How much is enough?

"If everyone had enough, it would be of no moral consequence whether some had more than others", says Harry Frankfurt. Skepticlawyer agrees. In a recent post on ‘progressive fusionism’ she suggests combining Frankfurt’s ‘doctrine of sufficiency’ with Amartya Sen’s capabilities approach. But what does ‘enough’ mean?

Libertarians have long struggled against the crudest form of egalitarianism — the demand that everyone’s income should be the same. This was the egalitarian ideal that animated Edward Bellamy’s 19th century utopian novel Looking Backwards. Bellamy dreamed of a society which was both meritocratic and egalitarian — a society where all workers were motivated to do their best and all were paid the same (with no rewards for inherited ability).

Hayek spotted a fatal flaw in Bellamy’s visionwithout a price mechanism there would be no way to coordinate economic activity. And with a price mechanism there would be no way to maintain equality of income (or reward in proportion to talent and effort ).

While number-crunching sociologists and economists still focus on gini coefficients, egalitarian philosophers who follow John Rawls embrace positions which are immune to Hayek’s criticism. Rawls’ influential version of egalitarianism allows inequality as long as the social arrangements that produce it improve the prospects of the least advantaged. This is why some libertarians think that it might be possible to combine Rawls’ philosophy with Hayek’s economics. This is the ‘progressive fusionism’ skepticlawyer refers to in her post.

Progressive fusionism & the difference principle

According to the Cato Institute’s Brink Lindsey, progressive fusionism "seeks some kind of reconciliation between Hayek and Rawls." For Hayek’s followers, the sticking point has always been Rawls’ difference principle — the idea that social and economic inequalities should be allowed only if they benefit the least advantaged.

According to the difference principle, the least advantaged have a veto over everyone else’s gains. To many people this makes the poor look like a dog in the manger. No matter how large the gains or how many people benefit, reforms that don’t benefit the worst off, can’t go ahead. And in the same way, reforms that provide only minor benefits to the worst off must go ahead even if the cost to everyone else is astronomical.

Libertarians worry that a strict application of the difference principle in the short term could cripple the market’s ability to improve living standards in the long term. In the short term resources might go into developing ‘luxuries’ for the the rich that later become everyday items of consumption for almost everyone. One day luxuries like car air bags and anti-lock brakes might join indoor plumbing and antibiotics.

Classical liberals like Hayek have never endorsed a strict interpretation of the difference principle. While Hayek favoured a guaranteed minimum income available to all, he intended this to be no more than a guarantee against severe deprivation.

Frankfurt’s ‘doctrine of sufficiency’

Frankfurt’s ‘doctrine of sufficiency’ is more demanding than Hayek’s minimum. In his 1987 paper ‘Equality as a Moral Ideal‘ he wrote:

It is essential to understand that having enough money differs from merely having enough to get along or enough to make life marginally tolerable. People are not generally content with living on the brink. The point of the doctrine of sufficiency is not that the only morally important distributional consideration with respect to money is whether people have enough to avoid economic misery. A person who might naturally and appropriately be said to have just barely enough does not, by the standard invoked in the doctrine of sufficiency, have enough at all.

The key idea is contentment. For Frankfurt, a person has enough money when they have no active interest in getting more. "A contented person regards having more money as inessential to his being satisfied with his life … He is simply not much interested in being better off, so far as money goes, than he is."

The price of contentment

So how much money does a person need in order to feel contented? Paul Sweeney and Dean McFarlin examined data on people’s satisfaction with income in 12 nations. They found that people’s satisfaction depended, not just on their own income, but on their income relative to others — "In all cases, satisfaction with income dropped when the comparison suggested that employees were worse off than others in one’s country."

Comparison effects are common in the literature. for example, analyzing data for West and East Germany from 1990 to 2004 Conchita D’Ambrosio and Joachim Frick, found evidence consistent with Runciman’s theory of relative deprivation. Even though incomes in Germany rose over the period, satisfaction with income did not. Where people ranked on the income scale seemed to be more important than their actual income.

Research from the Asian Development Bank shows that people can be content with very low incomes if they perceive themselves to be rich. Having more than in the past, or more than you expected to have, can be more important for contentment than the absolute level of income.

Comparison effects are difficult to predict. Research suggests that comparisons can influence people’s desires and that their desires influence their level of satisfaction.

Inequality redux

Frankfurt argued that "Economic equality is not, as such, or particular moral importance." But even if his ‘doctrine of sufficiency’ is right, inequality might still matter. If people have a strong desire to have an average or above average income, then an income distribution that places the majority of the population below the mean might leave many people discontented.

To libertarians Frankfurt’s doctrine of sufficiency might seem an attractive alternative to Rawls’ difference principle and crude egalitarianism. But unless people lose their aversion to being excluded from normal levels of consumption, the problem of income inequality returns.

Capabilities?

The Indian economist Amartya Sen was deeply influenced by Rawls’ theory of justice. But he argued that Rawls’ account placed too much emphasis on primary goods like money and not enough on people’s ability to use these goods to achieve things they valued. Individuals differ in their ability to convert goods into ‘functionings’. For example, a person with paraplegia needs more resources to achieve the same level of mobility as a person without a disability.

Creating a society that maximises the capabilities of people with disabilities means more than just throwing some money their way. It means changing the way all of us go about our business. Buildings, railway stations, buses and taxis need to be accessible for people using wheelchairs. Services usually delivered by telephone and voice need to be made accessible to those who are deaf. And people with poor sight need alternatives to information which is usually provided by signs and brochures.

In a lightly taxed, lightly regulated society, people with severe disabilities are only likely to be content if they learn to desire a lower level of capability than other citizens. And if they can do it, then why can’t everyone?

Rational desires?

One issue Frankfurt doesn’t try to settle is whether ‘enough’ refers to the amount of money an individual actually needs in order to be content with their income or the amount it would be reasonable for them to be content with. In the first case there is the problem of people with expensive tastes — princess and the pea types who can only be content with the very best. In the second there is the problem of deciding what it is reasonable for people to desire.

Thousands of years of philosophical debate have failed to produce a consensus on that issue. But perhaps we can crack the problem in the comments thread.

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NPOV
NPOV
13 years ago

I think it would be a mistake to leave out the role of technology in all this. Now increased technological capacity is obviously in general a very good thing, and is arguably the single biggest factor behind growth in living standards. It has made even the lowest-skilled workers more productive than they would have been otherwise. But it has vastly improved the productive capacity of those who own and manage modern technology, and those who know how to manipulate it at the highest level. This includes, for instance, Hollywood actors, who only have perform once, and yet be seen by many millions. This is surely at least part of the reason that wealth disparities have grown considerably in countries with minimal wealth redistribution. Ultimately, I think the social consequences of allowing that trend to continue are pretty unhealthy, so on that basis alone there is an argument for increased redistribution of income.
Further, I think we already have pretty much the right mechanism in place for determining how to best redistribute income: as long as we have a democracy where one political alternative offers less redistribution and another offers more, then voters can collectively decide which they want.
On that basis, while I personally believe that Australia would be better off with (slightly) more redistribution of income than it has now, as long as whatever arrangement we have is accepted by the majority of Australians then I don’t think there’s too much room for complaint.

Fred Argy
Fred Argy
13 years ago

Thanks Don. I enjoyed reading this but I frankly doubt that Frankfurt’s doctrine of sufficiency has much practical policy application.

I look for a principle of redistribution that has a strong moral basis and is capable of policy application – yet can also make the economic cake bigger.

So I go back to my “substantive equality of opportunity” principle – a version of Sen’s principle of “maximising the capabilities of people”. It has clear practical policy implications (unless you believe governments stuff everything up); it is a good moral foundation for redistribution (subject to a decent safety net); and it makes the economic cake bigger in the long term.

Don Arthur
Don Arthur
13 years ago

Fred – I agree. Frankfurt’s doctrine of sufficiency is no use at all for policy makers. And as a philosophical principle I think it’s dubious.

I think Sen’s ideas on capabilities is an important advance on Rawls’ idea of primary goods. And it’s a huge improvement on egalitarian theories that focus entirely on income.

I remember when I asked you about what you meant by ‘substantive equality of opportunity’ (SEOP) you said that it:

… describes a situation where people with the same innate capacities have an equal chance to achieve their potential to the full over their lifetimes. This requires governments to try to overcome risk factors and handicaps in early childhood and teenage years.

Elsewhere you’ve written that the policy goal is to ensure that “excessive market inequality – inequality that cannot be explained and justified in terms of differences in effort and talent – is kept to a minimum.”

You reject the ideal of a society that rewards effort alone. I think you’re right to do this. This is Bellamy’s vision, and any attempt to turn it into reality it would destroy both freedom and prosperity.

And I think you’re right to talk about enabling people to develop their potential. Many people seem to think egalitarianism is about crippling the talented.

But there are two aspects of SEOP that worry me. The first is attempting to minimize “inequality that cannot be explained and justified in terms of differences in effort and talent”.

It seems to me that a lot of the differences in income and wealth in a market society are due to chance. The reason entrepreneurs can earn such high returns is because of the amount of risk they have to carry. I wouldn’t want to discourage entrepreneurship. I think this could undermine prosperity and, in the end, damage the prospects of the least advantaged.

The second aspect is about how far you go to overcome handicaps. If SEOP requires such high levels of expenditure on the most disadvantaged that it stifles the economy and makes even the least advantaged worse off, then it seems as if we ought to trade off some equality of opportunity in order to raise the prospects of the worst off.

NPOV
NPOV
13 years ago

Don, there’s actually a fair bit of research indicating that high(ish) income taxes on top-earners doesn’t really have that depressive an effect. In many ways it makes sense – I can certainly imagine that an enterpreneur earning $500,000 a year isn’t going to be too fussed if doubling the size of their business “only” increases their income by another $250,000.

I don’t think a society that rewards “effort” alone would even be possible – and obviously it would be silly to pay someone who put enormous amounts of effort into producing things that nobody wants more than someone who worked out how to produce things that were wanted for minimal effort. But it does seem there’s widespread acceptance that, for instance, nurses and teachers are largely underpaid, while many lawyers, sports players, and CEOs are often paid more than their contribution to society would seem to justify. On the other hand, while this is how people might answer in opinion polls, they don’t seem to feel strongly enough about it to be attracted to vote for governments promising ‘fairer’ salaries.

Don Arthur
Don Arthur
13 years ago

NPOV – It’s certainly true that high taxes can go together with free markets and a healthy economy. Recently the Economist Intelligence Unit named Denmark as “the best place to conduct business over the next five years.” But as Robert Kuttner writes:

Denmark spends about 50 percent of its GDP on public outlays and has the world’s second-highest tax rate, after Sweden; strong trade unions; and one of the world’s most equal income distributions.

Obviously high taxes and a generous welfare state don’t mean the end of civilization as we know it.

My point isn’t that taxes need to be low, it’s that government can’t create a system that aligns rewards with talent and effort. I think Hayek’s right. If you made a serious effort to do that you’d destroy the economy.

As for opinion polls, one area of concern seems to be high income earners. A recent UK study reported that “people appear to think not so much that those on low incomes are underpaid, but that those on higher incomes are very overpaid.” (pdf)

Patrick
Patrick
13 years ago

people appear to think not so much that those on low incomes are underpaid, but that those on higher incomes are very overpaid.

This is the point, isn’t it? Public morality should be concerned, as are the people you quote, with the least well off. But in fact so much time and effort is wasted on the best off!!

I simply can’t see how any man or woman’s super-riches diminish my modest wealth (using ‘wealth’ rather relatively).

I’ll just point out that billionaires are very very rare in Northern European/Nordic countries – the founder of Ikea lives in Switzerland. Maybe those countries are in part free-riders on America’s inequality. Maybe, if all the bright brains were not distracted by American dollars, similar technological advances could/would have been achieved in the Nordic oasis of white tranquillity.

But no-one believes that last hypothesis.

NPOV
NPOV
13 years ago

Patrick, we’ve been through this before. If Australia did have not have a top 1% of income earners that earned an average of nearly $450,000 each (~$315,000 post tax), then the fact that we had a bottom 1% earning an average of ~$5500 each (~$10K post-benefits) wouldn’t be something to be particularly ashamed about: you could simply state that Australia wasn’t yet wealthy enough to support anything much higher.

BTW, out of…

Society A) Bottom 1% earn an average of $5000, top 1% earn an average of $500000
and, with an average GDP of $60K
Society B) Bottom 1% earn an average of $10000, top 1% earn an average of $300000, with an average GDP of $50K

Which society do you think is “better off”?

NPOV
NPOV
13 years ago

Oh, and regarding Ingvar Kamprad (the IKEA guy), he’s known for driving old cars and flying economy class, so it seems unlikely he’s living in Switzerland for the purposes of tax relief (OTOH, IKEA does seem to be involved in some tax-sheltering scheme). Further, Switzerland itself is a fairly high-taxing nation overall, despite having various options available for the rich to protect their wealth.

As it is, I think there are good reasons for not wanting Australia to become a high-taxing/big-spending nation like the Nordic states. After all, under Howard, goverment spending grew from something like 22% of GDP to over 30%, and for what? There’s been no noticeable improvement in public services in that time. For whatever reason, Australia doesn’t seem mature enough as a nation to leave that much of our GDP in the hands of politicans driven by populist demands as much as anything.

Don Arthur
Don Arthur
13 years ago

Maybe, if all the bright brains were not distracted by American dollars, similar technological advances could/would have been achieved in the Nordic oasis of white tranquillity.

Patrick – Billionaires might be rare in the Nordic countries but technological advances seem to be more common than in Australia. Compare Sweden’s performance with Australia’s on the ‘Number of US patents per million population’ (pdf) or its ranking on innovation in the Global Competitiveness Report.

What relationship do you think there is between income inequality, taxation and innovation? What does the data say?

It’s times like this you need Andrew Leigh!

NPOV
NPOV
13 years ago

Who should be able to tell us first hand…I believe he’s currently in Sweden.

I doubt that innovation per se is significantly affected by taxation/inequality, but innovation isn’t much use if it doesn’t get brought to market, and, for instance, high corporate taxes will certainly tend to discourage enterpreneurs from turning new innovations into commercial products.

If Australia suffers from a lack of patentable innovations, it’s possibly due to the degree we rely on farming and mining for our economy. But there’s also something of a long-standing difficulty in Australia with attracting funding for innovative ideas, which must discourage a number of would-be innovators from bothering to patent their ideas. If tax breaks can assist in encouraging those with cash to put it behind new ideas, I’m all for them.

Fred Argy
Fred Argy
13 years ago

Don, I share both your reservations about substantive equality of opportunity as a social policy goal. One cannot and should not eliminate the element of chance and there is a potential for high taxes to make everyone worse off at least in an unfriendly psychological climate like Australia (we are more like the Americans than we like to think).

So I see my policy goal as something which, while elusive and unattainable, serves as a beacon or light on the hill and which governments can strive towards over time, using evidence based analysis to implement only those tried and tested programs which can meet the standard tests in terms of social efficacy and economic returns. It means, as Andrew Leigh reminds us regularly, looking not only at inter-temporal and cross country studies but also at randomised policy trials.

Perhaps this is what Rudd and Gillard intend if one believes their rhetoric.