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03 June 2013

Sport, Economics, and The Krug

Krugman wrote this today about Ben Bernanke's recent speech:
OK, this is...basically a Rawlsian view of the world, in which you think of life as a kind of lottery in which you draw a ticket that includes things like your genetic endowment as well as the wealth of your parents. And what you're supposed to do, ethically, is support the economic and social system you would choose if you had to enter that lottery not knowing what ticket you were going to draw — if you were making political choices behind the "veil of ignorance".

As soon as you portray the choice that way, you've introduced a strong presumption in favor of redistribution. After all, if you should happen to end up as a member of the top 1 percent, an extra dollar at the margin won’t mean a lot to you; but if you should happen to end up as a member of, say, the bottom quintile, an extra dollar could make a lot of difference. So you should, other things equal, favor a system of progressive taxation and generous aid to the poor and unlucky.

So why not favor complete leveling, America as Cuba? Because for many reasons, both economic and political, we favor a market economy in which people make decentralized decisions about working, saving, and so on. And this means that incentive effects become important; you can't levy 100 percent taxation on the rich, or completely insulate the poor from any consequences of low income, without destroying the incentives you need to make the economy work. [emphasis added]
That last sentence is telling for the implicit assumptions it makes, which are, I think, telling about both popular opinion in the U.S. and the state of economics as a discipline. First, either the world is Rawlsian or it isn't; either life is essentially a crap shoot or it's driven by incentives. One does not get to make both arguments. The base assumption of modern and contemporary economics is that, all else being equal, individuals will be incentivized to behave in ways that are in their best interest. That "all else being equal," however, is a huge caveat. In effect, it says, set aside the fact that we live in a Rawlsian world. If our starting point is to set aside reality, we can play whatever deceptive game we like with the remaining evidence. Second, the "incentives you need to make the economy work" line assumes a specific type of economy, one that creates and rewards inequalities. So, the logic goes, we cannot change the rules to the current game because the rules of the current game demand that we follow these rules; if we changed the rules, we'd be playing a different game, with different rules and different goals. I posted on this before, writing:
It's like arguing that, in (American) football, it is necessary to reward teams with six points for crossing the goal line in order to give them an incentive to drive down the field and not sit idly on the sidelines. What this neglects is that it's the game of football itself--the rules of the game that we created--that establish that driving down the field toward the opponent's end zone is the goal. Now, imagine one of the participants arguing that there are other sports that we could be playing, baseball for example, with a new set of rules. Another player might complain, "But, if we allow each player a chance in the batter's box, what motivation will he have to score a touchdown?" Just like crying, there are no touchdowns in baseball.
It's impossible for us to have a serious conversation about "the" economy until we are able to realize that we are framing the discussion about "an" economy.

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