might favor markets. One need not buy the justification of the fundamental theorems. There are reasons why one might find markets repugnant too, at least some of them. See Deborah Satz’s Why Some Things Should Not Be for Sale.)

Hence, what should the distribution be? is a very natural and wise question to ponder, at least among people of this type. It is highly appropriate for the question to arise. The charge that “You just want to redistribute wealth!” could be met with, “You got a better idea to address concerns about the market outcome? Or, do you just like the outcome we have, in which case, why don’t you say so?” Without redistributing income, how would a theorem-based market purist propose we address inequality of outcomes we observe? There are good answers to this question* but one of them is not, “You just want to redistribute income.”

Amartya Sen published a paper in 1985, The Moral Standing of the Market, that makes something like these points, among many other excellent ones. I highly recommend you get your hands on this paper and read it.

[I]f there is an absence of – or reluctance to use – a political mechanism that would actually redistribute resource-ownership and endowments appropriately, then the practical relevance of the converse theorem [the Second Fundamental Theorem of Welfare Economics] is severely limited. […]

But the issue of inequality does have to be addressed, whether inequality is seen in terms of utilities, well-being, incomes, resources, or freedoms (including the real “freedom to choose”). The practice of avoiding this question through evasion or silence, on the one hand, or through peculiar definitions of “optimality,” on the other, seems hard to defend.

We must discuss and address market failures and income distribution. To avoid them is to absolve oneself of the moral consequences of (usually imperfect) market outcomes. That is very hard to defend indeed.

* One good answer would include proposals to improve the functioning of markets that deviate from perfection, if possible. Practically speaking, this is not always possible, certainly not always quickly or in a politically viable way.

Acknowledgments: Many thanks to Paul Kelleher and Julian Jamison for their comments on earlier versions of this post.

[Cross-posted at The Incidental Economist]

Austin Frakt

Austin Frakt is a health economist and an assistant professor at Boston University's School of Medicine and School of Public Health. He blogs at The Incidental Economist.