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January 15, 2011 / David Woodford

Making society fairer is only an approximation for making it better

Politicians, the media and the public are constantly concerned about how fair society is (without any real definition of what they mean by fair) when this is really missing the point. Making things fair is broadly about making sure that some people don’t have vastly more than others, which seems like a good aim, but, isn’t it better to make everyone better off, even if that widens the gap between rich and poor.

I don’t think that it is desirable to make everyone poorer in order that we can all be the same. In fact we know this isn’t what people want because it could easily be arranged by raising taxes to 100%. What people want is to have more stuff and when they see other people who have a lot more stuff than them it seems like a simple solution take some of it off that person to give it to themselves. This would be considered jealousy, which is really what it is, if it were not for the fact that not only are most people in society in this situation but, also, in many cases it would raise the total “utility”.

If we think as utility as a kind of happiness, being the objective of people’s lives. For example if you enter into any trade it is because you think that it will increase your utility because you want the thing that you are giving less than what you are receiving for it. When people see a rich person with a lot more stuff than them they think they should get some of that stuff because, they believe the utility they would gain from it would be much greater than the loss of utility of the rich person, since the rich person has a lot of other stuff to enjoy.

So raising utility should be the main aim of economic policy because it means that everyone is better off and more able to enjoy their lives, irrespective of what other people have. Whilst it may be true that people are happier in a fairer society there is no reason why they should be other than because of jealousy, and satisfying jealousy shouldn’t be the aim of government.

To understand why increasing fairness is a good approximation to increasing the total utility of a nation is to consider the “diminishing returns” we get with goods and services in terms of utility. If you are starving being given £10 to buy food will dramatically increase your utility, but as you have more money the value of that additional £10 will decrease until you wont even notice it. The result of this is that spreading money (or the goods and services that can bought with it) more evenly will generally increase utility as what you take off a rich person means less to them than the value it has to a poor person. In fact, if everyone was identical in their wants the most “efficient” (in the sense that it maximises utility) society would be one where income is spread completely equally.

However, real life is, as always, a bit more complicated. In this case it is because we do not all want the same things. Some people do value money or their time or some good or service more than others. This is the basis of trade: because our wants are different, we can swap the things we do want for the things we don’t want by finding someone who’s wants are the other way round. If we all wanted to have more bread then no one would sell bread. And so because some people gain more utility from money (and the goods and services it buys) than others, we will maximise utility by giving them more money compare to everyone else. This is demonstrated by the fact that some people are prepared to work much longer hours than others, meaning they value their time less than the money it earns.

So whilst increasing fairness is a good way of increasing utility at the moment (because of just how large the inequalities are) it doesn’t always increase utility and should not be the ultimate goal of economic policy.

However the problem is further complicated by the fact that redistributing wealth can reduce the total amount of wealth. If you tax someone in order to increase equality now it is likely that in the future they won’t work as hard, and so won’t produce as much wealth (since if they are to made equal whatever their effort why bother making more). Then, in the future, there may be equality but, that won’t have been by raising the incomes of the poor but by reducing the incomes of the rich, which doesn’t benefit anyone. A good example is the Victorian era: whilst there was a large and increasing amount of inequality, in the long run it improved the lives of everyone by raising the incomes of a few which then brought up the incomes of everyone else. If we had stopped them earning such large incomes at the time it is likely we would be much poorer now as a result.

So not only is equality or fairness only an approximation of what we want to achieve but, if we delude ourselves into thinking that it is our goal we could even end up damaging our true goal, of maximising utility. That is not to say that fairness should not be a goal, as it is much easier to measure than total utility, but it should be remembered than it’s purpose as a goal is only as a way of increasing utility, and we need to judge our methods of seeking it by their impact on utility as well.

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