Tuesday, December 14, 2010

Knowledge and the Declining Marginal Utility of Wealth

Stephen Bainbridge writes:
Put less forcefully, the argument is plagued by the inherent problem that interpersonal comparisons of utility are difficult if not impossible. Hence, there is no way to know how rapidly a given individual's utility declines. A progressive tax system is thus, at best, a guess about average utility across society. And how exactly is that "fair"?
This is a pretty nonsensical objection. It is also impossible to calculate with exact precision the optimal number of miles of roads or aircraft carriers that the government should build. Are we to conclude, therefore, that it isn't "fair" for the government to build roads for transportation or aircraft carriers for national defense?

This argument doesn't even make sense. I think it is pretty obvious that basic necessities provide more benefit than extreme luxuries. For example, I think it is plainly obvious that there is more benefit to providing basic nutrition to what would otherwise be a malnourished child than providing a $1.9 million Hermes Birkin bag to a particularly vain man or woman. (Link: http://hubpages.com/hub/Top-Ten-Most-Expensive-Womens-Handbags) This is true, even though providing basic nutrition is much less expensive than the bag. Stephen Bainbridge's ludicrous response: "If you can't calculate with precision exactly how much more beneficial such an allocation is, it just isn't 'fair.'"

If we buy into this concept of fairness (fairness requires precise calculation), then it follows that it is not "fair" for the government to build roads or provide national defense. I am still not sure what the "optimal" number of roads or aircraft carriers is and do not believe that there is any purely objective way to make such a determination.

Maybe instead of unrealistic standards, some basic pragmatic sensibility is in order here?

Just as there is lack of pragmatic sensibility in the claim that redistribution should occur until everyone has exactly equal wealth, it is completely nonsensical and contrary to what everyone knows to be true to assert that the consumption of extravagant luxuries is as beneficial as the provision of basic necessities.

Or is the basic concept of "necessity" versus "luxury" just too difficult, because lines cannot be drawn with perfect precision? I would assert that a fetish with a utopian world with absolute perfection in line drawing is itself a luxury. One that is both impossible and which we could not possible afford.

I am perfectly glad to concede exceptions. Just as economists concede that, contrary to the expectation of the "law of demand" the demand for Veblen or Giffin goods actually increases with an increase in price, at least up to a point, even while emphasizing that this is an exception not the rule. In general, I don't think that the existence of declining marginal utility of wealth can seriously be doubted by anyone who does not have an ideological agenda to deny that which is plainly true.

It is also true that you cannot prove with absolute certainty that you are not actually nothing more than a brain in a vat being experimented on by mad scientists. It may be "impossible" to do interpersonal comparisons of utility in the same sense that it is "impossible" to prove that you are not actually a brain in a vat. As in all things, to some degree we just have to accept pragmatic sensibility as a guide rather than unreasonably expect the sort of absolute proof which doesn't actually exist for anything.

For example, using pragmatic sensibility, one can see that there is more value in providing basic nutrition to what would be otherwise malnourished children than an alternative of providing prostitutes to perfectly healthy middle aged men going through a mid-life crisis and cheating on their wives. I may not be able to "prove" that the prostitution provides less utility for these cheaters than basic nutrition does for what would otherwise be malnourished children to those who insist on a fantasy world with perfect line drawing, but I am nonetheless perfectly comfortable asserting it.

This reminds me of my earlier post with the quote by Bertrand Russel:
If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it.
Why does Professor Bainbridge create an impossible standard of proof for the plainly correct observation that increases in wealth tend to have a diminishing marginal utility? I would suggest that the answer has something to do with ideology rather than truth.

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