Must-Read: Nancy Folbre: Does the One Percent Deserve What It Gets?

Must-Read: If people’s utility is proportional to the log of their lifetime incomes, then a perfectly competitive market without increasing returns, non-rival or non-excludible goods, or externalities “solves” the social welfare problem of maximizing a weighted sum of individual utility levels in which each individual’s utility is weighted by the value of his or her comprehensive lifetime endowment. What determines your lifetime endowment? The environment in which you are raised and your genetic inheritance that determines your skills, the property you inherit, luck; plus whether your particular environment-genetic-property-luck combination is scarce by nature, the luck of the draw, or by rent-seeking policy; and whether rich people have a strong jones for the things that your comprehensive lifetime endowment gives you a comparative advantage in making.

And if people are more risk averse than log utility–and it really looks like they are–the social welfare problem the market “solves” weights the ex post rich even more highly.

And we haven’t even gotten to the point that virtually nobody well-off is paid their marginal product–subtract them from society and let the market reach a new equilibrium, and in all but the most exceptional cases the drop in output would be only a small fraction of their “compensation”. (The poor, by contrast, are paid their marginal product–or less.)

The answer to the question, “is it sensible for society to maximize a social welfare function in which everybody’s utility is weighted by the ex post value of their comprehensive lifetime endowment?” is “no”.

Where does the idea that it is sensible come from. I think it comes from the opposite of rational thought. It is, psychologically, very important for human happiness for people to convince themselves that they “deserve” what they get–people are very unhappy if they think that they are among the moochers, and very very unhappy if they think that they are among the moochers. Finding a way to believe that this is true–that what is is one’s just karma–is important to many people. Thus it is a form of theology, not social science…

Nancy Folbre: Does the One Percent Deserve What It Gets?: “Years of schooling in neoclassical economic theories predispose [economists] to the view that perfectly competitive markets yield equitable as well as efficient outcomes…

…As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes. Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers…