Over at Project Syndicate: What Do We “Deserve” Anyway?: Monday Focus: June 2, 2014

Over at Project Syndicate: The best review of Thomas Piketty’s Capital in the Twenty-First Century that I have read so far is the review in Michael Tomasky’s Democracy Journal by my good friend and frequent co-author Lawrence Summers. Go read the whole thing. And subscribe to Democracy Journal. If you do that, you will make better use of your time than reading further here…

Still here? You are, you say, unwilling to read 5000 words? It would be time well spent, I assure you. But if you are still here, let me give not a highlight but a brief expansion of a very small and minor sidelight, an aside in Summers’s review about moral-philosophy:

There is plenty to criticize in existing corporate-governance arrangements…. I think, however, that those like Piketty who dismiss the idea that productivity has anything to do with compensation should be given a little pause…. The executives who make the most money are not… running public companies… pack[ing] their boards with friends… [but] chosen by private equity firms to run the companies they control. This is not in any way to ethically justify inordinate compensation—only to raise a question about the economic forces that generate it…

This last sentence points out that our moral-philosophical discussion of who deserves what has gotten tangled up with the economics of the marginal productivity theory of distribution in a fundamentally unhelpful way. Suppose that it really is the case that there are decision-makers willing to voluntarily pay an absolute fortune to hire you in a genuinely arms’-length transaction–not because you have given them favors in the past or they expect favors from you in the future. That, Summers says, does not mean that you in any relevant sense “earn” or “deserve” your fortune.

If you win the lottery–and if the big prize in the lottery that is given to you is there in order to induce others to overestimate their chances and purchase lottery tickets and so enrich the lottery runner–do you “deserve” your winnings? It is not a win-win-win transaction: you are happy being paid, the lottery promoter is happy paying you, but the others who purchase lottery tickets are not happy–or, perhaps, would not be happy in their best selves if they understood what their chances really were and how your winning is finely-tuned to mislead them, for they do voluntarily buy the lottery tickets and you do have a choice.

Do you have an obligation to spend your post-winning life telling everyone that what they really ought to do is put their daily lottery ticket purchases in an equity-heavy tax-favored retirement account–something in which rather than paying the house for the privilege of gambling they are in fact the house to the tune of the 5%/year real equity earnings yield? Are you under a moral obligation to act like Coleridge’s Ancient Mariner, under a geas to tell your story to all you come across? I would say that you certainly do have such an obligation.

And I would say that the same applies to those generators of inequality that we economists call “tournaments” more generally. It appears to be true that tournaments turn out to be good incentivizing mechanisms: offer a few big prizes and a lot of people will flock to try their luck. But, given general human risk aversion, this means that the only reason it is sensible to offer a tournament is because it imposes cognitive distortions on the typical tournament entrant. You are thus doing them injury by feeding these distortions of overoptimism. Or, at least, you are doing their best and most rational selves injury. Or, at least, you are aiding and abetting their doing themselves injury–for they are making a free choice.

But there is more. Suppose that, somehow, you are paid your genuine marginal product to society. The fact that you are lucky enough to be in a position in which you are able to extract said marginal product is a matter of, well, luck. Others are not so lucky. Others find that their bargaining power is limited–perhaps to what their standard of living would be if they moved to the Yukon and lived off the land. Do you deserve your luck? By definition no: nobody deserves luck. And what do you owe those who would be in position to get what they deserve, if you had not been lucky enough to get there first?

And, of course, in what sense is choosing the right developmental environment that made your skills highly productive in today’s economy–because they probably weren’t so highly productive in the economy of 5000 BC or 7000 AD–your doing? Is it any better than your choosing to be born from the right parents? And how is that different from pure, undeserved luck?

We would have a much clearer discussion of issues of inequality and distribution if we would simply stick to considerations of human well-being and useful incentives.