On The Distribution Of Income

Moneybox
A blog about business and economics.
March 30 2013 12:02 PM

On The Distribution Of Income

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Pizza pies are the most delicious kind of pie.

Photo by LOUAI BESHARA/AFP/Getty Images

As there's some considerable conservative interest in my views on so-called "income redistribution" (and conversely always a lively chorus of leftwingers upset about "neoliberalism") so I thought perhaps a little random Saturday political theory. Crack open a really banal mainstream neoclassical economics textbook and you'll learn that free market solutions are generally the efficient ones (i.e., they create the biggest economic pie regardless of distribution) with a few minor exceptions:

— The air pollution impacts of modern electrical power generation, industrial activity, and transportation can't be efficiently bargained away because the transaction costs are way too high.
— So-called "public goods" like basic scientific research or musical recordings will be underproduced absent some combination of state subsidy and state-created intellectual property monopolies.
— Basic infrastructure (roads, electrical lines, sewers) won't be provided properly without some eminent domain and they won't be priced correctly due to the monopolistic nature of the market.
— Absent deposit insurance and regulation, banks will be subject to runs and economically destructive panics.
— Without a central bank minding the store properly, the entire macroeconomy will fall into periodic recessions lasting months or years.
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Obviously there's lots of other stuff people disagree about—health care and education, importantly—but this is the banal core. Unfettered markets are fine except for activities that might involve the transportation or production of goods, the production or transmission of electricity or scientific knowledge, or access to the financial system. So actually when you think about it, that's basically everything. The basic economic foundations of industrial capitalism as we've known them for the past 150 years or so have an activist state at their core. Building political institutions capable of doing these things properly is really difficult, and one of the main things that separates more prosperous places from less prosperous ones is that the more prosperous places have done a better job of building said institutions. There's also the minor matter of creating effective and non-corrupt law enforcement and judicial agencies that can protect people's property rights and enforce contracts. 

The point is, it takes an awful lot of politics to get an advanced capitalist economy up and running and generating wealth. A lot of active political decisions need to be made to grow that pie. So why would you want to do all that? Presumably because pie is delicious. But if you build a bunch of political institutions with the intention of creating large quantities of pie, it's obviously important that people actually get their hands on some pie. In other words, you go through the trouble of creating advanced industrial capitalism because that's a good way to create a lot of goods and services. But the creation of goods and services would be pointless unless it served the larger cause of human welfare. Collecting taxes and giving stuff to people is every bit as much a part of advancing that cause as creating the set of institutions that allows for the wealth-creation in the first place.

The specifics of how best to do this all are (to say the least) contentious and not amenable to resolution by blog-length noodling. But the intuition that there's some coherent account of what the "market distribution" would be absent public policy is mistaken. You have policy choices all the way down.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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