Interpersonal utility comparisons are unavoidable
By Scott Sumner
When I advocate policies aimed at redistribution on utilitarian grounds, some commenters object that interpersonal utility comparisons are impossible. Actually they are unavoidable.
Consider a policy that almost all well-informed people would support; ending sugar subsidies. Ending sugar subsidies would increase the efficiency of the American (and global) economy, boosting real GDP. It would redistribute money from relatively wealthy sugar producers to average Americans. But real GDP is just a number, and redistribution is not necessarily good, as we (supposedly) can’t make interpersonal utility comparisons. Maybe the wealthy sugar producers get amazing happiness out of the extra sugar subsidies, far more than the loss in happiness to average taxpayers.
If one is going to argue to for or against any public policy on pragmatic utilitarian grounds, then one has to make interpersonal utility comparisons. Of course you can also make non-utilitarian arguments, as when people oppose government intervention on “natural rights” grounds. But it is not easy to convince the broader public without some sort of utilitarian argument.
I tend to rely on common sense when making interpersonal comparisons. People seem to be strongly influenced by relative conditions, and thus I believe that absolute changes in utility are roughly proportional to percentage changes in wealth. Thus the disappointment in falling from $10 billion to $5 billion in wealth, is about the same as the disappointment in falling from $10 million to $5 million, or from $10 thousand to $5 thousand. Furthermore, I’d argue that if this rule of thumb is incorrect, it’s probably because it underestimates the extent to which marginal utility diminishes at high wealth levels. That is, it’s quite possible that the decline from $10 million to $5 million is actually a bigger psychological blow than falling from $10 billion to $5 billion. I can’t prove that, it’s just an educated guess based on 59 years of observing people. But it underpins my advocacy of high marginal tax rates on very high levels of consumption. It also explains my advocacy of wage subsidies at the low end of the spectrum.
Here’s some information on Larry Ellison:
Indian Wells is a vacation paradise full of resorts with luscious green golf courses, vibrant flower gardens, and abundant pools. Some resorts even have sandy beach wading areas for the grandchildren. The weather is perfect eight months of the year.
In 2011, Larry Ellison, co-founder of Oracle, paid $43 million for Porcupine Creek, a 249-acre estate here. Visitors sign a nondisclosure agreement to get past the armed guard and front gate. Once inside, they find an exquisitely maintained 18-hole golf course decorated with sculptures of naked women lounging among pink and purple tropical flowers, a “slidetacular” pool, and a Bellagio-worthy fountain that shoots water into the air when cars approach. These diversions surround a 27-room residence reminiscent of an Italian villa. Each year, Ellison’s architect adds another signature feature to the estate to keep him from getting bored.
Ellison comes to Porcupine Creek for at least two weeks in mid-March to take in the BNP Paribas Open tennis tournament at the Indian Wells Tennis Garden, 20 minutes away. Ellison is worth an estimated $47 billion, making him the world’s seventh-wealthiest person.
. . .
Ellison, 70, has rebuilt a sport before. His love of sailing led him to his highly controversial domination of the America’s Cup, the capstone to decades of exploits that have included brushes with death while sailing in the Pacific, the construction of a real estate empire in Malibu and Hawaii (where he owns 98 percent of the island of Lanai), and liaisons with far younger women, including current girlfriend Nikita Kahn, a young actress and model from Ukraine.
Unlike many on the left, I don’t envy the rich. I’m really happy that Larry is really happy. If Larry was even a bit happier, and if that boosted total global happiness, that would be fine with me. But I can’t get away from the implication of (what I perceive as) diminishing marginal utility. Some redistribution is justified.
Larry Ellison is extremely lucky to live in a universe where:
1. Government is very inefficient.
2. Incentives have a surprisingly strong effect on behavior.
If not for those practical limitations to redistribution, it would be hard to argue against people who favor taking away almost all of Ellison’s wealth, and reducing his consumption levels back to roughly average. But that’s not the world we live in; Larry’s very lucky that incentives do matter a lot and that governments are very inefficient. Even Sweden tolerates multi-billionaires for pragmatic reasons. Thus even a pure utilitarian like me favors MTRs on top consumption peaking at perhaps 80%, not 99.999%. As a result, I get hammered by people on the left for opposing hair-brained schemes like minimum wages, maximum wages, and taxes on capital income. Gene Marsh left the following remarks after my previous post:
Please correct me if I’m wrong but doesn’t each and every post here align perfectly with the desired messaging of the wealthy and the business elite (not counting appeals for the deregulation of hair braiding and legalization of soft drugs which (for the time being) run orthogonal to those interests.)
What bothers me is that this fealty to a single interest group is elided, effaced, concealed, whatever.
At the opposite extreme, more deontologically-inclined libertarians accuse me of being a Maoist.
I plead innocent to both charges. I’m a pragmatic libertarian who just happens to think that global happiness would be maximized by small government, free market economic systems, with a few interventions to deal with externalities like pollution, and also to redistribute consumption.
It just so happens that most of my policy recommendations help the super rich (but not redistribution). But it also just so happens that all of my policy recommendations help the poor. There may be some potential policies out there that boost Larry Ellison’s happiness by more than it hurts the happiness of the poor, and where a true libertarian like me would have to favor the rich over the poor. But I haven’t yet seen such a policy, and I very much doubt that I ever will. Larry’s already a pretty happy guy, and there is only so much happiness that can be squeezed into one human brain, especially at age 70.
Gene also expressed disbelief that policies intended to help the poor might not actually do so, for “counterintuitive” reasons:
You only object on the absurdly counterintuitive grounds that, in all cases all policies designed to help labor are paradoxically doomed to harm labor.
I’m tempted to give a two-word response: Chavez, Venezuela.
More seriously, I do favor those policies that I believe actually favor the working poor, such as tax cuts and wage subsidies for the less well off.
PS. I hope it’s obvious that some of this is written in jest, I don’t really know whether Larry Ellison is happy or not. I think that most people on both the left and the right overestimate the role of money in happiness. My hunch is that the observed correlation in the survey data reflects (mostly) other factors—optimism, wisdom and energy leads to both wealth and happiness. (At least that’s the view of a guy that is somewhat lacking in those areas.)