Income Inequality Fairness And Economics

Fairness is difficult to define, in large part because we all have such different ideas about what it is. Witness the conflicts—which often come to blows—among kids at play, where the accusation "That's not fair" is invariably answered with "Yes, it is." Or think about the conflicts over marital property in divorce proceedings, over business property in the dissolution of a partnership, or over the grades given by

8 Greg Duncan, et al., Years of Poverty, Years of Plenty: The Changing Fortunes of American Workers and Families (Ann Arbor, MI: University of Michigan Institute for Social Research, 1984).

For an update on women's earnings, see Mary Bowler, "Women's earnings: An overview," in the Monthly Labor Review (12/99) available at http://stats.bls.gov/ opub/mlr/art2full.pdf.

teachers. In all of these cases, highly emotional disputes center around entirely different definitions of fair.

For the most part, economics steers clear of the fairness controversy, since so much of the field emphasizes positive (descriptive and predictive) issues, rather than normative (prescriptive) ones. But there is no avoiding the problem of fairness when one discusses income inequality. After all, what is the purpose of measuring inequality in the first place, except to compare what is to some standard of what should be?

Since the controversy over fairness is based on conflicting values, what can economics possibly contribute to this debate? Actually, quite a bit.

First, despite the controversy, there are some issues of fairness on which almost everyone agrees. By identifying the many different causes of income inequality—as we've done in this chapter—we can at least pinpoint those types of inequality that almost all of us would regard as fair and those we would regard as unfair. This is no small accomplishment, and it can help us avoid policies that would, when properly understood, actually make the distribution of income more unfair.

For example, almost everyone would agree that income inequality due solely to compensating wage differentials is entirely fair. If one worker must put up with longer hours, a greater risk of death, more unpleasant weather, a greater risk of unemployment, or more years of schooling than another, it is only fair that he or she be paid more. Thus, eliminating compensating wage differentials, which would make incomes more equal, would also make them less equitable to most of us.

The same holds for some of the inequality in property income. Remember the fable of the grasshopper, who fiddled all day, and the ant, who prepared for winter? Although many well-to-do Americans have inherited their wealth, many others have acquired theirs through years of working long hours, saving, or bearing risk. If some of us could have chosen to make these sacrifices, but did not, is it really fair for all of us to have the same wealth? Is it fair for the grasshopper to end up as wealthy as the ant? Most of us would say no.

These examples suggest the key to our common ground:

Inequality that results from choices that any of us can make is generally regarded as fair.

What about the other side of the coin: Do we all agree that inequality arising not from different choices, but from different opportunities, is inherently unjust? Actually . . . we do not seem to agree about this.

In some cases where opportunities are restricted—as in discrimination—there is widespread agreement, and social policy is often directed toward removing or weakening these barriers—for example, giving victims of employment discrimination the right to sue.

In other cases, there is no consensus about fairness. For example, some see large differences in inherited wealth as a social evil, creating an uneven playing field from the very beginning of life. Others believe that the freedom to use one's property as one wishes—including passing it on to one's heirs—is a fundamental human right. Similar disagreements occur over inequality arising from inherited talent, intelligence, beauty, or physical strength.

In a democracy, conflicts of values like these are resolved in the voting booth. Does economics have anything to contribute here? Yes, it does: Once we decide on our goals, there is the very difficult matter of designing policies to achieve them. A fuller understanding of the impacts of different policies, and the opportunity costs they require us to pay, can help us avoid serious and harmful mistakes.

Suppose, for example, that the majority of citizens, applying their own definitions of fairness, were to decide that it is unjust for superstars—the most talented or intelligent or physically gifted among us—to reap the huge rewards the market bestows upon them. The question of fairness, in the majority's mind, has been resolved.

But then would come the tough questions. What are the options for limiting these high incomes? What would be the consequences of each action? In particular, what would be the opportunity cost for the rest of us? Would the reduced incentives mean fewer new discoveries of lifesaving drugs or new technology? Would fewer entrepreneurs be willing to devote the time, money, and energy to discover which goods and services we want? Would the quality of our culture gradually decline, as many talented singers, writers, artists, musicians, and actors decided that—with a smaller prize at the very top—a career in the arts is no longer worth it? In other words, would our effort to distribute the economic pie more equally result in a smaller pie overall? If so, how much smaller? And how would the burden be shared among the rest of us?

These are questions that economics, more than any other social science, is equipped to answer. An example of this type of analysis is discussed in the following "Using the Theory" section.

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