On Innovation, Redistribution, and the ‘Veil of Ignorance’


IndianSlum_Flickr_8_3_2015-e1438616049740What kind of society would you desire if you had to enter it cold, sight unseen? The classic example: What would have been the opinion of antebellum slaveholders if there were an equal chance they would enter society as a slave owner or a slave? The “veil of ignorance” is a common philosophical thought experiment for helping determine the ethics of social arrangements or of an optimal social contract. More to the point today, what sort of modern welfare state would you want if you had an equal chance of possessing the sort of innate skills likely to gain you a high income in a particular society as of not having those skills? You might, perhaps, want a social contract that includes income transfers from high skill to low skill. A social contract with social insurance. But an interesting new paper out of the Minnesota Fed by V. V. Chari and Christopher Phelan wonders about incentive effects:

For instance, policy mechanisms that transfer income from highly skilled people to those with low innate skills frequently require progressive income taxes. Such policies affect incentives regarding the acquisition of skills through effort and education. If high incomes are highly taxed, high-innate-skills individuals may have less incentive to get, say, a medical degree. Economic arrangements seen as best using the behind-the-veil criterion typically trade off such output losses against the “insurance” or welfare gains associated with transfers. … A rich-country policy to tax high incomes will redistribute income (within that country) from those with high innate abilities (and, by assumption, with the ability to become highly skilled) to those with lower innate abilities. In so doing, that policy will reduce inequality within the rich country, but it will also create disincentives there to becoming highly skilled and thereby reduce the global supply of skilled workers. This reduced supply of skilled workers from the developed country then reduces opportunities for young workers in the poor country to become skilled. … We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.

Take the issue of trade. Many free trade opponents in advanced economies point out the economic impact on low-skill workers from having to compete with counterparts in emerging economies. But maybe this should count, too, as Chari and Phelan explain: “According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent. This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.”

Likewise, what are the ethics of a certain set of policies that could make it less likely the US would generate innovative, risk-taking people and companies that (a) provide opportunity to low-income overseas workers and (b) technologies that can be spread to lower-income nations and boost economic growth? As the Financial Times recently noted, one study suggests that corporations only keep about 4% of the social value of their innovations.

Published in Economics
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  1. bridget Inactive

    I’ve never bought the “veil of ignorance” idea as one that necessarily leads to promoting a welfare state: I would only want welfare if I were disabled and not capable of holding down a job, rather than simply unable to procure an interesting, rewarding, high-paying job. (I might also be upset if money that could be used to help my blind/crippled/mentally disabled self were doled out to people with baby daddies.) If I were to wind up in the non-disabled, working-class situation, I wouldn’t want to have a lower standard of living than those on welfare.

    Regardless of where I wound up in a society, I would want to live in the wealthiest society – and one in which poor people own cars is better than one in which almost everyone risks dying of tuberculosis.

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  2. drlorentz Member

    No discussion of Rawls’s veil of ignorance is complete without mentioning Robert Nozick’s riposte, Anarchy, State, and Utopia. While capitalism might lead to better results for more people (a utilitarian view), Rawlsian thinking is fundamentally at odds with both utilitarianism and capitalism. Accepting Rawls’s approach to justice leads to the administrative welfare state. In short, it is slouching towards Gamorrah, in the words of Robert Bork.

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  3. Eric Mawhinney Inactive
    Eric Mawhinney

    It has not been too many years since I was faced with the work + welfare  or work + tough it out decision had to be made. Actually I made the decision a few times. I never chose welfare. I was reminded of the SNAP dollars we could have had whenever the accounts ran dry, but my wife always supported my refusals to take the aid. The decision was always fueled by my belief that the government’s involvement in the safety net portion of the social contract was wrong for the able-bodied.

    So If you live by principle, you have to fight it out in your own mind. The active incentive probably has something to do with your principles. For the utilitarians in the populace, choosing $1000/month in SNAP money is pretty easy as long as you have a need.  And then there are those who would take it simply because they can.

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  4. drlorentz Member

    Eric Mawhinney:I never chose welfare. I was reminded of the SNAP dollars we could have had whenever the accounts ran dry, but my wife always supported my refusals to take the aid. The decision was always fueled by my belief that the government’s involvement in the safety net portion of the social contract was wrong for the able-bodied.

    And then there are those who would take it simply because they can.

    You and your wife are rare birds. Many will choose the last alternative.

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  5. Z in MT Member
    Z in MT


    As drlorentz states, you and your wife are rare birds. One of the issues with how the welfare programs have evolved is that most are no longer seen as temporary assistance. It used to be one had to go down to the welfare office (or unemployment office) and reapply every week to months. Now you apply online, and for SNAP they send out a benefits card that automatically refills at the end of the month.

    The other problem is that working is no longer seen a necessary condition for self actualization. A man doesn’t feel like a man if he doesn’t earn the bread for his table. Having a job is the best self-esteem builder there is.

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  6. skipsul Inactive

    I am reminded of an employee who is constantly nagging to have salaries bumped across the board, and that we should engage in “profit sharing” within the company.  They are always stymied when I ask “so, if I raise everyone to X, will they work harder or more efficiently?  Or, once comfortably ensconced in a higher wage bracket will they slack off, knowing that they have reached a plateau from which there are no more promotions?”  I also try to point out that our company is debt free, and can thus afford to purchase capital equipment when required, or expand operations, all by paying cash up front – doling out all of our earnings would mean that we could not have this reserve to accomplish this in future.

    Excessive redistribution not only reduces incentives to grow and improve, it throws away the future in favor of present gratification.  We were frugal in our beginnings so our business could grow, we remain so now for the same reason.

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  7. PHCheese Inactive

    It is never a good idea to subscribe your principles and ideals to others. I would eat grass before going on wefare but I know I am no longer the norm. Many people will expend more engery gaming the system than they would working. A conservative knows this about human nature. A progressive thinks it can be changed.

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  8. Big Green Inactive
    Big Green

    Not sure why anyone needed a study for this.  It is pure common sense.

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  9. Frozen Chosen Inactive
    Frozen Chosen

    Like Seattle is discovering with their nifty $15 minimum wage, government policies seeking to help the poor always have negative unintended consequences for those very same poor.  It’s only the hubris of liberals which keeps them from honestly facing this reality; the same hubris which leads them to believe they can control earth’s climate.

    When you think about it, liberal hubris is a greater threat to mankind than global warming, Ebola, GMO foods and rap music – combined!

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  10. Guruforhire Inactive

    All else being equal I would take the nation without the welfare state.

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  11. Manfred Arcane Inactive
    Manfred Arcane

    I love this topic; thanks for starting it.

    Economic Justice, what is it?  The celebrated Rawls theory has spread throughout the intelligentsia like a virus as pernicious as Marx’s:

    “Rawls argument is that producers cannot deserve their objects [i.e., what they produced] because they do not deserve their productive attributes” [their superior talents, etc.] (- Morris Silver, “Foundations of Economic Justice”)

    Silver provides a nice (partial) antidote to this disease; it originates in our instinctual understanding that “each normally formed person feels that a producer is legitimately entitled to an object he has produced and is outraged when a producer is forcibly deprived of his object.”  Self-ownership, then is critical.

    So is self-determination.  IMO, those who love liberty need to promote a Liberty Principle respecting tax levels, where Rawls-based expropriation of wealth causes its greatest mischief, something like this: “The wealthiest contingent of society needs to give majority approval to the tax levels they are subject to (in accordance with the like privilege of the middle and lower contingent to, effectively, determine their own tax rates)”.

    Any society that follows this principle is going to have a difficult time expropriating wealth willy nilly.  Any tax rates established in this way would have the high merit of being approved by those bearing the tax burden.  If the avenue to acquiring wealth is open to all, that is exactly as it should be.

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  12. John Penfold Member
    John Penfold

    Rowels set out to justify a social welfare state and he failed, because all the arguments against socialism, central planning, dependency, destruction of accountability  still hold even in his fantasy land board game.   Besides, we have now lived with a welfare state for 50 years, so we know that our dice throw could get us aborted and sold for organs, or delivered to a welfare dependent single mother, where we’d probably be shot by a peer if we didn’t end up in jail before that.  It’s no longer a mind experiment.  It exists and it’s hard to excuse the abominable results as unintended consequences.    Maybe for a decade or two the consequences were unintended, but now that we’ve seen the results?  

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