Picking up on a theme from two years ago, let’s consider again the argument in favor of progressive (re)distribution of income from the wealthiest to the poorest. The argument I made back then was that on basic behavioral grounds, the assumption that taking a dollar from the rich and giving it to the poor would increase aggregate utility does not follow. And it does not follow precisely for the reasons behavioralists tell us. First, there is no reason to believe that another dollar to an already rich person provides less utility than a dollar to a poor person. There is no theory that can conclude that. Second, and perhaps more important, is that loss aversion may reverse the results aimed for by the transfer of wealth. People suffer more utility loss from the loss of a dollar than they gain from the securing of a dollar.
Those objections have never been adequately dealt with. And to those I’d like to add two more.
Now, if (and this is ironic, isn’t it) you want to assume that all markets are supremely perfectly competitive, that all economic agents are always optimizing with full information 100% of the time, and that they cannot adjust their consumption in any way to make themselves better off at the current income and price levels that prevail, then maybe the conflation of diminishing marginal utility of consumption and diminishing marginal utility of dollar bills would be acceptable. But critics tell us regularly (and I do not disagree) that the idea of perfectly competitive markets is a myth, and that it is not even remotely possible that we are optimizing all of the time.
If we WERE optimizing all of the time, consumers would end up allocating their (marginal) dollars so that, at the margin, the very last dollar spent on every single item provided them with exactly the same amount of satisfaction.
But if we are not going to be comfortable making that assumption, then it does not follow that the satisfaction provided by spending that last dollar on apples is the same as the satisfaction we would have gotten spending it on pears. In other words, since a dollar allows us to purchase ANYTHING on offer in the entire economy, if in fact there are diminishing marginal gains to additional dollars, they would have to set in at consumption levels far beyond anything any normal person could ever achieve. So, while, right at this moment, if you had me spend one additional dollar on coffee (I am on my third cup) it would not make me happy, that does not mean that taking a dollar from me would not diminish my happiness. That dollar enables me to buy a piece of a book, a few minutes of a phone call, some cleaner for my eyeglasses, and so on. Since resources are scarce, it is implausible that I have already reached a point of satiation in all of those things and more. And if the (re)distributionists are going to nonetheless argue that I get less satisfaction from reading the next book than someone else (who would be receiving my dollar) who would use that dollar to purchase bacon, they are going to be left with a morally bankrupt argument that boils down to, “we just know that person X likes bacon more than you like books.” There is no other foundational theory to rest such an assumption on aside from it just being an assumption, a preference, a non-universal value.
Call me crazy for expecting these ideas to be dealt with.