The Triumph of ParetoThe Triumph of Pareto(Does Equity Matter?)(Does Equity Matter?)

Gary FlomenhoftGary Flomenhoft

VT Law SchoolVT Law School

Class 4Class 4

Growth FactorsGrowth Factors Theological belief in growth Biotic potential Fixation on GDP Bank interest Discounting Interest charged on money creation To provide jobs for labor displaced by productivity

improvements Welfare economics is defined by consumption Profit motive Materialism Pareto optimality

Pillars of Neo-classical welfare Pillars of Neo-classical welfare economics (Erickson/Gowdy)economics (Erickson/Gowdy)

1. Homo-economicus-utility maximization. 1. Homo-economicus-utility maximization. crumblingcrumbling

2. Perfect2. Perfect competition (independent actions of firms, no market power, constant returns to scale, perfect information, no uncertainty) - - crumbling:crumbling: Stiglitz: Nobel for assymmetrical info.Stiglitz: Nobel for assymmetrical info.

3. Pareto Optimality-still alive3. Pareto Optimality-still alive

Pareto efficiency

Any policy alternative which makes anyone worse off in their own estimation, while making other people better off in their own estimation is not “Pareto efficient.”

“Value-free scientific principle”

Assumptions of P.O.Assumptions of P.O.

Current distribution of wealth is a given.

No distinction between earned or unearned income, or any question about the legitimacy of the source of wealth.

No comparison of utility between people. (Each

person can only decide how well off they are “in their own estimation.”)

No one can be made worse off.

ProblemsProblems

Ethical: Ending Slavery failed Pareto criteria.Ethical: Ending Slavery failed Pareto criteria.

Growth bias-If no one can be made worse off, Growth bias-If no one can be made worse off, the only choice to improve welfare is growth. the only choice to improve welfare is growth. “grow the pie higher” - “Grow our way out of “grow the pie higher” - “Grow our way out of poverty”.poverty”.

No Interpersonal Utility is self-contradictory.No Interpersonal Utility is self-contradictory.

No one worse off?No one worse off?

Grow out of poverty?Grow out of poverty?

Grow out of poverty?Grow out of poverty?Poverty rate vs. GDP per Capita (1996$)

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

8%

10%

12%

14%

16%

18%

20%

per capita GDP (1996$) poverty rate

Why no Interpersonal utility?Why no Interpersonal utility?

No one worse off 1979-2000?No one worse off 1979-2000?

Pareto’s Other Principles

“…no social class can for long hold its property or its power if it does not have the strength and vigor necessary to defend them. In the long run only power determines the social forms; the great error of the 19th century will be to have forgotten this principle (1906:361).”

Top 1% Share of wealth 1922-1998Top 1% Share of wealth 1922-1998

Top 1% Share of Household Wealth 1922-1998

36.7

44.2

33.3

36.4

29.8

27.1

31.2 31.8

34.4

31.129.1

19.9 20.5

24.8

30.931.9

35.737.2

38.540.1

38.1

1922

1929

1933

1939

1945

1949

1953

1962

1965

1969

1972

1976

1979

1981

1983

1986

1989

1992

1995

1997

1998

““Circulation of the Elites”Circulation of the Elites”

the dominant class A has an alpha part that “still has enough strength and energy to defend its share of authority; and a beta part “made up of degenerated individuals, with feeble intelligence and will, humanitarians, as is said today…

Objectively the struggle consists solely in the B-alpha trying to take the place of the A-alpha; everything else is subordinate and incidental.”

(Pareto 1927:91)

47-79 Real Family Income 47-79 Real Family Income GrowthGrowth

79-98 Real family income Growth79-98 Real family income Growth

NET WORTHNET WORTH

Pareto on Genetic Selection

“The struggle to appropriate the goods of others may be favorable to (genetic) selection” (Pareto p. 341).

US CEO Pay ratio to average workerUS CEO Pay ratio to average worker

International CEO Pay ratioInternational CEO Pay ratio

Real Wages and productivity 1948-2002Real Wages and productivity 1948-2002

Reasons for wage stagnationReasons for wage stagnation

The decline in unionization from 35% in 1948 to 14% in 1999.

Globalization led to export of jobs resulting in a “race to the

bottom” for wages. (Free-trade zones, NAFTA, WTO, etc.)

Increased temp and contract workers with no benefits, corporate downsizing, mergers.

Pareto on Suffrage

“When suffrage has been given to all men, including madmen and criminals, when it has been extended to women, and if you like, to children, it will have to stop. One cannot go any lower, unless the suffrage is extended to animals” (Pareto p. 100).

55% single mothers with 55% single mothers with children <6 are poorchildren <6 are poor

http://www.nccp.org/99uptext.htmlhttp://www.nccp.org/99uptext.html

Pareto on equalityPareto on equality

“Equality before the law is a dogma for many people…it is not at all evident a priori that such equality is advantageous to society;…the contrary appears more probable.” (Pareto p.95).

Gini Coefficient=Gini Coefficient=

Inequality good for society?Inequality good for society?

PopulationPopulation Ratio of top 10% Ratio of top 10% income to income to bottom 20%bottom 20%

Incarceration Incarceration

CaliforniaCalifornia 30 Million30 Million 12:1 (US)12:1 (US) 200,000200,000

KeralaKerala 30 Million30 Million 3.5:13.5:1 5,0005,000

Source: Collins, Economic Apartheid in America

Does Equity matter?Does Equity matter?

Redistribute what?Redistribute what?

UN Resolution 1803(XVII) of 14 December 1962/Declaration of Permanent Sovereignty over Natural Resources:

“Violation of the rights of peoples and nations to sovereignty over their natural wealth and resources is contrary to the spirit and principles of the Charter of the UN, and hinders the development of international co-operation and the maintenance of peace.”

Another view: “The meek shall inherit the earth…Except for the mineral rights.” -J. Paul Getty

Natural Capital WealthNatural Capital Wealth (NOT THE PRODUCTS OF LABOR OR CAPITAL)(NOT THE PRODUCTS OF LABOR OR CAPITAL)

•Sub-soil assets-oil, coal, minerals, etc•Urban land •Cropland•Pastures•Forests•Non-timber Benefits•Protected areas•etc

CASE STUDYCASE STUDY

Alaska has the smallest gap between rich and Alaska has the smallest gap between rich and poor of any state, according to figures released poor of any state, according to figures released Wednesday by the U.S. Census Bureau.Wednesday by the U.S. Census Bureau.

ALASKA Dividend checks help make for more ALASKA Dividend checks help make for more equal distribution.equal distribution.

By Maureen ClarkBy Maureen Clark The Associated PressThe Associated Press (Published: September 25, 2002)(Published: September 25, 2002)

Alaska Model: Alaska Permanent Fund

Proposed Iraq Fund, Niger Delta Fund

COMMON ASSETSCOMMON ASSETS (NOT FROM LABOR AND CAPITAL)(NOT FROM LABOR AND CAPITAL)

Government R&D: internet, patentsSeignorage (money creation)Airwaves/broadcast spectrumAircraft landing rightsSatellite slotsFishing RightsCap and trade pollution permitsGreen taxesLand valuesStock market liquidityCollectively produced assetsCollectively produced assetsEtc.