Truth and Consequentialism

President Bush met with his economic team at his Texas ranch.
George W. Bush walks with U.S. National Economic Council Director Steve Friedman, U.S. Commerce Secretary Don Evans, U.S. Treasury Secretary John F. Snow, Council on Economic Advancement Chairman Greg Mankiw and U.S. Labor Secretary Elaine Chao at Bush’s ranch, Aug. 13, 2003 in Crawford, Texas.

Photo by Duane A. Laverty-Pool/Getty Images

Really the crucial part of Greg Mankiw’s recent paper “Defending the One Percent” is his attack on what he rather loosely terms “utilitarianism.” In essence, Mankiw wants to say that redistributive taxation is morally wrong even if redistributive taxation increases human welfare. After all, forcible kidney donations might increase human welfare and nobody endorses that, so why should forcible transfers of money from the rich to the middle class be any different?

An alternative to the social insurance view of the income distribution is what, in Mankiw (2010), I called a “just desserts” perspective. According to this view, people should receive compensation congruent with their contributions. If the economy were described by a classical competitive equilibrium without any externalities or public goods, then every individual would earn the value of his or her own marginal product, and there would be no need for government to alter the resulting income distribution. The role of government arises as the economy departs from this classical benchmark. Pigovian taxes and subsidies are necessary to correct externalities, and progressive income taxes can be justified to finance public goods based on the benefits principle. Transfer payments to the poor have a role as well, because fighting poverty can be viewed as a public good (Thurow 1971).

I think the right issue to ask about this is what’s the basis for the Pigouvian taxation and public goods provision supposed to be? In a traditional economics class paradigm you’re taught that these things are necessary because these are cases where interventions into the marketplace increase human welfare. After all, the mere fact that something is a public good isn’t a sufficient case for subsidizing it. Fireworks displays, for example, are public goods, but that observation isn’t enough to answer the question of how much should be spent on them. The standard approach would be to make a utilitarian appeal to the idea of balancing between the amount of public benefit and the amount of public cost. And when assessing the amount of public benefit, you want to take a broad population average notwithstanding the fact that any given level of fireworks investment will be too high for many people and too low for many others.

It’s the same with externalities. The appropriately priced “social cost” of air pollution is going to be a kind of average across the whole range of personal private costs. The standard justification for setting a price that will be too high for half the population and too low for the other half is a utilitarian one.

Last but by no means least, the competitive equilibrium. Going back to Adam Smith, at least we have economists warning about the evils of cartels, and the problem of noncompetitive markets is much more severe in our time than in Smith’s because we have so many utility-ish industries like broadband Internet and mobile phone networks. The competitive equilibrium is the one that maximizes total welfare—which is desirable on utilitarian grounds.

All of which is to say that I think Mankiw has hit upon a deeper issue than he realizes. Utilitarian and utilitarianish ideas are woven very deeply into the fabric of classical and neoclassical economics, and these linkages often do not receive adequate care or scrutiny. The “right-wing” version of this problem is to do what Mankiw does and appeal to enough utilitarianism to get something resembling a modern capitalist economy off the ground and then want to get off the train when it starts endorsing broad economic redistribution. A frequent related fallacy on the left, I would say, is to draw the boundaries of concern along national or temporal boundaries, to get the result “the greatest good for the greatest number of currently eligible voters” rather than treating all people as equal. Alternatively, perhaps Mankiw is right and utilitarianism is bunk. I don’t think it is, but many people do. But if you want to completely reject utiltiarian thinking, you have to dig deeper into the foundations of orthodox economic thought than Mankiw seems willing to go.